[Congressional Record Volume 145, Number 79 (Monday, June 7, 1999)]
[Extensions of Remarks]
[Pages E1148-E1152]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




  SIXTH REPORT OF THE SPEAKER'S TASK FORCE ON THE HONG KONG TRANSITION

                                 ______
                                 

                           HON. DOUG BEREUTER

                              of nebraska

                    in the house of representatives

                          Monday, June 7, 1999

  Mr. BEREUTER. Mr. Speaker, this Member rises today to submit the 
Sixth Report of the Speaker's Task Force on the Hong Kong Transition. 
It has been almost two years since Hong Kong reverted to Chinese 
sovereignty on July 1, 1997. Prior to that historic event, at the 
request of Speaker Gingrich, this Member formed the House Task Force on 
Hong Kong's Transition. In addition to myself as Chairman, the 
bipartisan Task Force includes Representatives Howard Berman (D-CA), 
Sherrod Brown (D-OH), Eni Faleomavaega (D-AS), Alcee Hastings (D-FL), 
Don Manzullo (R-IL), and Matt Salmon (R-AZ).
  To date, the Task Force has prepared six quarterly reports assessing 
how the reversion has affected Hong Kong. The sixth report, which I 
submit today, covers the period of October through March 31, 1999, 
during which time this Member, as Task Force Chairman, visited Hong 
Kong in January 1999.
  Mr. Speaker, this Member submits the following Task Force report for 
the Record.

   The Speaker's Task Force on the Hong Kong Transition, Sixth Report

       This is the sixth report of the Task Force on the Hong Kong 
     Transition. It follows the first report dated October 1, 
     1997, the second reported dated February 25, 1998, the third 
     report dated May 22, 1998, the fourth report dated July 23, 
     1998, and the fifth report dated February 2, 1999. This 
     report focuses on events and development relevant to United 
     States interests in the Hong Kong Special Administrative 
     Region (HKSAR) between October 1, 1998, and March 31, 1999, 
     and incorporates findings drawn from the Task Force 
     Chairman's visit to Hong Kong in January, 1999.
       Hong Kong's ongoing economic recession marked the six 
     months covered by this report as the consequences of the 
     Asian Financial Crisis continued to be felt. Hong Kong's 
     gross domestic product (GDP) declined by 5.1 percent in real 
     terms in 1998, its first annual contraction on record. 
     Unemployment and trade figures were correspondingly negative. 
     Despite the difficulties. Hong Kong authorities operated 
     independently in all areas of economic decision making, and 
     there was no evidence of any attempt to intervene by Beijing. 
     Opinion on the Hong Kong government's controversial August 
     1998 intervention in the currency, stock and futures markets 
     turned increasingly positive as equities regained much of 
     their lost value and the currency exchange rate held steady.
       In the legal-political realm, Chinese officials' public 
     expressions of unhappiness over a controversial decision by 
     Hong Kong's Court of Final Appeal raised concern about the 
     future independence of the Hong Kong judiciary. Discussions 
     between Hong Kong and Beijing authorities, combined with a 
     ``clarification'' issued by the court, appeared to have 
     succeeded in settling the matter, at least temporarily, 
     without serious damage to the ``one country, two systems'' 
     concept. The

[[Page E1149]]

     practical consequences of the court decision, which could 
     permit a large number of persons now in China to claim the 
     right to reside in Hong Kong, had not yet been dealt with at 
     the end of March. The Hong Kong Government's obvious 
     displeasure with the ruling, combined with public fears of 
     the consequences of renewed mass immigration, led to fears 
     that the Government would seek Beijing's assistance in 
     rolling back the decision in a manner that would undermine 
     Hong Kong's judicial independence and the rule of law.


