[Congressional Record (Bound Edition), Volume 146 (2000), Part 1]
[Extensions of Remarks]
[Pages 872-876]
[From the U.S. Government Publishing Office, www.gpo.gov]



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

                                 ______
                                 

                           HON. DOUG BEREUTER

                              of nebraska

                    in the house of representatives

                       Tuesday, February 8, 2000

  Mr. BEREUTER. Mr. Speaker, I rise today to submit the Sixth Report of 
the Speaker's Task Force on the Hong Kong Transition. It has been 
approximately two and half 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, Sherrod 
Brown, Eni Faleomavaega, Alcee Hastings, Don Manzullo, and Matt Salmon.
  To date, the Task Force has prepared six reports assessing how the 
revision has affected Kong Kong. The seventh report, which I submit 
today, covers the period of March 31, 1999, through December 31, 1999. 
Mr. Speaker, I submit the following Task Force report to be printed in 
full in the Congressional Record.

                    Seventh Report--February 7, 2000

           Presented by the Honorable Doug Bereuter, Chairman

       This is the seventh 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, the fourth report dated July 23, 
     1998, the fifth report dated February 2, 1999, and the sixth 
     report dated May 27, 1999. This report focuses on events and 
     development relevant to United States interests in the Hong 
     Kong Special Administrative Region (HKSAR) between May 27, 
     1999, and December 31, 1999.
       It has been over two years since Hong Kong reverted to 
     Chinese sovereignty on July 1, 1997. It remains a vibrant 
     economy that the Heritage Foundation and the Cato Institute 
     recently ranked as the freest in the world. During the past 
     six months, Hong Kong's economy showed signs of recovering 
     from the recession induced by the Asian regional financial 
     crisis, although economic indicators were mixed. China's 
     World Trade Organization (WTO) agreement with the U.S., and 
     agreement to build a major Disney theme park in Hong Kong 
     contributed to the mood of economic optimism and business 
     confidence. Hong Kong continued to operate independently in 
     economic decision-making and to voice its own views in 
     international fora, including the WTO and APEC.
       In the six months covered by this report, concerns have 
     grown about the long term prospects for the independence of 
     Hong Kong's judiciary. These concerns were prompted by the 
     decision of the National People's Congress, (NPC) at the 
     request of the Hong Kong Government, to reinterpret the Basic 
     Law and reverse the Court of Final Appeal's (CFA) ``right of 
     abode'' decision for mainland Chinese. The NPC's 
     interpretation and the CFA's acknowledgement of the NPC's 
     authority over the matter drew considerable domestic and 
     international criticism, including that of the UN Human 
     Rights Committee (UNHRC). On November 5, the UNHRC released a 
     report critical of Hong Kong's post-transition record in a 
     number of human rights related areas. (In addition to the 
     question of judicial independence, the report expressed 
     concern about the abolition of municipal councils, phone 
     monitoring and freedom of association.) A recommendation by 
     the Hong Kong Law Reform Commission to establish an 
     independent ``privacy commission'' to monitor media excesses 
     also created concern because of the implications for media 
     freedoms. The Government initially remained neutral, but in 
     October the Chief Executive expressed the hope that the press 
     could regulate itself.
       On May 21, 1999, following the mistaken bombing of the 
     Chinese Embassy in Belgrade, the PRC halted U.S. naval and 
     air visits to Hong Kong. At least seven military aircraft and 
     ten warships were denied permission to visit. After a two 
     month ban, the Chinese Government began granting permission 
     for plane visits on July 29, 1999, and a U.S. Navy destroyer 
     was permitted to visit in October. Since then, other visits 
     have taken place and a carrier task force and nuclear 
     submarine were granted permission to visit in February.
       The reversion of Macau to Chinese administrative control on 
     December 20, 1999, went smoothly. Like Hong Kong, Macau will 
     become a Special Administrative Region within a ``One 
     Country, Two Systems'' formula under which the legislature 
     elected under colonial rule will remain in place. However 
     Macau faces a number of daunting economic and political 
     challenges. Macau's civil service is inexperienced compared 
     to Hong Kong. The judicial system is also poorly developed 
     and there are few trained or experienced judges. The economy 
     is heavily reliant on gambling and tourist related 
     industries. Crime, corruption and violence are serious 
     problems that have begun to affect the tourist/gaming 
     industry. For a variety of reasons, Macau's evolution under 
     the One Country, Two Systems model is likely to differ 
     considerably from Hong Kong's.


