The Economy, Not Beijing, Is Hong Kong’s Biggest Headache

A year after China reclaimed Hong Kong from British control, the territory is in little mood to celebrate.

What had been a bubbly, booming economy is now heading for its worst recession since World War II. Add to that a series of health scares--bird flu, an algae-filled “red tide,” a cholera outbreak and pesticide-tainted vegetables--and people are worrying about not only the money in their pockets but the food on their tables.

But the good news is this: Despite years of gloomy predictions of how life would change under Communist rule--and despite grumbling over government tinkering in the political realm--few of Hong Kong’s worst problems are the fault of Beijing.

The past year, more than anything, has been about Asia’s economic crisis. The day after the Hong Kong hand-over last July 1, Thailand’s just-floated baht fell like a rock, and its neighbors’ currencies followed. The crisis blasted over the region like a sandstorm, infiltrating even the best-protected economies.

While Hong Kong has weathered the storm better than most, the crisis has exposed and exacerbated the territory’s economic and political weaknesses. The government’s attempts to protect the Hong Kong dollar’s value have sent interest rates surging, buffeting the stock and property markets: The Hang Seng index has dropped to half its pre-hand-over high, and property prices have plunged more than 40%.

While Hong Kong has long been able to piggyback on China’s double-digit growth, the mainland’s development now may mean a decline in the importance of Hong Kong as a gateway to China. Multinational businesses are setting up headquarters directly in Shanghai and Beijing; ships are docking in Dalian and Shanghai instead of transshipping goods through Hong Kong. The result of these economic shifts is 4.1% unemployment, the highest Hong Kong has seen for years.

“I never thought I would see this happen here: to go from caring about what I do to worrying about how we eat,” said Stephen Lam, who used to fly to different countries every week as a buyer for an import company. The company went bankrupt, and now he drives a truck.

The downturn has focused attention on how the new administration is handling the regional turmoil as well as its own structural changes. And at times, Chief Executive Tung Chee-hwa’s government appears to be scrambling on slippery ground.

A well-intentioned government plan to provide an additional 85,000 units of low-cost housing to the territory each year sucked the life out of the property market that underpins Hong Kong’s economy. After intense pressure from big real estate developers and small businesses that enjoy the trickle-down dollars from homeowners’ spending, Tung froze the plan last week and halted government land sales for nine months.

In a hastily called news conference, he lined up his top officials to break the news that Hong Kong’s downturn was worse than they had expected--and that even the $4.1-billion rescue package they had unveiled would only slow, not stop, the downward spiral.

“We believe we are in a critical phase,” Tung said somberly, “and therefore, we have to be pragmatic.”

Despite such seesaw intervention, China has acted as a stabilizing force for Hong Kong’s economy in the past year. When speculators attacked the Hong Kong dollar last year, Beijing left policy purely to Hong Kong’s Monetary Authority, promising to back up the dollar with its $140 billion in reserves, but only if asked.

In the past few months, China has indeed been throwing its weight around, but to the benefit of Hong Kong.

China has resisted the temptation to devalue its currency, the yuan, because it could spark another round of currency crisis and endanger the Hong Kong dollar. But by dangling the threat of devaluation, Beijing nudged the U.S. to help stop the slide of the Japanese yen, which was putting intense pressure on Hong Kong’s and China’s economies.

The move showed an acute understanding of how the world economy works and China’s growing ability to protect its interests--and Hong Kong’s. China’s economic czar, Zhu Rongji, “is a world-class economic and strategic thinker,” said Tokyo-based Deutsche Bank economist Kenneth Courtis, who met with Zhu twice during the week of the yen-yuan showdown. “His level of sophistication should be quite reassuring for Hong Kong.”

But less comforting to the territory are the political changes of the past year.

From the first day of Chinese rule, there has been a quiet, incremental adjustment of Hong Kong’s political and legal infrastructure, done in a way that the people on the street may hardly notice. The result is a revival of the same kind of controls over the territory that Britain once held as a colonial power--controls, it may be noted, that were rarely used in the final years of British rule and were mostly dismantled in its final days.

“It is very clear that the government means to be a lot harsher on basic rights and freedoms,” said Margaret Ng, a lawyer and legislator. “Where civil liberties are concerned, they are taking a very tough line.”

The first step backward was the replacement of the partially elected legislature that held sway before the hand-over with one filled with more cooperative lawmakers. That temporary legislature stayed in power long enough to repeal amendments broadening Hong Kong’s Bill of Rights and to push through a law transferring the immunity of the British Crown to the Chinese state. In addition to the army garrison and the Foreign Affairs office, the definition of “state” put the state-run New China News Agency and the headquarters of the Communist Party above Hong Kong law.

That worries some, like legislator Emily Lau, who insists that even the Chinese government must be held accountable in Hong Kong. The Hong Kong branch of the New China News Agency illegally dodged Lau’s request under the territory’s Privacy Act to open the files it has kept on her, but the government declined to prosecute. The law providing the exemptions passed soon after.

Adding to the concerns about the appearance of favoritism for those with close China connections, publisher Sally Aw was arrested with three colleagues for circulation fraud involving her Sing Tao newspaper. Aw, who has close ties to China, was not indicted, while the other three were.

“It’s a disgrace,” Lau said of the two cases. “It makes it look like in Hong Kong, some people are more equal than others.”

Despite these steps back, Lau, who remains one of Hong Kong’s most popular legislators, hopes to keep pushing the territory forward.

Only one-third of the current legislature is directly elected, but in recent voting to replace the temporary legislature, a surprisingly high 55% of voters sloshed to the polls in pouring rain to cast their ballots. The high turnout has been read by some analysts as a referendum on people’s desire to have a greater voice in the government--sooner rather than later.

“Hong Kong is moving forward, at our own pace,” is Tung’s mantra. Another favorite phrase is “Slowly, slowly.”

Hong Kong’s constitution, the Basic Law, prescribes that only half the legislature will be elected by 2007, when the government must decide how quickly to phase in full democracy. Hanging over Hong Kong’s head is the knowledge that China can override the Basic Law. But even pro-China parties are asking: Why not use that sword to slash through bureaucratic obstacles to hasten democracy if there is a real demand for it?

“The pace of our political development has always been contentious,” said Tsang Yok-sing, chairman of the pro-China Democratic Alliance for a Better Hong Kong. “We would be glad to see the date brought forward.”