A Tale of Two Cities:
The Image and Reality of Hong Kong Today

Remarks by U.S. Consul General Michael Klosson

Houston, Texas, February 15, 2001

Thank you for that warm Texas welcome for this traveler from Hong Kong. You know, there's a connection between Hong Kong and Texas that goes back over one hundred and fifty years. For those of you who have boned up on your Hong Kong history, you might recall a certain Captain Charles Elliott, a British superintendent of trade, who in 1841 claimed Hong Kong for the UK. That rocky island, though, was far less than what Foreign Secretary Lord Palmerston had in mind. London had wanted a big port on the Chinese mainland. So Elliott was packed off in ignominy. You know where he was sent? To the brand-new Republic of Texas as the British envoy. Fortunately, he didn't try to secure Houston for Queen Victoria!

Well, both Texas and Hong Kong have changed a lot since Elliott's day. But both places still evoke strong images that may or may not accord with reality.

Mention Hong Kong, and many Americans get a definite picture in their minds. Maybe they think of "Hong Kong -- Fabled City of the Orient." Junks in the harbor. Suzie Wong. Bruce Lee. Or maybe it's "Made in Hong Kong" toys, electronics, suits. Or maybe what sticks in their mind is an historic picture -- the British flag being lowered for the last time and the troops of the Chinese People's Liberation Army marching across the border on July 1, 1997.

No matter what image people may have, Hong Kong's reality is more complex, and more intriguing. This always-on-the-move city is certainly Chinese, but also quite international. It is modern, but traditions abound. It was a temporary refuge for many fleeing post-war China, but now is regarded as home by most. As a gateway to China and as an Asian hub, it has always put business in the driver's seat, but pluralistic and increasingly democratic politics are now also taking root.

So I'd like to talk to you today about the crosscurrents that make Hong Kong what it is, both the positive developments and some raising concern. I'll also discuss the reasons why what happens in Hong Kong matters to the United States. And finally, I'll talk about what we need to do to make sure that U.S. interests are protected and promoted in Hong Kong and elsewhere overseas.

One of the keys to understanding Hong Kong today is to remember that it is a work in progress. Hong Kong had a 156-year history as a British colony. As a Special Administrative Region of China, however, Hong Kong is not yet four years old.

So these are still early days for an arrangement -- established by an international treaty and a Chinese domestic law -- that provides for Hong Kong's way of life to continue unchanged for fifty years. And not only that -- the "One Country, Two Systems" concept, as it is called, is as counter-intuitive as it is unique. So skepticism, even disbelief, overseas is entirely understandable.

One can say with confidence that the worst fears of the pessimists -- those who predicted that Chinese sovereignty would mean the end of Hong Kong as an international city and that the "one country" would quickly trump the "two systems" -- have not come to pass. But it's also true that Hong Kong today is not exactly the same as in 1997. Crosscurrents, some flowing from China and others solely within Hong Kong, are defining Hong Kong's evolving character.

So, what has happened? Since 1997, Hong Kong has actually faced two major challenges. The first has been to manage the transition to the new governing system after the handover. The second has been to deal with the Asian Financial Crisis and the need to adjust Hong Kong's economy to the demands of the 21st century.

The unfolding story of the transition has so far been a positive one overall. With some notable exceptions, China has kept its fundamental promise to respect Hong Kong's autonomy. At the same time, the Hong Kong people have demonstrated their continuing commitment to their unique way of life and institutions.

Hong Kong built its success on being a free society with free markets, adherence to the rule of law, freedom of speech and of the press, and a clean, efficient civil service. Those principles remain key to Hong Kong's continuing vitality. Human rights are respected. Protests and demonstrations are common. The Falun Gong, outlawed on the mainland, is a legal organization in Hong Kong and has been allowed to meet and practice there. (In fact, just last month they held an international conference and march in Hong Kong with some 1,000 practitioners from around the world.) The news media are still free and feisty, and for the most part not shy about reporting on China or criticizing the Hong Kong government. Hong Kong has held two sets of open and fair elections since 1997 for its Legislative Council, though I should note that the body does have substantial constitutional limitations. The police and courts follow established common-law legal principles. The free market system and lack of large-scale corruption provide a sound foundation for doing business.