                         Economic Developments

       Developments on the economic front in the past six months 
     have been positive. A survey by the Heritage Foundation and 
     the Wall Street Journal once again ranked Hong Kong as the 
     world's freest economy. In January 2000, the Cato Institute 
     came to a similar conclusion in its report. Hong Kong's 
     economy showed signs of recovering from the recession induced 
     by the Asian regional financial crisis, although economic 
     indicators were mixed. After four consecutive quarters of 
     negative economic growth, the recession in Hong Kong appears 
     to have bottomed out, with positive growth of 0.7% projected 
     for the second quarter. In September, The IMF forecast that 
     Hong Kong would have GDP growth of 1.2% this year and 3.6% 
     next year.

[[Page 873]]

     The Government projected budget deficit for the 1999-2000 
     fiscal year that began April 1 was estimated at HK $32 
     billion (US $4.1 billion), although overall foreign exchange 
     reserves remained high at over US $90 billion. However, 
     unemployment remained at historically high levels. The figure 
     for the August-October quarter was 6.2%, up from 6.1% the 
     previous quarter. Underemployment remained steady at 3.1%. 
     Weak demand and falling asset values brought about continued 
     significant deflation, with consumer prices falling 6.0% in 
     September over a year earlier. Investment spending remained 
     sluggish. Exports, tourism and retail sales were up in recent 
     months. The stock market has more than doubled since the 
     government decided to intervene in August 1998, although 
     concern remains about Government intervention in the economy.
       Export performance improved considerably in recent months. 
     However, for the first ten months of 1999, the volume of re-
     exports was down 0.7% and the volume of domestic exports was 
     down 12.2%. Imports for the first ten months of the year also 
     declined by 5.6%. The trend towards increased reliance on re-
     exports and offshore trade makes the economy susceptible to 
     external factors beyond Hong Kong's control. The Government 
     sought to address this problem in part through its ambitious 
     ``Cyberport'' project aimed at attracting world class 
     information technology companies. While this initiative was 
     widely welcomed, questions were raised by the government's 
     decision to sell the land for the project without an open, 
     transparent bidding process.
       Tourism was another sector with mixed indicators. The Hong 
     Kong Tourist Association projected in August that total 
     arrivals would exceed 10 million, an increase of over 6% from 
     1998. However, although arrivals did increase 13% in the 
     first quarter, spending was actually down by 0.8%. This 
     reflected the changing nature of tourism in Hong Kong, with 
     lower spending arrivals from the mainland making up an 
     increasingly large percentage of total visitors.
       Overall, Hong Kong's Government's massive intervention in 
     the currency and stock markets in August 1998 appears to have 
     been a success despite earlier concerns. The market rose to 
     over 15,000 in November 1999, compared to 6,660 in March 1998 
     before the intervention. Trading volume has also risen 
     sharply. The equities purchased by the Government have 
     increased greatly in value and the Government's unprecedented 
     ownership of significant amounts of equities, both in Hong 
     Kong-based companies and in PRC-related ``Red Chips'' has 
     raised questions about the potential to affect official 
     decision-making in ways contrary to Hong Kong's traditions of 
     free markets and transparency. To allay these fears, 
     authorities have placed the equities in the hands of an 
     independent appointed board and in November began the first 
     steps to liquidate its holdings by selling approximately 20% 
     to the public through an indexed tracking fund (``The Tracker 
     Fund'').
       Positive developments included the U.S.-China agreement on 
     China's accession to the WTO. Most analysts believe that WTO 
     membership for China should be an economic boon for Hong 
     Kong, both in the short and long term. China's accession to 
     the WTO is expected to benefit Hong Kong's business by 
     allowing it to capture its portion of China's expanding trade 
     and investment. However, Hong Kong is also likely to face 
     increased competition from the mainland in several fields and 
     will have to find new ways to keep serving as a bridge 
     between China and its global partners. Another plus was the 
     HKSAR's agreement with the Disney Corp. to build a major 
     theme park. Although some questioned the terms of the deal 
     and the fact that most of the investment would come from the 
     Hong Kong Government, most observers felt that the 
     development would provide a positive economic stimulus, 
     particularly for the tourism sector.


