CIAO DATE: 10/98

Hong Kong: The Challenges of Change

Jeffrey Fischer, Hugh J. Ivory,
Yi-zheng Lian, and James T. H. Tang

Asia Society

May 1998

Contents

An Economic Roundup of Post-Handover Hong Kong,  by Yi-zheng Lian

Politics in Hong Kong: Democracy in Retreat?,  by James T. H. Tang

The 1998 Hong Kong Election System,  by Jeffrey Fischer and Hugh J. Ivory

Appendix 1. Seats per Party in 1995 Legislative Council Versus Provisional Legislative Council

Appendix 2. Major Political Parties in Hong Kong (March 1998)

Appendix 3. The Inter-Parliamentary Union’s Declaration on Criteria for Free and Fair Elections

Appendix 4. Number of Seats per Geographical Constituency

Appendix 5. Allocation of Seats Under List Proportional Representation Electoral System in a Hypothetical Constituency with 100,000 Valid Votes

An Economic Roundup of Post-Handover Hong Kong
by Yi-zheng Lian

Almost a year after the handover of sovereignty over Hong Kong from Britain back to China, and with the election for the Special Administrative Region’s first Legislative Council (which will replace the Provisional Legislative Council) around the corner, people in Hong Kong and elsewhere are beginning to take stock. In what ways has the city changed? How many of these changes are attributable to the change in sovereignty? Are more of the changes for better or worse? Will the election results imply major changes in the direction of Hong Kong’s development? This essay attempts to shed light on these questions. Of course, change is pervasive, and one can look at changes in the cultural, political, social, and economic spheres. The analysis below is confined to the economic realm.

This essay will look at the major sectors, facets, and episodes in Hong Kong’s economy in the year since the handover. These are:

• currency stability
• real estate
• tourism, unemployment, and the overall slump
• government regulations
• the chief executive’s first policy address
• the budget and fiscal health
• the long-term plan

An item that is missing conspicuously from the above list is, of course, China’s involvement in Hong Kong’s economic activities. The much-feared avalanche of Chinese influence in the local markets as a result of the handover simply has not materialized. In fact, Beijing takes great pains to strictly prevent mainland intervention in the Hong Kong economy. Even the fever for “red chips” (Hong Kong-listed subsidiaries of Chinese government-owned parents) has faded. It has gone to bust, to be exact, in part as a result of China’s resolution to regulate the launching of red-chip firms in Hong Kong and their financing activities in the Special Administrative Region (SAR). The missing item tells a lot about the economic reality in Hong Kong since the handover.

Currency Stability, at Significant Costs

The Asian currency turmoil that began in Thailand on July 2, 1997, a day after the historic date for Hong Kong, has by all accounts not ended yet; but there has been a lull, and the region’s various currency values, with the possible exception of the Indonesian rupiah, have stopped gyrating furiously, with some settling into relatively stable levels that are 50 percent or more below those of last summer. Yet Hong Kong has been spared the pains of similarly steep currency devaluations and their dire consequences. Its exchange rate, approximately HK$7.75 to US$1, has not changed. How has Hong Kong done it? And at what costs?

While many people know that Hong Kong’s currency is linked to the US dollar, not many know that the SAR does not have a central bank. The monetary system in use is called the currency board system, an invention of the British colonial empire for some of its smaller erstwhile colonies. The system is simple. First, it sets a linked exchange rate between the local currency and a major foreign currency—the US dollar in the case of Hong Kong.

Second, the monetary authority enforces a rule of creating money strictly according to the amount of foreign currency entering the system. For example, in Hong Kong, if a local firm earns US$1 from the export of goods and deposits the money into a bank in the system upon receipt from the importing country, then the bank will be allowed to create a fixed amount—HK$7.8—of local currency and deposit it into the account of the firm. Local currency is similarly created if foreigners bring into the system US dollars as either investment funds or loans. Unlike systems with a central bank, there is no room for discretionary printing of money to finance government fiscal projects, such as subsidizing money-losing transportation or yet another entitlement program. Inflation results only from the inflow of foreign currency into the system in excess of its real asset growth and therefore can only be “passive.”

Third, the system stands ready to allow redemption of foreign currency by anyone. If I go to the bank and dump my local currency on the counter, the bank must take it all and return an amount of foreign currency to me according to the predetermined linked exchange rate; the monetary authority in turn is prepared to support the banks in such redemption activities, using its foreign currency reserves if necessary. Similarly, if banks take their local currency to the board and want to redeem it for foreign currency, the board must oblige. In particular, the board should not distinguish “speculators” in a discriminatory way from others who redeem with a “legitimate” purpose. This is in part because of the difficulty of distinguishing between the two kinds of redeemers, and in part because the board should go by rule and not discretion. The system works fine if the government adopts disciplined, conservative fiscal policies and has rich foreign currency reserves, two attributes that Hong Kong has long had.

Thus when the Asian currency turmoil threatened Hong Kong time and again in the past several months, the linked exchange rate held steady despite the acts of faint-hearted people who went to the bank and dumped their Hong Kong dollars to the tune of some 10 percent of total cash, savings and checking account money, and CDs, causing the foreign reserve level to go down. But not all that comes free. The cost of defending the linked system has been a sustained increase in the interest rate on the Hong Kong dollar as a result of the people having less than complete confidence in the government in defending the link and honoring all redemptions. For example, 15- to 20-year mortgage rates are some 2 percentage points above the US level. Other rates are similarly higher. Under normal circumstances, because of the link between the Hong Kong dollar and the US dollar, interest rates on the Hong Kong dollar closely track those on the US dollar, usually a quarter percentage point difference or less. Higher rates have hurt businesses and buyers of big-ticket items like cars and real property, leading some in the business sector to call for delinking the Hong Kong dollar from the US dollar.

The Hong Kong Monetary Authority has refused to entertain the idea of delinking. In defending the link, it did not hesitate to take a punitive action contradictory to the third point in the definition of a currency board—free redemption, even for suspects of currency speculation. After the most severe attack on the Hong Kong currency took place, the Monetary Authority used exorbitantly high interest rates to, in part, punish banks that had dumped the Hong Kong dollar on October 23. After the banks had dumped the local currency to the board, they had too little local currency to do normal transactions and had to turn to the board to borrow short-term money. The board then punished them by agreeing to lend only at a 300 percent interest rate. That thoroughly shook the confidence of the business sector. More recently, short-term rates have come down but long-term rates are still in the lower two-digit range. If the situation continues, 1998 will be a bad year for the economy. Most academic economists, strangely enough, come out in full support of the link. However, they criticized severely Monetary Authority head Joseph Yam’s use of the interest rate weapon to deal with currency speculators. “Contrary to popular belief and the utterances of the Monetary Authority, jacking up the interest rate will simply invite more speculators to look for opportunities in the Hong Kong financial markets,” remarked Nai-fu Chen, professor of finance at the Hong Kong University of Science and Technology and the University of California-Irvine, and a former tenured professor at the University of Chicago. According to Chen,

Speculators do not have to sell short the Hong Kong dollar, drain the confidence in the currency, wait for the exchange rate to fall, and make money in the currency market. They don’t even have to sell short in the stock or stock index futures market, then attack the dollar, wait for the interest rate to go up and the stock market to go down, and make money. All they need is to do two things that when done simultaneously are almost costless: (i) sell HK dollars for US dollars [and] (ii) do a say 3-month US-HK dollar swap. After that, they can just sit there and profit almost for sure. If the interest rate goes up, they make money in the forward Hong Kong dollar market; if the exchange rate falls, they profit all the same.

Together with six of his colleagues, Professor Chen came up with a structural innovation that purportedly can defend the link without having to use the interest rate as a weapon against speculation on the Hong Kong dollar, and that can actually steer the Hong Kong dollar interest rates toward the US rates, eliminating the weakness in the Hong Kong dollar. Their scheme has the clear and explicit blessing of Nobel Prize winner Merton Miller, who came to Hong Kong in January to talk about the issue at length. The likely result? No change. Bureaucrats are not inclined to try something new and “risky” when the old ways are good enough if Hong Kong can pay its way out of trouble by subsidizing those hit hardest by high interest rates.

But interest rates are remaining high, which under the linked exchange rate should not happen if the market is confident of the currency value. So the market does not think all is over yet. From time to time, with adverse economic news—such as the hasty drop in the Japanese market in early April upon the Japanese government’s introduction of its much-belated financial reform package—Hong Kong’s interest rate rises even higher, and the exchange rate link has to be closely watched and defended.

Yet the Monetary Authority is not unaware of the threats of high interest rates. Financial Secretary Donald Tsang has said, “High interest rates would normally not hurt the general public directly, even though [they] may impact directly on the business sector. Direct harm would be felt by the general public if the mortgage rates are severely affected.” In fact, mortgage rates have been affected. For a standard 15-year floating-rate mortgage, the rate now stands at about 11 percent, fully two percentage points above the pre-crisis level. Hong Kong does not have long-term fixed-rate mortgages. That kind of mortgage was introduced in the early eighties, but banks offering it were burned when political turmoil related to the future of Hong Kong led to jacked-up long-term rates. (Unlike in the United States, where finance companies and S&Ls do a lot of mortgage business, banks do most of the mortgage lending in Hong Kong.) With floating rates, monthly payment adjusts frequently. Currently, no banks offer mortgages with a fixed period of more than two years, and even two-year periods are rare. With no secondary market for mortgage resale to institutions like Fannie Mae in the United States, banks are hesitant to hold on to a large number of mortgages with fixed rates. If rates go higher, which is likely with the currency turmoil, banks will not be able to adjust the rates on fixed mortgages and so will suffer.

