[Congressional Record (Bound Edition), Volume 145 (1999), Part 2]
[Extensions of Remarks]
[Pages 2143-2145]
[From the U.S. Government Publishing Office, www.gpo.gov]




        HONG KONG TRANSITION--REPORT OF THE SPEAKER'S TASK FORCE

                                 ______
                                 

                           HON. DOUG BEREUTER

                              of nebraska

                    in the house of representatives

                       Tuesday, February 9, 1999

  Mr. BEREUTER. Mr. Speaker, this Member rises today to submit the 
Fifth Quarterly Report of the Speaker's Task Force on the Hong Kong 
Transition. It has been more than eighteen months since Hong Kong 
reverted to Chinese sovereignty on July 1, 1997. Prior to that historic 
event, and at the request of former Speaker Newt Gingrich, this Member 
formed the House Task Force on Hong Kong's Transition. In addition to 
myself as Chairman, the Task Force was bipartisanly balanced in its 
membership during the 105th Congress, including Representative Howard 
Berman (D-CA), Representative Sherrod Brown (D-OH), Representative Eni 
Faleomavaega (D-AS), Representative Alcee Hastings (D-FL), 
Representative Jay Kim (R-CA), Representative Donald Manzullo (R-IL), 
and Representative Matt Salmon (R-AZ).
  The Task Force now has completed its Fifth Quarterly Report which 
assesses how the reversion has affected Hong Kong. The Fifth Report, 
which I submit today, covers the period of July through September 1998, 
during which there was no actual visit to Hong Kong by the Task Force. 
In the next several weeks the Sixth Quarterly Report will be completed 
and presented to Speaker Dennis Hastert and the House.
  Mr. Speaker, this Member submits the Task Force Fifth Quarterly 
Report and asks that it be printed in full in the Congressional Record.

  The Speaker's Task Force on the Hong Kong Transition, Fifth Report, 
                            February 2, 1999

          (Presented by the Honorable Doug Bereuter, Chairman)

       The following is the fifth quarterly report of the Task 
     Force on the Hong Kong Transition. It follows the first 
     report dated October 1, 1997, the second report dated 
     February 25, 1998, the third report dated May 22, 1998, and 
     the fourth report dated July 23, 1998. This report focuses on 
     events and development relevant to United States interests in 
     Hong Kong between July 1, 1998, and September 30, 1998--the 
     fifth quarter following Hong Kong's reversion to China.
       The fifth quarter following Hong Kong's reversion to 
     Chinese sovereignty on July 1, 1997, has been dominated by 
     increasing concern about Hong Kong's economic situation. The 
     good news is that Hong Kong has continued to enjoy 
     substantial political economic autonomy following its 
     reversion to Chinese sovereignty. Hong Kong continues to 
     voice its own views in international economic fora, including 
     the World Trade Organization (WTO) and APEC. On the bad news 
     side, however, Hong Kong's economy has been dragged down by 
     external factors and its strong currency. The driving forces 
     of the slowdown are largely beyond the Hong Kong government's 
     control and are not related to Hong Kong's reversion to 
     Chinese sovereignty.


                         Economic Developments

       Hong Kong continued to suffer the negative effects of the 
     Asian Financial Crisis, posting its third consecutive quarter 
     of negative growth, as its first recession in thirteen years 
     showed no sign of coming to a quick end. An early turnaround 
     continues to appear unlikely. Hong Kong's GDP is now 
     projected to shrink by four percent in 1998. (Official 
     figures for the second quarter of 1998 show a GDP drop of 5.2 
     percent, following the first quarter's decline of 2.8 
     percent.) This would be the first annual economic contraction 
     on record. Some Hong Kong companies have cut wages by 10 
     percent. Compared to the same period in 1997, total retail 
     sales from January 1998 to July 1998 decreased by 15 percent 
     in value, reflecting shrinking local consumer demand, reduced 
     tourism, and the fall in asset markets. Hong Kong's stock 
     market has dropped by roughly 50 percent since its peak in 
     August 1997, property prices have fallen by as much as 60 
     percent, and unemployment has soared to a fifteen year high 
     of five percent.
       The budget deficit for fiscal 1998-99 may substantially 
     exceed the current estimate of HK $20 billion (US $2.56 
     billion), which the government announced in June. (The 
     original government forecast for the fiscal year projected 
     3.5 percent growth and a budget surplus of about HK $10 
     billion.) The budget deficit can be expected to retard growth 
     in government expenditures over the next few years. Although 
     the government had been promising a revised medium-range 
     economic forecast since mid-August, it failed to produce one 
     by the end of the quarter, indicating to some an 
     unwillingness on the part of the government to face up to the 
     full consequences of the recession on public spending. The 
     government continues to insist that the currency peg to the 
     U.S. dollar is here to stay, despite serious attacks by 
     speculators. Defending the peg has required the government to 
     keep interest rates high, further depressing economic growth, 
     and was a major motivation for the government's decision to 
     intervene in the stock market in August (see below).
       The stock market's Hang Seng Index at one point fell to 
     6660, 44 percent below its highwater mark for 1998 on March 
     25. The market remained concerned about Japan's economy, 
     China's commitment to maintaining the value of the renminbi, 
     and regional economic woes. On August 14, the government 
     intervened massively in the stock market, spending an 
     estimated US $15 billion (representing over 15 percent of 
     Hong Kong's US $96 billion reserves) to buy stocks, futures, 
     and currency in an effort to keep

