[Extensions of Remarks]
[Pages E1544-E1546]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

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

______

HON. DOUG BEREUTER

of nebraska

in the house of representatives

Tuesday, August 4, 1998

Mr. BEREUTER. Mr. Speaker, this Member rises today to submit the
Fourth Quarterly Report of the Speaker's Task Force on the Hong Kong
Transition. It has been slightly more than one year since Hong Kong
reverted to Chinese sovereignty on July 1, 1997. Prior to that historic
event, and at your request, Mr. Speaker, this Member formed the House
Task Force on Hong Kong's Transition. In addition to myself as
chairman, the Task Force is bipartisanly balanced in its membership,
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).
To date, the task force has prepared four quarterly reports assessing
how the reversion has affected Honk Kong. The fourth report, which I
submit today, covers the period of April through June, 1998, during
which there was no actual visit to Hong Kong by the Task Force. (A
visit had been scheduled during the July 4th district work period, but
scheduling difficulties forced cancellation of the visit.) Despite a
number of concerns about the ailing economy, as well as concerns in the
areas of freedom of expression, the independence of the media, and the
protection of intellectual property rights, we continue to describe the
situation as ``so far, so good.'' Most notably, Hong Kong held
remarkably successful elections for the first post-reversion
Legislative Council.
Mr. Speaker, this Member submits the Task Force report and asks that
it be printed in full in the Record.

The Speaker's Task Force on the Hong Kong Transition: Fourth Report,
July 23, 1998

(Presented by Hon. Doug Bereuter, Chairman)

The following is the fourth 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, and the third report dated May 22, 1998.
This report focuses on events and development relevant to
United States interests in Hong Kong between April 1, 1998,
and June 30, 1998--the fourth quarter following Hong Kong's
reversion to China.
It has been one year since Hong Kong reverted to Chinese
sovereignty on July 1, 1997. Looking back at those last few
weeks of June, 1997, we recall that the reversion was viewed
with a mixture of excitement and trepidation. Many observers,
both in Hong Kong and abroad, worried aloud that Beijing
might be unable to resist the temptation to meddle in Hong
Kong's internal affairs, despite China's commitment in the
Joint Declaration to ``one-country, two-systems'' and its
agreements to grant Hong Kong autonomy over all matters
except foreign affairs and defense for fifty years. Skeptics
questioned whether Hong Kong would continue its traditions of
freedom of expression and were concerned about the apparent
roll back in democratization of the new electoral system.
Businessmen wondered whether Hong Kong would maintain the
rule of law upon which its international commercial
prominence is based. Other observers, concerned with security
issues, questioned Hong Kong's continued ability to maintain
effective export controls.
The fourth quarter following revision can briefly be summed
up as both ``good news and bad news.'' The good news was that
Hong Kong's citizens confounded political pundits by turning
out in record numbers for the first post-reversion election
of its Legislative Council. The bad news was that the
financial crisis which had engulfed much of southeast Asia
from mid-1997 finally, unfortunately, made its impact on Hong
Kong.

Political Participation--A Surprisingly Enthusiastic Populace

On May 24, Hong Kong held its first election for its
Legislative Council (LegCo) under the new, controversial
election law adopted by the post-reversion, Beijing-appointed
legislature. The new law rolled back key provisions of
election reforms finally instituted by the last British
colonial governor, Chris Patten, in 1995. For example, it

[[Page E1545]]