In fact last year the government did set up a Mortgage Corporation, modeled after Fannie Mae, with an initial injection of capital from the government. However, with the Asian currency turmoil, the rates at which banks procure funds to lend have been pushed higher than the banks’ lending rates, so banks do not want to make new mortgage loans, and the Mortgage Corporation has languished. More recently, the Monetary Authority gave it another line of revolving credit, so that it could buy up some of the mortgages signed by the banks last year, bundle them according to quality, and sell them as mortgage-backed securities of the Mortgage Corporation to the public. With the money it gets from such sales it can buy more mortgages from the banks. In the process, interest risks accumulated by the banks in the mortgages are dispersed, enabling them to do more mortgage lending. But even that credit line was not sufficient to jump-start the mortgage market. The problem is in part the high mortgage rates and the possibility of them rising even higher, which would lead home-buyers into grave difficulties. So the government recently decided to push the idea of fixed-rate mortgages (actually balloon mortgages with five years or more of initial fixed-rate periods), even though the market is unwilling to entertain the notion. The Monetary Authority is spearheading the move, proposing to make a start in, of all places, the public housing sphere. The plan is to sell such mortgages to people in the government’s Home Ownership Scheme, Public Rental Housing Privatization Scheme, or Sandwiched Class Home Ownership Scheme. The mortgages are to be insured by the Housing Authority, overseer of most of these subsidized-housing schemes, with possible subsidies to the banks (which issue the mortgages) or the Mortgage Corporation (which buys up the mortgages from the banks) for taking over the interest rate risks. The financial secretary claims that the operation will “not involve any subsidy.” His tune is different from that of the head of the Monetary Authority, who maintains that the Housing Authority, which already heavily subsidizes its client home-purchasers, might as well subsidize this interest rate risk-bearing as well. The Housing Authority, sensing a hand trying to reach into its coffer, is visibly cool to the idea, and has issued an official line-to-take to its decision-making members, saying essentially that it would discuss the matter but without any precommitment.

All this for the sake of shielding a portion of the public from the ravages of high interest rates and their volatility. But the public is too impatient to wait for this process to work its way through the economy. Some politicians, with eyes on the upcoming Legislative Council election, have led conspicuous demonstrations in the banking districts to demand lower interest rates. Aided with newspaper commentaries, the demonstrators were able to force the Bankers’ Association to lower rates by a quarter of a percentage point on March 27. The association denied that the move was due to political pressure, even though such pressure was clearly evident. Some commentators are worried. “Rates should be set in the market by banks, not by politicians in the streets,” said one.

So the financial side of the economy has more or less held up, but the costs are high interest rates; a stock market that has been down by 45 percent since last summer; and a growing belief that the government or politicians would interfere in the market in an attempt to stabilize it, in subtle defiance of laissez-faire principles of the past. None of this is cause for serious concern at the moment, for the government coffer is still rich, and government interference, though apparent, is not yet blatant.

Beleaguered by the Asian currency turmoil, the leaders of Hong Kong have been toeing a line that says Hong Kong will be the first to recover among the economies in East Asia, on account of its advanced financial and economic infrastructure. Its clean government and well-regulated firms will also be attractive to foreign investors upon their return to this part of the world. It may be so. However, if California is any example, we cannot be so optimistic. In the US slump of the late eighties and early nineties, the Golden State went into recession last and was also the last to come out. Faith healing didn’t help.

The general atmosphere is pretty grim: House prices are falling further; more companies in the financial sector may fold; more white-collar workers will be laid off. It is not a sudden collapse, but we are probably in a long drawn-out process of deflation and slump. George Soros said it would take just 18 months for Hong Kong to recover. But reputable local forecasters are predicting five years before that happens.

Throughout the currency turmoil, politicians have said surprisingly little about it. They complain about the high interest rates and, as mentioned previously, have even staged demonstrations. They have also applied political pressure during the budget discussion—eventually forcing the government to withdraw even minor tax hikes. But aside from that, their impact has been quite marginal. No doubt that is because of the highly technical nature of any meaningful discussion related to the turmoil. Economic nationalism à la Mahathir Mohamad of Malaysia never appeared. Some credit must be given to Hong Kong’s politicians in this regard.

Real Estate: A Dose of Realism

The astronomical levels of real estate prices in Hong Kong are well-known. Houses are rare in Hong Kong; most people live in high-rise condos, or flats. A typical flat is 700 square feet and costs HK$4.9 million (US$630,000). They don’t last long; 30-year-“old” residential high-rises are regularly torn down for redevelopment. About half of the population lives in such private flats, some more, others less expensive. The rest live in heavily government-subsidized rental or sale units.

Most people think prices are high because there is too little land for too many people. That is not quite true. The main reason for such high prices has been the tight land-supply policy pursued by the British colonial government in the last several decades of its rule. All new land before being released into the market belongs to the government, which can lease it to developers and residents for long periods of time (99 years or more is typical). The supply of new land had been constrained to about 200 acres (just below a third of a square mile) a year. With booming commercial activities and a steady 2-3 percent annual increase in population (i.e., about 200,000 a year), the land increase was too limited. Prices skyrocketed. But Hong Kong does have a large potential supply of land. At current densities, the city can house double its current population with not much problem, if only the government would increase the amount of new land coming into the market. This the new government under C.H. Tung has promised to do.

That promise set the stage for real estate prices to tumble, and tumble they did after an initial standing-firm which lasted until January, when the second and most severe onslaught of the Asian currency turmoil occurred. Following the precipitous drop in the stock market, the property market has also begun its downward slide. Prices have so far fallen some 30 percent and are expected by many, including Financial Secretary Donald Tsang, to drop further. Real estate developers are slashing the prices of their newly offered units, some by 20 percent below comparable units in the secondhand market. Even at such discounts—which furthermore are often accompanied by generous gifts, easy financing terms, and other creative gimmicks—buyers are very hesitant.

Cheung Kong, the real estate giant headed by Richard Li, son of the legendary Li Ka-shing, who is gradually devolving power to his junior, made an embarrassing pricing mistake. In the face of a down market, it tried to stand firm with the offer prices for units in its brand-new development in Taipo, a suburb in the northwestern New Territories with magnificent sea views. Buyers balked, and Richard beat a hasty and apologetic retreat on the first day of offer, lowering prices by a hefty 20 percent. This kind of mistake has been very rare, and even rarer from the seasoned Cheung Kong. Still, when the subscription period ended, only a third of the units had been sold. Commentators see the about-face of Cheung Kong as a very bad sign: Now there is no mistake that the market is headed down. There are other bad signs too. Developers are putting their new units as well as units under construction on the market as quickly as possible, while delaying new projects. They want to absorb as much as possible the purchasing power of the consumers before a recession hits, with just what they have in their current inventories and not more.

But why would the new government want to bring down real estate prices? The answer is that Chief Executive C.H. Tung by temperament abhors a speculative economy in which people get rich quickly through luck and market acumen, not hard work and real innovation. He is trying to change the economy into one more dependent on high-value-added real enterprises such as software-development companies, biotech firms, and commercial research labs and less on stock and real estate speculation. For that, costs must be low enough to attract foreign investors in real enterprises; land and labor must be cheap. And so real estate prices must come down. Hence his vow to increase new home units by 85,000 a year for at least ten years—about twice the rate of previous years. High prices and wages are affecting Hong Kong’s competition for foreign investment and inflow of talent. Corporations are finding it too expensive to hire expatriates to work in Hong Kong. A midlevel office manager costs about US$65,000 a year in salary and fringes. A professor’s package costs at least US$250,000, including salary, pension benefits, health care, and an enormous housing subsidy. Local construction companies are finding it too expensive to hire local workers and are now clamoring for imported labor, with predictable opposition from the labor unions, whose leftist background provides ample political muscle under the SAR. The root cause of high wages is inflated real estate prices. Mr. Tung, in a rare show of temper, has said that house prices must come down (and that he would not guarantee a “soft-landing”) or “someone will have to be answerable.”

Yet the government is afraid of a quick meltdown in the real estate market, because that would bring havoc to the banking sector, more than 40 percent of whose loans are real estate-related. A slower meltdown will cause fewer problems for the banks. The reason is simple. If the price of a flat falls gradually, there will be time for the owner to opt out and cut his losses before the flat’s value falls below the outstanding loan value. The new buyer facing continued price drops will also suffer some loss and may then bail out. This way, the pain of asset deflation will be shared by a number of successive owners; and as the property value falls as the flat changes hands, the mortgage value will also fall, so that it is less likely for the property value to fall below the outstanding property value at any time. This lessens the likelihood of the bank to call in the loan. On the other hand, if property value drops quickly, before any owner has the time to react and bail out, the loss will be concentrated on one person, and property value will likely be lower than outstanding loan value, causing the bank to call in the loan. Thus, the government wants to see prices come down further on the one hand and wants them to come down slowly on the other. To achieve that end, it will have to actively engineer the process. The way to do that is to give different or even conflicting signals at different times, to apply brakes on falling prices or to ease them as the situation demands. This, again, is a form of market interference, wrong in principle from a purist point of view, but designed for a worthy goal in Tung’s overall game plan. If such interference is administered only in the transitional period and not afterward, it could yet be justifiable.

A string of significant political events related to the real estate market did occur. Many buyers of residential flats and renters of commercial property who had paid money or signed contracts just before the precipitous drop in the real estate market clamored to have their payments partially rebated or their contracts renegotiated. They were helped by politicians eager to seize upon an issue just before the election. Noisy demonstrations were organized, and their voices were indeed heard. However, the media and public opinion in general were opposed to them. Their moves were seen as a threat to the “spirit of contracts,” considered sacrosanct in this commercial city. Many newspaper editorials came out strongly criticizing them, and they beat a hasty retreat.