                         Political Developments

       Under the Basic Law that serves as Hong Kong's 
     Constitution, directly elected representatives to the 
     Legislative Council (Legco) from geographic constituencies 
     make up only 20 of the 60 members. That number will increase 
     to 24 in the year 2000 and 30 in 2004. The Basic Law allows 
     for (but does not mandate) the remaining 30 functional seats 
     to be converted to directly elected positions. It would also 
     permit the direct election of the Chief Executive in 2008. 
     Some elected members of Legco, as well as other political 
     activists, have been lobbying for some time for a faster 
     transition to a more democratic system. On January 3, 2000, 
     the three major political parties in Hong Kong, joined to 
     urge full democracy by 2008, arguing that the present system 
     is ``unsustainable.'' However, in his 1999 policy address in 
     October, Chief Executive Tung Chee-hwa said he would restrict 
     democratic development to that laid down by the Basic Law. He 
     was quoted as saying, ``We must allow time for further study 
     and for the present political system to mature.''
       The current political system in Hong Kong is heavily 
     weighted towards concentrating power in the executive rather 
     than the legislature. Legco acts primarily as a monitoring 
     body that can block or amend government legislation and held 
     hearings. In this capacity, Legco performed well, ensuring 
     that views critical of the Government were vigorously voiced 
     and pursued. Legco forced the Government to become more 
     transparent than might otherwise have been the case, 
     involving and informing the public and maintaining a vibrant 
     political debate on issues of public concern. However, some 
     critics complained that Legco had few tangible achievements 
     since the Basic law leaves the Government with an 
     overwhelming preponderance of power. They cite Legco's 
     inquiry into problems at the new airport. Government 
     intervention in the stock market, the non-prosecution of a 
     well-connected editor, acquiescence on criminal jurisdiction 
     of the Hong Kong courts and the right of abode debate as 
     examples of Legco's ultimate inability to affect government 
     policies. Differences between many of Legco's elected 
     representatives and the Executive created tensions and caused 
     Tung to pledge that ``my administration will make still 
     greater efforts to maintain communication with Legco and 
     secure its greater support.'' He said that the two had 
     explored ways to establish a cooperative relationship.
       The Government's decision to eliminate elected municipal 
     councils by the end of the year brought widespread criticism. 
     The UNCHR said that abolishing the councils, which are 
     largely elected, would diminish the opportunity for the 
     public to take part in public affairs. The report urged the 
     government to ``take all necessary measures to maintain and 
     strengthen democratic representation of SAR residents in 
     public affairs.'' In addition, Chief Executive Tung's 
     decision to appoint additional members to the 18 local level 
     councils was seen by some as undemocratic and regressive. The 
     Democratic Party and the pro-Beijing Democratic Alliance for 
     the Betterment of Hong Kong (DAB) were the biggest winners 
     with 86 and 83 seats respectively. The DAB's showing, in 
     particular, was markedly better than in the last District 
     Council elections.


