China - Hong Kong re-united with China... through the world market

Jul/Aug 1997

By the time this issue of our journal comes out, Hong Kong will have been officially returned to China. After 155 years of colonial rule, the British state will have finally withdrawn from its last remaining imperial outpost in Asia, and for good. That the Union Jack - the blood-stained symbol of the most savage exploitation and plundering of the planet - will disappear from this part of the world can only be welcome. One can only hope that the same will happen, sooner rather than later, in the 13 other remnants of the British empire which are still scattered across the world.

The replacement of the Union Jack by the Chinese red flag, however, does not mean that Hong Kong will really be re-united with to China, far from it. There is no question of dismantling the former border and allowing the population of mainland China to mix freely with that of Hong Kong, and to discover the affluence of its lush middle-class residential areas or the luxury of its famous race tracks, yacht clubs and golf courses. Hong Kong will remain a restricted area, the access to which will be strictly reserved to those Chinese privileged who have the right connections, or a specific task to carry out in the territory. It will be a sanctuary for the very rich, or the very high-up - which is often synonymous in China - and their businesses, with just enough wage earners and professionals to service their needs.

For the time being at least, and provided nothing interferes with the plans painstakingly laid out through fourteen years of negotiations, Hong Kong will be money machine, banker, broker and profit spinner for both the Chinese and imperialist bourgeoisies. All the checks and balances built into the handover agreement are only meant to ensure that both sides will play by the rules and to guarantee the political and social stability needed for this formidable financial machine to operate smoothly.

In this game, however, the Chinese and imperialist bourgeoisies are not starting from comparable positions. China may well be the world's largest country, but its economic backwardness is no match for the industrialised world. The Chinese bourgeoisie remains weak, living in the protective shadow of a huge state machinery which acts at the same time as a brake on its development. It cannot measure up to the competition of the imperialist bourgeoisies on the open world market - except through tightly controlled mechanisms - such as, precisely, those of Hong Kong's financial and trading markets. The Chinese bourgeoisie can - and does - hope to boost its pickings, thanks to its relations with the world market through Hong Kong, but it cannot hope to do as well out of it as its imperialist colleagues. And for the time being, Hong Kong will remain to all intents and purposes an imperialist outpost - although no longer British-controlled - on China's southern coast, in any case an alien body within China.

A new set-up, tailor-made to do business with the West

So, from July 1st, the Hong Kong territory will become the Hong Kong Special Administrative Region (HKSAR).

According to the 1984 Sino-British Joint Declaration, the HKSAR will retain its present "free enterprise system" for the next fifty years. This means that foreign investment will be protected by law, the free flow of capital will be guaranteed, without any form of exchange controls, together with the "freedom" to set up private businesses in any field of activity - that is "freedom" within the limits of capitalist competition, of course: Hong Kong has its own more or less concealed monopolies, its unofficial price-fixing mechanisms, etc.. just like any other capitalist country, and that will undoubtedly remain so.

The HKSAR, says the Joint Declaration, will also retain its present currency system - the HK dollar which has been pegged to the US dollar since 1983 - and will have total control over it. It will have its own independent tax system (currently corporation tax is 15 to 17.5% and there is no tax on the sale of capital assets). It will not have to pay any tax to Beijing. The HKSAR will also remain a separate and independent customs area and will be free to participate in the international trade and finance organisations of its own choosing.

The HKSAR will have its own administration and government system based on a constitution called the "Basic Law", which was adopted in 1990 as part of the negotiating process. The administrative machinery of the state and the legal system will remain entirely intact. The only exception being the Court of Final Appeal - up to now the Judicial Committee of the Queen's Privy Council - which will be replaced with a local court which has still to be appointed.

The only area in which the HKSAR will have to toe Beijing's line will be in diplomatic and military matters. Thus, one of the first moves after midnight on June 30th will be a party at the Prince of Wales barracks, to welcome the first group of the Chinese PLA (People's Liberation Army) to move into the former quarters of the British army.