Tourism, Unemployment, and the Overall Slump

A first victim of the regional currency crisis on Hong Kong has been the tourism industry. Hotels have been running at an average occupancy rate of less than 80 percent in what had been forecast as a boom year with last summer’s handover events and the World Bank/IMF annual conference in late September. The trend of the monthly figures was even more worrisome. Beginning with a good first quarter in 1997, the overall occupancy rate had dropped to 70 percent by June and 58 percent by July, against 87 percent for the two corresponding months in 1996. In part the problem was one of mispricing. Anticipating a deluge of tourists coming in for the handover events, hotels raised their prices beyond realistic levels, only to find that rumors of overbooking had kept many potential tourists from even planning to include Hong Kong in their itineraries. The currency devaluations in Southeast Asia didn’t help. Tourists are going elsewhere to enjoy the benefits of cheaper deals. In addition to high prices, tourists to Hong Kong have other complaints—for example, dishonest shopkeepers in the upscale hotel districts bilking unsuspecting visitors. Japan has lodged very vocal protests on this score. Altogether, there has been a drop of 61.7 percent in the number of tourists coming from Japan last July compared with the number in the same month in 1996. From Britain, Germany, France, the United States, and Taiwan, the respective percentage decreases were 46 percent, 36 percent, 20 percent, 15 percent, and 14 percent. The situation was one of panic. The sorry state of the industry continued right through the first quarter of 1998 and shows no signs of a turnaround.

On the other hand, the outflow of tourists has not lost steam. Southeast Asian countries, with their much-devalued currencies, are excellent destinations for middle and lower-middle class tourists from Hong Kong, and tourist companies doing inexpensive packaged tours are offering incredibly low-priced tours to Taiwan, South Korea, Malaysia, and Thailand. Thus, there has been no reduction of the total number of flights using the Hong Kong Airport yet. However, this may not be a good thing—the lopsided tourist flow may imply a drain on Hong Kong’s foreign currency reserve. The problem may not be very serious for long, though, because the outflow may ebb as the slump in Hong Kong soon works its way into people’s pocketbooks.

The situation in the tourist business is not isolated. Business outlook is negative overall. Unemployment was down sharply in February, to 2.9 percent from January’s 2.5 percent. Admittedly, the rate is still amazingly low by Western standards, but Hong Kong was accustomed to low unemployment of around 2 percent before the currency turmoil. So the addition of one full percentage point to the unemployment rate is certainly serious. For that reason, the government has temporarily shelved its labor importation scheme and made fairly generous provisions to take care of displaced workers. It is expected that the rate will climb higher, perhaps to 3-4 percent at the worst.

Wages have come down. Residential and office rents have also come down. It may be true that the currency turmoil is a blessing in disguise, at least for Tung, who wants a deflated economy to attract more enterprising investments of a nonspeculative nature.

Government Regulation of Vital Markets

A major thing to watch in post-handover Hong Kong is the apparent increase of an emerging-market mentality in the stock market and securities industry, a direct consequence of last year’s “March of the Red Chips.” Insider trading and inappropriate information leaks are rampant, leading to frequent “unexplained” leaps in some stock prices, which are often good telltale signs of market manipulation. The Securities and Futures Commission and the stock exchange can do very little. The red-chip concept is based on the prospects for the injection of relatively high-grade assets into listed companies in Hong Kong that have been acquired by China. Such asset injection, however, must obtain permission from Beijing. Many layers of mainland bureaucrats know the injection plans before the investing public does. Injudicious use of such information is widely believed to be the result. Vincent Cheng, chairman of the Hong Kong Stock Exchange (HKSE), in an act of no small political courage, recently called for more teeth in containing such abnormalities. Will that wish be granted? Difficult to say. Mr. Cheng is resigning this year because his term is up.

The biggest news about Chinese companies is that surrounding the Xinhua Estate Limited. A real estate firm apparently set up with money from the Xinhua News Agency (“Little Xinhua,” i.e., the bona fide news agency, not “Big Xinhua,” which is Beijing’s political power center in Hong Kong), its directors and CEOs hold important positions in Little Xinhua and other companies funded by it. Last May, in the real estate frenzy in the run-up to the handover, the Xinhua Estate had contracted with another listed real estate company, the Pearl Oriental Holdings Limited, to buy from the latter an office property for some HK$1.7 billion, paying 10 percent of that as earnest money up front. With the drop of some 30 percent in real estate prices several months later, Xinhua Estate decided to break contract. Pearl promptly forfeited the earnest money and brought charges in court, demanding that Xinhua honor the contract. Apparently in an attempt to shield the parent, Little Xinhua, from legal problems, the top persons in Xinhua Estate denied, to Pearl’s chagrin, that their company was in any way related to Little Xinhua. Pearl declared that the top people of Xinhua Estate had stated to them clearly and unequivocally that it was a Little Xinhua subordinate company and that they were “important people” in that organization. Based on that understanding, Pearl said, it went into contract with Xinhua Estate, assured that financing the deal would be no problem. Because Xinhua Estate is not a listed company, its formal or true relationships with Little Xinhua and its other commercial establishments are hard to trace.

So is Xinhua Estate related to Little Xinhua or is it not? Well, it is, and it is not. The paradox lies in the various ways Chinese companies are set up by China’s provincial or local governments, central government departments, and even the People’s Liberation Army. Since the opening up of the economy to market forces, these governmental units have been furiously forming commercial firms to operate outside China, chiefly in Hong Kong. Some of them receive capital infusion from their parent units legally and openly; these are called the “window companies” of their respective governmental units. However, such establishments are tightly restricted, and forming one now is no longer easy because Beijing does not want them to jam-pack Hong Kong’s market. So if a governmental unit wants to establish such a company, what does it do? It gives the capital to some of its top people, who bring the money to Hong Kong to set up a private company and do business. Call them back-window companies. Having these companies is of course risky for the parent units, and the director of at least one ran away overseas after purportedly losing money in an investment. Still, there are many. There are more than a thousand (listed and unlisted) legally recognized window companies in Hong Kong, and about 4,000-5,000 back-window companies. They have done much business in Hong Kong in good times, brandishing their “relationship” with their parent units—some of which are quite powerful—and denying the relationships when times are tough.

However, many Hong Kong firms are not perfectly innocent either. Last month Hong Kong’s regulatory officials, long priding on the oft-trumpeted financial integrity of the local market, had to eat humble pie when a large local brokerage house, CA Capital (CAC), and its financing arm, CA Finance Company (CAF), went bankrupt amid allegations of fraud and regulatory oversight. Over 11,000, mainly small, clients jammed the doors of CAC branch offices clamoring for repossession or refunds of their already much-shrunk financial assets held by CAC—the scene was about as chaotic as the city’s slaughter of 1.2 million chickens during the recent bird-flu attack. After all, people were trying to recover their money, for some their life savings, before the advent of the traditional Lunar New Year, when all debts are supposed to be paid and gifts given to friends and relatives.

What went wrong? First, the CAF overleveraged. It could do so because it was under no financial regulations, even though it was called a finance company. In Hong Kong, banks are carefully regulated by the Monetary Authority, but finance companies are not—they just need to register with the police and observe usury laws, which merely prohibit lending at exorbitant interest rates (70 percent). So Hong Kong finance companies are free to make any loan, cut any deal, and take any risk. But why are they not properly regulated in the first place?

That takes us squarely to the HKSE and many of its unruly members—holders of the HKSE license. The members are of course the brokerage houses, large and small, local and foreign. The locals, smaller and much more numerous, have been very powerful politically, because many of them are the founding fathers of the Hong Kong stock market. While operating a brokerage business, they set up a finance company on the side to lend money to brokerage-arm clients to play margins—that is, buy stocks worth many times what they can afford. That is a lucrative business, especially when the market is going nowhere but up. The brokerage house earns on the interest rate spread (the difference between what it gets from its clients and what it pays the banks which lend them the money in the first place) and on the brokerage fees. Clients buy several times the number of shares they could buy without margins, and the brokerage business earns several times the income. No wonder CAC clients now angrily reveal on television that CAC sweet-talked them into opening margin-trading accounts.

Fraud came into the picture in the following way. Non-margin players at CAC were hoodwinked into signing an agreement containing a clause in fine print (in English, which many clients could not understand) which essentially allowed CAC to transfer their share assets held at the company to the banks as collateral. Normally, only shares purchased with margins can be handled that way, so CAC was in fact doing something inappropriate (though not illegal) to clients who were kept in the dark. In addition, the lending of money by CAC to a closely related company to finance a real estate purchase that later went sour has been alleged by CAC’s liquidator as an attempt by CAC’s major shareholders to divest assets away from CAC before its imminent bankruptcy. This was possibly a fraudulent act to cheat stakeholders of what they could get in liquidation. The matter is now being litigated as a separate court case.

