[Extensions of Remarks]
[Pages E1148-E1152]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

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

______

HON. DOUG BEREUTER

of nebraska

in the house of representatives

Monday, June 7, 1999

Mr. BEREUTER. Mr. Speaker, this Member rises today to submit the
Sixth Report of the Speaker's Task Force on the Hong Kong Transition.
It has been almost two 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 (D-CA),
Sherrod Brown (D-OH), Eni Faleomavaega (D-AS), Alcee Hastings (D-FL),
Don Manzullo (R-IL), and Matt Salmon (R-AZ).
To date, the Task Force has prepared six quarterly reports assessing
how the reversion has affected Hong Kong. The sixth report, which I
submit today, covers the period of October through March 31, 1999,
during which time this Member, as Task Force Chairman, visited Hong
Kong in January 1999.
Mr. Speaker, this Member submits the following Task Force report for
the Record.

The Speaker's Task Force on the Hong Kong Transition, Sixth Report

This is the sixth report of the Task Force on the Hong Kong
Transition. It follows the first report dated October 1,
1997, the second reported dated February 25, 1998, the third
report dated May 22, 1998, the fourth report dated July 23,
1998, and the fifth report dated February 2, 1999. This
report focuses on events and development relevant to United
States interests in the Hong Kong Special Administrative
Region (HKSAR) between October 1, 1998, and March 31, 1999,
and incorporates findings drawn from the Task Force
Chairman's visit to Hong Kong in January, 1999.
Hong Kong's ongoing economic recession marked the six
months covered by this report as the consequences of the
Asian Financial Crisis continued to be felt. Hong Kong's
gross domestic product (GDP) declined by 5.1 percent in real
terms in 1998, its first annual contraction on record.
Unemployment and trade figures were correspondingly negative.
Despite the difficulties. Hong Kong authorities operated
independently in all areas of economic decision making, and
there was no evidence of any attempt to intervene by Beijing.
Opinion on the Hong Kong government's controversial August
1998 intervention in the currency, stock and futures markets
turned increasingly positive as equities regained much of
their lost value and the currency exchange rate held steady.
In the legal-political realm, Chinese officials' public
expressions of unhappiness over a controversial decision by
Hong Kong's Court of Final Appeal raised concern about the
future independence of the Hong Kong judiciary. Discussions
between Hong Kong and Beijing authorities, combined with a
``clarification'' issued by the court, appeared to have
succeeded in settling the matter, at least temporarily,
without serious damage to the ``one country, two systems''
concept. The

[[Page E1149]]

practical consequences of the court decision, which could
permit a large number of persons now in China to claim the
right to reside in Hong Kong, had not yet been dealt with at
the end of March. The Hong Kong Government's obvious
displeasure with the ruling, combined with public fears of
the consequences of renewed mass immigration, led to fears
that the Government would seek Beijing's assistance in
rolling back the decision in a manner that would undermine
Hong Kong's judicial independence and the rule of law.

