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The Hong Kong Policy Act Report

Released by the Bureau of East Asian and Pacific Affairs
June 30, 2007

In 1993 and annually from 1995 through 2006, the Department of State has submitted regular reports to Congress, pursuant to the U.S.-Hong Kong Policy Act of 1992. On July 1, 2007, Hong Kong will commemorate ten years of implementation of the "one country, two systems" framework and the Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China, which together with the "Sino-British Joint Declaration on the Question of Hong Kong" provide the legal and institutional foundations for Hong Kong's transition and for its status as a Special Administrative Region (SAR) of China. The following report to Congress, although no longer required by law, serves to highlight key developments over the past year as well as Hong Kong's experience since it became a SAR of the People's Republic of China.

Ten Years Since Reversion

During the past ten years, Hong Kong has overcome significant economic, social, and political challenges to its prosperity, stability, and autonomy. In 1997, just after establishment of the Hong Kong Special Administrative Region (HKSAR), the Asian financial crisis strongly battered the city's economy, financial sector, and real estate market. In 2003, the Severe Acute Respiratory Syndrome (SARS) epidemic struck Hong Kong and other parts of Asia, causing nearly 300 deaths in Hong Kong as well as a widespread collapse of confidence in the government's ability to manage crises. At the same time, an ill-fated attempt to introduce national security legislation (Article 23) led many Hong Kong residents to express concern over the integrity of the HKSAR's autonomy and raised questions about the population's confidence and trust in the territory's political leadership. Since 2004, however, developments have been more positive and Hong Kong has rebounded.

As a Special Administrative Region of the People's Republic of China, Hong Kong remains an international city and the most open, free, and developed part of the PRC. The implementation of the "one country, two systems" framework put forth by the PRC by and large have proven successful for both Hong Kong and the mainland. Although it exercises considerable influence in Hong Kong, the central government in Beijing has generally respected its commitment under the Basic Law to maintain a "high degree of autonomy" for Hong Kong and to preserve and respect the integrity of the HKSAR's distinct economic, legal, and social systems. The central government has also acted over the years in concrete ways to support Hong Kong's economic development and prosperity. Hong Kong continues to maintain its dedication to the rule of law, adherence to free and fair market principles, and respect for fundamental civil rights and human freedoms. Public debate on all issues is active and dynamic. Politically, while development of democratic institutions remains incomplete, a robust dialogue among all concerned parties continues and is covered in a largely unfettered press. A wide and growing perception exists, however, that much of the Hong Kong press engages in a degree of self-censorship regarding issues sensitive to the PRC central government. Public opinion polls suggest that about half the people of Hong Kong believe such self-censorship occurs.

Thriving Economy

Hong Kong boasts one of the most open, thriving, and prosperous economies in the world. It is the most modern and developed part of China, with a first-world standard of living, simple and transparent tax regime, and enviably low unemployment and inflation rates. Its role as an international financial center has strengthened over the past ten years.

The Hong Kong Special Administrative Region Government (HKSARG) pursues a market-oriented approach to commerce. Hong Kong is a duty-free port, with few barriers to trade in goods or services and few restrictions on foreign capital flows and investment. The few remaining non-tariff barriers and investment restrictions concern certain professional service sectors, such as the ability of foreign doctors and lawyers to practice in Hong Kong. In several other domestic service sectors, the absence of a general competition law and the high cost of local market entry have led to domination by major local companies. There are no significant trade barriers with regard to telecommunications or electronic commerce. The HKSARG continues to maintain a robust regime to protect intellectual property rights, and it continues to promote public education to encourage respect for intellectual property.

As a Special Administrative Region of the PRC, Hong Kong is an independent customs territory and economic entity physically and legally separate from the rest of the PRC, and it continues to participate actively and independently in a range of international organizations and agreements, including the World Trade Organization (WTO), the Asia Pacific Economic Cooperation (APEC) forum, and the Financial Action Task Force (FATF). The United States enjoys broad and effective cooperation with Hong Kong's highly proficient law enforcement agencies. Hong Kong maintains an effective export control system and cooperates closely with the United States on export control matters. Reflecting its strong institutional and regulatory infrastructure, Hong Kong also continues to maintain and expand its role as an international financial, arbitration, and litigation center. Hong Kong issues its own currency, the Hong Kong dollar, which is pegged to the U.S. dollar.