     Judicial Independence--right of Abode Decision Creates Concern

       A fair and independent judicial system is a critical 
     element of international confidence in Hong Kong. However, 
     two incidents involving the ``Right of Abode'' judgment 
     raised concerns about whether the independence and authority 
     of Hong Kong's judiciary would be maintained. The Hong Kong 
     Government's request for a clarification of sections of the 
     judgment referring to the court's right of judicial review, 
     and the Hong Kong Government's request for interpretation by 
     the National People's Congress of the section of the Basic 
     Law affecting the ruling.
       In January, the Court of Final Appeal issued rulings in 
     three cases, known collectively as the ``Right of Abode'' 
     ruling. The ruling declared some Hong Kong immigration 
     regulations (discriminating against children born out of 
     wedlock) inconsistent with the International Covenant on 
     Civil and Political Rights subsumed in the Basic Law and 
     confirmed that all children of Hong Kong residents had right 
     of abode in Hong Kong. The ruling also asserted the Court's 
     right of judicial review over not only the Basic Law, but 
     also over acts of the National People's Congress as they 
     affected Hong Kong.
       In February, in response to criticism from Chinese 
     officials, the Hong Kong Government requested an 
     unprecedented ``clarification'' of the ruling. The Court 
     responded with a statement stressing that it did not question 
     the power of China's NPC to interpret the Basic Law, but 
     reserved its power to test acts of the NPC against the Basic 
     Law. Human rights advocates and some lawyers and legislators 
     expressed concern that the clarification set a dangerous 
     precedent.
       In May, after releasing reports suggesting that the ruling 
     would result in an influx of 1.6 million new immigrants, the 
     Hong Kong Government asked the Standing Committee of the NPC 
     to interpret two sections of the Basic Law relevant to the 
     Right of Abode ruling. Hundreds of Hong Kong lawyers who 
     viewed the request as a post-judicial remedy which undermined 
     the authority and independence of Hong Kong's judiciary 
     marched in protest. Although the NPC interpretation issued in 
     June, did not affect the original litigants in the case, it 
     overturned the prescriptive effect of the CFA judgment and 
     reduced the number of people eligible for right of abode in 
     Hong Kong to 160,000. The UN Human Rights Committee expressed 
     concern that the interpretation could undermine the 
     independence of the Hong Kong courts and interfere with the 
     right to a fair trial. Legal scholars and activists said the 
     interpretation raised the question of ``how final is the 
     Court of Final Appeal?''
       In a judgment on a separate appeal in December, the CFA 
     upheld the NPC interpretation saying it was ``valid and 
     binding'' on courts in Hong Kong. The decision provoked 
     street clashes between protestors and police and caused a 
     widespread outcry from opposition legislators academics and 
     newspaper editorials. Legco legal sector representative, 
     Margaret Ng, for example, said that the ruling means the NPC 
     Standing Committee can interpret any part of the Basic Law at 
     any time, and the interpretation has a binding effect on the 
     Hong Kong courts. The South China Morning Post in a December 
     4, 1999, editorial said, ``it has now become clear that

[[Page 874]]

     the Basic Law means only what the NPC Standing Committee 
     wants it to mean, even if the SAR judges disagree.
       Another case that generated concern among some was the 
     CFA's December 15 decision that desecration of the national 
     and regional flags was indeed a criminal offense. While this 
     is the case in many countries, including Germany and Italy, 
     some critics viewed the decision as inconsistent with the 
     guarantee of freedom of expression and motivated by political 
     considerations.