But some events over the eighteen months that I've been in Hong Kong, coupled with several earlier, raise concerns which highlight that Hong Kong's situation merits continued attention from the United States and other major partners which have interests at stake.

You may have heard about some of them. Last spring, for example, one senior PRC official based in Hong Kong publicly exhorted the news media not to report the views of Taiwan independence advocates as "normal news." Another said that Hong Kong firms should not trade with certain Taiwan firms that are perceived as supporting independence. In December, Chinese officials warned Macau and Hong Kong not to permit activities to be staged against the Central Government and urged the local press to play a more positive role. These remarks prompted concerns that China was calling for limitations on the exercise of fundamental freedoms in Macau and Hong Kong. In response to activities by the Falun Gong, senior PRC officials in Hong Kong declared publicly in recent weeks that it was "forbidden" for any organization to turn Hong Kong into a center for Falun Gong and anti-China activities, prompting the Hong Kong governmnent to state it would observe closely the group's activities.

Finally, and in a different light, came the decision last month of Hong Kong's top civil servant -- widely seen as a key proponent of Hong Kong's autonomy and its international character -- to retire a year early for family reasons. Her announcement generated lots of speculation, and time will tell whether the excessively pessimistic prognoses of some observers will be borne out. We certainly hope that will not be the case.

It is important that China adhere to its commitments -- in letter and spirit -- to respect Hong Kong's high degree of autonomy and that China recognize Hong Kong's success as a society based on open expression, among other things. It is, as Hong Kong's Chief Executive said last week, a "peaceful and free society that subscribes to the rule of law."

At the same time Hong Kong's autonomy does not depend on Chinese forbearance alone. It also depends on the strength of the local community's commitment to, and willingness to stand up for, its freedoms and the rule of law guaranteed in Hong Kong's mini constitution, the Basic Law. These values are also fundamental to Hong Kong's prosperity and stability, and set Hong Kong apart from other Chinese cities. When the PRC official I mentioned earlier, for example, issued his warning last April to the local media, the Hong Kong Government, with strong support from the local community, responded by reaffirming Hong Kong's commitment to press freedom. Such reactions reflect the continuing strength of those values.

Nevertheless, the influence of the "one country" factor is palpable in post-handover Hong Kong, and comes in many forms. The pride of being Chinese, the lure of the vast mainland market, and a desire to establish relationships with the new sovereign power are some of its manifestations. It is important that the balance inherent in the "One Country, Two Systems" arrangement be maintained.

Fortunately, there are many in Hong Kong -- and in Beijing too -- who understand that Hong Kong's true value to its residents as well as to China lies in its uniqueness and in its willingness to give full play to the autonomy it has been granted. After all, a vibrant Hong Kong helps China's prosperity and pride by being a world-class, international city that provides talent, capital and experience to the mainland. A vibrant Hong Kong shows the mainland its own potential future - a way forward toward prosperity that rests on openness, tolerance, the rule of law, sound management and transparent dealings, free of the corruption that at times permeates mainland transactions. Hong Kong's Chief Executive just last week reaffirmed his government's commitment to protect "the two systems under one country," and maintain the rights and freedoms enjoyed by the people of Hong Kong.

So, basically, I would say that the post-handover direction of Hong Kong has been positive, though there are some areas that bear watching to see whether these are just bumps along its new path or portents of difficulty ahead.

The second challenge Hong Kong has faced since the handover has been economic in nature and region wide in scope. In some ways, the Asian Financial crisis that struck in 1997 has been harder for the city to handle. Hong Kong's stock market plummeted, the property bubble burst, unemployment hit an all-time high, and the economy sank into a serious recession.

But Hong Kong has managed to turn itself around over the past two years, by drawing on its core strengths and launching a series of impressive reforms. The stock market has returned to pre-crisis levels, unemployment is down somewhat, and the overall rate of economic growth last year probably exceeded 10%. Much of this growth was generated by re-exports from China through the world's busiest seaport and one of its busiest airports. A recent survey by the American Chamber of Commerce in Hong Kong showed renewed optimism -- 95% of AmCham companies see a "good" or "satisfactory" outlook for 2001, and 61% plan to expand their Hong Kong operations.