                         Economic Developments

       Hong Kong continued to suffer the negative effects of the 
     Asian Financial Crisis, posting its fourth consecutive 
     quarter of negative growth, as its first recession in 
     thirteen years showed no sign of coming to a quick end. 
     Preliminary estimates showed GDP dropped 5.7 percent in real 
     terms in the fourth quarter of 1998 following a decline of 
     6.9 percent in the third quarter. For 1998 as a whole, Hong 
     Kong's GDP fell by 5.1 percent, the first annual economic 
     contraction in Hong Kong since such statistics have been 
     calculated. Spending for private consumption continued to 
     fall steeply, declining 9.3 percent in the fourth quarter of 
     1998, as consumer confidence remained affected by rising 
     unemployment and stagnating personal income. Weak demand and 
     dropping asset values brought about significant deflation, 
     with consumer prices declining for four consecutive months 
     beginning in November. In February, the consumer price index 
     dropped by 1.7 percent. Unemployment reached 6.2 percent in 
     the first quarter of 1999, the highest level recorded in 
     twenty-five years. An early economic turnaround continued to 
     appear unlikely, with most analysts predicting an upturn no 
     earlier than the last quarter of 1999. Many view the official 
     Hong Kong government's forecast of 0.5 percent GDP growth in 
     1999 as too optimistic, with some private analysts predicting 
     a decline of as much as 3 percent.
       The government's budget for the 1999-2000 fiscal year that 
     began April 1, 1999, projects a budget deficit of HK $36.3 
     billion (US $4.7 billion). This comes on top of an estimated 
     deficit of HK $32 billion (US $4.1 billion) in fiscal year 
     1998-1999. The government anticipates running a deficit for 
     the next two years before returning to a balanced budget in 
     fiscal 2001-2002, but maintains this is a prudent and modest 
     use of Hong Kong's sizable reserves during difficult economic 
     times. While the general consensus among analysts is that a 
     modest deficit is justifiable in view of the current 
     recession, some have voiced concern about the impact three 
     consecutive years in the red would have on Hong Kong's 
     reputation for fiscal prudence. Some also attribute the 
     fiscal deficit in part to Hong Kong's continued reliance on 
     an excessively narrow, property-focused revenue base.
       There was some positive economic news during the reporting 
     period. The tourism market continued to cover, with January 
     1999 visitor arrivals up nearly 11 percent over the previous 
     year. The liquidity crunch in the banking sector showed signs 
     of easing, and interest rates began to move downward, 
     although real interest rates remain high by historical 
     standards. Improved international investor confidence helped 
     the stock market to recover much of the ground it had lost 
     since the onset of the financial crisis, and the Hang Seng 
     index stood above 11,000 at the end of March. The renewed 
     buoyancy in the equity markets turned the government's August 
     1998, market intervention into an extremely profitable 
     venture, with shares acquired by the government appreciating 
     by 20 percent or more. The real estate market also showed 
     signs of bottoming out. The government announced it would 
     resume land sales in April, ending the suspension it imposed 
     in June 1998 to reduce downward pressure on property values. 
     Hong Kong's hard currency reserves also remained substantial.
       By the end of March, however, these encouraging signs had 
     yet to translate into improvements in Hong Kong's real 
     economy. Concerns remained about Hong Kong's continued 
     dependence on entrepot trade and the relative lack of growth 
     in sectors with high value-added, such as the high-tech 
     industry. The government sought to address the latter problem 
     by announcing an ambitious ``Cyperport'' project aimed at 
     attracting world class information technology companies, but 
     opinions varied as to the commercial viability of the 
     proposal. An increasing percentage of Hong Kong's visitors 
     for tourism are coming from China (27 percent in 1998 versus 
     22 percent the previous year and 19 percent in 1993). Chinese 
     visitors are believed to spend substantially less than 
     tourists from more affluent countries such as Japan and the 
     U.S., whose numbers have stagnated or declined over the same 
     period. In the short term, Hong Kong's exports (both domestic 
     and transhipments) will probably remain depressed due to the 
     weakened economies of some of its key trading partners and 
     its higher cost of production relative to competitors that 
     have devalued their currencies. The problems of certain 
     mainland companies and financial institutions, highlighted by 
     the insolvency of the Guangdong International Trust and 
     Investment Corporation, also have the potential to negatively 
     affect Hong Kong. With a return to growth apparently still 
     some time off and credit still extremely tight for small and 
     medium sized businesses, more pay cuts and layoffs are likely 
     in the months ahead. Although pressure has clearly eased 
     since the August intervention, the Hong Kong dollar remains 
     vulnerable to speculative attacks. Renewed instability in 
     regional financial markets could seriously set back Hong 
     Kong's prospects for recovery.