maintained the original formula of twenty LegCo members to be
directly elected by popular vote, thirty to be elected by
``functional constituencies'' (initiated by the British in
1985), and ten to be chosen by an Election Committee.
However, the ``functional constituent'' electorate was
reduced from approximately 2.7 million voters under the 1995
British reforms to about 180,000 voters. Of course, the
widespread view in Congress is that direct election is
preferable to functional constituencies and that the members
elected by the special Election Commission make the process
less than fully democratic.
Because of the complex and cumbersome electoral system,
many observers predicted voter apathy and a low turnout.
Happily, these predications proved wrong. Despite torrential
rains, a record 53.3 percent of eligible voters cast ballots,
compared to 35,8 percent in 1995. The Democratic Party and
its allies won 65 percent of the popular vote, but were held
to only 20 of the 60 seats because of the complex elections
rules. The Democratic Party alone won 43 percent of the
popular vote and will be the largest party in the new LegCo.
In effect, Hong Kong's voters have created the first
opposition bloc in the history of communist-ruled China.
Following the election, seven parties crossing ideological
lines and representing 41 of the 60 members of the new
legislature agreed on a blueprint to create jobs and revive
Hong Kong's ailing economy. In an extraordinary challenge to
C.H. Tung's notion of executive-led government, the coalition
threatened to block all of the administration's legislation
and funding unless it played ball. The two sides averted a
showdown by agreeing to a dialogue aimed at finding solutions
to Hong Kong's economic troubles.
Many Hong Kongers now hope that the high voter turnout and
strong showing of the Democrats and their allies will hasten
the pace toward full universal suffrage. President Clinton
buoyed those hopes during his July 1-3 visit to Hong Kong
(the first by a sitting president), when he called for ``more
democracy, not less, and faster, not slower, strides toward
political freedom.'' Accelerating the pace toward universal
suffrage, however, would require amendment of the Basic Law,
Hong Kong's mini-constitution, which stipulates that a fully
directly elected LegCo will not be considered before the year
2007. Amendment, however, requires approval by both the chief
executive and China's National People's Congress, and thus is
viewed as highly unlikely.

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 the
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. On June 4, for example, more than
16,000 protesters held the first commemoration of the
Tiananmen Incident since reversion. While the crowd was
lower in number than in 1997, the high turnout belied
skeptics who had predicted interference. Similarly,
political activists protesting Japan's occupation of the
Diaoyu Islands (Senkakus) have operated freely. Hong Kong
authorities report that it has not denied any application
for a demonstration permit since reversion and that the
number of demonstrations has actually increased from an
average of 80 per month prior to reversion to between 150
and 160 per month.
Hong Kong's media also continues to practice its
traditional vibrant style of journalism without overt
interference from authorities in Hong Kong or Beijing.
Nonetheless, concerns of self-censorship continue. The Hong
Kong Journalists Association, in its recently issued annual
report, noted that self-censorship was ``nor worse'' than in
the year prior to reversion. It noted, however, that concerns
were on the rise about the self-censorship of reporting on
independence-related activities in Tibet, Taiwan or Xinjiang.
Recently, for example, the Western media gave considerable
attention to a local Hong Kong television reporter who
claimed that his report on the independent movement in
Xinjiang was kept off the air for political reasons.
This aspect of freedom of expression and how it applies to
expressions about certain sovereignty issues in China is
especially important because Hong Kong's Legislative Council
will soon be considering a measure to define subversion.
Moreover, Chief Executive Tung has widely stated that he
believes Hong Kong people should not be freely expressing
their support for independence for places like Taiwan, Tibet
and Xinjiang. Therefore, a crucial test of Hong Kong's
adherence to free expression will be whether mere expressions
of support for independence for those areas will be
punishable under law.
Beijing authorities, however, continue to bend over
backward to avoid the appearance of direct interference. At
the time of Chinese Prime Minister Zhu Rongji's early April
visit to France, a senior Chinese foreign minister official
rebuked a Hong Kong television reporter accompanying the
visit after the reported asked Zhu what he felt about the
demonstrators. The subsequent uproar over this perceived
threat to press freedom led premier Zhu to publically
criticize the Chinese diplomat for having a ``bad attitude.''
The controversy eventually died down.
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 new instances, as we did in the previous
quarter, which would call into question the judiciary's
independence or its vulnerability to Chinese influence.
On a more positive note, the Hong Kong government clarified
in April that the first official post-handover human rights
report to be submitted to the United Nations by the SAR
government will not be amended by Beijing. This report is
submitted under the International Covenant on Civil and
Political Rights and the International Covenant on Economic,
Social and Cultural Rights. The report will be submitted
through Beijing, but will not be subject to Beijing's review.