The biggest story of high finance of them all was the unraveling of Peregrine Securities, Asia’s largest indigenous investment bank, established in 1988 by a Hong Kong-Brit pair, Francis Leung and Phillip Toase. The unfortunate event was precipitated by the steep currency depreciation in Indonesia. Peregrine’s meteoric rise had been related to the waves in red chips and H-shares (shares of Chinese state-owned enterprises sold in Hong Kong). The company was the most important investment banker to bring all those sizzling initial public offerings to Hong Kong from China, and it made its money mostly that way. In recent years, Peregrine branched out to East Asian countries, including Indonesia, where it helped float many bond issues. Peregrine, in the issuance of a rupiah-denominated bond for a small Indonesian transportation company, quite unprofessionally overextended itself and had to buy up many of the bond shares while waiting for resale in the future, probably as junk bond, since the transportation company’s viability is now under a cloud. Meanwhile, the rupiah plummeted, losing over 80 percent of its value at one point. Peregrine, holding the rupiah bonds, rapidly lost asset value and could not meet many of its other financial obligations. Bankers refused to help, and it had to declare bankruptcy and face liquidation. (Hong Kong has no Chapter 11 provisions, which would have allowed an ailing company some breathing space to reorganize and reschedule debts and perhaps to recover.)

The Hong Kong stock market, hit by the news, fell 1,200 points, or about 13 percent, in two days, causing a significant drop of 222 points in the US market the first day. Eventually, the most promising part of the Peregrine group—Greater China Investment—was sold to Banque Nationale de Paris (BNP) of France, an event fraught with charges of unprofessional conduct. Price Waterhouse, appointed by the court as provisional liquidator of Peregrine and supposedly agent of the creditors of Peregrine, failed to disclose that it had been retained by BNP as its official external auditor. When confronted by Peregrine creditors with the obvious conflict of interest, Price Waterhouse lamely responded by saying that it cannot “recall clearly who its auditing clients are at any time, because there are so many of them.” Some Peregrine creditors are considering suing it. But the biggest cloud hanging over the entire incident is how on earth Peregrine could lose approximately US$10 billion in a couple of months. No satisfactory explanation has been given.

The currency turmoil has revealed many legal and technical loopholes in Hong Kong’s financial markets. Some of the problems are China-related; many are not. It remains the business of the regulatory officials of Hong Kong to turn the bad into good by diligently closing up the loopholes.

C. H. Tung’s First Policy Address

Against a dour economic backdrop, C.H. Tung delivered his maiden policy address on October 8, 1997. As many commentators quickly pointed out, it was long on economic and social policy and short on politics—issues about democracy and freedom were conspicuously given little emphasis. In a way, that was to be expected—the progress of democracy is so clearly defined in the Basic Law that there is little or no room for Tung or the Democrats to maneuver before constraints are hit; so it is not fair to criticize Tung for not devoting more space to democracy in the address. In fact, the strong emphasis on economic and social issues is in line with his earlier declared intention of concentrating his gubernatorial efforts on these issues. Stability abhors surprises, so even though the address contained a few things not previously aired to the public, the document was generally well received. The ever-practical people of Hong Kong welcomed Tung’s brand of pragmatism. Indeed, Tung showered goodies to just about every sector and major interest group in Hong Kong. Thus people perceive him as a chief executive who wants to make life better for everyone under SAR rule. There is, however, considerable doubt about whether his promises will indeed bring about the intended changes for the better.

The theme of the address was very different from those delivered under British colonial rule. “Active noninterventionism,” the maxim defining the role of government in economic affairs, is giving way to “activism with free-market characteristics,” which some purists see as lacking any principle. For example, Tung abstains from using tax and other executive fiats in cooling off the property market, except when the government determines that the market is improperly overheating owing to speculation, in which case he will employ certain undisclosed instruments to rein in the market. This is more or less in line with market principles; however, he is at the same time proposing still more housing subsidies, for the layer of households just above the sandwiched class. In the future there will be three kinds of housing subsidies: rental housing for the poorer masses; purchase-price subsidies for the lower-middle and middle-middle classes; and now mortgage subsidies for first-time buyers for an amount of up to about US$77,500. All three kinds of subsidies are means-tested, and the third kind will be available to families with combined incomes as high as US$110,000.

Tung sees the need for replacing a Hong Kong whose competitiveness arose from low-cost production with a Hong Kong whose continued prosperity is backed by high-value-added production. For this purpose, he sees better education as the key. He is implementing plans for improved education, in terms of both quality and quantity. In language training, for example, he will import 700 native English-speaking teachers. New language teachers will meet a competency benchmark by 2000; existing teachers must meet the benchmark by 2005. Competency review, perhaps through tests, will be a reality soon, much to the dismay of the teachers’ unions. To bridge the language barrier between Hong Kong and the mainland, Mandarin will be taught as a separate subject, starting with Elementary 1, Junior High 1, and High School 1 in 1998. Information technology will be emphasized in the curriculum. To improve the efficiency of resource use, new material incentives will be used to reward the better-performing schools and teachers.

Labor would have been in for a rough wake-up call, were it not for February’s higher unemployment figure calling for some moderation of the labor-related measures in the policy address. The address announced a labor-importation policy beneficial to employers, especially those in the construction, textile, and clothing industries. Jobs will go first to qualified locals—but at what wage level, given competition from imports? Even professionals will feel the pinch: Based on an existing pilot scheme, a plan will be drawn up to import professionals from China to complement local supply. If the controversy surrounding the licensing of mainland-trained physicians, whose professional presence in Hong Kong would harm the entrenched interests of Hong Kong- and British Commonwealth-trained physicians, is any indication of potential conflicts of interest, one can imagine the impact of the plan in the long run.

Employers will welcome the new labor-supply initiatives which are in line with free-market principles, but that is not the only benefit they are getting. The policy address essentially says Hong Kong must go high-tech, emulating many successful developing countries. Accordingly, development of a science park, a second industry technology center, and a fourth industrial estate will commence. These will be supplemented by costly special bank loan programs, research support funds, and export credit guarantee schemes. All this smacks of applying market principles to labor but subsidizing employers. To sweeten the deal for people at the grassroots, a special emphasis has been placed on elderly people with limited means. In particular, their monthly Comprehensive Social Security Assistance payment will be increased by US$50 per person (more than 10 percent) this year, on top of inflation adjustments.

All this costs money, but Hong Kong is in a good position to pay for it, at least so far. The estimated nonrecurrent cost alone for making good on all the promises in the policy address is about US$114 billion. Which gives the financial secretary hard nuts to crack when he prepares the budget, which is bound by the Basic Law to be balanced. In view of the minislump in the economy since summer 1997, it seems that the government will have to dip into its rich coffer to finance these expenditures.

An activist government will suffer from bureaucratic encroachment. Committees will proliferate; more powers and authorities will be defined into existence. This is obvious in the policy address. For instance, there will be a committee to educate the public on the Basic Law, to be chaired by a person no less than the chief secretary for administration, Anson Chan. A committee to make sure Hong Kong becomes a center for product innovation will be set up, to be led by the famous Chinese American scholar Chang-lin Tien, former head of the University of California-Berkeley. To promote the development of the film industry (the world’s second largest after Hollywood in terms of the number of films and TV programs marketed overseas), a Film Services Office will be established. A regulatory body will be formed to oversee the practice of traditional Chinese medicine and the prescription and use of traditional Chinese herbs. And so on.

Will Hong Kong shed its famed laissez-faire image and become more and more like its other Little Dragon sibling in terms of government outlook? That seems to be a distinct possibility, and not necessarily a bad one. With a dose of good luck, Hong Kong may yet become another Taiwan, with a much more comprehensive industrial base and better overall sustainable growth potential. But then even Taiwan paid dearly for its success: It made the mistake of choosing auto manufacturing and ship building as targets of subsidies. Neither industry ever flew. As in all planned industrial policies, a committee-directed market receives fewer market signals, has less flexibility, and faces more risks if officials make planning errors.

The Budget and Fiscal Health

The budget for the 1998/99 fiscal year was big news, even for the ordinary people of Hong Kong. Housewives and bankers discussed it alike. It has something for everybody. Mired in the adversities brought on by the Asian currency turmoil, the public expected a sprinkle of breaks and benefits from the new budget. Financial Secretary Donald Tsang poured cold water on that sentiment in the weeks preceding presentation of the budget proposal. But when the budget was proposed to the Provisional Legislative Council, he surprised everybody by revealing a torrent of goodies—tax breaks, price freezes, and most incredibly an across-the-board mortgage interest tax deduction of up to HK$100,000 (US$13,000) for each taxpayer. The financial secretary had explicitly written in his previous (pre-handover) budget that giving such a tax deduction would be against well-established principles of a simple tax system and no special tax benefits for subsidizing specific private consumption. Normally, such an about-face would have generated a howl from politicians and the business sector. However, in the depth of economic adversity, the move was widely considered to be a caring one by the government, besides being politically astute. Real estate taxes and the prices of government-provided services and utilities will go into an immediate freeze for a year. This had also been proclaimed as a no-no time and again by the government in the past. Yet this has also come to pass.

The budget is almost certainly expansionary. Traditionally, it states a projected year-end surplus equivalent to a couple percentage points of GDP; actual year-end surpluses have generally surpassed the projections. For example, in the current fiscal year projected surplus was HK$31.7 billion (US$4.1 billion), whereas actual surplus is going to be some HK$77 billion (US$10 billion). The new budget announces a surplus projection of HK$10.7 billion (US$1.4 billion). This time the projected figure is likely going to be quite close to the actual year-end figure, a slight departure from the “conservative” approach of previous years. If that is the case, it means the government will have allowed about HK$66 billion (US$8.5 billion) more to be in the private sector than it did last year. This is about 4.5 percent of the projected GDP for fiscal 1998/99. Compared with the stimulation package (not quite 2 percent of GDP) recently announced by the Japanese government, Hong Kong’s dose is fairly strong. However, on the whole, one can fairly say that fiscal prudence is still being observed. The budget will have a surplus, and the tax breaks and other goodies are not extravagant, save individual items such as public housing expenditure, which sees a 52 percent increase in real terms over last year. The government is obsessed with housing.