All of the economic turmoil prompted both government and business to think seriously about how to re-position Hong Kong's economy for the future. And with its legendary entrepreneurial spirit, Hong Kong has sought to do just that -- diving headfirst into the networked economy. With the adoption of a greatly liberalized and highly competitive telecommunications regime, Hong Kong is going digital and wireless. Almost three out of every four persons now own a mobile phone and Hong Kong has one of the highest levels of Internet use in Asia. When new fiber optic cables arrive in Hong Kong over the next 18 months, they will multiply the available data bandwidth ten-fold and open the door for Hong Kong to have one of the most advanced networks of telecommunications, internet applications and data services in the world. Greater global connectivity and opportunities for e-commerce are still to come. These expanded links should help American and Hong Kong companies take part in Mainland China's embrace of the "new economy."

Hong Kong has been busy making other structural changes as well to enhance its competitiveness. For example, the government merged the stock and futures exchanges to find new efficiencies, and launched a second exchange for new technology issues to strengthen Hong Kong's position as Asia's leading international financial center. To address concerns about English language competency and quality of life, the Government has launched a fundamental reform of the educational system and devoted increased attention to the environment.

These moves appear to be paying off: A two-year study of 8,000 companies released by The Economist Intelligence Unit found Hong Kong remains the preferred location for Asian regional headquarters of multinational corporations. Its top selling points were legal and political stability, good infrastructure, professional services and quality local management.

The next big stimulus -- and challenge -- for Hong Kong will be China's accession to the World Trade Organization. This has prompted concerns that Hong Kong's middle-man role will be diminished, that companies will bypass Hong Kong and enter the mainland directly. Our belief is that China's entry into the WTO, in broad terms, will be a net plus for Hong Kong, provided Hong Kong can add value to foreign companies seeking to enter the mainland market. There will certainly be more competition when China opens its doors wider. Most analysts, however, believe that this will encourage significant overall growth in China. So, even if Hong Kong's share of the economic pie is smaller in relative terms, it will be larger in absolute terms because the pie itself will be bigger.

An important key to how this ultimately works out will be the adaptability and flexibility of the Hong Kong business community. And if history is any guide, I have to be optimistic about that. I expect Hong Kong will become more economically intertwined with China, or at least with the fast-growing Pearl River Delta of South China. Twenty years ago, Hong Kong took advantage of China's opening to move production facilities into southern China where Hong Kong capital and know-how were married with more abundant, less costly mainland labor. Now, Hong Kong's next major transformation will be to get more deeply involved in China's domestic market, particularly distribution, sales and services to Chinese customers. Hong Kong's success will continue to depend on its ability to bolster its core free-market and free-society values, which are critical to its comparative advantage as a platform for entering the China market.

Thus, another challenge Hong Kong faces has to do with governance. Its current governing structure -- set out in the Sino-British Joint Declaration of 1984 and the Basic Law of 1990 -- was established more than a decade ago and served Hong Kong well in ensuring a smooth transition. But in the years since these documents were drafted, political expectations have increased, and experience has shown a need to look at the issue of governmental accountability. Neither the Chief Executive nor a majority of the legislature are currently democratically elected in the sense of one man - one vote. The Basic Law provides for a gradual expansion of democracy, which we believe should occur at a pace that the Hong Kong people want.

How Hong Kong addresses these issues of democratic governance over the coming decade is likely to have a major impact on its continued vitality and future prospects. The Chief Executive has signaled his intent to review accountability and aspects of Hong Kong's governance. We hope these steps will result in progress toward a system that is more accountable to and fully representative of the Hong Kong people.

The fate of Hong Kong -- how this "One Country, Two Systems" idea plays itself out -- matters very much to the United States. We have important interests at stake. About 50,000 Americans live in the city and more than 75,000 Americans visit each month. It's a major port of call for the U.S. Navy. There are approximately 1,100 American companies in Hong Kong, and the U.S. has $21 billion dollars worth of direct investment, and much more in funds and portfolios.

As our fifteenth largest trading partner, Hong Kong holds out good business opportunities for American companies. Texas' exports to Hong Kong, for example, totaled more than $845 million in 1999, and more than half of that was electronic equipment and components. It's the kind of place that makes deals happen because its genius lies in bringing together manufacturing, markets, finance and technology from all over the world.