Recent Developments

According to Hong Kong's Basic Law, the "ultimate aim" of the SAR's political development is election by universal suffrage of both the Chief Executive and the entire Legislative Council (Legco). Following the Government's December 2005 failure to secure the qualified Legco majority required to approve proposed limited electoral reforms for the 2007 Chief Executive and 2008 Legco elections, Chief Executive Donald Tsang announced that those elections would be held under the existing, limited suffrage structures and procedures. Thus, there likely will be no significant progress toward universal suffrage before the 2012 Chief Executive and Legco elections, at the earliest. On July 1, 2006, tens of thousands of Hong Kong residents marched through the city to express their support for universal suffrage, labor rights, and various other issues. On October 11, Chief Executive Tsang delivered his annual Policy Address to the Legco; he identified the three main challenges facing his government as sustaining economic development, developing a democratic political system, and building a "harmonious" society.

For the Chief Executive election, the pan-democratic parties coordinated their efforts and supported a single candidate, Civic Party legislator Alan Leong, to run against incumbent Donald Tsang in the March 2007 vote. In December 2006, Leong successfully competed in the Chief Executive Election Committee (CEEC) selection process. To the surprise of many observers, he garnered 134 of the 795 nominations, thereby surpassing the 100-nomination threshold for contesting the election. In March 2007, Tsang and Leong conducted an open and vigorous election campaign throughout Hong Kong and participated in two televised, widely viewed debates that attracted broad public and media interest. Public opinion polls consistently showed that the Hong Kong people supported a contested election and also favored Donald Tsang by a large margin. On March 25, Donald Tsang won a large majority of the CEEC votes and will serve a five-year term, starting July 1, to 2012. Under Hong Kong law, he cannot run for another term. Tsang has vowed publicly to "resolve" the universal suffrage issue during his term in office. In early 2006, the HKSARG announced that the Commission on Strategic Development (CSD), the members of which were appointed by the HKSARG, would continue to meet periodically to consider proposals and determine ways in which to advance political and electoral reform under the Basic Law's requirement for "gradual and orderly progress" toward democratization. As of June 2007, the HKSARG plans to publish recommendations from the CSD in mid-summer, to be followed by a period of up to one year for public consideration and comment. A consensus plan agreed to by the pan-democrats reportedly will be included in the publication, although it seems unlikely that the democrats' proposal will be one of the three "mainstream" proposals that the report will highlight. Recent public statements and background comments by mainland figures and pro-Beijing figures in Hong Kong indicate some will be inclined to defer to at least 2017 universal suffrage for the Chief Executive election, with universal suffrage for the Legislative Council elections to come later. Others are arguing for full universal suffrage in 2012. The method of selecting Chief Executive candidates looks likely to be a key issue for debate.

Hong Kong's Relations with Beijing

Relations between the HKSAR and the central government in Beijing are based on two fundamental documents: the 1984 "Sino-British Joint Declaration on the Question of Hong Kong," an internationally recognized agreement, and the "Basic Law of the Hong Kong Special Administrative Region of the PRC," which serves as the territory's "mini constitution." All parties to these agreements largely have respected them, and public opinion polls show that the people of Hong Kong increasingly "trust" the central government and express confidence in the future. Nevertheless, some events over the past ten years present troubling precedents or undermine the high degree of autonomy enshrined in those documents. Specifically, there have been several instances in which observers questioned overt interventions by the central government in Hong Kong's political and legal processes. Most recently, in April 2004 the National People's Congress Standing Committee (NPCSC) ruled out implementation of universal suffrage for the 2007 Chief Executive and 2008 Legco elections. In April 2005, the NPCSC decided that Hong Kong's next Chief Executive would serve only the remaining two years of the term of Tung Chee-hwa, who had resigned the previous month. In both these instances, many in Hong Kong called into question the right of the NPCSC to make such determinations for the Hong Kong SAR. Also, in late 2006 there was at least one high-profile case generating widely held perceptions that mainland political pressure may have influenced the course of what should have been a purely Hong Kong commercial transaction. Such interventions, while infrequent, can undermine public confidence in Hong Kong's autonomy, the integrity of its legal system, and the openness of its economic system and media, all of which are vital components of Hong Kong's competitiveness.

Economically, Hong Kong's increasingly close cooperation and integration with the mainland economy, most significantly the Pearl River Delta region of southern China, have contributed strongly to Hong Kong's prosperity since 1997. The Closer Economic Partnership Arrangement (CEPA), essentially a limited free trade agreement between Hong Kong and the mainland, has proven to be a stimulus for economic growth on both sides of the border. Similarly, the growing numbers of mainland travelers, including business people and tourists, helped Hong Kong recover from the 2003 SARS crisis and continue to provide major economic benefits. Hong Kong continues to play a vital role as an international financial center with unique expertise and advantages in promoting financial flows and investments to and from mainland China. It offers human resource capabilities and a first-world legal system that will be difficult for any other Chinese jurisdictions to match for several decades. The HKSARG, vigilant in maintaining its advantageous position, continues to upgrade its physical infrastructure and take other steps to improve its economic competitiveness.