In the run-up to the handover, a major bone of contention was the interpretation of the Basic Law as regards legislation passed after its adoption. Beijing argued that the Basic Law implied that only legislation passed up to 1990 would be automatically recognised, while London argued that the cut-off date could only be that of the handover itself. So, in a matter of a few years, the British governor Chris Patten enacted a long list of reforms, which he and his predecessors had always flatly refused to allow before this. These ranged from the extension of the franchise for the designation of the Legislative Council to the setting up of a compulsory public pension fund and other welfare measures.

In this quarrel, the Beijing leaders obviously did not trust Patten one bit and feared being carried into on unchartered territory by pieces of legislation over which they had no say. At the same time, they wanted to avoid at all costs being accused, on the day after the handover, of "rolling back democracy" - which, according to the international media and the official line of US diplomacy, was already supposed to be their "hidden agenda" - for fear of sparking off civil unrest in the territory.

Patten, on the other hand, had a similar preoccupation, except that he was more concerned about the period before the handover than about what would come afterwards. He wanted to reassure the Hong Kong petty-bourgeoisie in order to avoid a possible exodus abroad and mass demand for British citizenship. So he introduced measures like the extension of the franchise, aimed at giving them a stake in the political system, something that only a tiny minority among the bette-offs had enjoyed so far. Besides, of course, Patten was certainly not averse to a bit of tactical overbidding to strengthen his hand in the negotiations with Beijing.

In any case, when the Legislative Council was appointed on the basis of the extended franchise in 1995, Beijing refused to recognise it and proceeded to appoint its own provisional legislature to take over on the day of the handover. But, of course, they needed this new body to have some credibility both in Hong Kong and with foreign businesses. First, a 90-strong Preparation Committee was appointed by Beijing, involving a majority of well-heeled businessmen, professionals and academics. Then this Committee nominated a 400-strong Selection Committee, whose members' list read a bit like the Hong Kong "Who's Who". Finally the Selection Committee elected a 60- strong legislature and an Executive Committee set to take over from Patten's own Executive on the day of the handover.

The result of this convoluted selection process is quite indicative of the Chinese leaders' real objectives. First, a majority of the "pro- Beijing" provisional legislature (33 out of 60) are already members of the current Legislative Council. Only the most vocal representatives of the Democratic Party - the group most openly hostile to the handover - were left out. Even more significant is the composition of the Executive Committee. Of its 14 members, five are top figures in the Hong Kong civil service, including the current head of the civil service and its financial secretary, a former chief justice and the current head of the housing authority. Then come six leading business tycoons, including the head of the Federation of Hong Kong Industries (a sort of local CBI), a former chairman of the Stock Exchange, the managing director of the Hong Kong branch of the US Chase Manhattan Bank and the chairman of Inchcape Pacific. Only one of the Executive members seems almost out of place, despite his long-standing and public support for Beijing - a former leader of the pro-Beijing trade-union federation and representative of the pro-Beijing Democratic Alliance for the Betterment of Hong Kong!

As to the choice made by Beijing for the chief executive who is to replace Patten on the day of the handover, it is no less striking. Tung Chee-hwa is a shipping tycoon, chairman of Orient Overseas International and former chairman of the Hong Kong Shipowners Association - the territory's most influential business body. Tung inherited his empire from his father, a prominent supporter of the anti- communist Kuomintang, who moved with his ships from Shanghai to Hong Kong in 1949. Tung spent most of the 1960s in the USA and came back to serve as a director for the Hong Kong Bank, a subsidiary of the Anglo-US HSBC banking empire, before becoming chairman of the Hong Kong-US Economic Cooperation Committee, which he is still today.

The pedigree of Beijing's preferred leaders for Hong Kong speaks for itself. It would be difficult to select a team from the Hong Kong Establishment with more personal and institutional ties with the former administration, local big business and Anglo-US companies than they have! If these men are there do to anything, it is certainly to use their personal influence with these milieus, which are obviously the only ones that really count as far as Beijing is concerned, to smooth out the transition and get big money to roll as usual.