             Freedom of Expression and Individual Liberties

       The people of Hong Kong continued to enjoy a tradition of 
     free speech and free press. Political debate is dynamic and 
     raucous. Thousands of demonstrations or petitions have been 
     filed or held since the reversion. A wide and diverse range 
     of opinions, including those critical of the Hong Kong and 
     PRC Governments, are routinely aired in the mass media and 
     public fora. Government owned, but independently operated, 
     Radio and Television Hong Kong (RTHK) is among the media that 
     has been routinely critical of the government. In August, 
     RTHK was criticized by a member of the NPC Standing Committee 
     for airing the views of Taiwan's unofficial representative in 
     Hong Kong to discuss Taiwan President Lee's ``state to 
     state'' theory of China-Taiwan relations. The NPC member 
     urged RTHK to exercise self-censorship on this issue and not 
     provide a channel for ``splittist views.'' The subsequent 
     reassignment of the widely respected, long time director of 
     broadcasting for RTHK, Cheung man-yee, in October was seen by 
     some as Government retribution for RTHK's independent 
     editorial policy. Democratic Party Chairman Martin Lee 
     labeled the ``exile'' of Cheung as a Government effort to 
     control the press. Cheung however, expressed continued 
     confidence in the editorial integrity and independence of 
     RHTK under her deputy and successor.
       On August 20, 1999, a subcommittee of Hong Kong's Law 
     Commission issued a recommendation that proposed establishing 
     an independent ``privacy commission'' to deal with complaints 
     about media excesses. The commission would be empowered to 
     hear complaints about unwarranted or offensive media 
     intrusions into peoples' personal lives (acknowledged even by 
     the media to be a serious problem), to make decisions about 
     the merits of those complaints, and to award compensation to 
     complainants. The media and public, given until November 30, 
     1999, to comment on the proposal, gave the subcommittee an 
     earful. Ms. Margaret Ng, a Legco representative of the law 
     profession voiced the concern of many calling the proposed 
     privacy commission a measure to control the press, not 
     protect privacy. A Freedom Forum representative described the 
     proposal as ``dangerous to press freedom.'' The U.S. consul 
     general in Hong Kong also expressed concern about the 
     proposal in a widely quoted speech. Thus far, the Government 
     has not taken a position on the proposal and for the time 
     being at least, Hong Kong media remains vibrant, critical and 
     sometimes intrusive into the private lives of individuals.
       Another area of concern has been the prosecution in China 
     of Hong Kong residents for crimes committed elsewhere. The 
     conviction and execution in China of two persons, one a Hong 
     Kong resident and the other a PRC national, who was wanted 
     for committing crimes in Hong Kong in December 1998, first 
     brought the issue to public attention. Most recently, the 
     arrest and rendition of a Hong Kong resident from Thailand to 
     China has created fears that Hong Kong residents can be 
     apprehended by PRC authorities while overseas.
       The denial of visas for Hong Kong residents to visit China 
     and for Chinese dissidents to visit Hong Kong was another 
     issue of concern. In March 1999, a number of well known 
     exiled Chinese dissidents were denied Hong Kong visas to 
     attend an NGO organized conference on the future of democracy 
     in China, although several of the dissidents had visited Hong 
     Kong prior to reversion. In August, the Government refused a 
     visa to Chang King-yuk, a former senior Taiwan official, who 
     wished to attend an academic conference on unification at 
     Hong Kong University. However, a number of prominent Chinese 
     dissidents including Labor Rights activists Han Kongfang and 
     Information Center for Human Rights and Democracy Movements 
     in China Director Lu Siqing continue to operate freely in 
     Hong Kong.
       In September, Legco legal representative Margaret Ng, who 
     led public protest against the Hong Kong Government's 
     decision to seek NPC interpretation in the Right of Abode 
     case, had her Chinese visa revoked to prevent her from 
     attending a legal conference on the PRC Constitution. Human 
     Rights activists fear that the action, and the Hong Kong 
     Government's failure to protest it, may have a ``chilling 
     effect'' on public discourse. The Hong Kong Government's 
     failure to include any representatives of the democratic 
     parties on its delegations to attend National Day in Beijing 
     or the Macau Handover Ceremony on December 20 was seen by 
     some as an effort to placate the PRC at the expense of 
     promoting pluralism in Hong Kong.
       In May, the failure of the PRC, which has responsibility 
     for Hong Kong's defense and foreign affairs, to allow a visit 
     to Hong Kong by Pope John Paul II during his trip to Asia 
     last fall was also of concern to many. Many religious, 
     political and human rights leaders publicly expressed 
     disappointment that the visit was canceled.
       Despite China's crackdown on the Falun Gong spiritual 
     organization, adherents continued to practice freely in Hong 
     Kong and held a continuing demonstration outside the office 
     of China's Xinhua News Agency. In December 1999, about 1,000 
     members held an international conference in Hong Kong and 
     conducted a march through the city. Hong Kong Chief Executive 
     Tung Chee Hwa warned that the demonstrators ``must comply 
     strictly with Hong Kong laws and must not act in any manner 
     which are against the interest of China, Hong Kong or `One 
     Country, Two Systems.' '' In another development, the Hong 
     Kong telecom authority ruled that a private company could 
     refuse to relay messages referring to Falun Gong to 
     subscribers on the mainland but was required by Hong Kong law 
     to relay such messages to customers in Hong Kong
       Article 23 of the Basic Law provides that Hong Kong shall 
     enact laws on its own to prohibit subversion, secession, 
     treason and sedition against the Chinese Government. The 
     Government has moved cautiously and deliberately in this 
     regard and has sought to conduct wide public consultations; 
     no such legislation appears to be on the horizon. Xu Simin, a 
     senior local adviser to the Chinese Government said in August 
     that such laws were not urgently needed and that the time was 
     not right to enact such legislation.


                       U.S. Ship and Plane Visits

       Following the accidental NATO bombing of the Chinese 
     Embassy in Belgrade last May, PRC authorities denied at least 
     ten U.S. warships and seven planes permission to stopover or 
     visit Hong Kong. After more than a two month ban, the Chinese 
     government began granting permission for plane visits on July 
     29, 1999, and a U.S. destroyer, the O'Brien, was given 
     permission to visit in October, 1999. In addition, a carrier 
     task force and a nuclear submarine were given permission to 
     visit in February 2000. No ship or plane visits have been 
     denied since September 1999, but the Chinese authorities 
     denied permission for several routine training flights by 
     long-range P-3 aircraft without offering any explanation. 
     However, Chinese authorities have not publicly stated that 
     visits will be routinely approved as had been the case 
     previously. It appears as though such visits are now being 
     considered on a ``case by case'' basis creating a degree of 
     unpredictability that may detract from Hong Kong's image of 
     autonomy and openness.