[[Page 2144]]

     share prices at levels that would punish speculators betting 
     on a decline. The government later imposed more stringent 
     trading regulations to make illegal trading and speculation 
     more difficult. Even with the government's massive 
     intervention, the market ended September at 7,883 points, 
     down 48 percent since September 1997. Trading volume also 
     plummeted, with the average daily turnover for the first nine 
     months of 1998 standing at just 40 percent of the 
     corresponding figure for 1997. In terms of value, average 
     daily turnover fell 56 percent.
       In defending their decision to intervene, senior Hong Kong 
     officials cited fears that unnamed ``foreign traders'' were 
     improperly manipulating Hong Kong's markets. They maintained 
     it was not their intention to interfere with market forces, 
     only to improve Hong Kong's ability to manage its monetary 
     affairs. The government said the measures were necessary to 
     counter harmful speculative activities and to stabilize 
     interest rates. Some observers have expressed concern that 
     the intervention could mark the beginning of a turn away from 
     the global market. While this seems unlikely given Hong 
     Kong's overwhelming dependence on foreign trade, the August 
     market intervention does pose some worrisome questions. The 
     Hong Kong government's unprecedented ownership of significant 
     amounts of equity, both in Hong Kong-based companies and in 
     PRC-related ``Red Chips,'' has the potential to begin to 
     affect official decision making in ways contrary to Hong 
     Kong's traditions of free markets and transparency.
       There is some positive economic news. Inflation is low and 
     falling, with the year-on-year rate of increase in the 
     composite consumer price index standing at 2.7 percent in 
     August, down appreciably from 3.2 percent in July. The August 
     figure was also the lowest monthly figure recorded since Hong 
     Kong began tracking the year-on-year inflation rate in 1981. 
     For the first time in a year, the unemployment rate did not 
     increase in September, holding at the same five percent it 
     reached in August. The tourism market recovered slightly in 
     September, with tourist arrivals and hotel occupancy rates 
     showing small increases over August figures. Hong Kong also 
     still possesses substantial foreign currency reserves, even 
     after the costly market intervention in August. The slump has 
     exposed inherent flaws in Hong Kong's economic fabric, 
     however, particularly its heavy dependence on entrepot trade 
     and the relative lack of growth in sectors with high value-
     added, such as the high-tech industry. With hope of a swift 
     recovery fading, further pay cuts and layoffs appear certain. 
     Land sales remain suspended until next March--a step intended 
     to reduce downward pressure on the real estate market. Hong 
     Kong's recovery would appear to hinge on a combination of 
     external and internal factors, including improved 
     international financial conditions, a steadying of interest 
     rates, restored stability in the property market and a return 
     of public confidence.


     Political Developments--Economic Problems Affect Government's 
                               Popularity