             Revisiting the August 1998 Market Intervention

       One of the key events described in the Fifth Task Force 
     report was the Hong Kong government's massive intervention in 
     the stock, currency and futures markets on August 14, 1998. 
     On that Friday afternoon, Financial Secretary Donald Tsang 
     invested the equivalent of an estimated US $15 billion of 
     Hong Kong's reserves in the market in what proved to be a 
     successful effort to defend against outside speculators 
     betting against Hong Kong's ability to sustain its currency's 
     peg to the U.S. dollar. Although controversial at the time, 
     over the subsequent months the intervention has increasingly 
     come to be viewed as a regrettable but necessary action, even 
     by many who questioned it initially. During the Task Force 
     Chairman's visit to Hong Kong in January, it was evident that 
     even the sharpest critics of the intervention had changed 
     their opinion and believed the government made the right 
     decision. Direct discussions with those involved also made it 
     abundantly clear that the Hong Kong authorities acted 
     entirely independently in undertaking the intervention. While 
     they informed their interlocutors in Beijing of their 
     actions, they did not consult them beforehand or seek their 
     agreement before proceeding.
       As noted above, the equities purchased by the government 
     have appreciated significantly in value during the recent 
     recovery in the Hong Kong stock market. To allay fears that 
     this sizable portfolio will be manipulated for political 
     purposes or will come to influence government decision 
     making, the authorities have placed the equities in the hands 
     of an independent appointed board of senior figures. The 
     problem of how to liquidate the holdings remains to be 
     resolved. It appears likely that it will have to be done 
     gradually, and a residual may be retained, with appropriate 
     safeguards, to support the government pension plan.


                         Political Developments

       As described in previous Task Force reports, the Basic Law 
     that effectively serves as the Hong Kong Special Autonomous 
     Region's constitution provides for a gradual increase in the 
     number of members of the Legislative Council (LegCo) chosen 
     by direct election. Twenty of the 60 members of the Council 
     that took office in July 1998 were directly elected from 
     geographic constituencies, with the remainder coming from 
     ``functional constituencies'' with limited voter pools. Under 
     the Basic Law, the number of directly elected members will 
     increase to 24 in the year 2000 and 30 in 2004. In 2008, the 
     Basic Law allows for (but does not require) the remaining 30 
     functional constituency seats to be converted to directly 
     elected positions. Similarly, it would also permit, but not 
     mandate, the direct election of the Chief Executive beginning 
     in 2008.
       Heartened by their strong showing in last year's election, 
     political parties favoring more rapid movement toward 
     elections by universal suffrage continue to call for the 
     immediate amendment of the Basic Law to provide for direct 
     election of the full LegCo and the Chief Executive at the end 
     of their present terms of office (2000 and 2002 
     respectively). Chief Executive C.H. Tung and the Hong Kong 
     government oppose such proposals, arguing that public 
     consultations on the pace and scope of democratization should 
     wait until after the 2000 LegCo election. Advocates of a 
     faster move to direct elections across the board have not 
     renewed their attempt to put the LegCo on the record in favor 
     of their position since the defeat of an earlier motion last 
     July.
       Another point of contention is the relative power of the 
     LegCo vis-a-vis the Chief Executive and government. Reformers 
     argue that the Basic Law unduly restricts the LegCo's clout 
     by barring it from introducing many types of legislation and 
     by requiring concurrent majorities of directly and 
     functionally elected members to pass certain bills. Defenders 
     of the current arrangement cite Hong Kong's long tradition of 
     ``executive-led'' colonial governance in which legislative 
     authority was strictly limited. Senior civil servants, in 
     particular, take a dim view of efforts to increase the 
     LegCo's clout, claiming that the legislature simultaneously 
     demands greater power while fleeing the responsibility that 
     such power entails. Within the constraints under which it 
     currently operates, the LegCo has successfully brought its 
     influence to bear on the government's policies and actions, 
     for example, by carrying out an independent inquiry into the 
     chaotic opening of the new Chep Lap Kok airport. Unhappiness 
     over the Government's handling of several legal and judicial 
     matters also prompted the LegCo to mount a no confidence 
     motion against the Secretary for Justice, Elsie Leung. The 
     Government ultimately blocked the motion, but only after an 
     intense lobbying campaign. In combination with Hong Kong's 
     lively and free press, the LegCo's willingness to criticize 
     and challenge government actions clearly has served to 
     further public debate and increase transparency. Opinion 
     surveys suggest, however, that the ongoing recession is 
     taking a toll on the popularity of the Chief Executive, the 
     Civil Service and the legislature, while the increasingly 
     adversarial relationship between the Government and the LegCo 
     remains a subject of widespread concern.