Leaving more money in the private sector does not mean the government’s share of GDP will shrink, because the absolute size of the economy will still be growing (forecast at 3.5 percent real for fiscal 1998/99). In fact, the government share should grow to 19.2 percent of GDP, in contrast to last year’s 18.3 percent. This may seem low compared to the US (federal plus local) figure of about 34 percent. However, the difference between Hong Kong and the United States is not that great considering that Hong Kong does not have national defense costs, maintains no foreign embassies, gives little or no foreign aid, and has fewer layers of government and law courts.

Asked if the budget was expansionary, Donald Tsang replied, “Oh, was it? I certainly didn’t mean it to be. The people are suffering, and this budget merely reflects compassion on the part of the government.” One remembers the kind fatherly figure of C.H. Tung and suspects him to be behind all this.

With the election for the Legislative Council coming up on May 24, politicians are fighting for media exposure. Many have become extremely vocal in voicing support for the grassroots, where most of the votes will come from. Even the traditionally pro-business Liberal Party has to put up a pro-grassroots facade. Most of the social issues will come up—public housing, welfare, health subsidies, labor importation, and so on—and politicians of all colors will promise a lot. It is likely that they will collectively demand even more than what Tung in his paternalism has promised. However, none of that will really matter. They have all been in the legislative process before, and if they get in again Hong Kong is not likely to change much for the worse in terms of welfarism. The pro-business turn of the Liberal Party, for example, will likely reappear soon after the election. In addition, the gradual but perceptible move of the Democratic Party away from the grassroots and toward the middle class will make welfarism less potent a force in the legislative process. Also, with the switch of election rule from single candidate-single vote to proportional representation, party politics will head toward more fragmentation. In each district, voters will vote on party lists; the intraparty fight to get to the top of the list means that the parties will splinter—this has already occurred with the Liberal Party, which has already lost one of its major leaders because of the change in voting rules. Thus the SAR government will face weaker, less unified blocs in the Legislative Council. In any case, the vocal fanfare of this election should not amount to much. If Tung’s government eventually fails to impose its vision for Hong Kong’s development, it will not be because of this election.

The Long-Term Plan

In late March the government unveiled its new Territorial Development Strategy Review, a substantial update of the 1996 document of the same name. The new document clearly has a China slant. It adopts a progressive view—looking beyond the Pearl River Delta—of Guangdong and the inner provinces of China as Hong Kong’s economic hinterland. As such, it envisages a fairly high population growth rate—up to 8.1 million in 2011 from the current 6.4 million. The baseline population estimate entails more aggressive infrastructural planning and development. Three major strategic population growth areas are identified: Northeast New Territories, Northwest New Territories, and Island South. Each of these areas, currently relatively sparsely populated, will receive high priority in land development, road construction, and rail extensions. Business estates, alongside potential industrial and science parks, dot the maps. Major rail and subway extensions will form a loop that connects these centers, with the outlying major land mass, Lantau Island, to be connected by automobile and rail bridges to Hong Kong Island and Kowloon Peninsula. Several major links involving gigantic engineering projects will be developed to connect Hong Kong to the booming economic zones across the land border and sea boundaries. When these projects are completed, the economic geography of Hong Kong will no longer be the same: It will be truly interconnected with the mainland. With the kind of clockwork with which the government constructed the gigantic Chek Lap Kok Hong Kong International Airport on an island created entirely from land reclaimed from the sea, no one doubts the government’s ability to put together the necessary financial and engineering prowess required for the plans to come to fruition as scheduled. On that score at least the future of Hong Kong looks good.

All in all, many of the changes in the economy of post-handover Hong Kong have been brought on by unexpected extraneous adversities. Some are reactions to those adversities that bear the characteristics of the new government, especially its head, C.H. Tung. Not all adherents of laissez-faire principles are pleased, but in such tumultuous times, when many economies in East Asia are treading deep water, Hong Kong is doing relatively fine. Perhaps not much more can be asked for, at least for the moment.

 

Politics in Hong Kong: Democracy in Retreat?
by James T. H. Tang

The smoothness of the political handover in Hong Kong has been truly remarkable by all accounts. As soon as the British departed on July 1, 1997, the central government in Beijing replaced the confrontational tactics that often characterized Sino-British relations prior to the handover with a far more benevolent stance. So far Beijing has refrained from making comments on issues concerning internal governance in Hong Kong. Chinese leaders assert on almost every public occasion where the question of Hong Kong comes up that the central government has complete confidence in the administration under Chief Executive Tung Chee Hwa.

The Beijing government’s hands-off approach has even earned the praise of the British government in the Foreign Office’s first report on Hong Kong after the handover. Similarly, the US government reported in April 1998 that, “Since reversion, China has been scrupulous in avoiding pronouncements on Hong Kong or becoming involved in Hong Kong affairs. Chinese officials have been silent on election arrangements in Hong Kong and have refrained from singling out any political figure in Hong Kong as being unacceptable to serve in the legislature.”

The Special Administrative Region (SAR) government rode on a wave of popular approval once apprehensions arising from pessimistic predictions of the fate of Hong Kong gave way to post-handover euphoria in the first few months of its administration. The chief executive shifted the focus of the administration’s efforts from political to socioeconomic problems and launched an ambitious housing program to increase home ownership.

The Tung administration, however, quickly confronted the reality of governance at the beginning of 1998 when the Asian financial turmoil and a major community health crisis in the form of the bird flu caught the government by surprise. The SAR government’s initial handling of both crises was widely criticized. The administration was seen to have underestimated the impact of the regional financial crisis and seemed incapable of providing clear leadership in dealing with the killer virus. As a result, the reputation of the Hong Kong government as an efficient and effective administration suffered. Nonetheless, the SAR government survived these tests of governance by maintaining the stability of Hong Kong’s currency throughout the Asian financial turmoil and preventing the outbreak of a potential epidemic by slaughtering millions of chickens in the territory.

Political tranquillity in the SAR, however, should not mask the significant if subtle political changes taking place and the tough challenges ahead. On May 24, 1998, the people of Hong Kong will go to the polls, less than one year after the territory’s reversion to Chinese rule. They are to elect their own representatives for the first time as citizens of the Hong Kong SAR under the “one country, two systems” arrangement. How significant are the elections for future political developments in Hong Kong?

Popular elections are usually seen as a central feature of modern democracy. The first election in postcolonial Hong Kong, like those held during the colonial era, however, is not about the formation of a new government. The people of Hong Kong are electing representatives to the Legislative Council, but not for a new administration. During the colonial era, similar exercises had been described as insignificant or “votes without power.” Chief Executive Tung Chee Hwa was appointed by the central government upon his election by a special Selection Committee with 400 members representing sectoral interests, dominated by those Beijing trusted. Like British governors before him, the chief executive has appointed his principal advisers in the Executive Council and nominated principal officials for appointment by the central government.

The SAR government nonetheless is clearly not a disinterested party in the forthcoming elections. In an attempt to persuade the people in Hong Kong to vote, the government gave five reasons: to elect a credible and representative legislature; to choose Legislative Council members to monitor government performance; to realize the goal of Hong Kong people running Hong Kong and practicing a high degree of autonomy; to exercise civil rights; and to fulfill civic duty. Almost immediately after assuming office the new administration reassured the international community that the elections would take place. The administration swung into action in late 1997 to update the electoral register and persuade people to register to vote.

Although the outcome of the elections will not affect the terms of office of the administration, there are good reasons for the SAR government to take the elections seriously. The legitimacy of the administration and the successful implementation of the one country, two systems model are at stake. The Hong Kong SAR administration as well as the central government are fully aware of the fact that without free and fair elections in Hong Kong as promised, both the local and the international community will remain skeptical that the people of Hong Kong have accepted the new system.

But the May elections are not merely an exercise for legitimizing the position of the SAR government. The process and outcome of the elections may determine the direction of Hong Kong politics and the future of democracy in the SAR. To understand the likely consequences of this event requires an examination of the existing model of governance in the Hong Kong SAR.

Executive Dominance in the SAR

Almost immediately after his election as chief executive in December 1996, Tung Chee Hwa indicated that he favored the old model of governance perfected by the British during the colonial era. He lamented in a press conference that “things have become too politicized.” The chief executive maintained that he wanted to concentrate on livelihood matters and build a better business environment to improve Hong Kong’s competitive edge in the global economy. He wanted to maintain the executive-led approach to government, a central feature of the administrative state of colonial Hong Kong in which public policy making was dominated by an informal alliance between the bureaucracy and the business elite.

The elements of continuation in the Tung administration are indeed remarkable. On the eve of Tung’s October 1997 policy address, the administration announced that the government had met 94 percent of the pledges made by its predecessor. The SAR government is committed to promises made by and policy programs inherited from the colonial administration.

By any standard Tung introduced minimal changes to administrative arrangements in the SAR. Almost all the top civil servants have kept their positions. The only new face among the 23 principal officials, all of whom must be ethnic Chinese according to the Basic Law, is the secretary of justice. Apart from a few key titles, such as “Chief Secretary,” which has been modified to “Chief Secretary for Administration,” the only visible changes are the Chinese names and titles of key political institutions and some government positions and agencies.

Although Beijing loyalists emerged as the dominant force at the highest level of government in the Executive Council, the chief executive also took care to retain a sense of continuity in the system. Tung, a former member himself, retained the three ex-officio positions and reappointed two unofficial members who had served in the previous administration. The convenor of the new Executive Council, S.Y. Chung, is a former senior member who had served concurrently in the Executive and Legislative Councils in pre-Patten days. By appointing three members from the legislature to his Executive Council, Tung restored the linkages between the two bodies which had been severed by Patten. The most important break in the political tradition of Hong Kong has been the appointment of three Executive Council members to take up special public policy areas, including housing, the elderly, and education. Another notable change is that Cantonese has replaced English as the language of Executive Council meetings, but most documents are still available in English.