Economic Developments

Hong Kong continued to suffer the negative effects of the
Asian Financial Crisis, posting its fourth consecutive
quarter of negative growth, as its first recession in
thirteen years showed no sign of coming to a quick end.
Preliminary estimates showed GDP dropped 5.7 percent in real
terms in the fourth quarter of 1998 following a decline of
6.9 percent in the third quarter. For 1998 as a whole, Hong
Kong's GDP fell by 5.1 percent, the first annual economic
contraction in Hong Kong since such statistics have been
calculated. Spending for private consumption continued to
fall steeply, declining 9.3 percent in the fourth quarter of
1998, as consumer confidence remained affected by rising
unemployment and stagnating personal income. Weak demand and
dropping asset values brought about significant deflation,
with consumer prices declining for four consecutive months
beginning in November. In February, the consumer price index
dropped by 1.7 percent. Unemployment reached 6.2 percent in
the first quarter of 1999, the highest level recorded in
twenty-five years. An early economic turnaround continued to
appear unlikely, with most analysts predicting an upturn no
earlier than the last quarter of 1999. Many view the official
Hong Kong government's forecast of 0.5 percent GDP growth in
1999 as too optimistic, with some private analysts predicting
a decline of as much as 3 percent.
The government's budget for the 1999-2000 fiscal year that
began April 1, 1999, projects a budget deficit of HK $36.3
billion (US $4.7 billion). This comes on top of an estimated
deficit of HK $32 billion (US $4.1 billion) in fiscal year
1998-1999. The government anticipates running a deficit for
the next two years before returning to a balanced budget in
fiscal 2001-2002, but maintains this is a prudent and modest
use of Hong Kong's sizable reserves during difficult economic
times. While the general consensus among analysts is that a
modest deficit is justifiable in view of the current
recession, some have voiced concern about the impact three
consecutive years in the red would have on Hong Kong's
reputation for fiscal prudence. Some also attribute the
fiscal deficit in part to Hong Kong's continued reliance on
an excessively narrow, property-focused revenue base.
There was some positive economic news during the reporting
period. The tourism market continued to cover, with January
1999 visitor arrivals up nearly 11 percent over the previous
year. The liquidity crunch in the banking sector showed signs
of easing, and interest rates began to move downward,
although real interest rates remain high by historical
standards. Improved international investor confidence helped
the stock market to recover much of the ground it had lost
since the onset of the financial crisis, and the Hang Seng
index stood above 11,000 at the end of March. The renewed
buoyancy in the equity markets turned the government's August
1998, market intervention into an extremely profitable
venture, with shares acquired by the government appreciating
by 20 percent or more. The real estate market also showed
signs of bottoming out. The government announced it would
resume land sales in April, ending the suspension it imposed
in June 1998 to reduce downward pressure on property values.
Hong Kong's hard currency reserves also remained substantial.
By the end of March, however, these encouraging signs had
yet to translate into improvements in Hong Kong's real
economy. Concerns remained about Hong Kong's continued
dependence on entrepot trade and the relative lack of growth
in sectors with high value-added, such as the high-tech
industry. The government sought to address the latter problem
by announcing an ambitious ``Cyperport'' project aimed at
attracting world class information technology companies, but
opinions varied as to the commercial viability of the
proposal. An increasing percentage of Hong Kong's visitors
for tourism are coming from China (27 percent in 1998 versus
22 percent the previous year and 19 percent in 1993). Chinese
visitors are believed to spend substantially less than
tourists from more affluent countries such as Japan and the
U.S., whose numbers have stagnated or declined over the same
period. In the short term, Hong Kong's exports (both domestic
and transhipments) will probably remain depressed due to the
weakened economies of some of its key trading partners and
its higher cost of production relative to competitors that
have devalued their currencies. The problems of certain
mainland companies and financial institutions, highlighted by
the insolvency of the Guangdong International Trust and
Investment Corporation, also have the potential to negatively
affect Hong Kong. With a return to growth apparently still
some time off and credit still extremely tight for small and
medium sized businesses, more pay cuts and layoffs are likely
in the months ahead. Although pressure has clearly eased
since the August intervention, the Hong Kong dollar remains
vulnerable to speculative attacks. Renewed instability in
regional financial markets could seriously set back Hong
Kong's prospects for recovery.

Revisiting the August 1998 Market Intervention

One of the key events described in the Fifth Task Force
report was the Hong Kong government's massive intervention in
the stock, currency and futures markets on August 14, 1998.
On that Friday afternoon, Financial Secretary Donald Tsang
invested the equivalent of an estimated US $15 billion of
Hong Kong's reserves in the market in what proved to be a
successful effort to defend against outside speculators
betting against Hong Kong's ability to sustain its currency's
peg to the U.S. dollar. Although controversial at the time,
over the subsequent months the intervention has increasingly
come to be viewed as a regrettable but necessary action, even
by many who questioned it initially. During the Task Force
Chairman's visit to Hong Kong in January, it was evident that
even the sharpest critics of the intervention had changed
their opinion and believed the government made the right
decision. Direct discussions with those involved also made it
abundantly clear that the Hong Kong authorities acted
entirely independently in undertaking the intervention. While
they informed their interlocutors in Beijing of their
actions, they did not consult them beforehand or seek their
agreement before proceeding.
As noted above, the equities purchased by the government
have appreciated significantly in value during the recent
recovery in the Hong Kong stock market. To allay fears that
this sizable portfolio will be manipulated for political
purposes or will come to influence government decision
making, the authorities have placed the equities in the hands
of an independent appointed board of senior figures. The
problem of how to liquidate the holdings remains to be
resolved. It appears likely that it will have to be done
gradually, and a residual may be retained, with appropriate
safeguards, to support the government pension plan.