Economic Developments

Ironically, the greatest immediate threat to Hong Kong's
prosperity stems not from its reversion to China but from the
external events of the Asian Financial Crisis. It just posted
its second quarter of negative growth following a 2%
contraction in the first quarter of 1998. It is now clear
that Hong Kong is in a recession for the first time in 13
years. Almost no one (including Hong Kong officials) predicts
an early turnaround.
This negative growth led to an unemployment rate of 4.5
percent in for the months April-June, a 15 year high,
concentrated in the retail, restaurant and transport sectors.
Retail sales dropped 16 percent in April over April 1997, due
largely to reduced tourism, a marked correction in the asset
markets and reduce local consumer demand. Additionally, Hong
Kong's real estate bubble has burst and commercial and
residential property prices at the end of June were 40% below
their bubble-priced highs of 1997, returning to their 1996
levels. The Hang Seng Index has followed the real estate
downward slide, falling at one point to 40% below its all
time high of August last year. It ended June at 8,543 points.
The market did not respond positively to the government's
stimulus package (described below), and also remained
concerned about the Japanese economy, China's commitment to
maintaining the renminbi, and regional economic woes.
Finally, Hong Kong's tourism industry has been badly affected
by the decline in visitors from the flagging economies of
East Asia, and Hong Kong is now projecting a minus six
percent growth in tourist arrivals and a decline of eight
percent in tourism revenues in 1998.
The positive news in Hong Kong is that the Hong Kong
Government is responding. Chief Executive Tung proposed a
stimulus package of $5.67 billion U.S. dollars in June. The
multi-part package is aimed in part at easing the credit and
liquidity crunch by immediately exempting interest income
earned locally from profits tax and setting up a credit
guarantee system for small to medium businesses. The
government also suspended all land sales until next March--
thus reducing the downward pressure on the real estate
market--while at the same time increasing assistance for new
home buyers. It also imposed a freeze on pay raises for top
civil servants. The stimulus package will force the highly
efficient civil service to wipe out an anticipated budget
surplus and to run a deficit of $2.7 billion U.S. dollars in
1998-1999--the largest deficit since the early 1980s. In
earlier measures, the government eased travel requirements
for travelers from both Taiwan and the mainland in an effort
to boost tourism. Confidence in the Hong Kong dollar remained
high, with the ratio of Hong Kong dollars to total bank
deposits in May unchanged from April's 57.7 percent, and the
ratio of foreign currency to total bank deposits ending the
month of May at a healthy 42.3 percent.
Despite its considerable economic woes, Hong Kong still
maintains the third largest holding of foreign currency
reserves in the world. With $96.2 billion U.S. dollars, they
are behind only Japan and China in that category. Moreover,
Hong Kong has not jettisoned its free market ideology and
ranks 2d on the competitiveness rankings of the World
Economic Forum and 1st in the Heritage Foundation's ranking.
Negative economic growth and rising unemployment has put
strong pressure on authorities to ``untie`` the ``peg'' that
has bound the Hong Kong dollar to the U.S. dollar at HK $7.8
to one U.S. dollar for the past 15 years. Hong Kong
authorities have repeatedly assured skeptics that they have
both the foreign exchange reserves and the political will to
maintain the U.S./Hong Kong dollar linked exchange rate
system.

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 dependence on entreport trade between
the United States and China. Entreport trade is one of the
few economic areas still registering positive growth as
compared, for example, to exports from domestic manufacturing
in Hong Kong.
For Hong Kong, its reliance on entreport trade is both good
and bad. The United States is still growing and buying more
and more Chinese manufactured goods. This provides an
excellent export market for Hong Kong. Nevertheless, the bad
news for Hong Kong is that our current trade deficit with
China ($50 billion last year and projected to be $60 billion
this year) is politically and economically unsustainable. And
if the

[[Page E1546]]

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
the U.S. Government--even if it does everything right.
The pirating of movies, audio and software compact discs
continues to be the most serious bilateral trade issue
between the United States and Honk Kong. In recent months.
Hong Kong has stepped up its anti-piracy enforcement efforts
and implemented a new copyright law. The new law, among other
things, gives officials greater enforcement capabilities
against illicit production facilities. Hong Kong customs
authorities, which have had primary jurisdiction for
enforcing IPR legislation, were recently joined by Hong
Kong's highly respected Independent Commission Against
Corruption (ICAC), which combats corruption and triad-related
crime. The ICAC in April carried out a ``mega-raid'' that
netted over eight million video compact discs in the course
of an investigation against one of Hong Kong's most senior
customs officials (subsequently charged with tipping off a
pirating syndicate about planned raids). Not long after,
customs followed with a raid which yielded an additional 2.2
million compact discs. Further productive raids were made in
June.
Despite these efforts, the intellectual property rights
(IPR) situation in Hong Kong remained sufficiently
troublesome of warrant its designation by USTR on the Special
301 Watch List for the third year in a row on may 1, 1998.
The ongoing IPR problem was demonstrated again when a pirated
pre-release version (``beta version'') of ``Windows 98''
appeared on Hong Kong streets well before the official
release of the software in the United States. The local media
reports that Hong Kong authorities are considering stronger
measures to combat piracy, including applying the Organized
and Serious Crime Ordinance to violators (which would allow
their assets to be seized) and punishing landlords who lease
shops to retailers of pirated material.
Money laundering also remains a very serious concern in
U.S. bilateral relations with Hong Kong. As we have 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 work harder with the international community to
improve its laws and enforcement in this vital area. We note,
in that regard, that Hong Kong is a member of the Egmont
Group (the international group which combats money
laundering) and that Taiwan joined in June. Some observers
expect Taiwan's inclusion to create a new dynamic in East
Asian efforts to fight money laundering.