The emergence of a new political elite of Beijing loyalists at the top governing structures of the SAR, however, may prove to be problematic. This group is charged with charting a new course for Hong Kong and advising the chief executive on major policy choices. In the past, senior government officials in Hong Kong had often assumed the political roles played by politicians elsewhere. They were directly responsible for the formulation of public policies and regularly called upon to explain them to the public. Similarly, Tung has asked his advisers to take on policy areas. Moreover, a number of Executive Council members also belong to political parties, which are becoming influential political forces. In fact some parties have openly indicated that they would like to see the development of a ministerial system of government in the SAR. Tung and his advisers may therefore need to strike a balance between establishing their authority and seeking accommodation with the civil service.

If tensions between the new political leadership and the bureaucracy have emerged, the administration’s relationship with the legislature has certainly improved. The Provisional Legislative Council is clearly a more pro-administration body than its predecessor, with the departure of pro-democratic forces from the legislature. Pro-business types and Beijing loyalists rose to predominance in the Provisional Legislative Council formed in December 1996 as China’s response to Patten’s unilateral constitutional reforms. The first meeting of this interim body took place in the border town of Shenzhen on April 10, 1997, almost two and a half months prior to the political handover. Parties and groups that enjoyed good relations with Beijing during the territory’s transition, such as the Democratic Alliance for Betterment of Hong Kong, the Hong Kong Progressive Alliance, and the Liberal Party, became dominant forces in the new body. (See Appendix 1.)

The provisional legislature has become more supportive of the administration than its colonial predecessor. During the last days of colonial rule the legislative body had made life difficult for the administration. Patten’s biographer has revealed that the governor often agonized over how the Legislative Council would vote, including on his reform package. In contrast, the Provisional Legislative Council passed all the government’s major political proposals with a clear majority. Between April 10, 1997, and its final meeting on April 8, 1998, the Provisional Legislative Council passed 63 bills, 42 of which were amendments.

Many of these bills cover technical issues such as public holidays for 1997 and 1998. But others are more political. The local government structures (urban and regional councils and district boards), for example, were replaced by provisional bodies. Although the functions and structures of local administrations remained unchanged and existing members of the councils and boards elected in 1995 were reappointed, the memberships of these bodies were expanded with appointed members. Other controversial bills included: the Public Order and Societies Ordinances passed in mid-June 1997; the Immigration Bill in July 1997; the Legislative Council Bill on electoral arrangements passed in September 1997; the Bill of Rights amended in February 1998; and the Adaptation of Laws (Interpretative) Bill passed on April 7, 1998.

The Public Order and Societies Ordinances impose restrictive measures on the formation of political organizations and public demonstrations judged to be contravening the interests of national security. They are defined as “safeguarding the territorial integrity and the independence of the People’s Republic of China.” Political organizations are also not allowed to have connections with foreign or Taiwanese political organizations. The Immigration Ordinance restricts the right of abode in the SAR for mainland children with Hong Kong parents. The Adaptation of Laws (Interpretative) Ordinance allows key mainland agencies in Hong Kong to inherit Crown privileges.

The interim legislative body’s cooperative relationship with the administration supports the claim that the political system of the SAR is designed to ensure the central government’s overall control over policy and politics in Hong Kong. The executive-led approach to governance, however, is not without its limits. Prior to the departure of the British, an independent and respected legal system, a fiercely critical if not always admired popular press, and a more politicized legislature managed to check the administration and help to preserve a high degree of freedom in colonial Hong Kong, which had only begun to democratize in the late 1980s. The extent to which an active legislative body, the rule of law, and a free press have been reversed, therefore, is critical in the analysis of the future of Hong Kong politics.

An Active Legislature?

Changing Executive-Legislative Relations

Until the 1980s the Legislative Council, composed of appointed members and civil servants, was often seen as no more than an extension of the executive. Legislative Councilors began to challenge the administration’s decisions and policies only with the introduction of electoral politics. While the Provisional Legislative Council has been more cooperative with the administration compared to the last colonial legislature, council members, particularly those who served on the last colonial council, clearly resent suggestions that they are subordinate to the executive. In general they have been less compliant than their predecessors who served in pre-Patten legislatures.

The interim legislature is marked by the absence of the Democrats, fierce critics of the Beijing government who have demanded more democracy for Hong Kong. Pro-democratic legislators who boycotted the Provisional Legislative Council elections were unceremoniously “removed” on July 1, 1997. In the words of Democratic Party leader Martin Lee, when he was introduced as “the honorable Mr. Lee” in a conference immediately after July 1, he was “dishonorably discharged.” Nonetheless, the introduction of electoral politics has changed the dynamics of the executive-legislative relationship in the SAR, even for a legislative body dominated by Beijing loyalists and Tung administration sympathizers.

The administration’s executive-led approach to government was first challenged by the provisional body when the administration sought to freeze seven laws passed by the last Legislative Council, claiming that the ordinances “represent[ed] a major departure from government policies and [might] have adverse long-term effects on the community.” The unprecedented move to suspend ordinances already in operation was questioned by the legislature. In the end the Provisional Legislative Council supported the administration’s position on four ordinances related to labor matters, but not the other ordinances, which covered compensation for occupational deafness, making Labor Day a public holiday, and restrictions on more landfill in the harbor. In addition, the administration promised not to extend the freeze beyond October 30, 1997, without approval from the legislative body.

More significant, many legislators, especially those who served in the previous Legislative Council and harbor hopes for reelection, have projected themselves as critics of the government. An attempt by one Executive Council member in late July 1997 to redefine the legislature’s role was rejected by many Provisional Legislative Council members. In August they rebuffed a suggestion during a panel discussion on housing policy by Executive Councilor Leung Chun Ying that legislators should be more cooperative with the administration. Members representing the Democratic Alliance for Betterment of Hong Kong and the Liberal Party declared that the legislature should not be a rubber stamp.

In mid-March 1998 major political parties joined forces in objecting to the financial secretary’s proposal to raise the fuel tax in his budget for fiscal 1998/99. Council members accused the secretary of issuing a threat when he suggested that the executive might withdraw certain tax concessions if the Legislative Council rejected his fuel tax proposal. Eventually, the financial secretary backed down. The Provisional Legislative Council also stepped in when the public challenged a decision in March by Secretary of Justice Elsie Leung not to charge Sally Aw, a member of the Chinese People’s Political Consultative Conference, in a fraud case involving her newspaper the Hong Kong Standard. The panel on justice and legal issues convened a special meeting and asked the secretary to explain her decision.

The fact that the Provisional Legislative Council will give way to an elected legislature in May (despite the unfairness of the electoral arrangements) means that electoral politics have been on the minds of many councilors serving in the interim body. During debates over the electoral arrangements, many members sought to amend the government’s proposals by changing the size of the functional constituencies (i.e., constituencies based on profession) or creating new constituencies. Many of these amendments were seen as attempts to improve individual members’ personal chances in the May elections by maximizing their electoral support. Bills to expand the social welfare and textiles and garment functional constituencies proposed by the Democratic Alliance for Betterment of Hong Kong and the Hong Kong Progressive Alliance were passed when members of the two parties voted in coalition support of both amendments.

These amendments, described as “blatant attempts at vote-garnering,” simply create some technical difficulties for the government and may even strengthen generally pro-government political forces. But when Legislative Councilors have to obtain votes for their seats, cooperating with the administration ceases to be a priority. With their own political interests at stake, even members of pro-government parties do not hesitate to defy the administration’s preferred arrangements.

On the whole the SAR government found support in the Provisional Legislative Council. Members of the interim body generally backed the Tung administration on major political issues, but challenged the government on a number of socioeconomic questions, particularly toward the end of their terms. While the SAR government would obviously prefer to see a sympathetic legislature in place, the new Legislative Council is likely to have a more diverse political outlook, far more sensitive to the electorate’s support and less “cooperative” with the administration.

Political Parties and Electoral Politics

Political groups, which sponsor candidates in Legislative Council elections, have only emerged since the 1980s. Although they are constitutionally limited to compete in elections for the legislature, with no hopes of forming a government, many of them have been described as political parties. With well-established organizational structures and stable bases of political support, they act like political parties and participate in elections to influence public policy.

Although parties in Hong Kong have not secured a strong sense of public attachment, results of the 1991 and 1995 elections have demonstrated that they are playing an increasingly important role in electoral politics. In the 1991 elections independents received only 17.55 percent of the vote in the geographical constituency elections. In 1995 support for independents went down further to 5 percent of the vote. Hong Kong voters have also consistently supported pro-democracy political forces. In the 1991 elections candidates with pro-democracy political positions won 15 out of 18 seats in the geographical constituency elections, and in 1995, 17 out of 20.

In the May 1998 elections voters are confronted with an electoral system regarded by many as unfavorable to pro-democracy political forces. As in the 1995 elections, voters are being asked to elect representatives from three types of constituencies using different methods. But the SAR government has introduced changes which have made the complex electoral system even more complicated. The process involves voting more than once on two different dates. Some citizens have already elected representatives to an Election Committee, which will choose 10 Legislative Council members. Some voters have only one vote, others three, depending on whether they are qualified to register as voters in more than one type of constituency. (For details of the 1998 electoral system, see the article by Jeffrey Fischer and Hugh Ivory.)