Political Developments

As described in previous Task Force reports, the Basic Law
that effectively serves as the Hong Kong Special Autonomous
Region's constitution provides for a gradual increase in the
number of members of the Legislative Council (LegCo) chosen
by direct election. Twenty of the 60 members of the Council
that took office in July 1998 were directly elected from
geographic constituencies, with the remainder coming from
``functional constituencies'' with limited voter pools. Under
the Basic Law, the number of directly elected members will
increase to 24 in the year 2000 and 30 in 2004. In 2008, the
Basic Law allows for (but does not require) the remaining 30
functional constituency seats to be converted to directly
elected positions. Similarly, it would also permit, but not
mandate, the direct election of the Chief Executive beginning
in 2008.
Heartened by their strong showing in last year's election,
political parties favoring more rapid movement toward
elections by universal suffrage continue to call for the
immediate amendment of the Basic Law to provide for direct
election of the full LegCo and the Chief Executive at the end
of their present terms of office (2000 and 2002
respectively). Chief Executive C.H. Tung and the Hong Kong
government oppose such proposals, arguing that public
consultations on the pace and scope of democratization should
wait until after the 2000 LegCo election. Advocates of a
faster move to direct elections across the board have not
renewed their attempt to put the LegCo on the record in favor
of their position since the defeat of an earlier motion last
July.
Another point of contention is the relative power of the
LegCo vis-a-vis the Chief Executive and government. Reformers
argue that the Basic Law unduly restricts the LegCo's clout
by barring it from introducing many types of legislation and
by requiring concurrent majorities of directly and
functionally elected members to pass certain bills. Defenders
of the current arrangement cite Hong Kong's long tradition of
``executive-led'' colonial governance in which legislative
authority was strictly limited. Senior civil servants, in
particular, take a dim view of efforts to increase the
LegCo's clout, claiming that the legislature simultaneously
demands greater power while fleeing the responsibility that
such power entails. Within the constraints under which it
currently operates, the LegCo has successfully brought its
influence to bear on the government's policies and actions,
for example, by carrying out an independent inquiry into the
chaotic opening of the new Chep Lap Kok airport. Unhappiness
over the Government's handling of several legal and judicial
matters also prompted the LegCo to mount a no confidence
motion against the Secretary for Justice, Elsie Leung. The
Government ultimately blocked the motion, but only after an
intense lobbying campaign. In combination with Hong Kong's
lively and free press, the LegCo's willingness to criticize
and challenge government actions clearly has served to
further public debate and increase transparency. Opinion
surveys suggest, however, that the ongoing recession is
taking a toll on the popularity of the Chief Executive, the
Civil Service and the legislature, while the increasingly
adversarial relationship between the Government and the LegCo
remains a subject of widespread concern.

[[Page E1150]]

The Government also continued to receive for criticism for
moving to reduce the opportunity for Hong Kong residents to
choose their own representatives at lower
public administration levels. Following its earlier
decision to abolish the two largely elected Municipal
Councils at the end of 1999, the Government in December
announced plans to increase the percentage of appointed
(versus elected) positions on Hong Kong's 18 District
Boards (to be renamed District Councils) beginning in the
year 2000. In March, the Government proposed to transfer
the Municipal Council's responsibilities for arts and
cultural services to a government appointed commission and
a newly created department, leading to complaints that
this would be a step toward centralized control of
cultural affairs and the discouragement of non-mainstream
views.

