The East Asian Review.
An Economical and Political Newsletter from Hong Kong.
Nov 15 1996 Volume I Article 1

What Will Happen to Hong Kong After 1997?

When people find out I live in Hong Kong the inevitable question always comes up. What will happen to Hong Kong after the British leave in 1997?

I do not find it strange that citizens of colonial powers such as Britain or even the US should worry about what terrible things will happen to Hong Kong after the "civilized" British leave and the "Chinese." take over in 1997. I find it strange, however, people from India, which decided it will rather rule itself than to continue letting the British civilize them less than 50 years ago, should also worry about the fate of Hong Kong when the British leave in 1997.

India too has had a history of little enclaves that were left in colonial hands after it achieved independence, such as Goa and Pondicherry. India forcibly annexed Goa in the sixties and I still meet Konkan speakers elsewhere in the world who say they would have been better off on their own in Goa. Perhaps they are right. But the fact remains that history and morality favoured India over Portugal then, just as history favours China over Britain. This is not altered by the fact that Hong Kong will obviously better off in a narrow economic sense by ruling itself.

Speaking hypothetically, Goa too would have been better off as a duty free port on the West Coast India without prohibition and with a casino. In the long run, however, Goa will be better off by linking with its hinterland rather than some remote decaying Imperial power in Europe. The same applies for Hong Kong regardless of what the BBC may say about Hong Kong.

Indians, I notice have such touching and almost religious faith in BBC, an outfit that is directly funded by the Foreign Services of Britain which also controls espionage and other propaganda, that one wonders whether Indians have indeed broken free of the mental apparatus that the British tried to impose on India. Those who want to see the other side of the "objective" British will be advised to read what "The Times" and BBC were saying about India's independence leaders during the 1930s. This is not to say that BBC is always wrong, merely that when British interests are directly involved, as opposed to Punjab or Kashmir in 1996, their "objectivity" is less than 100%.

Notwithstanding all this the anxiety the takeover by China promotes in certain quarters is understandable. The contrast between China and Hong Kong is stark indeed. After all the Heritage Foundation has classified Hong Kong as the "freest economy" in the world. China is still, after nearly two decades of liberalization, one of the most controlled economies in the world and on a per capita basis a rather poor one. Hong Kong on the other hand, is one of the richest economies in the world and on a per capita basis is richer than that of its colonial master, Britain.

So China taking over Hong Kong will be like the case of a Third World country taking over a First World country and outsiders have reasons to be concerned about the outcome of this almost unprecedented exercise.

But there are always two sides to every question and optimists, including me, come down on the side of optimism, because of the "other side." The fact of the matter is that Hong Kong is already a part of China. And since Hong Kong doing well now - the Hang Send index, like the Dow, just hit a record in October, 1996 and the property market is still very high - there is reason to believe that Hong Kong will continue to do well.

Why is it Hong Kong is already a part of China?

Hong Kong's manufacturers of garments and toys, who fueled its economy in the past three decades, now employ more workers in China than in Hong Kong itself. Hong Kong is now used only for the `service" portion of manufacturing such as marketing and design. China also supplies a substantial part of Hong Kong's water and most of its food. The important thing to remember here is that China has been supplying the life-line to Hong Kong through the cultural revolution and other vicissitudes of China's political history. China, which is now anxious to rejoin the world as a modern nation, has little incentive to mess up Hong Kong now when it has protected Hong Kong even during its mad "cultural revolution" in the sixties and seventies.

Hong Kong, a territory of just six million rich people on the edge of a continental sized country of relatively poor people, has always been dependent on the goodwill of China for its survival. The late helmsman of China, Mao, is said to have joked that Hong Kong is nothing more than "a pimple on the ass of China" ( a look at the atlas will show the aptness of the analogy). The fact is that China has taken good care of this pimple and been careful not to sit too hard on it. In summary, Hong Kong has survived thus far only because China has allowed it to survive. After taking over as a sovereign in 1997 China will have more rather than less reasons to let Hong Kong survive.

From 1949 onwards, China could have simply killed off or impoverished Hong Kong considerably by just closing the borders. That it did not choose to do so shows that China wants Hong Kong to succeed and emerge as the richest city in China - which Hong Kong will become after 1997. The other important question to remember is that China is the largest foreign investor in Hong Kong and that China itself has a lot to lose should Hong Kong shrivel.

Intentions are easy but it is not so easy to make the sacrifices necessary to let the intentions become reality. Therefore the real question is whether China, ruled by a Communist Party elite that has to use rather rough methods to rule over a billion people, about three-quarters of whom are peasants, can acquire the "light touch" needed to rule Hong Kong. Hong Kong has no peasants and hardly any manufacturing left and makes its living by engaging in such intangible services such as financial services.

The short answer, and the only honest answer to that question has to be that the odds favor optimism but that there will be the inevitable "learning curve" as China learns the needed compromises that it has to make in order to make Hong Kong succeed. So the process is likely to be a turbulent one.

To get an idea of what is at stake in Hong Kong it is necessary to look at some data. This territory of some six million people is the home to the world's sixth largest stock market and the second largest stockmarket in Asia after Japan. Japan by contrast has more than a hundred million people and is the world's second largest economy. Hong Kong is also the world's sixth largest exporter and almost all major banks from the world are represented here.