The highly complicated electoral system introduced for the 1998 elections appears to be not only confusing for ordinary people, but also unfair. The election arrangements seem to have been designed to limit the voices of pro-democratic forces. They are clearly less favorable to large political parties such as the Democratic Party, which won the most seats in geographical constituencies in the 1995 Legislative Council elections. The first-past-the-post (i.e., largest number of votes) system of election favored the larger political parties in 1995. With 42.3 percent of the vote, the Democratic Party obtained 12 seats, or 60 percent of the total seats for the geographical constituencies. The Democratic Alliance for Betterment of Hong Kong managed only 2 seats, or 10 percent of the total, with 22.2 percent of the vote.

In the 1995 elections the Democratic Party candidates were far less successful in the functional and Election Committee constituencies. Pro-Beijing and pro-business parties took 21 of the 30 functional constituencies. The Democratic Party won only 2 seats in the 10-seat Election Committee constituency. Although the Democratic Party is committed to taking part in the 1998 elections, under the list proportional representation system it is unlikely to maintain its political strength in the legislature (see Appendix 5). Moreover, two-thirds of the Legislative Council seats will be returned by those representing sectoral interests in the SAR.

The new arrangements are clearly less democratic than those introduced under the previous colonial administration. But the SAR government refused to consider electoral arrangements inconsistent with the Preparatory Committee’s proposal. The public was given only nine days for consultation on the electoral arrangements in September 1997. Attempts by Provisional Legislative Council members to introduce amendments other than on technical issues, such as membership of individual functional constituencies, were ruled out of order by the council president. Overall, the electoral arrangements encourage a more fragmented legislature, making the emergence of a powerful Legislative Council with the capacity to seriously constrain the executive unlikely.

As in 1995, support for the pro-democracy camp will come from the geographical constituencies. According to most opinion surveys, high-ranking candidates on the Democratic Party list are predicted to emerge with the largest percentage of votes in the geographical constituency elections. But the new system also enables candidates from less popular parties to be elected. The majority of those elected through the functional constituencies and Election Committee, as in the past, are likely to be from pro-business and Beijing-loyalist parties.

In the May elections, parties are almost certain to become dominant forces. The list proportional representation system will strengthen the role of parties with name recognition, good central resources, and a large pool of candidates. Altogether eight major political parties have declared their participation in the May 24 elections. (See Appendix 2.)

The pro-democracy camp is represented by the Democratic Party, the Frontier, the Citizens Party, and the Association for Democracy and People’s Livelihood. The Democratic Party under the leadership of Martin Lee is the mainstream dominant force. The Frontier led by Emily Lau represents the more radical wing. The Citizens Party under Christine Loh’s leadership seems oriented toward middle-class interests. The Association for Democracy and People’s Livelihood, representing local and grassroots interests, may suffer from its participation in the Provisional Legislative Council. The 123 Democratic Alliance, a pro-Taiwan group, may find its electoral appeal diminishing.

The conservative camp is represented by strange bedfellows—the pro-business and the traditional left-wing grassroots groups. The Liberal Party and the Hong Kong Progressive Alliance are the major pro-business parties. The leader of the Liberal Party, Allen Lee, who won a geographical constituency seat in 1995, is running again. Another pro-business party, with a conservative, pro-Beijing reputation, the Hong Kong Progressive Alliance, is to field candidates only in the functional constituency and Election Committee elections. The Democratic Alliance for Betterment of Hong Kong, a group representing traditional left-wing trade union and grassroots interests, is the only politically conservative party to have attracted respectable electoral support in the geographical constituency elections in the past. It is expected to benefit from the list proportional representation system.

Many have argued that people in Hong Kong are still politically apathetic. Voter turnout rates in the 1991 (39.15 percent) and 1995 (35.79 percent) geographical constituency elections were low. Opinion surveys predict an even lower turnout rate of around 30 percent for the 1998 elections. Compared with colonial days, however, when the idea of an opposition did not exist, the administrative state has become political. Although political parties remain small and are confined to the role of political opposition, they have become central features in the Hong Kong political system. Furthermore, the electoral support enjoyed by pro-democracy forces points to a rising political activism and significant change in the public’s political attitudes. The development of political parties and their growing importance in Hong Kong may reinforce such changes.

The Rule of Law

The rule of law has been regarded as such an important element of the Hong Kong system that under colonial rule it was described as a substitute for political ideology. The continuation of laws and the legal system in the territory is considered to be of paramount importance to the successful operation of the SAR. The Basic Law stipulates that “the judicial system previously practiced in Hong Kong should be maintained.” The most important change is the replacement of the Privy Council by the Court of Final Appeal. And the general power of interpretation of the Basic Law rests with the Standing Committee of the National People’s Congress (NPC). The membership of the Court of Final Appeal and the legal power of the NPC over the SAR were sources of major controversy prior to Hong Kong’s reversion.

Like the political handover, the transition of the legal system turned out to be smooth. The continuity of the legal system was maintained when the chief executive named the chief justice and other senior judges prior to the establishment of the SAR. The chief justice of the Court of Final Appeal, Li Kwok-nang, is a well-respected lawyer who had served on the Executive Council during the Patten administration. On July 1, 1997, the chief executive reappointed all the judges who had served on the previous day. Within months of the SAR’s establishment, an agreement was also reached with Britain to appoint two lords of British law to the Court of Final Appeal. Altogether 15 retired or serving judges were recommended as nonpermanent members of the court, including a former Australian High Court chief justice and a former Court of New Zealand president.

While the SAR government’s commitment to the continuity of the legal system seems very strong, the extent to which the courts in Hong Kong can check the executive has remained unclear. The courts in Hong Kong under British colonial law had the right to restrain the executive through legal procedures and judges could invalidate an ordinance or part of an ordinance in accordance with their constitutional interpretation. Although the Standing Committee of the National People’s Congress has been given the power to interpret the Basic Law, the courts in Hong Kong are expected to perform roles similar to those of the past. The Court of Final Appeal which consists of both local and overseas judges of the SAR also exercises the powers of final adjudication.

In the first month of the SAR, its court was asked to rule on the validity of the Provisional Legislative Council. The court ruled that the courts in Hong Kong only had the power to examine whether the decisions of the NPC had been correctly interpreted or implemented, not the authority to challenge such decisions. Although the ruling was criticized for limiting the degree of autonomy of the territory, the independence of the Hong Kong courts and the integrity of the judges were not questioned.

Despite his ruling in favor of the administration’s restrictions on the inflow to the SAR of mainland-born children with Hong Kong parents, a judge at the Court of First Instance rejected a new law denying the right of abode to mainland children born out of wedlock. In early April 1998 the Court of Final Appeal again upheld the administration’s scheme in controlling the influx of immigrants from the mainland, but it also ruled that children who had arrived prior to the handover should be allowed to stay and illegitimate children should have equal rights of abode in the SAR.

The right to bring charges rests with the Justice Department of the SAR government. The decisions by the department not to prosecute two cases have become a matter of public attention. In February 1998 the Justice Department decided not to prosecute the Hong Kong branch of Xinhua News Agency for breach of the Personal Data (Privacy) Ordinance. The agency had failed to respond to a request to release information about former Legislative Councilor Emily Lau within 40 days as required by law. A second noteworthy decision was made when the department charged three executives from the Hong Kong Standard for fraud but did not prosecute the chairman of the newspaper, Sally Aw, who was also named in the case.

Few have challenged the integrity of the courts in the SAR. Nonetheless, the administration has sought to limit the scope of social freedom and to provide legal cover for mainland institutions through the amendment of existing laws or the introduction of new laws in the Provisional Legislative Council, which is seen as too cooperative with the administration and ineffective as a watchdog for the public.

The Mass Media

The independent mass media in Hong Kong enjoy a high degree of freedom of the press. Colonial Hong Kong boasted not only a thriving local press, but also a highly visible international media. Hong Kong also serves as a hub for a number of major English-language publications and leading international news organizations. The continuing presence of a free press is seen as important to the development of democracy in the SAR.

Although many predicted that the vibrant press scene would die after reversion, that scenario did not materialize. Many publications in Hong Kong continue to publish news reports and commentaries critical of the Beijing and SAR governments. What is difficult to measure is self-censorship. Some surveyed journalists say they are more careful about reporting on political news in China and believe many of their colleagues practice self-censorship over sensitive issues like the political status of Taiwan and Tibet.

But the closure of publications and news organizations has so far not been connected to political pressure from Beijing or the SAR government. Nineties, a widely respected magazine known for its political commentary on mainland China’s political scene, announced its decision to close down in April 1998; but the aging editor-in-chief, a leading critic of mainland authorities, made the decision primarily based on personnel problems and the lack of suitable successors.

One of the most widely publicized cases of government action against the local press since the establishment of the SAR concerns the prosecution of Oriental Daily News for contempt of court. In December 1997 the Hong Kong courts threw out a copyright case lodged by the newspaper against its rival Apple Daily for publishing a photo of a local pop singer taken by the Oriental Daily News. The judge did not consider the Oriental Daily News to be the copyright holder, as the photo was taken without the singer’s consent. Responding to a court judgment in December 1997 the newspaper began a round-the-clock watch of the judge to show him “how real paparazzi behave.” The SAR government took legal action against the Oriental Daily News over a series of articles published by the newspaper following the judgment. The case generated a debate about the public’s right to know and the individual’s right to privacy, but it clearly had nothing to do with political censorship.