       One casualty of Hong Kong's continued economic malaise has 
     been Chief Executive Tung Chee-hwa's popularity with 
     significant portions of the public. As Beijing's choice to 
     preside over the Hong Kong government, Tung lacks the popular 
     mandate that can help government leaders push through 
     unpopular measures in difficult economic times. As Hong 
     Kong's economic problems have deepened, Tung has been 
     criticized for timidity and failure to enunciate major 
     initiatives to address the crisis.
       The newly elected Legislative Council (LegCo) took its seat 
     on July 2, replacing the provisional legislature that had 
     been appointed upon reversion. Under the executive-led system 
     of governance prescribed by the Basic Law, however, the new 
     LegCo has relatively narrow powers and does not form a 
     government. Rather, like past legislatures, the new LegCo is 
     essentially a monitoring body that can block or amend 
     government legislation and can call on the administration to 
     defend government policy. Legislators have the power to 
     introduce private member bills, but not ones that involve 
     public expenditure, the political structure, or government 
     operations. Troubled relations between the Government and the 
     LegCo is widely seen as a serious problem.
       Pro-democracy candidates elected in the May LegCo elections 
     have been pushing for a faster transition to full democracy. 
     On July 15, Democratic Party (DP) legislator Andrew Cheng 
     Kar-foo introduced a motion for the LegCo to endorse direct 
     elections of all members in the year 2000 and direct 
     elections for the office of chief executive in the year 2002. 
     (Note: Although the Basic Law does not guarantee a date when 
     the entire LegCo or the Chief Executive will be directly 
     elected, it sets forth an ``ultimate aim'' of electing a 
     legislature and a Chief Executive after a transition period 
     of about ten years.) Tung opposed this proposal, however, 
     arguing that the addressing the economic crisis requires 
     stability, and until now has declined to advance the 
     timetable for subjecting the Chief Executive post and the 
     full legislature to direct election. The measure was defeated 
     in both divisions of the LegCo, by a vote of 15-14 among 
     geographical constituency and election committee 
     representatives, and by a 20-5 margin among functional 
     constituency representatives. Voting was split along strict 
     party lines, with members of the DP, the Frontier Party, and 
     the Citizens Party supporting it and legislators from the 
     Democratic Alliance for the Betterment of Hong Kong (DAB), 
     the Hong Kong Progressive Alliance (HKPA) and the Liberal 
     Party opposed.
       A government-led effort to reassess the current local 
     government structure is now underway. Scrapping the elected 
     Urban and Regional Councils--the option the government is 
     believed to favor--comes in for strong opposition from many 
     LegCo members. While these councils have been criticized for 
     their incompetence in handling public hygiene and other 
     matters under their purview, abolishing them outright could 
     send a disturbing message about the government's attitude 
     toward democracy and also deprive Hong Kong of a vital 
     training ground for future LegCo members. The ultimate impact 
     of scrapping the councils will depend on the degree to which 
     responsibility and funding for managing issues now handled by 
     those bodies devolve to the elected district boards.


                   Rule of Law--Freedom of Expression

       As we have noted in earlier reports, international 
     confidence in Hong Kong is based on the commitment of Hong 
     Kong's authorities to the rule of law inherited from the 
     British. An integral part of this is the ``check'' on abuse 
     of authority provided by the free expression of opinion. 
     During this quarter, we find again that the people of Hong 
     Kong largely continue to express themselves without 
     restraint. The Hong Kong government has not denied any 
     application for a demonstration permit since reversion. 
     Beijing authorities continue to bend over backward to avoid 
     the appearance of interference in Hong Kong affairs.
       Hong Kong's media also continue to practice their 
     traditional vibrant style of journalism without overt 
     interference from authorities in Hong Kong or Beijing. 
     Nonetheless, concerns regarding self-censorship continue. 
     Chief Executive Tung has stated publicly on a number of 
     occasions that he believes Hong Kong people should not be 
     freely expressing their support for independence for places 
     like Taiwan, Tibet, and Xinjiang. The question of freedom of 
     expression and how it applies to expressions about certain 
     sovereignty issues in China is especially important because 
     under the Basic Law, Hong Kong is required to enact laws on 
     treason, secession, sedition, and subversion. Through the end 
     of the quarter, however, the Hong Kong government had not 
     introduced bills addressing these matters, and the Secretary 
     for Justice stated that there was no rush to pass sedition 
     laws. When they finally are introduced, such bills will be a 
     crucial test of Hong Kong's adherence to freedom of 
     expression, depending on whether they seek to criminalize 
     mere expressions of support for independence for those areas 
     or other expressions of opinion concerning the Chinese 
     government.
       A fair and independent judiciary is another critical 
     element of international confidence in Hong Kong. In general, 
     the Hong Kong judiciary continues to operate independently 
     and without taint of political influence. During the past 
     quarter, we noted no instances that would call into question 
     the judiciary's independence or its vulnerability to Chinese 
     influence.