[[Page E1150]]

       The Government also continued to receive for criticism for 
     moving to reduce the opportunity for Hong Kong residents to 
     choose their own representatives at lower 
     public administration levels. Following its earlier 
     decision to abolish the two largely elected Municipal 
     Councils at the end of 1999, the Government in December 
     announced plans to increase the percentage of appointed 
     (versus elected) positions on Hong Kong's 18 District 
     Boards (to be renamed District Councils) beginning in the 
     year 2000. In March, the Government proposed to transfer 
     the Municipal Council's responsibilities for arts and 
     cultural services to a government appointed commission and 
     a newly created department, leading to complaints that 
     this would be a step toward centralized control of 
     cultural affairs and the discouragement of non-mainstream 
     views.


                  Rule of Law and Judicial Independence

       A fair and independent judicial system is a critical 
     element of international confidence in Hong Kong. The Basic 
     Law provides for judicial independence and grants Hong Kong's 
     courts jurisdiction over all cases except those involving 
     ``acts of state,'' such as defense and foreign affairs. A 
     Court of Final Appeal, consisting of five justices, was 
     created on July 1, 1997, to replace the United Kingdom's 
     Privy Council as Hong Kong's highest court. Since the 
     reversion to Chinese sovereignty, Hong Kong's judiciary 
     generally has continued to operate independently and without 
     taint of political interference.
       The response by officials in Hong Kong and Beijing to a 
     controversial January 29, 1999, decision by the Court of 
     Final Appeal (CFA), however, for the first time raised 
     substantial doubts about the Hong Kong judicial system's 
     future independence. The case concerned the ``right of 
     abode,'' that is, the right of children of legal Hong Kong 
     residents to join their parents in Hong Kong. The CFA decided 
     upon a generous interpretation of the provisions of the Basic 
     Law concerning the right of abode, granting the right to 
     reside in Hong Kong to all children of legal Hong Kong 
     residents, regardless of whether the children are legitimate 
     or illegitimate or whether they were born before or after 
     their parents attained legal resident status. In making this 
     ruling, the Court clearly opened the door to the legal influx 
     of a large number of persons now residing in China, where it 
     is assumed many Hong Kong residents have children born inside 
     or outside of wedlock. Just how many persons could qualify to 
     reside in Hong Kong under the terms of the CFA decision, both 
     now and in the future, remains a subject of considerable 
     controversy. Critics charged the Government with needless 
     alarmism about the numbers involved, questioning both the 
     methodology of the estimates and the Government's assumption 
     that the new residents will make heavy demands on welfare and 
     other public services.
       Much of the initial reaction to the CFA decision, however, 
     focused not on the practical concern of a massive influx of 
     new residents but on the question of the Court's authority 
     vis-a-vis that of China's National People's Congress. The CFA 
     sparked this furor by the somewhat gratuitous inclusion of 
     language in its decision which asserted its right to rule on 
     actions by China's National People's Congress that affected 
     Hong Kong if such actions breach provisions of the Basic Law. 
     In apparent response to this portion of the decision, four 
     Chinese legal experts who had participated in the drafting of 
     the Basic Law, together with an official from China's State 
     Council, labeled the CFA ruling an attack on the authority of 
     the National People's Congress and a serious breach of the 
     ``one country, two systems'' principle. The Hong Kong 
     Government, in turn, reacted to the expressions of Chinese 
     displeasure by dispatching the Justice Secretary to Beijing 
     for urgent consultations. Subsequently, on February 24, the 
     Government made an unprecedented request to the CFA for a 
     ``clarification'' of the portion of the ruling which touched 
     upon the CFA's authority to review acts of the National 
     People's Congress (NPC) and its Standing Committee. Two days 
     later, on February 26, the CFA complied, issuing a short 
     statement of clarification in light of what it called ``an 
     exceptional situation.'' The clarification did not address 
     the substance of the original January 29 ruling, but merely 
     asserted that nothing in the decision questioned the 
     authority of the NPC Standing Committee to make an 
     interpretation of the Basic Law binding upon the Hong Kong 
     courts. In its concluding sentence, the clarification stated 
     ``the court accepts that it cannot question the authority of 
     the NPC or the Standing Committee to do any act which is in 
     accordance with the provisions of the Basic Law and the 
     procedure therein.''
       The Hong Kong Government's decision to request the 
     clarification caused considerable criticism from some legal 
     experts and from opposition party leaders, who charged that 
     it served to undermine the autonomy of the Hong Kong's 
     judicial system. The Chief Executive, on the other hand, 
     defended the action as entirely in keeping with the ``one 
     country, two systems'' concept, citing other legal scholars 
     who argued the CFA's initial decision had made overreaching 
     claims regarding the court's own authority.
       In general, the consensus appeared to be that the CFA's 
     ``clarification'' had succeeded in defusing the initial 
     controversy in a way that did little or no harm to the 
     underlying principle of rule of law in Hong Kong. With that 
     question disposed of, however, attention increasingly turned 
     to the practical dimension of the CFA decision. By the end of 
     March, the Government's increasingly dire warnings about the 
     potential consequence of large scale immigration and its 
     refusal to draft procedures to implement the decision were 
     drawing criticism from opponents who argued that it reflected 
     disrespect for the authority of the courts. Opinion surveys 
     consistently showed strong public opposition to the admission 
     of large numbers of new residents under the ruling, but the 
     question of whether or how to go about seeking to overturn or 
     modify the terms of the CFA decision remained deeply 
     controversial. The options under discussion included asking 
     the CFA to review the substance of its original decision, 
     requesting that the NPC amend the Basic Law, or seeking an 
     interpretation of the existing Basic Law provisions by the 
     NPC Standing Committee. While there are provisions for the 
     latter two options in the Basic Law, critics charge it would 
     be improper for the Hong Kong Government, rather than the 
     courts, to request the Standing Committee to interpret the 
     Basic Law, since that would amount to executive branch 
     intervention to overturn a judicial decision. It is important 
     to note that Chinese officials have shown no inclination to 
     intervene unilaterally in the controversy over the practical 
     aspects of the court decision, and have consistently 
     expressed the hope that Hong Kong would find a way to solve 
     the matter internally without involving Beijing.
       Another emerging area of concern is that of the prosecution 
     of individuals in China for crimes committed in Hong Kong. 
     The subject rose to public attention with the conviction and 
     execution in China of two persons, one a Hong Kong resident 
     and the other a Chinese national. The Hong Kong resident was 
     a notorious gangster who was convicted by the Chinese court 
     of a number of crimes, committed both in Hong Kong and in 
     China. The Chinese national was convicted of crimes committed 
     while visiting Hong Kong. Chinese law permits the 
     prosecution of Chinese citizens for crimes committed 
     outside of its jurisdiction, and both individuals had 
     traveled to China voluntarily prior to being apprehended. 
     Hong Kong authorities are admittedly reluctant to request 
     the return of criminal suspects from China for fear of 
     having to reciprocate when China makes similar requests. 
     As a matter of policy, the Hong Kong government does not 
     return suspected criminals wanted in China, largely due to 
     public concern about China's application of the death 
     penalty. (There is no death penalty in Hong Kong.) In 
     contrast, Chinese officials have unilaterally returned 
     persons wanted for crimes committed in Hong Kong, as long 
     as they were not subject to criminal proceedings in China. 
     Negotiations on a formal agreement on the rendition of 
     criminal suspects between China and Hong Kong are said to 
     be underway, but prospects for a successful conclusion are 
     not clear.