A grandiose role in financing China?

The frantic activity on the Hong Kong Stock Exchange in the run up to the handover gives some idea of the role the Chinese and imperialist bourgeoisies want the HKSAR to play in future.

With a capitalisation of £250bn, the Hong Kong Stock Exchange is the 7th largest in the world. By May this year, its daily turnover was £1.2bn, four times its level a year before.

The main reason for this unusual activity was frantic speculation on the so-called "red chips". These are companies which are based in Hong Kong (and therefore have to abide by its laws), but are controlled by mainland Chinese ministries, provinces, local governments or enterprises. Fifty or so of these "red chips" have been floated on the Hong Kong stock market since January 1996.

A typical example is that of Beijing Enterprises Holdings, a company which was set up by Beijing's local government. Its main assets are the exclusive rights over the sale of tickets to the Great Wall, a 50% share in the ownership of the 30 MacDonald's franchises in Beijing, and a stake in China's largest brewery. No-one knows exactly how much these assets are really worth, nor how much profit they can be expected to make. Nevertheless, when this company was floated in Hong Kong on May 5th this year, for a total asking price of £118m, the issue was 1100 times oversubscribed and within a week, its shares were traded at 3 times the flotation price.

One could wonder whether this crazy stampede might not be due simply to a reaction of fear ahead of the handover, with small shareholders rushing for mainland China-based stocks, in the hope that they will still be traded whatever happens after the handover. However the level of oversubscription was such that individual shareholders would have been unable to borrow the cash necessary in Hong Kong. In reality, the main movers in this rush were the large foreign institutional investors and fund managers.

This is not an isolated case. Every single one of the "red chips" floated over the past year has been similarly oversubscribed, and the price of their shares have increased by 100 to 200% within weeks of the flotation. In early June, the Hong Kong- based Far Eastern Economic Review explained this frenzy by noting that all these companies are owned by Chinese state bodies, hence "the expectation that the companies concerned will, at some point, be sold Chinese state-owned assets on the cheap. So punters are effectively paying for what the companies don't have".

That these "red chip" companies are going to be offered state-companies on the cheap is born out by the fact that this is exactly what has happened with the oldest among them. And there is some logic to this. The top Chinese officials in central, provincial or local governments cannot just sell state assets and pocket the money. In the past they used to take funds illegally to Hong Kong and launder them using a local company as a front which then re-invested these funds in mainland China, with all the benefits attached to foreign investment. But this requires very large amounts of cash and has become a risky business - some have paid for these little schemes with their lives. So now Chinese officials play by the law which allows state bodies to float a company in Hong Kong. They appoint themselves as managers of such a company, get the authorities to sell them some state assets at a low price, and go to the Hong Kong stock market. The company can then be sold cheap on the market, with great expectations of future profits. And these Chinese managers can reward their own good work with a large chunk of very profitable share options. It is quick and easy money, it is neat, and what's more, it is legal. In fact, this is exactly the same mechanism used by the privatised utilities' fat cats in Britain in the early 90s, except that they were able to do it with the direct assistance of the government!

In a special feature on Hong Kong, in June, the Financial Times quoted a top fund manager saying: "The future of Hong Kong capital's markets is China. For Hong Kong to become a larger stock market than London - which it will be in 25 years - will require the flotation of Chinese assets". And the same fund manager added: "The West privatised industries, China is privatising cities". And there is some truth in this last cynical remark. Chinese state bodies do not have many factories that can be sold, even on the cheap. What they do have, which they can always sell, is real estate, utilities, sometimes transport companies, or simply bare land. And these are the kind of assets which are to be found in most of the "red chips".

Put in a nutshell, the main role that western financial tycoons see Hong Kong playing in the future is that of a buyer of any kind of Chinese public assets, provided they have a value and are sold cheaply, not in order to develop these assets, even though occasionally this might happen, but in order to increase the role of Hong Kong as a money- lending market!