                              Trade Issues

       While the Asian Financial Crisis has seriously jolted and 
     hurt Hong Kong's economy, it has also highlighted Hong Kong's 
     serious and unhealthy dependent on entrepot trade between 
     China and other nations, particularly the U.S. During the 
     quarter, entrepot trade figures turned negative for the first 
     time since the onset of the crisis, with July 1998 re-exports 
     decreasing by 11 percent over the same month in 1997. With 
     exports from domestic manufacturing in Hong Kong dropping by 
     eight percent in the same period, overall exports showed a 
     decrease of 10 percent in July from one year ago.
       As noted in our previous quarterly report, Hong Kong's 
     reliance on entrepot trade leaves it vulnerable in the event 
     that continued large trade deficits between the U.S. and 
     China prove politically or economically unsustainable. If the 
     China trade deficit issue is not addressed by increased 
     market access for U.S. firms to China, then Hong Kong could 
     get hit with collateral damage from a frustrated America and 
     U.S. Government--even if it does everything right.
       While the Hong Kong Government has taken significant steps 
     to improve its intellectual property rights regime and 
     enhance enforcement efforts, the production and retail sale 
     of pirated movie, audio and software compact discs continues 
     to be the most serious bilateral trade issue between the 
     United States and Hong Kong. Representatives of the 
     recording, film, and software industries generally agree that 
     Hong Kong has made some progress in curbing intellectual 
     property rights violations at the retail level since the 
     Customs service began a campaign of sustained raids in April. 
     Using enforcement tools from the June 1997 Prevention of 
     Copyright Piracy ordinance, Customs officers have been able 
     to substantially increase seizures of pirated goods. In 
     August and September, authorities raided several illicit 
     factories and distribution centers, seizing more than 1.8 
     million pirated discs. The intensified

[[Page 2145]]

     enforcement generally pushed retail shops selling pirated 
     goods further out of the city core and away from areas 
     frequented by tourists. Despite these improvements, more 
     remains to be done, and an estimated 100 to 150 shops are 
     still selling pirated U.S. products.
       On the production side, 60 factories with some 200 
     production lines have applied or registration under a 
     provision of the Prevention of Copyright Piracy ordinance. 
     On-site inspections by Customs officials determined that 
     another 19 known factories that failed to register and close 
     during the registration period. A twentieth was closed 
     following a raid on September 3. Trade and Customs officials 
     have said they will inspect the registered factories 
     regularly, including after normal working hours. In early 
     August, the Hong Kong Government also successfully prosecuted 
     the first illicit factory case to go to court. Although the 
     penalties imposed by the court were relatively minor, the 
     failure of the defendant's ``no knowledge'' plea set an 
     important precedent. While there is some evidence that 
     illicit compact disc production has been dropping, it is 
     still too early to judge the ultimate effectiveness of the 
     new copyright ordinance. To date, the drop in illicit 
     production appears attributable to copyright pirates' 
     decision to ``wait and see'' how strictly the ordinance will 
     be enforced and to stepped up anti-smuggling efforts in the 
     People's Republic of China. All sources agree that the 
     mainland has been the primary market for Hong Kong's 
     producers of illicit discs.
       One area in which enforcement has yet to increase is in the 
     illegal use of business software. Responding to requests from 
     the Business Software Alliance, Trade and Industry Bureau 
     officials say they have asked Customs to pursue cases of 
     corporate end-users of unlicensed software and unauthorized 
     hard-disc loading by dealers. To date, however, Customs has 
     failed to act.
       Money laundering also remains a very serious concern in 
     U.S. bilateral relations with Hong Kong. As noted in earlier 
     reports, the same favorable factors that make Hong Kong one 
     of Asia's most important financial centers also make it 
     attractive to criminals wishing to conceal the source of 
     their funds through money laundering. It is important that 
     Hong Kong continue to work with the international community 
     to improve its laws and enforcement in this vital area. Hong 
     Kong and the United States continue to make progress toward 
     negotiation of a bilateral investment agreement based on the 
     model text approved by China through the Sino-British Joint 
     Liaison Group.
       Another event with implications for trade was the opening 
     of Hong Kong's new airport at Chek Lap Kok in early July. 
     Unfortunately, the government found its self subjected to 
     widespread criticism over the chaotic way in which the 
     opening was handled. Cargo operations, in particular, were 
     seriously disrupted. The problem was so severe that it could 
     shave up to a full point off of GDP in 1998. Chief Executive 
     Tung appointed a commission of inquiry to look into what went 
     wrong. The commission is expected to finish its work in early 
     1999. The LegCo also has launched its own inquiry into the 
     matter.


