Fortunes Tied In A Test Of Trust

When the Union flag is lowered over Hong Kong harbour two weeks from today, and the red flag of China is hoisted in its place, the ceremony will be well rehearsed, the protocol practised. But there are no precedents for what comes next, the return of a vibrant capitalist territory to a communist state.

There are no guides in history, no books to turn to, says Tung Chee-hwa, the shipping tycoon who, as Hong Kongs post colonial leader, will steer the territory from British to Chinese sovereigns under the one country, two systems formula.

The journey will prove crucial on both sides of the border. For China, the handover symbolises its rise as an economic and political force. Successess in harnessing Hong Kong would fuel its industrial and financial development and could help lure Taiwan back to the fold. It is the first step in our long march, says President Jian Zemin, referring to the goal of national reunification.

 

A turbulent transition or broken promises over Hong Kongs autonomy, would add to Beijings burdens. Apart from reducing the prospect of peaceful unification with Taiwan, it would threaten investor confidence and diplomatic ties. Another obstacle would be added to the Sino-US relationship, the most important of the coming decades. At home, the leadership has presented the handover as an historic event. Any mis-steps would deal a heavy blow ahead of the autumn party congress.

For Hong Kong the handover could strengthen its role as the dynamo for the mainland economy and its standing as the regions most vibrant business centre. But the risk is a reversal of a remarkable climb that has propelled the barren rock once disparaged by Lord Palmerston beyond the wealth of its colonial ruler. Market-driven economics and entrepreneurial energy have lifted financial reserves to US$90 billion and average incomes to more than US$25,000 a year.

Evidence on the eve of the transition gives cause for economic confidence and for political concerns. Hong Kong approaches the handover in surprisingly robust shape, leaving far behind the gloomy predictions of the 1980s and their warnings of capital flight and mass emigration. Returnees have out-numbered migrants over the past few years, while opinion polls betray few signs of anxiety. Although volatile, the stock market has hit records in recent months, outperforming many regional rivals.

Growing integration means Hong Kongs economic fortunes are determined increasingly by performance north of the border. So the rapid growth and low inflation engineered by Beijings planners have further boosted the territorys business bulls. We will see a deepening in economic ties after the handover, says Henry Cheng, managing director of New World Development, the property giant.

His company has already spent US$3 billion in mainland cities and has earmarked up to US$15 billion more, mainly in low-cost housing, infrastructure and sectors supporting Chinas modernisation.

For many businessmen, this optimism is not based solely on commercial opportunities, however. Chinese reforms are irreversible, they claim. The predict improved living standards and, in time, increased social freedoms.

For businessmen, the issue is not the handover but the need to stay competitive in the face of rising regional competition from Singapore to Shanghai. So Tungs corporate background - and his image of integrity - have secured their support. His criticism of the politicisation of the territory has struck a chord, as have his moves to instal an executive-led administration.

Economic confidence has been reinforced by Beijing. We will not interfere, says mr Li Lanqing, vice-premier. I am responsible for economic relations and trade and I have never even been to Hong Kong.

Mainland-backed companies such as Citic Pacific have emerged as pillars of the local establishment. And so far, at least, they have played by the rules of the game. A recent surge in capital-raising in the territory has prompted concerns about the transparency of so-called redchips. But is has also underlined Hong Kongs position as the financial centre for China.

It is economics that best demonstrates the identity of interests between China and Hong Kong on which Tung bases his optimism. But away from the business world dominating Hong Kong society, uncertainties and fears remain. There is nothing to suggest a collapse of confidence or rapid decline, more a worry that curbas on social and political freedoms will sap Hong Kongs vitality and erode its edge as an international business centre.

Chinas tight political and economic controls raise suspicions about its willingness to trust Hong Kong and its understanding of what makes it tick. Fears that the territory could create a base for subversion have prompted tougher laws on civil liberties and the dismantling of democratic reforms. By attempting to exert control they will damage Hong Kong, warns Margaret Ng, an independent legislator.

Controversy has focused on the legislature and social freedoms. In two weeks, the elected legislature will be booted farm office, to be replaced by a provisional body selected by a Beijing-backed committee. Although its terms it limited to one year, it has polarised Hong Kong politics and is now faced with potentially disruptive legal challenges from pro-democracy forces. They warn that the body lacks the credibility needed to maintain Hong Kongs autonomy, the rule of law and the cosmopolitan character which gives the territory its edge. Similar concerns surround curbs on civil liberties, which have granted police greater powers over public demonstrations and tightened regulations governing political parties. More broadly, signs of self-censorship in the media have prompted wories about creeping political correctness. Hong Kong people themselves are surrendering their autonomy, says Emily Lau, a pro-democracy legislator. There is a belief that criticising China is bad for business, and that is very

dangerous.

Warnings have not been limited to Hong Kong. There is no firewall between economic freedom and freedom in its many other dimensions, says Lawrence Summers, deputy secretary of the US Treasury. If China handles the transition poorly, if it encroaches upon Hong Kongs autonomy, Hong Kongers have the ability to make such actions very costly, either by leaving Hong Kong or by transferring their funds out of the territory.

Tung insists these pitfalls will be avoided. Rejecting criticism that he is unable to stand up for Hong Kong, he says Beijing is giving him room for manoeuvre. The shipping tycoon describes that provisional legislature as the unfortunate result of Sino-British disputes, rather than a stepback from democracy. And although he admits his political conservatism, he dismisses charges that civil liberties will be weakened, promising to defend Hong Kongs way of life. That is the responsibility of the chief executive, he says. That means freedom of thought, freedom of capital, and freedom of the press.

Democrats claim there is limited comfort in a free hand for Tung if it leades to a patriarchal style of government. But there are supports for Hong Kongs institutions. Its civil service, headed by Anson Cha, has built a reputation for integrity and efficiency. It has also survived as the sole wagon on the political through train. Lily Yam, the new head of the Independent Commission Against Corruption, appears determined to maintain the fight against graft, while last months appointment of Andrew Li as chief justice has eased fears about an erosion of the rule of law.

Tests will soon be forthcoming. With world attention focused on the handover, expected protests require careful handling. Despite a setback in the courts last week, pro-democracy groups are proceeding with legal challenges to the provisional legislature, threatening uncertainty. Strains between the government-in-waiting need to be resolved. The management of elections to replace the controversial will also provide benchmarks for the new administration.

Faced with his daunting task, Tung calls for trust. I know many sceptics will not be turned into believers by my words. I urge them to have faith. But the real trust is required from Beijing.

As Chris Patten, the last British governor puts it: This is an incredibly successful city, bloody well run with tremendous momentum. It isnt going to be screwed up, but it can go more or less well. And it will go more well if it is just left to tick over.