                             IPR Protection

       The continued widespread availability of pirated movie, 
     audio software and trademark goods remains a serious issue. 
     An elite special task force of 185 Customs officers was 
     established this year to deal with this issue. The Task Force 
     is employed to keep pirate retailers off balance, while 
     Custom's Intellectual Property Investigation Bureau (IPIB) is 
     used to take down pirate factories and distribution networks. 
     In the first nine months of the year, IPIB and the Task Force 
     seized 12.3 million pirate discs, 61% of which were VCD or 
     DVD movies. United States industry representatives have 
     emphasized the need to extend the Task Force's mandate past 
     December to make it permanent. At the behest of United States 
     and local industry, the Task Force now has a permanent 
     mandate. Under the direction of the new Customs Commissioner, 
     John Tsang, there has been a marked improvement in IPR 
     enforcement, although local film and music retailers are 
     still losing millions of dollars to pirates. Hong Kong 
     Customs has also pledged early action on outstanding 
     legislation, including amendments to re-categorize piracy as 
     an organized and serious crime and to criminalize the abuse 
     of corporate licenses. Improvements in IPR enforcement 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. The Legislative Council's January 2000 re-
     classification of piracy under Hong Kong's Organized and 
     Serious Crimes Ordinance (OSCO) will provide additional tools 
     for Customs' effort to dismantle pirate networks.
       Another looming issue is the problem of internet piracy in 
     which local distributors of counterfeit discs use U.S. or 
     Hong Kong based web-sites to sell their products to overseas 
     customers. U.S. industry has identified numerous sites, 
     accessible through Hong Kong-based internet service providers 
     that offer downloads of pirate products. Hong Kong has 
     requested U.S. training in internet crime detection and 
     prosecution.


                            Money Laundering

       To combat money laundering, the U.S. continues to urge the 
     Hong Kong Government to adopt mandatory financial transaction 
     and foreign exchange reporting requirements and to explore 
     options to discourage the illicit use of non-bank remittance 
     centers. The Hong Kong Government has begun the legislative 
     process to bring such centers under regulatory oversight. The 
     U.S. has also urged Hong Kong to establish mandatory minimum-
     value currency entry and exit reporting requirements and 
     penalties for illicit cross-border currency movements and 
     bank deposits.

[[Page 875]]




                            Export Controls

       Hong Kong has one of the finest systems of export controls 
     in the world and the reversion to Chinese sovereignty appears 
     to have had no major impact on the exercise of export 
     controls. U.S. Government agencies report no evidence of 
     Chinese interference in Hong Kong's export control system. 
     Chinese officials have recognized that export control matters 
     fall within the trade, rather than foreign policy area, 
     thereby placing export controls within the Hong Kong 
     Government's exclusive purview. Hong Kong requires both 
     import as well as export licenses, enabling authorities to 
     track controlled commodities as they enter or leave the 
     HKSAR. Hong Kong also refuses to issue re-export licenses for 
     products unless it is sure that the original exporting 
     country would export the product to the ultimate end user.
       The Hong Kong Government is exceptionally transparent 
     regarding export controls and cooperates closely with many 
     countries, including the United States, to ensure compliance 
     with multilateral and country specific export control 
     regimes. Hong Kong adheres fully to international control 
     regimes such as the Nuclear Non-proliferation Treaty, the 
     Missile Technology Control Regime, the Nuclear Suppliers 
     Group, the Australia Group and the Wassenauer Agreement. 
     United States Department of Commerce officials continue to 
     conduct regular pre-license and post-shipment inspections as 
     part of dual-use licensing process. United States Department 
     of State and Customs officials also 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 involved in making them. 
     Hong Kong has not imposed any limitations on pre- or post-
     shipment verification by U.S. agencies and in some instances 
     U.S. investigators have conducted two and even three post-
     shipment inspections to ensure that the end user remains in 
     compliance with its license. American and other countries' 
     officials have been directly seconded to work directly on 
     export control issues. In addition, Hong Kong officials 
     regularly receive training in the
       Hong Kong's record of enforcement of its export control 
     regime is good. Examples in recent years include confiscation 
     of a PRC armored personnel carrier that a PRC supplier 
     attempted to return through Hong Kong after a show in 
     Thailand, and the ``Changsha'' case involving unlicensed 
     import and export of high speed computers to the PRC and 
     confiscation of approximately U.S. $800,000 of aluminum 
     percolate in 1996. A House Select Committee report issued in 
     May 1999, (the Cox report) expressed concern about the 
     transshipment of technology through Hong Kong, especially the 
     lack of customs inspection of Chinese People's Liberation 
     Army (PLA) vehicles when they cross the border between Hong 
     Kong and China. A recent visit to Hong Kong by staff members 
     of the House International Relations Committee found that 
     there is no evidence to suggest that the PLA is smuggling 
     controlled items into China. Hong Kong officials have assured 
     the U.S. that they have full authority to stop any truck they 
     believe is carrying contraband, but have had no intelligence 
     to suggest the need to inspect PLA trucks beyond reviewing 
     the manifest and making a visual inspection. Although no 
     stops have been made, an instructive case involves the 
     shipment of a PLA troop transporter back from a military show 
     in Thailand. Because the PLA did not have the proper 
     licenses, the Hong Kong authorities seized the transporter in 
     accordance with Hong Kong law, and the Hong Kong police are 
     currently using it.