What about the "emerging industrial power"?

Not so long ago, "experts" with very respectable international finance institutions such as the World Bank used to predict that China would become the world's largest economy by the year 2005, 2010 or 2030.

Today this kind of prediction seems to have gone out of fashion (but for how long?). Business papers like The Economist have profusely apologised for being "ove-optimistic". Others, like the Financial Times have been complaining for some time over the disappointing performance of China's new private companies (meaning those which are not entirely state-owned). The FT went as far as to admit that these private companies were consuming their capital rather than producing profits and, moreover, they were no longer creating significant numbers of jobs, and therefore would be unable to absorb even a small part of the workforce threatened with redundancy in the ageing state industries.

So what is going to turn China into this "emerging industrial power" which has been so talked about in the western media? Direct foreign investment? This has long turned out to be another fairytale. The funds actually invested by western capital in China are insignificant compared to the size of the Chinese economy and population. In 1996, the official figures, which are usually vastly inflated - if only because these figures include Chinese money which has been laundered illegally through Hong Kong - showed foreign investment to be £18 per inhabitant, which is 30% less than in 1994 and only one hundredth of the level of foreign investment in Malaysia for instance. What is more, over the past years, investment in industrial manufacturing has shrunk to 2% of total investment, while the share of real estate, hotels and offices has increased to 58% and that of roads, power stations, bridges, etc.. has reached 37%. As The Economist admitted in March this year, "foreign enterprises, for all their export success, still account for only a tiny proportion of China's economy; and rather a lot of them consist merely of importing components, bolting them together and shipping them out again".

In other words, what foreign direct investment does mainly at present is milk existing funds - state funds in the case of infrastructure, or private funds in the case of real estate - without laying down the basis for any new wealth to be created.

And apart from such projects which aim at tapping existing resources rather than developing them or creating new ones, the only other plans for capital development in China are those mentioned before - the privatisation of cheap state assets, which are bought mostly for the speculative profit that can be made out of their shares.

China's contradictory position

In the end of the day, there is no role for Hong Kong to play, and for imperialist capital operating there, other than to carry on with the parasitic activity it always had, at the expense of the Chinese economy. The form of this parasitism and its scale may be different today, but not its nature.

That the scale of this plunder of the Chinese economy (of the Chinese "capital market", as the economic "experts" would say) is larger today is certainly true. If only because this plunder is now increasingly helped by the Chinese bourgeoisie, who strives to do its best to cooperate in order to get its share of the loot. And the whole purpose and value of the Hong Kong handover, from the point of view of imperialism, is precisely to increase the scale of this plunder by removing a layer of obstacles for any Chinese bourgeois who is willing to act as a go-between for the benefit of the imperialist capitalist looking for quick bucks on the Hong Kong financial market.

This does not mean, however, that there is a consensus in this respect amongst the Chinese ruling class. It is well-known that when Thatcher first approached the Chinese leaders in 1979, offering to rediscuss the status of Hong Kong, they did not show any interest. A few months ago, Huang Wenfang, a Chinese Communist party stalwart, confirmed this, explaining that if it had not been for Thatcher's insistence on formal renegotiation aimed at extending the unequal treaties of the 19th century, the Chinese leadership would have been willing to agree on a less formal arrangement, making no reference to the unequal treaties, but extending by one or two decades the property rights on Hong Kong's New Territories, which were due to end in 1997 - something that the Chinese leaders agreed to do when they were approached by the Portuguese government in the 1970s over the status of the Portuguese colony of Macau.