                          Individual Liberties

       Elsewhere in the legal and judicial area, the people of 
     Hong Kong continued to enjoy broad freedom of speech. Hong 
     Kong's media airs a wide range of views and opinions, 
     including those critical of the Hong Kong and Chinese 
     governments, without overt interference from the authorities 
     in Hong Kong or Beijing. Concerns regarding self-censorship 
     appear to have eased somewhat since Hong Kong's July 1997 
     reversion. In its 1998 annual report, the Hong Kong 
     Journalists Association concluded that ``self-censorship may 
     even have abated a little from its evident proliferation in 
     the period leading up to the hand-over.'' The Government has 
     yet to introduce proposed laws on treason, secession, 
     sedition, and subversion, all of which are required under the 
     Basic Law. In a legal case with implications for individual 
     liberties, on March 23 Hong Kong's Court of Appeal threw out 
     convictions under laws forbidding the burning or defacing of 
     the Chinese and HKSAR flags, ruling that the laws 
     unconstitutionally breached the Basic Law's protections of 
     freedom of expression. The Hong Kong Government announced 
     plans to appeal the case to the Court of Final Appeal. Also 
     in March, a number of well known exiled Chinese dissidents 
     applied for Hong Kong visas to attend an NGO organized 
     conference in May on the future of democracy in China. 
     Although several of the dissidents had visited Hong Kong 
     prior to the reversion, it was unclear if the Government 
     would approve the applications. (The Immigration Department 
     subsequently announced the denial of the visas on April 21.)


                    Trade and Export Control Issues

       Final 1998 trade statistics showed across the board drops 
     in Hong Kong's imports (-11.5 percent), domestic exports 
     (-10.9 percent), and re-exports (-6.9 percent). While much of 
     this is a result of the Asian Financial Crisis, domestic 
     exports are subject to a longer-term downward trend, having 
     now fallen for three straight years and for five years out of 
     the last six. The broader regional crisis has thus served to 
     underscore Hong Kong's continuing dependence on entrepot 
     trade between China and other nations, particularly the U.S. 
     This makes Hong Kong highly vulnerable to disruptions in the 
     U.S.-China trading relationship, and helps explain the 
     nervousness with which Hong Kong officials view political or 
     economic tensions between Beijing and Washington.
       The continued widespread availability of pirated movie, 
     audio, and software compact discs and trademark goods remains 
     the most serious bilateral trade issue between the United 
     States and Hong Kong. In January, the Department of Trade and 
     Industry informed the Task Force Chairman that the

[[Page E1151]]