Security and Related Issues

There are three primary security related issues with Hong
Kong--ship visits, PLA activities and export controls. First,
the U.S. Navy continues to enjoy an excellent relationship
with Hong Kong in terms of ships visit. With the loss of
Subic Bay as a major installation, these port-of-call visits
have become extremely important for the effective functioning
of our naval forces in East and Southeast Asia. The
relationship with Hong Kong port authorities since the
reversion has been outstanding. We are unaware of any
security problems in the 65 port calls since the reversion.
As an added benefit, the resident People's Liberation Army
(PLA) officials certainly have developed a better
appreciation of the power and flexibility of the U.S. Navy.
The second security concern is related to the influence of
the PLA and the Chinese defense industries in Hong Kong
business. Certainly, there is concern regarding the PLA's
surreptitious acquisition of militarily sensitive
technologies. We have no evidence to date of direct
involvement by PLA entities in Hong Kong (estimated at nearly
200 companies) in acquisition of sensitive technology. Yet to
the extent that PLA entities operating in Hong Kong are
engaged in arms trading or acquisition of Western technology,
Hong Kong's relations with the U.S. will be put at risk.
Their activity, or lack thereof, will be an important
determinant in future congressional attitudes.
The implementation of export controls is a third area of
security-related concern. 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 pre-license and
post-shipment inspections. Moreover, U.S. and Hong Kong
customs officials continue their close cooperation and, in
July, will hold the second in the most recent 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 500,000 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 the 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. For example, the transhipment of textiles through
Macao continues. But primary among our economic concerns is
Macao's role as a manufacturing center for pirated goods,
particularly pirated compact discs. To date, Macao has yet to
develop adequate legislation, enforcement mechanisms and
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 those
shortcomings.
As we noted in our third quarterly report, Macao's
Portuguese administrators have still not made adequate
arrangements to replace themselves with local Macanese
officials and are well behind where the British were 18
months before the handover of Hong Kong. They have also
allowed the law and order situation to deteriorate.
Throughout the spring, news reports of gangland slayings and
attacks on public officials repeatedly filled the news,
seriously affecting Macao's tourism. China and Portugal
exchanged frequent barbs accusing each other of contributing
to the growing spiral of public violence. Finally, following
the early May firebombing of police chief's car, authorities
performed a massive crackdown, netting two dozen suspected
triad society members, including Macao's most notorious
gangster, ``Broken Tooth'' Wan. Local police have now been
reinforced by 20 criminal investigation experts from
Portugal. We applaud strengthened measures against organized
crime. It will be difficult for the territory to complete
smooth transition unless it brings the intolerable situation
under control.

Conclusion

The Hong Kong Transition Task Force has ended our previous
three quarterly reports with the assessment ``so far, so
good.'' This time, we cautiously repeat that assessment, but
with a few caveats. On the economic front, we recognize that
the external forces affecting Hong Kong are beyond its
control and complicate the transition in unexpected and
unpredictable ways. We were encouraged by the demonstration
of support for democratic institutions shown in the May
election and applaud those elements pressing to accelerate
the move toward universal suffrage. 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. We are concerned, however, by what
appears to be growing self-censorship, although we admit that
the phenomenon of self-censorship is difficult to document or
quantify. Undoubtedly, the coming months will bring new
challenges to Hong Kong and the region. It is important that
the international community and Congress continue to closely
monitor developments there.