Rule of Law and Judicial Independence

A fair and independent judicial system is a critical
element of international confidence in Hong Kong. The Basic
Law provides for judicial independence and grants Hong Kong's
courts jurisdiction over all cases except those involving
``acts of state,'' such as defense and foreign affairs. A
Court of Final Appeal, consisting of five justices, was
created on July 1, 1997, to replace the United Kingdom's
Privy Council as Hong Kong's highest court. Since the
reversion to Chinese sovereignty, Hong Kong's judiciary
generally has continued to operate independently and without
taint of political interference.
The response by officials in Hong Kong and Beijing to a
controversial January 29, 1999, decision by the Court of
Final Appeal (CFA), however, for the first time raised
substantial doubts about the Hong Kong judicial system's
future independence. The case concerned the ``right of
abode,'' that is, the right of children of legal Hong Kong
residents to join their parents in Hong Kong. The CFA decided
upon a generous interpretation of the provisions of the Basic
Law concerning the right of abode, granting the right to
reside in Hong Kong to all children of legal Hong Kong
residents, regardless of whether the children are legitimate
or illegitimate or whether they were born before or after
their parents attained legal resident status. In making this
ruling, the Court clearly opened the door to the legal influx
of a large number of persons now residing in China, where it
is assumed many Hong Kong residents have children born inside
or outside of wedlock. Just how many persons could qualify to
reside in Hong Kong under the terms of the CFA decision, both
now and in the future, remains a subject of considerable
controversy. Critics charged the Government with needless
alarmism about the numbers involved, questioning both the
methodology of the estimates and the Government's assumption
that the new residents will make heavy demands on welfare and
other public services.
Much of the initial reaction to the CFA decision, however,
focused not on the practical concern of a massive influx of
new residents but on the question of the Court's authority
vis-a-vis that of China's National People's Congress. The CFA
sparked this furor by the somewhat gratuitous inclusion of
language in its decision which asserted its right to rule on
actions by China's National People's Congress that affected
Hong Kong if such actions breach provisions of the Basic Law.
In apparent response to this portion of the decision, four
Chinese legal experts who had participated in the drafting of
the Basic Law, together with an official from China's State
Council, labeled the CFA ruling an attack on the authority of
the National People's Congress and a serious breach of the
``one country, two systems'' principle. The Hong Kong
Government, in turn, reacted to the expressions of Chinese
displeasure by dispatching the Justice Secretary to Beijing
for urgent consultations. Subsequently, on February 24, the
Government made an unprecedented request to the CFA for a
``clarification'' of the portion of the ruling which touched
upon the CFA's authority to review acts of the National
People's Congress (NPC) and its Standing Committee. Two days
later, on February 26, the CFA complied, issuing a short
statement of clarification in light of what it called ``an
exceptional situation.'' The clarification did not address
the substance of the original January 29 ruling, but merely
asserted that nothing in the decision questioned the
authority of the NPC Standing Committee to make an
interpretation of the Basic Law binding upon the Hong Kong
courts. In its concluding sentence, the clarification stated
``the court accepts that it cannot question the authority of
the NPC or the Standing Committee to do any act which is in
accordance with the provisions of the Basic Law and the
procedure therein.''
The Hong Kong Government's decision to request the
clarification caused considerable criticism from some legal
experts and from opposition party leaders, who charged that
it served to undermine the autonomy of the Hong Kong's
judicial system. The Chief Executive, on the other hand,
defended the action as entirely in keeping with the ``one
country, two systems'' concept, citing other legal scholars
who argued the CFA's initial decision had made overreaching
claims regarding the court's own authority.
In general, the consensus appeared to be that the CFA's
``clarification'' had succeeded in defusing the initial
controversy in a way that did little or no harm to the
underlying principle of rule of law in Hong Kong. With that
question disposed of, however, attention increasingly turned
to the practical dimension of the CFA decision. By the end of
March, the Government's increasingly dire warnings about the
potential consequence of large scale immigration and its
refusal to draft procedures to implement the decision were
drawing criticism from opponents who argued that it reflected
disrespect for the authority of the courts. Opinion surveys
consistently showed strong public opposition to the admission
of large numbers of new residents under the ruling, but the
question of whether or how to go about seeking to overturn or
modify the terms of the CFA decision remained deeply
controversial. The options under discussion included asking
the CFA to review the substance of its original decision,
requesting that the NPC amend the Basic Law, or seeking an
interpretation of the existing Basic Law provisions by the
NPC Standing Committee. While there are provisions for the
latter two options in the Basic Law, critics charge it would
be improper for the Hong Kong Government, rather than the
courts, to request the Standing Committee to interpret the
Basic Law, since that would amount to executive branch
intervention to overturn a judicial decision. It is important
to note that Chinese officials have shown no inclination to
intervene unilaterally in the controversy over the practical
aspects of the court decision, and have consistently
expressed the hope that Hong Kong would find a way to solve
the matter internally without involving Beijing.
Another emerging area of concern is that of the prosecution
of individuals in China for crimes committed in Hong Kong.
The subject rose to public attention with the conviction and
execution in China of two persons, one a Hong Kong resident
and the other a Chinese national. The Hong Kong resident was
a notorious gangster who was convicted by the Chinese court
of a number of crimes, committed both in Hong Kong and in
China. The Chinese national was convicted of crimes committed
while visiting Hong Kong. Chinese law permits the
prosecution of Chinese citizens for crimes committed
outside of its jurisdiction, and both individuals had
traveled to China voluntarily prior to being apprehended.
Hong Kong authorities are admittedly reluctant to request
the return of criminal suspects from China for fear of
having to reciprocate when China makes similar requests.
As a matter of policy, the Hong Kong government does not
return suspected criminals wanted in China, largely due to
public concern about China's application of the death
penalty. (There is no death penalty in Hong Kong.) In
contrast, Chinese officials have unilaterally returned
persons wanted for crimes committed in Hong Kong, as long
as they were not subject to criminal proceedings in China.
Negotiations on a formal agreement on the rendition of
criminal suspects between China and Hong Kong are said to
be underway, but prospects for a successful conclusion are
not clear.