     number of customs officers monitoring Intellectual Property 
     Rights (IPR) enforcement had doubled since June 1997. A 
     significant increase in raids, seizures and prosecutions at 
     all levels, combined with the passage of new, more effective 
     Prevention of Copyright Piracy ordinance, led the U.S. Trade 
     Representative to remove Hong Kong from the Special 301 Watch 
     List after an out-of-cycle review in February 1999. Despite 
     this positive step, much more remains to be done to crack 
     down on the trade in pirated products. Hong Kong's domestic 
     recording and film industries have also begun to demand 
     stricter enforcment, reflecting their growing awareness of 
     the impact of priacy on their own profitability. This 
     domestic support for tougher enforcement is likely to provide 
     impetus for further improvements.
       To combat money laundering, U.S. Government agencies 
     continue to urge the Hong Kong Government to adopt mandatory 
     financial transaction and foreign exchange reporting 
     requirements and to explore options for discovering the 
     illicit use of non-bank remittance centers. In early 1999, 
     the Hong Kong Government began the legislative process to 
     bring these centers under regulatory oversight, complete with 
     mandatory reporting requirements. U.S. Government agencies 
     also are urging that Hong Kong establish a mandatory minimum 
     value currency entry and exit reporting requirement and 
     penalties for illicit cross-border currency movements and 
     bank deposits.
       At the time of this report, there appeared to be no 
     significant problems between Hong Kong and the United States 
     Government in the area of export controls. Hong Kong 
     continues to vigorously enforce what is widely viewed as a 
     highly regarded trade control regime. The U.S. Government 
     reports no evidence of Chinese interference in Hong Kong's 
     export control decisions. Chinese officials have explicitly 
     recognized that export control matters fall within the trade, 
     rather than the foreign policy, ambit, thereby placing export 
     controls within the Hong Kong Government's exclusive purview. 
     Hong Kong's trade control regime is uniquely strict in a 
     number of its features, including the requirement for import 
     licenses as well as the more common export licenses. This 
     enables Hong Kong authorities to track controlled commodities 
     entering, as well as leaving the HKSAR. Hong Kong also 
     refuses to issue re-export licenses for products unless it is 
     sure that the original exporting country, including, of 
     course, the United States, would export the product to the 
     relevant end-user. In one 1998 case, U.S. Commerce Department 
     agents notified Hong Kong Customs of the re-export of a high 
     performance U.S. computer from Hong Kong to the Changsha 
     Institute in China. Hong Kong Customs undertook an 
     investigation, uncovering a total of eleven shipments by the 
     same Hong Kong company that appeared to violate Hong Kong, if 
     not U.S., export control laws. In February, 1999, Hong Kong 
     officials advised a U.S. interagency export control 
     delegation that it intended to prosecute the case on four 
     counts of violating export control laws.
       United States Department of Commerce officials continue to 
     conduct regular pre-license and post-shipment inspections as 
     part of the dual-use licensing process. In addition, U.S. 
     Department of State and U.S. Customs officials carry out pre-
     license and post-shipment checks of munitions items under the 
     ``Blue Lantern'' program. In all such cases, Hong Kong 
     officials are neither informed of such checks nor are they 
     involved in making them. Hong Kong's Customs and Excise 
     Department conducts routine checks at entry and exit 
     points and searches of vehicles and vessels to ensure that 
     all strategic trade shipments have the required government 
     approval. One concern that has been raised regarding Hong 
     Kong's export control regime has been the lack of customs 
     inspection of Chinese People's Liberation Army (PLA) 
     vehicles when they cross the border between Hong Kong and 
     China. While this poses a potential vulnerability, U.S. 
     Government agencies have no indication that the PLA is 
     using this process to divert U.S. technology to China. The 
     Task Force Chairman raised this as an area of concern with 