                                 Macau

       Like Hong Kong before it, Macau reverted to Chinese 
     sovereignty on December 20, 1999, after 442 years as a 
     Portuguese colony and, like Hong Kong, Macau became a special 
     administrative region of China, under the ``One Nation, Two 
     Systems'' concept. Macau's Basic Law is also modeled upon the 
     Hong Kong law. The Legislative Assembly consists of 23 
     members, 16 indirectly elected from territorial and 
     functional constituencies and 7 appointed by the Chief 
     Executive. Unlike Hong Kong, the elected members of the 
     legislature remained in office following the reversion. 
     Moreover, there is no provision in the Macau Basic Law for 
     the eventual direct election of all members of the Assembly. 
     On May 15, 1999, Edmund Ho Hau-wah was elected Chief 
     Executive by a 199 member selection committee. He in turn 
     appointed five policy secretaries in August. Because Macau's 
     civil service was ``localized'' only very recently by the 
     Portuguese, Macau's bureaucracy is largely inexperienced.
       Macau's judiciary is independent. After the handover, 
     Macau's legal system is governed by conventional law derived 
     from the Portuguese legal system and the Basic Law, Macau's 
     mini-constitution. Human rights and legal activists have 
     expressed concern that the shortage of experienced bilingual 
     judges, lawyers and law officers could stymie development of 
     the legal system.
       Immediately prior to Macau's reversion to Chinese control, 
     authorities acted to bar entry to, or in some instances 
     deport, members of the Falun Gong spiritual movement. Shortly 
     after the handover, Macau authorities denied permission to 
     enter to Lui Yuk-lin, a member of the April 5 Movement, a 
     Hong Kong protest group. The Government later said the denial 
     was a mistake, the result of mistaken identity and said Ms. 
     Lui was welcome to visit Macau.
       China has established a 900 person strong garrison in Macau 
     to ``safeguard sovereignty, unity and territorial integrity 
     and the stability and development of Macau,'' according to 
     Xinhua.'' Chinese officials have also said that, ``when 
     necessary, the Macau Government may ask the Central People's 
     Government to let the troops help maintain social order or 
     conduct rescue work in cases of disaster.'' However, at the 
     same time the officials have emphasized that the force 
     ``would not interfere in the affairs of the territory.'' 
     Crime, particularly organized crime syndicates (triads) 
     fighting for control of the gambling and vice trade, has been 
     a major problem in Macau. Many Macau residents welcomed the 
     PLA, hoping the garrison would have a positive influence on 
     Macau's serious triad (organized crime) problem. There have 
     been 34 murders in this year alone in the tiny territory 
     whose population is only about 500,000. Both Chief Executive 
     Ho and many Macau residents have welcomed the introduction of 
     Chinese troops in the hope that they will bring the crime 
     problem under control. Macau's economy remains heavily 
     dependent on revenues from gambling and tourism. Yet there is 
     understandable concern that the crime problem has hurt 
     Macau's international image and contributed to the economic 
     slowdown that has plagued Macau since the onset of the Asian 
     regional financial crisis.
       While U.S. trade with Macau is relatively small, 40% of 
     Macau's exports go to the U.S. Furthermore, 80% of Macau's 
     total exports consist of textiles, and the transshipment of 
     textiles produced elsewhere through Macau has long been a 
     major concern. The violations of intellectual property rights 
     is very legitimately a major and continuing concern for the 
     U.S. There has been marked improvement in recent months in 
     the legislative framework for combating piracy of 
     intellectual property, including adoption of a new copyright 
     law. However, although millions of Patacas in fines have been 
     levied, there have been no criminal convictions of 
     intellectual property pirates. Macau was placed on the USTR's 
     Priority Watch List for IPR in April 1998 as a result of 
     widespread piracy, particularly of videos and optical disks. 
     Certainly, corruption plays a role in contributing to the 
     transshipment and piracy problems. Macau's laws on trade also 
     lack effective enforcement mechanisms in the areas of money 
     laundering and export control. The new Chief Executive has 
     pledged to work closely with the U.S. on trying to deal with 
     these issues. The problem of money laundering, through 
     Macau's casinos and banks, particularly by organized crime 
     gangs, but also on behalf on North Korea is a continuing 
     problem.
       The nature and extent of North Korean activity in Macau is 
     emerging as a concern. Weekly flights from Pyongyang support 
     significant activity. Press reports suggest that North Korea 
     takes advantage of weak banking laws to launder money and 
     facilitate the sale of ballistic missiles and their 
     components. Recent evidence suggests that Pyongyang also has 
     used Macao to launder counterfeit U.S. $100 bills. It also 
     has been reported that banks in Macao serve as a repository 
     for the proceeds of North Korea's growing trade in meth-
     amphetamines and other illegal drugs.
       The Hong Kong Policy Act provides a legislative basis to 
     continue to treat Hong Kong as a separate entity from China. 
     However, although a similar Macau Policy Act was introduced 
     in the 106th Congress, it was not enacted into legislation. 
     This has created considerable uncertainty as to how Macau is 
     to be treated in regard to such matters as export controls 
     and the sale of certain items such as riot control equipment 
     that are prohibited from shipment to China. It has also 
     terminated availability of U.S. trade promotion programs 
     including those of the Trade and Development Agency (TDA) and 
     the Overseas Private Investment Corporation (OPIC) in Macau. 
     This uncertainty in turn has created serious concerns in 
     Macau about U.S. interest for the territory.