But Hong Kong matters to us for more than just commercial reasons. Hong Kong is a window on China's future. It's an example and a stimulus for the mainland's dramatic transformation. It has been a crucial engine powering the economic development of China and providing capital for China's reforming economy. In broader terms, it serves as a model for China and the rest of the region, demonstrating how the rule of law and respect for personal freedom can turn a set of rocky islands with no resources into a prosperous, sophisticated "world city." In short, Hong Kong shows that free societies and free markets work.

Hong Kong also matters because of our shared attachment to universal values and our common interests and goals. The U.S. supports free trade and open markets, and so does Hong Kong, which has been a strong advocate for these policies on the world stage. In the international organizations to which we both belong, such as APEC and the WTO, we find ourselves on the same side on most issues.

So the U.S. has many interests in Hong Kong, and we at the Consulate General are working to advance them across the board. One of our primary focuses in recent years has been to end the piracy of computer software, music and videos, which had been a major problem in Hong Kong that cost American companies as much as $200 million a year. I'm pleased to report that Hong Kong has made enormous strides in that area. Its achievements were recognized in 1999 when it was removed from the U.S. 301 Watch List. Its anti-piracy efforts have become a model for the region.

We've also pushed hard for civil aviation liberalization, which could lead to more frequent and convenient air service, probably initially via code-sharing, between Hong Kong and cities like Houston and Dallas. After some disappointment last year, we're looking forward to another round of talks in the near future. We hope these will lead to an agreement on code-sharing and expanded cargo and passenger flights by U.S. airlines beyond Hong Kong to other points in Asia. An agreement would be win-win -- U.S. airlines, passengers and shippers would benefit from expanded services and Hong Kong would advance its objective of making its new airport a pre-eminent air services hub in Asia.

A third area in which the Consulate is working to advance our interests is through developing cooperative relations with Hong Kong's law enforcement authorities. With its independent judiciary, clean government and respect for human rights and the rule of law, Hong Kong is our leading law enforcement partner in the Asia-Pacific region. Despite being under Chinese sovereignty, Hong Kong has been able to conclude agreements providing for extradition and mutual legal assistance with foreign countries, including the United States. On the enforcement front, Hong Kong has made major efforts to fight narcotics trafficking, copyright piracy and alien smuggling. You've probably seen the news stories about Chinese migrants being smuggled through Hong Kong in shipping containers. What you may not be aware of is that Hong Kong has put a lot of resources into fighting the problem by inspecting containers, verifying shipping documents, and joining us in tracking down the ringleaders of the smuggling operations.

In addition, in July, Hong Kong assumes the chairmanship of the financial action task force group and in that capacity will also help promote new initiatives to combat money laundering.

The Consulate General is also working to help American firms do business in Hong Kong and China. China's WTO accession holds out great promise for American companies ready to tackle the challenges. That's where we - and my colleagues on the mainland - can help. We know, for example, that many small- and medium-sized U.S. companies lack the expertise to enter the China market. But there are many Hong Kong companies with that expertise who would make good partners for American firms, partners who speak English and understand our "Western" ways of doing business. The consulate's Foreign Commercial Service office has started a new program to match American firms with suitable Hong Kong counterparts. We are eager to help, so please contact us.

Both through these tangible steps and the more intangible ones of diplomacy aimed at supporting Hong Kong's environment of a free society, the U.S. Consulate General is advancing your interests in Hong Kong. But to do this in Asia and elsewhere, to defend our security, prosperity and principles in an ever-changing world, to protect America from the transnational threats posed by drugs, terrorism and crime, to strengthen the forces of democracy and law upon which our own future depends -- to continue to do all of these things will require a significant infusion of resources for international affairs.

Currently, we spend only one penny out of every federal dollar for our entire international affairs budget. In real dollars, we're spending only half of what we did in 1985 on international affairs. After years of budget cuts, the State Department has suffered a hollowing-out of its workforce. Embassy security upgrades are far behind schedule. The State Department's information technology remains woefully inadequate to the task of managing and sharing information in an interconnected world. Many overseas facilities are dilapidated and overcrowded -- hardly the image we wish to project as the world's leading power.

If we care about the future of our country and its role in the world, we must provide our diplomats with the resources they need to do their jobs. After all, they are America's first line of defense.

OK, there you've had it. The program and the commercial. I'd be happy to entertain any questions.