     Hong Kong officials during his visit in January, 1999, and 
     U.S. Government officials have raised it as well.


                                 Macau

       Preparations continue for the reversion of Macau to Chinese 
     sovereignty on December 20, 1999, after 442 years as a colony 
     of Portugal. Like the much larger Hong Kong, Macau with its 
     414,000 residents, will become a Special Administrative 
     Region under the ``one country, two systems'' formula for the 
     next 50 years. As we noted in our previous quarterly report, 
     the pace of preparation for the transition has been uneven 
     and a number of key elements have yet to be resolved. One 
     factor impeding progress appears to be Portugal's unhappiness 
     with China's unilateral announcement in September 1998 that 
     it planned to station PLA troops in Macau following the 
     reversion. The Portuguese maintain that there is no room for 
     such a garrison in cramped Macau, and that in previous 
     negotiations on the joint declaration concerning Macau the 
     Chinese had agreed no PLA presence was necessary.
       On March 19, Portuguese President Jorge Sampaio met in 
     Macau with Chinese Vice Premier Qian Qichen, but indicated 
     that the troop question would be addressed in bilateral talks 
     later in the year. Sampaio indicated it was possible 
     negotiations could be prolonged up until the moment of the 
     hand-over, and warned he might not attend the ceremony itself 
     if a satisfactory agreement was not reached. Among other 
     important matters still to be settled are the structure of 
     Macau's court of final appeal; the eligibility of certain 
     ethnically Chinese Macau residents to retain Portuguese 
     nationality; legislation implementing Macau's accession to 
     the International Covenant on Civil and Political Rights and 
     the International Convention on Economic, Social, and 
     Cultural Rights; and whether Portuguese will enjoy equal 
     status with Chinese as Macau's official languages. In March, 
     the initial steps were taken toward the nomination of the 200 
     person selection committee empowered to select Macau's first 
     post-reversion Chief Executive before the end of May. 
     (Subsequent to the date of this report, the selection 
     committee was named during the April meeting of the 
     Preparatory Committee of the Macau Special Administrative 
     Region. On May 15, Edmund Ho, a 44 year-old banker and son of 
     a well-known Macau community leader was selected to be the 
     Chief Executive. He will take office on the date of Macau's 
     reversion to Chinese sovereignty on December 20, 1999.)
       While U.S. trade volume with Macau is relatively small, 40 
     percent of Macau's exports go to the United States. Eighty 
     percent of Macau's total exports consist of textiles, and the 
     U.S. Government has long been concerned about the potential 
     that textiles produced elsewhere are being transhipped 
     through Macau. U.S. Customs officials have visited Macau on a 
     number of occasions to verify local production capacity, and 
     continue to work with the Government of Macus to prevent such 
     transhipment. Intellectual Property Right (IPR) piracy is 
     another key concern, and Macau has been on USTR's Priority 
     Watch List for IPR since April 1998. In response to U.S. 
     suggestions that it intensify and raise the profile of its 
     IPR enforcement actions, the Government of Macau conducted a 
     public destruction of seized pirated goods in March 1999. 
     Other inadequacies in Macau's laws related to trade include a 
     lack of effective legislation and enforcement mechanisms in 
     the areas of money laundering and export controls. These are 
     particularly troubling in view of widespread reports that 
     North Korean operatives currently use Macau as a transit 
     point for shipments of counterfeit U.S. currency.
       Finally, problems remain with the overall climate of law 
     and order. Gangland killings and drive-by shootings continue 
     to negatively affect Macau's image and its tourism industry. 
     Responsibility for the high levels of criminal activity have 
     at times been a point of contention between China and 
     Portugal. A failure to bring about improvements in this area 
     could tempt more overt action by Beijing following Macau's 
     reversion, with potentially harmful consequences to the 
     autonomy of the Government of Macau.