With just six million people, Hong Kong's GDP is also about fifth as large as that of China with a billion people. Hong Kong's population is so affluent that it is suffering from the typical problems of affluence such as low birth rates. Hong Kong's birth rate is now below replacement level and at 1.2 per woman, below that of even already bad rates places such as Germany. Without an influx of "cheap" labor from China, Hong Kong's population and labor force are in danger of stagnation and decay.

The only long term hope for Hong Kong lies in a prosperous China. And China is not doing too badly. China's economy has been growing at an average rate of about 9% every year for the past twenty years - a record that is unmatched by any large economy in the world. World Bank projects that by the year 2020 China will emerge as the world's largest economy on a purchasing power parity basis and that the US and Japan will be the second and third largest economies of the world.

Those in the US need not worry about China overtaking the US on a per capita basis, however. Since China has about four times more people than the US, all it takes is for the average Chinese to have about one-quarter the income of an average American before China overtakes the US in the aggregate.

The transfer of Hong Kong to China next year will be one of the highlights of the 20th century, like the falling of the Berlin Wall and the defeat of the Axis powers in the Second World War. It is not going to be a smooth process but the odds are that it will eventually work for the benefit of Hong Kong, China and the world.

Britain's Lack of Good Faith in Hong Kong.

Britain has the deserved good reputation for being a democracy within its own borders. But as Indians only know too well such good policies were not exported to its colonies and Hong Kong is no exception.

Hong Kong has always been ruled by governors appointed from Britain and the British have not even bothered to put in a "local" face even now after 150 years of British rule. To add a further irony the current governor, Chris Patten, who goes around the world preaching about democracy was appointed Governor of Hong Kong after he lost the election for a parliamentary seat in Bath in England. So after the local electorate rejected him, he was "appointed" to promote democracy in Hong Kong!

There is a saying among local people resentful of colonial expatriates that such people ar a case of "Failed In London Try Hong Kong" - or as the acronym would have it, "FILTH." Since the Governor retains the right to throw out anyone in Hong Kong whom he considers a security risk, though to the credit of the British it is seldom used, it is better for me not to speculate further.

Despite all the outward legal trappings, Hong Kong remains a colony in the fundamental sense. Any British citizen can still land and work in Hong Kong without a visa whereas the border with China is separated by fences and mothers are often separated from children.

About 140,000 women from Philippines work as domestic servants in Hong Kong and they are guaranteed a minimum wage of US$350 a month - incidentally the only people in Hong Kong who have a minimum wage. But the Hong Kong people are forbidden from recruiting domestic servants from China - possibly the biggest pool of poor people in the world and with whom people of Hong Kong share a common language and culture. This is supposedly because the Hong Kong government is afraid that some relatives from across the border might be "sneaked across' illegally and also security concerns that China may use the domestic servants as spies!

Britain used to appoint even "District Board" members in Hong Kong until the early 1990s. Universal adult franchise was granted to the population only in 1994, 150 years after it took over Hong Kong and just three years before it was due to leave. Given the circumstances under which "democracy" has been introduced in Hong Kong, the Chinese have ample right to be suspicious of it.

Britain also took away the citizenship rights of the Hong Kong people more than twenty years ago. Hong Kong people now travel with what is called the "British Overseas National" (BNO) passport which does not give the holders right of abode in Britain - the only passport in the world that does not grant the owners the right to live in the country that issued it! So niggardly and racist is Britain when it comes to giving passports to people from its colonies that it resisted giving right of abode in Britain for about five elderly war widows of soldiers who actually died during the second world war defending the British empire!

So it is obvious that Britain is in Hong Kong for economic rather than moral reasons. This is perhaps understandable in a world so many nations act with such self-interest but it hardly gives Britain the moral high ground. On the other hand all the commanding heights of Hong Kong's economy, such as banking, aviation and telecommunications are all controlled by British companies, the only place in Asia or indeed the world where such British dominance is still true.

British lawyers and engineers make a very good living in Hong Kong, more British civil engineers are employed in Hong Kong than in Britain itself for such is the construction boom in Hong Kong. Even police inspectors were imported from Britain until last year which goes to show that Britain was not at all serious about "localization."

People may argue that with all its flaws British rule in Hong Kong is still better than having Communist China rule it. The British do seem to have a talent for civil administration and Britain has a better civil service than either Italy or France in Europe. In fact I still meet elderly Indians who say that India was ruled better under the British! But I am sure nobody will seriously suggest that Italy or India must let the British administer their countries. In the end countries must learn to rule themselves or perish just as children must learn to fend for themselves one day rather than depend on their parents who may indeed know better.

The British record in Hong Kong is mixed at best and outright "colonial" at its worst. It is a system that has to come to an end sooner or later even if in the short run the new system in Hong Kong turns out to be worse than the flawed British system it replaced. The reversion of Hong Kong to China will be both an opportunity and a risk. Which facet of it will prevail remains to be seen.

[ Air-India as a Metaphor for India's Problems. ]

N.Balakrishnan runs an Investment Advisory company, "The Cool Investor Ltd," specializing in "cool headed" investing in Asia's Emerging Markets. He is registered as an Investment Advisor with Hong Kong's Securities and Futures Commission (SFC). He would be glad to answer any questions that you may have on this article or other investment topics relating to all Asian markets except Japan at greater detail. He can be contacted at:

Suite 13B
346-348 Queen's Road Central
Hong Kong
Tel: 852-2851-8380
Fax: 852-2581-9894