Individual Liberties

Elsewhere in the legal and judicial area, the people of
Hong Kong continued to enjoy broad freedom of speech. Hong
Kong's media airs a wide range of views and opinions,
including those critical of the Hong Kong and Chinese
governments, without overt interference from the authorities
in Hong Kong or Beijing. Concerns regarding self-censorship
appear to have eased somewhat since Hong Kong's July 1997
reversion. In its 1998 annual report, the Hong Kong
Journalists Association concluded that ``self-censorship may
even have abated a little from its evident proliferation in
the period leading up to the hand-over.'' The Government has
yet to introduce proposed laws on treason, secession,
sedition, and subversion, all of which are required under the
Basic Law. In a legal case with implications for individual
liberties, on March 23 Hong Kong's Court of Appeal threw out
convictions under laws forbidding the burning or defacing of
the Chinese and HKSAR flags, ruling that the laws
unconstitutionally breached the Basic Law's protections of
freedom of expression. The Hong Kong Government announced
plans to appeal the case to the Court of Final Appeal. Also
in March, a number of well known exiled Chinese dissidents
applied for Hong Kong visas to attend an NGO organized
conference in May on the future of democracy in China.
Although several of the dissidents had visited Hong Kong
prior to the reversion, it was unclear if the Government
would approve the applications. (The Immigration Department
subsequently announced the denial of the visas on April 21.)

Trade and Export Control Issues

Final 1998 trade statistics showed across the board drops
in Hong Kong's imports (-11.5 percent), domestic exports
(-10.9 percent), and re-exports (-6.9 percent). While much of
this is a result of the Asian Financial Crisis, domestic
exports are subject to a longer-term downward trend, having
now fallen for three straight years and for five years out of
the last six. The broader regional crisis has thus served to
underscore Hong Kong's continuing dependence on entrepot
trade between China and other nations, particularly the U.S.
This makes Hong Kong highly vulnerable to disruptions in the
U.S.-China trading relationship, and helps explain the
nervousness with which Hong Kong officials view political or
economic tensions between Beijing and Washington.
The continued widespread availability of pirated movie,
audio, and software compact discs and trademark goods remains
the most serious bilateral trade issue between the United
States and Hong Kong. In January, the Department of Trade and
Industry informed the Task Force Chairman that the