And there was a certain logic in the Chinese leadership's reluctance to change the status quo. On the one hand, the existence, within China, of a haven of arrogant western affluence like Hong Kong, can only be a cause for discontent and unrest among the Chinese population - which the Chinese leaders would certainly prefer to do without. On the other hand, as the recent developments show, the greed for profits of the Chinese bourgeoisie tends to develop in such a chaotic and uncontrolled way, that it may also cause all sorts of trouble to the state, and therefore to the bourgeoisie as a whole. Every now and then, the Beijing leaders embark on an anti-corruption drive and each time a few more heads roll in the top spheres of the regime to set an example. In mid-June this year, the Financial Times quoted China's vice-premier Li Lanqing asserting the need "to curb the negative role "red chip" companies play in terms of speculation and creating a bubble economy". Of course, this may well be because people like Li Lanqing object to the smaller fry getting crumbs in that way, out of his own share of the cake. But it is more likely to express the feelings of a section of the Chinese leadership which, out of responsibility towards the collective interests of the Chinese bourgeoisie, would prefer a more disciplined and less hazard-prone approach to profit-making - if only because they know that such undisciplined behaviour can only help imperialism get a larger share of the loot.

The scramble for a share of a relatively small pie

As to the imperialist powers themselves, they are not as united as it may seem over the issue of the handover, or rather each power has its own particular agenda.

Blair's theatrical refusal to attend the first session of the Transitional Executive Committee just after the handover ceremony - on the grounds that he does not recognise its legitimacy - is probably partly aimed at British public opinion, to reinforce his image as a prime minister who "stands for Britain's interest" as he was so keen to stress during his election campaign. But it is also partly a way of preserving the future for British interests in Hong Kong, by getting on his side a section of Hong Kong's middle-class. Not all western leaders have indulged in such spectacular posturing, because they prefer, on the contrary, like the French president Chirac, to be in Beijing's good books.

What applies to Blair, applies also to Clinton's reiterated exposure of Beijing's "threat to democracy". It is ironical to hear a US president denouncing the relatively mild limits (so far at least, because this may not last) which Bejing has said they intend to place on the right to stage street demonstrations in Hong Kong, as a "threat to democracy". After all, Clinton never went on record denouncing the total ban on street demonstrations which existed under British rule not so long ago in Hong Kong itself; nor the de facto ban which is enforced today in Taiwan, his pet ally when it comes to putting pressure on Beijing. In addition, of course, Clinton is involved in a great power game which embraces the whole region. And his posturing over Hong Kong is yet another way to assert that nothing will be allowed to take place in the region without US agreement.

But despite their common denunciation (though in rather different terms) of Beijing's "threat to democracy", Blair and Clinton are fighting different battles, and they are actually also fighting against one another. A series of articles published earlier this year in the American daily Washington Post highlighted this point. One of them, for instance, argued that "as the largest and most prominent foreign community in Hong Kong, Americans seem more likely to benefit from the shifting order that will occur here this summer... There has been some privileged status for certain British companies, and that will go away". Whether this prediction will turn out to be true is an open question. But undoubtedly the handover must be seen by US companies as an opportunity to gain some ground at the expense of the colonial privileges still enjoyed by British banks like HSBC or Standard Chartered (who are among the three banks allowed to issue Hong Kong money), or British companies like Swire Pacific (with its semi-monopoly of air transport) and Jardine Matheson (the largest real estate company). Blair cannot ignore this threat, any more than Thatcher did, when she included in the negotiations the guarantee that the two British banks mentioned would retain their monetary privileges for some time at least.

In any case, the Chinese "cake", as it turns out, is not the enormous boon that has been so often hailed. It is a relatively modest one and the relaxation of the grip that Britain had on Hong Kong can only whip up further competition between the big players - including also Japan and, potentially, the main European countries.

The bill for all this, the plundering of the Chinese economy as well as the rivalries between the various protagonists, will be forced down the throats of the proletarian masses, in China as well as in Hong Kong - after the handover, just as it was before. We must hope that somehow this bogus re-unification will bring Chinese mainland workers and Hong Kong workers closer together, and reinforce them, so that at some point in the future, they can put an end to these artificial power and financial games, by unifying China, and the whole region, but on their own terms, by ridding it of all capitalist exploiters once and for all.