Thriving Hong Kong capitalism in Communist embrace
By Keith Bradsher

Thursday, June 21, 2007
HONG KONG: Three years ago, the Chinese government sent a small flotilla of warships in a slow cruise past the skyscrapers of downtown Hong Kong, in an unsubtle reminder of who is in charge here. It was one of a series of events then that suggested that some of the worst fears about Chinese rule might be fulfilled.

The authorities in Beijing had just blocked further progress in Hong Kong’s steps toward democracy, in April 2004. Less than a year before, China had pushed for stringent internal security legislation, backing down only when 500,000 people took to the streets in protest. The SARS epidemic in 2003 seemed to underscore Hong Kong’s vulnerability to developments on the mainland. The real estate market was moribund.

But now, on the eve of the 10th anniversary of Hong Kong’s return to Chinese sovereignty, the city appears transformed. Real estate prices have rebounded. Apartment rents are among the world’s highest. Hong Kong’s stock market led the world last year in initial public stock offerings, thanks to China’s biggest banks and other mainland enterprises raising billions of dollars.

Democracy, in terms of one person one vote, still appears to be a distant hope. The frequent haze over Hong Kong’s historic harbor raises serious environmental concerns. But with its financial vitality restored and most individual liberties preserved, Hong Kong has managed to do what it has for ages: maintain its status as a thriving capitalist haven, even under new political masters.

Beijing’s allies here are elated. Shiu Sin-por, an adviser to Beijing who helped oversee the return to Chinese rule on July 1, 1997, said that Hong Kong, South Africa and the Palestinian territories had all acquired new governments within a few years of each other, and that Hong Kong had fared best.

"Hong Kong is a miracle," he said.

Democracy advocates are less happy. Hong Kong was supposed to retain its own economic and political structures, under the "one country, two systems" formula. But while the mainland’s soaring economy and increasingly ardent embrace of capitalism have reduced the need for separate economic systems, Hong Kong’s political autonomy from the mainland has also been eroded.

"After 10 years, I am beginning to feel that the whole thing has been a fraud," said Martin Lee, the founding chairman of the Democratic Party. "We were promised one country, two systems, Hong Kong people ruling Hong Kong. What do we have now? One country, one system."

In many ways, Hong Kong has retraced in the decade since the handover many of the lows and then highs of the decade that preceded it. The military crackdown on democracy demonstrators at Tiananmen Square in 1989 produced a wave of pessimism and a stampede of residents desperate to leave before Beijing took over.

But in the months leading up to the handover, real estate prices were at towering levels, memories of Tiananmen were fading and many residents were inclined to give Beijing the benefit of the doubt. The critical exception to the optimism then and now lay in the area of democracy. In 1997, the Chinese government moved quickly to replace Hong Kong’s elected legislature with its own appointees and to defer indefinitely any plans for direct elections of the chief executive.

China itself set a very low bar for what would represent a successful transition. "Dancing and horse racing will continue," the Chinese leader Deng Xiaoping had promised. Indeed, the city’s hundreds of nightclubs and two huge racetracks are as popular as ever.

Nine months before the handover, Chris Patten, the last British governor, laid out 16 more exacting benchmarks to assess the success of Chinese rule. Ten years later, Hong Kong passes all of them easily.

Border controls, for example, are still maintained with the mainland. Hong Kong still has its own representation in international economic and law enforcement organizations.

A more difficult question posed by Patten was: "Are democratic politicians continuing to play an active role in Hong Kong politics, or are they being excluded or marginalized by external pressure?"

The evolution of democracy has been stymied ever since 2004. That was when Beijing, responding to the 500,000-strong protests the previous year, issued a legally binding interpretation of the Basic Law, Hong Kong’s miniconstitution, that blocked any further increase in the proportion of democratically elected lawmakers.

Beijing has also been signaling that it will tolerate only limited changes in the selection of Hong Kong’s chief executive as well. In March, an election with a challenger to the incumbent chief executive was a contest in name only. Under the rules, Beijing’s favorite could not lose.