[[Page E1151]]

number of customs officers monitoring Intellectual Property
Rights (IPR) enforcement had doubled since June 1997. A
significant increase in raids, seizures and prosecutions at
all levels, combined with the passage of new, more effective
Prevention of Copyright Piracy ordinance, 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. Despite
this positive step, much more remains to be done to crack
down on the trade in pirated products. Hong Kong's domestic
recording and film industries have also begun to demand
stricter enforcment, reflecting their growing awareness of
the impact of priacy on their own profitability. This
domestic support for tougher enforcement is likely to provide
impetus for further improvements.
To combat money laundering, U.S. Government agencies
continue to urge the Hong Kong Government to adopt mandatory
financial transaction and foreign exchange reporting
requirements and to explore options for discovering the
illicit use of non-bank remittance centers. In early 1999,
the Hong Kong Government began the legislative process to
bring these centers under regulatory oversight, complete with
mandatory reporting requirements. U.S. Government agencies
also are urging that Hong Kong establish a mandatory minimum
value currency entry and exit reporting requirement and
penalties for illicit cross-border currency movements and
bank deposits.
At the time of this report, there appeared to be no
significant problems between Hong Kong and the United States
Government in the area of export controls. Hong Kong
continues to vigorously enforce what is widely viewed as a
highly regarded trade control regime. The U.S. Government
reports no evidence of Chinese interference in Hong Kong's
export control decisions. Chinese officials have explicitly
recognized that export control matters fall within the trade,
rather than the foreign policy, ambit, thereby placing export
controls within the Hong Kong Government's exclusive purview.
Hong Kong's trade control regime is uniquely strict in a
number of its features, including the requirement for import
licenses as well as the more common export licenses. This
enables Hong Kong authorities to track controlled commodities
entering, as well as leaving the HKSAR. Hong Kong also
refuses to issue re-export licenses for products unless it is
sure that the original exporting country, including, of
course, the United States, would export the product to the
relevant end-user. In one 1998 case, U.S. Commerce Department
agents notified Hong Kong Customs of the re-export of a high
performance U.S. computer from Hong Kong to the Changsha
Institute in China. Hong Kong Customs undertook an
investigation, uncovering a total of eleven shipments by the
same Hong Kong company that appeared to violate Hong Kong, if
not U.S., export control laws. In February, 1999, Hong Kong
officials advised a U.S. interagency export control
delegation that it intended to prosecute the case on four
counts of violating export control laws.
United States Department of Commerce officials continue to
conduct regular pre-license and post-shipment inspections as
part of the dual-use licensing process. In addition, U.S.
Department of State and U.S. Customs officials 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 are they
involved in making them. Hong Kong's Customs and Excise
Department conducts routine checks at entry and exit
points and searches of vehicles and vessels to ensure that
all strategic trade shipments have the required government
approval. One concern that has been raised regarding Hong
Kong's export control regime has been the lack of customs
inspection of Chinese People's Liberation Army (PLA)
vehicles when they cross the border between Hong Kong and
China. While this poses a potential vulnerability, U.S.
Government agencies have no indication that the PLA is
using this process to divert U.S. technology to China. The
Task Force Chairman raised this as an area of concern with
Hong Kong officials during his visit in January, 1999, and
U.S. Government officials have raised it as well.