                      Security and Related Issues

       Regarding the three primary security related issues with 
     Hong Kong--ship visits, People's Liberation Army (PLA) 
     activities, and export controls--the U.S. Navy continues to 
     enjoy an excellent relationship with Hong Kong in terms of 
     ships visit. The relationship with Hong Kong Port authorities 
     since the reversion has been outstanding.
       The second security concern is related to the influence of 
     the PLA and the Chinese defense industries in Hong Kong 
     business and the possible surreptitious acquisition by the 
     PLA of militarily sensitive technologies. The PLA garrison 
     includes an estimated 4,700 personnel physically stationed in 
     Hong Kong, and has a total strength of 8,000 (The remainder 
     are based at a headquarters element on PRC territory.) The 
     PLA has continued to keep a low profile during the 
     quarter, raising no concerns about activities with respect 
     to the Hong Kong population. We continue to have no 
     evidence of direct involvement by the estimated 200 PLA-
     related companies in Hong Kong in acquisition of sensitive 
     technology. Should PLA entities operating in Hong Kong be 
     found to be engaged in arms trading or acquisition of 
     Western technology, however, Hong Kong's relations with 
     the U.S. would be put at risk. Such activity, or the lack 
     thereof, will be an important determinant of congressional 
     attitudes in the future.
       Export controls are a third area of security-related 
     concern. Once again, we are pleased to note no new incidents 
     of export control violations to report this quarter. Hong 
     Kong continues to exercise autonomy as a separate customs 
     territory within China and to demonstrate vigorous 
     enforcement of its strict export control regime. United 
     States officials continue to conduct prelicense and post-
     shipment inspections. In a sign of their continued close 
     cooperation, in July U.S. and Hong Kong customs officials 
     held the second in a series of consultations on licensing, 
     enforcement, and the exchange of information.


                                 Macao

       The Portuguese colony of Macao will revert to Chinese rule 
     on December 20, 1999, after 442 years. Like Hong Kong, this 
     territory of 414,000 people, 95 percent of whom are ethnic 
     Chinese, will become a Special Administrative Region with a 
     ``one country, two systems'' formula for the next 50 years. 
     As we noted in our previous quarterly report, however, a 
     number of transition issues for Macao are very different from 
     those faced by Hong Kong. Unlike Hong Kong, for instance, the 
     legislature elected under colonial rule will remain in place.
       While U.S. interests in Macao are not nearly as large as 
     those in Hong Kong, they nonetheless require our continued 
     attention. These continue to be credible reports of 
     transshipment of textiles through Macao. Primary among our 
     economic concerns, however, is Macao's role as a 
     manufacturing center for pirated goods, particularly pirated 
     compact discs. To date, Macao has yet to develop adequate 
     legislation and enforcement mechanisms and has not dedicated 
     sufficient manpower to tackle this problem. Macao also lacks 
     legislation on money laundering. It is in U.S. interests to 
     press Macao's authorities to move forward expeditiously to 
     correct these shortcomings.
       In September, China announced that it would station troops 
     in Macao following its reversion. Macao's Portuguese 
     administrators still have not made adequate arrangements to 
     replace themselves with local Macanese officials and remain 
     well behind where the British were 15 months before the 
     reversion of Hong Kong. They have also been deficient in 
     maintaining law and order. Incidents of gangland killings and 
     attacks on public officials remain all too frequent, 
     negatively affecting Macao's tourism. China and Portugal have 
     at times engaged in mutual recrimination about responsibility 
     for the upsurge in criminal activity. It will be difficult 
     for the territory to complete a smooth transition unless it 
     brings this situation under control.


                               Conclusion

       The Hong Kong Transition Task Force has ended our previous 
     four quarterly reports with the assessment ``so far, so 
     good.'' Our fundamental assessment remains the same, although 
     we have a few new concerns, particularly with respect to the 
     economy. While we recognize that the economic crisis now 
     affecting Hong Kong is largely beyond its ability to control, 
     the government's response to that crisis has the potential to 
     alter the current situation, both for good and for ill. In 
     particular, the Hong Kong government's decision to intervene 
     in the stock market in August, while arguably a defensible 
     response in the face of these external economic pressures, 
     poses some worrisome questions about how Hong Kong's economic 
     policy may evolve in the future. We remain encouraged by the 
     demonstration of support for democratic institutions shown in 
     the May election, as described in our previous quarterly 
     report. Looking ahead, we hope to see continued progress 
     toward universal suffrage and the expansion of the number of 
     officials chosen by direct election. Finally, we continue to 
     be satisfied with the restraint shown by the Chinese 
     government in its handling of Hong Kong, at least to the 
     extent visible to outside observers. Undoubtedly, the coming 
     months will pose additional challenges for Hong Kong and the 
     region. It is important that the international community and 
     Congress continue their practice of closely monitoring 
     developments.

     

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