                               Conclusion

       The picture of Hong Kong two and a half years after 
     reversion to Chinese sovereignty is largely positive. It 
     remains a bastion of free-market capitalism, as shown by its 
     ranking as the world's freest economy in the recent Heritage/
     Wall Street journal report. After two difficult years 
     economically, Hong Kong seems well on the road to economic 
     recovery. It continues to formulate an independent economic 
     policy and maintain its own membership in international 
     economic organizations. People's Republic of China companies 
     are subject to the same laws and prudential supervision as 
     all other companies. Hong Kong's excellent system of export 
     controls remains intact, although continued vigilance to 
     potential violations or loopholes is required. Trade related 
     issues, particularly Intellectual Property Rights piracy and 
     money laundering, also require continued close attention.
       Hong Kong's political system continues to evolve. The Hong 
     Kong media remains free and continues to comment critically 
     on the

[[Page 876]]

     PRC, although concerns about self-censorship and the proposal 
     for a ``privacy council'' watchdog over the press bear 
     continued scrutiny. Demonstrations continue to be held. There 
     is vigorous public debate on the issues of democracy and the 
     law. The legislature and free press have used their roles to 
     increase government accountability and transparency.
       However, the controversy over the ``right of abode'' case 
     has cast a pall over the issue of Hong Kong's future judicial 
     autonomy and the rule of law. This is a fundamental issue 
     that business and the international community will be 
     watching closely. If the Standing Committee of the National 
     People's Congress continues to intervene in decisions 
     primarily affecting Hong Kong, confidence in Hong Kong's 
     future could be seriously undermined. Willingness by the Hong 
     Kong Government to speed up the pace of democratization of 
     elections for Chief Executive, Legco, and local government 
     could help ease some of the fears that the ``right of abode'' 
     case has raised.

     

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