Macau

Preparations continue for the reversion of Macau to Chinese
sovereignty on December 20, 1999, after 442 years as a colony
of Portugal. Like the much larger Hong Kong, Macau with its
414,000 residents, will become a Special Administrative
Region under the ``one country, two systems'' formula for the
next 50 years. As we noted in our previous quarterly report,
the pace of preparation for the transition has been uneven
and a number of key elements have yet to be resolved. One
factor impeding progress appears to be Portugal's unhappiness
with China's unilateral announcement in September 1998 that
it planned to station PLA troops in Macau following the
reversion. The Portuguese maintain that there is no room for
such a garrison in cramped Macau, and that in previous
negotiations on the joint declaration concerning Macau the
Chinese had agreed no PLA presence was necessary.
On March 19, Portuguese President Jorge Sampaio met in
Macau with Chinese Vice Premier Qian Qichen, but indicated
that the troop question would be addressed in bilateral talks
later in the year. Sampaio indicated it was possible
negotiations could be prolonged up until the moment of the
hand-over, and warned he might not attend the ceremony itself
if a satisfactory agreement was not reached. Among other
important matters still to be settled are the structure of
Macau's court of final appeal; the eligibility of certain
ethnically Chinese Macau residents to retain Portuguese
nationality; legislation implementing Macau's accession to
the International Covenant on Civil and Political Rights and
the International Convention on Economic, Social, and
Cultural Rights; and whether Portuguese will enjoy equal
status with Chinese as Macau's official languages. In March,
the initial steps were taken toward the nomination of the 200
person selection committee empowered to select Macau's first
post-reversion Chief Executive before the end of May.
(Subsequent to the date of this report, the selection
committee was named during the April meeting of the
Preparatory Committee of the Macau Special Administrative
Region. On May 15, Edmund Ho, a 44 year-old banker and son of
a well-known Macau community leader was selected to be the
Chief Executive. He will take office on the date of Macau's
reversion to Chinese sovereignty on December 20, 1999.)
While U.S. trade volume with Macau is relatively small, 40
percent of Macau's exports go to the United States. Eighty
percent of Macau's total exports consist of textiles, and the
U.S. Government has long been concerned about the potential
that textiles produced elsewhere are being transhipped
through Macau. U.S. Customs officials have visited Macau on a
number of occasions to verify local production capacity, and
continue to work with the Government of Macus to prevent such
transhipment. Intellectual Property Right (IPR) piracy is
another key concern, and Macau has been on USTR's Priority
Watch List for IPR since April 1998. In response to U.S.
suggestions that it intensify and raise the profile of its
IPR enforcement actions, the Government of Macau conducted a
public destruction of seized pirated goods in March 1999.
Other inadequacies in Macau's laws related to trade include a
lack of effective legislation and enforcement mechanisms in
the areas of money laundering and export controls. These are
particularly troubling in view of widespread reports that
North Korean operatives currently use Macau as a transit
point for shipments of counterfeit U.S. currency.
Finally, problems remain with the overall climate of law
and order. Gangland killings and drive-by shootings continue
to negatively affect Macau's image and its tourism industry.
Responsibility for the high levels of criminal activity have
at times been a point of contention between China and
Portugal. A failure to bring about improvements in this area
could tempt more overt action by Beijing following Macau's
reversion, with potentially harmful consequences to the
autonomy of the Government of Macau.

Conclusion--Still so far, so good, with some new concerns

In the months prior to Hong Kong's reversion to Chinese
sovereignty in July 1997 many voiced concern that Beijing
would rapidly move to undermine the relatively open political
system and the free market economy of Hong Kong. There was
great suspicion that the Chinese-appointed Provisional
Legislature would undermine all of the democratic principles
that Hong Kong had embraced. It was argued that, among other
things, press freedom and freedom of assembly would be
radically curtailed, and that the People's Liberation Army
garrison would rapidly interject itself into Hong Kong
affairs. Critics also warned that mainland financial
interests would rapidly move to manipulate and control the
then vibrant Hong Kong economy.
More than twenty months after the reversion, these fears
have proven to be unfounded, up to this point. Hong Kong
residents have retained the basic freedoms that they enjoyed
under British rule. Although buffeted by the Asian Financial
Crisis, the business community and the Government, appear
united in their desire to keep Hong Kong's market as free as
possible. The PLA troops have kept to their barracks, and
Beijing has repeatedly displayed a disinclination to involve
itself in Hong Kong's internal affairs. Although sharp
differences have arisen within Hong Kong, particularly
between the Government and opposition legislators to date
informed observers see no evidence of any intent by China to
violate the tenets of the Basic Law and the ``one country,
two systems'' concept.
This is not to say that there is no cause for further
concern. As we have noted in this report, the current crisis
over the Court of Final Appeal.s's decision on the right of
abode has the potential to undermine confidence in Hong
Kong's future judicial autonomy and the rule of law. Cautious
consideration of the long range implications of any action
aimed at addressing the practical implications of the ruling
is clearly appropriate. It would appear that improved
communication between the Government and the Legislative
Council could make a significant contribution to the
achievement of a solution, as well as facilitating public
consensus on Hong Kong's future political development. Trade
related issues, including IPR piracy and money laundering,
also deserve continued attention. Hong Kong's excellent
export control system is intact, but attention to the
potential loophole afforded by cross-border PLA vehicle
movements is also needed. Congress should continue its
practice of monitoring developments in these and other areas.

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