But two televised debates during the minicampaign ranked among the most-watched events in Hong Kong history, survey data show.

Individual liberties have fared much better in Hong Kong than suffrage. For example, Christian churches continue to face restrictions on the mainland, but not in Hong Kong.

"Religious freedom in a strict sense - as freedom of worship, freedom of organization and administration - there is no problem in Hong Kong, just as before," said Cardinal Joseph Zen, the Roman Catholic bishop of Hong Kong.

Two other Patten benchmarks involved preserving the freedom of the press and of foreign journalists here. While the government has not imposed controls on local or international media, most local newspapers and television stations have become more cautious about criticizing the government, mainly because they are owned by tycoons with major investments on the mainland who shy away from offending Chinese officials.

Two prominent exceptions are the irreverent newspaper Apple Daily, and the government-run Radio Television Hong Kong, much of whose staff is sympathetic to democratic ideals.

Both face threats. Apple Daily has suffered advertising boycotts by businesses with mainland connections. And a government commission suggested this year that RTHK be disbanded and a new broadcaster created with fresh staff.

Donald Tsang, Hong Kong’s chief executive, has not indicated what he might do. "If he shuts down RTHK, he would have to pay a very heavy political price," said Allen Lee, a cable television talk show host.

In the years immediately after the handover, it was Hong Kong’s economy that looked most vulnerable. The Asian financial crisis popped a real estate bubble that had been building through the 1990s, wiping out the equity of hundreds of thousands of middle-class families. The rapid development of mainland China prompted factories and other businesses to relocate across the border seeking lower-cost workers.

But after hitting bottom following the SARS epidemic in the spring of 2003, the local economy has come roaring back. The Hong Kong economy increasingly resembles that of New York City, with an enormous reliance on financial services and tourism. While Singapore remains dominant in energy trading and Japan has the deepest bond market in Asia, Hong Kong has become increasingly important as a center of regional equities trading.

Fidelity even decided in May to move its Japanese equities trading desk to Hong Kong from Tokyo, so as to combine operations with its equities trading desks for other Asian markets, already located in Hong Kong.

"Its proximity to China has given it a huge advantage over other people who thought that they would be in that space - I mean, I guess, the most obvious is Singapore," said Michael Smith, who recently stepped down as chief executive of Asian operations of HSBC, which was founded in Hong Kong in 1865.

Until very recently, Hong Kong retained its role as China’s biggest container port, and vied with Singapore for the title of the world’s busiest. But Shanghai passed Hong Kong in the first quarter of this year in container traffic, and Hong Kong’s neighbor Shenzhen is poised to pass it in the coming months, by offering newer ports with lower-cost labor to handle the flood of goods pouring out of southeast China’s factories.

As with New York, Hong Kong is finding that a base of finance and tourism but diminished manufacturing can exacerbate income inequality, with high-paying jobs for bankers and other professionals, many of whom are Western expatriates, and a lot of low-paying jobs in restaurants, hotels and other services.

Hong Kong has a problem that New York does not - terrible air pollution. The smog is sometimes so thick that it nearly blots out the famous view across the city’s harbor, largely the result of the tens of thousands of factories across the border that spew out pollution with little effective regulation.

Meanwhile, efforts to remake Hong Kong into a cultural hub like New York have foundered with more than a decade of political squabbling over what to build where. Hong Kong Disneyland has opened, however.

Anniversaries can be arbitrary and sometimes misleading times to measure progress. Hong Kong struggled with gloom on its first couple because of the Asian financial crisis, and felt beleaguered on its sixth and seventh. The mood approaching its 10th, by contrast, is something close to euphoria.

With the economy exuberant, public dissatisfaction expressed to pollsters about the lack of democracy here seems, for the moment, like a distant worry.

"As in other places," said Alan Leong, the democracy advocate who ran unsuccessfully for chief executive in March, "the weaknesses in institutions and governments will only reveal themselves when the place is in trouble."