       Conclusion--Still so far, so good, with some new concerns

       In the months prior to Hong Kong's reversion to Chinese 
     sovereignty in July 1997 many voiced concern that Beijing 
     would rapidly move to undermine the relatively open political 
     system and the free market economy of Hong Kong. There was 
     great suspicion that the Chinese-appointed Provisional 
     Legislature would undermine all of the democratic principles 
     that Hong Kong had embraced. It was argued that, among other 
     things, press freedom and freedom of assembly would be 
     radically curtailed, and that the People's Liberation Army 
     garrison would rapidly interject itself into Hong Kong 
     affairs. Critics also warned that mainland financial 
     interests would rapidly move to manipulate and control the 
     then vibrant Hong Kong economy.
       More than twenty months after the reversion, these fears 
     have proven to be unfounded, up to this point. Hong Kong 
     residents have retained the basic freedoms that they enjoyed 
     under British rule. Although buffeted by the Asian Financial 
     Crisis, the business community and the Government, appear 
     united in their desire to keep Hong Kong's market as free as 
     possible. The PLA troops have kept to their barracks, and 
     Beijing has repeatedly displayed a disinclination to involve 
     itself in Hong Kong's internal affairs. Although sharp 
     differences have arisen within Hong Kong, particularly 
     between the Government and opposition legislators to date 
     informed observers see no evidence of any intent by China to 
     violate the tenets of the Basic Law and the ``one country, 
     two systems'' concept.
       This is not to say that there is no cause for further 
     concern. As we have noted in this report, the current crisis 
     over the Court of Final Appeal.s's decision on the right of 
     abode has the potential to undermine confidence in Hong 
     Kong's future judicial autonomy and the rule of law. Cautious 
     consideration of the long range implications of any action 
     aimed at addressing the practical implications of the ruling 
     is clearly appropriate. It would appear that improved 
     communication between the Government and the Legislative 
     Council could make a significant contribution to the 
     achievement of a solution, as well as facilitating public 
     consensus on Hong Kong's future political development. Trade 
     related issues, including IPR piracy and money laundering, 
     also deserve continued attention. Hong Kong's excellent 
     export control system is intact, but attention to the 
     potential loophole afforded by cross-border PLA vehicle 
     movements is also needed. Congress should continue its 
     practice of monitoring developments in these and other areas.


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