U.S. Interests in Hong Kong

The U.S. Government wants Hong Kong and the "one country, two systems" approach to succeed. We have maintained substantial political and economic interests in Hong Kong for many decades and will continue to do so for the foreseeable future. The U.S. Government supports Hong Kong's high degree of autonomy under Chinese sovereignty; promotes trade and investment; supports an array of visits to and from Hong Kong; promotes law enforcement cooperation; bolsters educational, cultural, and academic links; and supports the large community of resident and visiting U.S. citizens through our consulate.

The United States has strong interests in the protection of human rights and the promotion of democracy throughout the world. In Hong Kong, the United States is committed to promoting democratic values, facilitating the development of democratic institutions, and generally supporting the advancement toward universal suffrage in accordance with the wishes of the Hong Kong people. We believe that the people of Hong Kong are especially well prepared for such participation and that the Hong Kong people should decide the scope and pace of movement toward universal suffrage, in accordance with the Basic Law. In that regard, we have noted the commitment of Chief Executive Tsang to resolve the issue of universal suffrage during his tenure. How that is done will be the subject of considerable debate. It is our hope that debate will expand genuine dialogue and consensus on Hong Kong's future within China and produce genuine and early political reform that will sustain Hong Kong's prosperity and stability.

U.S. trade, investment, and business with Hong Kong continue to flourish in a largely open and transparent environment. In 2006, U.S. exports to Hong Kong totaled US$17.8 billion, making Hong Kong our 15th largest export market. U.S. direct investment in Hong Kong through 2005 amounted to US$37.9 billion. Approximately 1,200 resident American firms operate in Hong Kong. Hong Kong is home to an estimated 60,000 U.S. citizens (including many dual nationals), and more than one million U.S. citizens visit Hong Kong each year.

Cooperation between the HKSARG and the U.S. Consulate General remains broad, effective and mutually beneficial. The United States enjoys strong cultural and educational relations with the people of Hong Kong, including continuing substantial flows of tourists, business travelers, and students in both directions. The United States has significant interests in seeking Hong Kong's support in the global fight against terrorism and pandemic disease, promoting economic and business relations, maintaining cooperative law enforcement relationships, and continuing access to Hong Kong as a port of call for U.S. military ships and aircraft. Hong Kong remains a regular port of call for the U.S. military. In 2006, 39 ships visited Hong Kong. The growth in this activity is on track to return the number of ship visits to the pre-reversion level of 45-50 per year.

More than a dozen U.S.-Hong Kong agreements currently are in force, including a stand-alone Air Services Agreement as well as Extradition, Prisoner Transfer, and Mutual Legal Assistance Agreements that entered into force after Hong Kong's reversion to China. These agreements continue to function very well.

Hong Kong maintains an effective, highly autonomous, and transparent export control regime that the U.S. Government has encouraged others to emulate. The USG and the HKSARG regularly hold interagency export control discussions, which serve to strengthen further our strong cooperation. Hong Kong has an active licensing system for both imports and exports of strategic trade, which reflects all the major multilateral export control lists. As economic interaction between Hong Kong and mainland China continues to expand, the United States continues to monitor potential new vulnerabilities in the U.S. and Hong Kong export control systems, track individual suspicious cases, collaborate with the HKSARG to educate Hong Kong importers and end-users regarding their obligations under Hong Kong law, including Hong Kong's obligations under bilateral and multilateral agreements, and encourage the HKSARG to maintain its vigilance in enforcement of strategic trade control laws and regulations.

Law enforcement cooperation remains a central pillar of U.S.-Hong Kong relations. The seven USG law enforcement agencies operating in Hong Kong cooperate with their highly professional Hong Kong counterparts in combating a wide range of criminal activities, including terrorism, human smuggling, trafficking in persons, narcotics trafficking and precursor chemical control, commercial fraud, cyber crime, counterfeiting, credit card fraud, money laundering, violations of intellectual property rights, and general organized crime. U.S. law enforcement agencies in Hong Kong conduct training seminars and other mutually beneficial activities with their Hong Kong and regional counterparts. Hong Kong remains a full and important partner in efforts to combat both terrorist financing and money laundering.

Hong Kong strongly supports the global campaign against terrorism. It has participated in the Container Security Initiative since May 2003; its CSI program is among the most effective and efficient in the world and has become a model for other ports to emulate. It is our hope that an appropriate role for Hong Kong in the U.S. Secure Freight Initiative will bring benefits to the program and strengthen our cooperation.

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