Contrary to predictions that China would tighten control over the foreign media and redefine the rules of news operation, the SAR government has not placed any new restrictions on foreign ownership of news organizations. Major regional magazines such as the Far Eastern Economic Review, Asiaweek, and leading local newspapers such as the South China Morning Post and Ming Pao continue to be foreign-owned. The business news channel CNBC decamped to Singapore following a decision to merge its operations with the Singapore-based ABN based on calculations of costs, not new rules of operation.

While press freedom has been maintained, the willingness of the SAR government to introduce tougher laws on social and political freedom continues to be a matter of international scrutiny. The different approaches toward the role of the media in the mainland and Hong Kong also generate debates within the SAR.

In fact Beijing loyalists in Hong Kong expressed dissatisfaction over Radio Television Hong Kong’s (RTHK) public affairs programs. RTHK is a government station with radio channels as well as a television wing whose programs are broadcast regularly by commercial stations. In March 1998 during the National People’s Congress meeting in Beijing, prominent Hong Kong delegate Xu Simin condemned RTHK for being too critical of the SAR government and pro-Beijing political figures. Chief Secretary for Administration Anson Chan suggested that the NPC was not an appropriate forum for such criticisms against a government department in the SAR. The chief executive, however, seemed to be more ambivalent about Mr. Xu’s remarks, though he also maintained that the editorial independence of RTHK should be protected. Eventually the controversy was settled when senior leaders in Beijing maintained that Hong Kong affairs should be determined by the SAR.

But different political cultures and rules of news operation do exist, and the two often come face to face. This was vividly demonstrated when a Chinese embassy official in Paris scolded a Hong Kong journalist for asking awkward questions when the Chinese premier Zhu Rongji was confronted by demonstrators during his visit to France in early April 1998. The Chinese diplomat angrily reminded the Hong Kong television journalist that he was questioning “our premier.”

After the conversation was televised in Hong Kong, journalists’ organizations unanimously condemned the Chinese official’s remarks and behavior. Pointing out that the remarks were a threat to press freedom, the Hong Kong Journalist Association wrote to the foreign ministry’s office in Hong Kong demanding an apology from the official. The Hong Kong News Executives’ Association also declared that the remarks were rude and unacceptable. Even Beijing loyalists, such as the chairman of the Democratic Alliance for Betterment of Hong Kong, shared the view that the Chinese official had made a mistake.

As Hong Kong journalists were invited to be part of the press corps accompanying the premier’s tour, mainland officials may have expected them to behave like their mainland counterparts, hence the angry outburst. Reporters in Hong Kong, however, are accustomed to challenging senior government officials and politicians with tough questions all the time. Given a very different outlook about the role of the media, mainland authorities may be tempted to exert pressure on the SAR government to redefine the role of the press in the SAR during a major crisis.

The China Factor

While the introduction of competitive politics has changed the political landscape of the territory, many fear that China may prevent democratic politics from flourishing in the SAR. China has long been a dominant factor in the political dynamics in Hong Kong, even prior to the reversion of Hong Kong to Chinese rule. The one country, two systems formula is supposed to accommodate the differences between them and isolate the two systems from each other until conditions for complete unity are reached. But China’s resumption of sovereignty over Hong Kong and the economic and social linkages between the mainland and the SAR make it inevitable that China has not only remained a major element in the political dynamics of the SAR, but may even be a decisive factor in the development of Hong Kong politics.

The central government and other mainland political institutions involved with Hong Kong affairs have not made public remarks on matters that are the responsibilities of the SAR government. Those bodies and groups established by the central government to prepare for the territory’s transition, such as the Hong Kong Affairs Advisers and the Preparatory Committee, have ceased operations. But other major mainland institutions continue to operate. These include central political bodies—the National People’s Congress, the Chinese People’s Political Consultative Conference, and the Communist Party. Hong Kong deputies to the National People’s Congress are elected by a selection committee of 800. They are not elected as lobbyists on behalf of the territory nor may they interfere with the internal governance of the SAR, but as representatives of the territory at the national level their political positions may influence the SAR government.

Constitutionally the SAR government is a local government under the central government in Beijing. Although the degree of autonomy Hong Kong enjoys as a local government is unparalleled under the one country, two systems arrangement, the chief executive is not only responsible to the SAR but also to the central government. Given the extensive economic and social linkages between the two and the contribution of Hong Kong to the country’s economy, problems in Hong Kong would have direct consequences for the mainland. Therefore the Beijing government naturally views developments in the SAR with intense interest and concern.

At the operational level, a large number of technical issues between the mainland and the SAR have to be dealt with regularly. For example, infrastructural projects in the Pearl River Delta are going to have major implications for economic developments in both the SAR and the mainland. The Hong Kong Mainland Major Infrastructure Coordinating Project Committee has been reestablished to manage projects such as the Western Corridor and the Lindingyang Bridge linking Zhuhai on the mainland and the western part of the New Territories in Hong Kong. There are also plans to build a second rail link between Shenzhen and the SAR. The administration has announced its intention to open a government office in Beijing and to establish a high-level framework for coordination on a large number of cross-border issues, from the environment to economic relations to food supply and traffic problems.

Although the central government has adopted a hands-off approach, mainland institutions set up to manage relations with the British Hong Kong administration and cultivate political support are still in place. Senior leaders continue to direct Hong Kong policy through the leading small group on Hong Kong and Macau Affairs. The two key institutions responsible for advising the central government—the Hong Kong and Macau Affairs Office under the State Council in Beijing and the Hong Kong branch of Xinhua News Agency (Hong Kong Xinhua)—have been restructured, but not abolished. The Hong Kong and Macau Affairs Office also manages day-to-day matters such as liaising with the SAR government and regulating mainland activities in Hong Kong. In addition, two other official mainland organizations under the central government now operate in the SAR. They are the Hong Kong garrison of the People’s Liberation Army and the Office of the Commissioner of the Foreign Ministry in Hong Kong.

While the foreign relations functions of Hong Kong Xinhua have been transferred to the foreign ministry’s office in the SAR, Xinhua is still expected to be in charge of party work. The Communist Party should not participate directly in Hong Kong politics under the one country, two systems formula, but Xinhua has kept its district offices and pledged to maintain “extensive contacts with people from various walks of life in Hong Kong.” Like the SAR executive, the four central government agencies operating in the SAR also inherited Crown privileges.

For the time being, as long as the SAR government is under the guidance of leaders trusted by Beijing, with a political framework favorable to pro-business and conservative political forces, the central government is likely to continue its hands-off approach. The central government is also unlikely to play a public role in the SAR’s electoral process. But the central government continues to wield considerable political influence directly as the sovereign and indirectly through loyalists within the political system. Moreover, central government agencies operating in the SAR can be activated to serve specific needs of the central authorities.

Conclusions

The democratization of Hong Kong which began in the early 1990s came to a halt with the establishment of the SAR. Unlike the last colonial legislature, the Provisional Legislative Council is not a popularly elected body. Arrangements for the first Legislative Council elections do not look promising. In many ways the May elections confirm that the democratization process has been reversed. The new electoral arrangements have reduced the size of the franchise and imposed limits on popular representation. In fact the complicated arrangements are designed to ensure that there will not be too many surprises.

The Democrats will be the losers under the new rules of the game, with their political strength diminished in the Legislative Council. But they can dominate in the geographical constituencies and therefore obtain a popular mandate as representatives of the people. Prominent Democrats should be able to return to the Legislative Council and remain active in Hong Kong politics. At the same time, the coalition of pro-business and conservative forces should be able to retain its political dominance in the legislative body.

The electoral arrangements for the first SAR Legislative Council clearly are more favorable to the continuation of the administration’s dominance in public policy making and therefore to the executive-led approach to governance. The administration probably would prefer to see the continuation of a fragmented opposition in the legislature, institutionalized through the division of political interests represented by the complex electoral system.

But Hong Kong politics have been fundamentally altered as a result of the introduction of electoral politics, even within the present narrow parameters. The May elections may prove to be decisive in determining the future development of democracy in Hong Kong. The formation of political parties and the need to appeal to the public for support have already created a less compliant legislature which is unlikely to return to the cooperative approach of the colonial era or the Provisional Legislative Council’s interlude.

How determined the SAR government is to introduce universal suffrage for the position of chief executive and all Legislative Council seats remains unclear. By 2004, however, half of the Legislative Council seats will have to be returned from geographical constituencies, electoral competitions are likely to become more intense, and political parties more important. In this context, the forthcoming May elections will have implications beyond the symbolic.

The elections may keep alive the sprit of competitive politics in Hong Kong. The outcome should give us an indication of the level of popular support for democracy in the SAR and perhaps shape the path for future development. With a free press, despite its precarious existence, and the continuation of an independent judiciary, the people of Hong Kong have a stronger political foundation for the development of democracy than some other polities going through similar processes. The path leading to democracy is going to be full of twists and turns. But a permanent reversal of democratization in the SAR would be not only difficult to justify morally but also unsustainable given the emerging political environment in Hong Kong.

 

The 1998 Hong Kong Election System
by Jeffrey Fischer and Hugh J. Ivory

On Sunday, May 24, 1998, Hong Kong will hold its first Legislative Council elections as a Special Administrative Region (SAR) of the People’s Republic of China (PRC). Although not the first elections to be held in Hong Kong, they will be the most extensive and universal to be held in the People’s Republic of China—which has so far limited this democratic franchise to the village level. For both the international community and the people of Hong Kong, these elections represent a major test of China’s commitment to its “one country, two systems” policy, which grants the SAR a high degree of autonomy in all its affairs except foreign and defense. They also represent a test of the ability of Hong Kong’s executive and legislative branches of government to prove that they represent the interests of Hong Kong and not of Beijing. This latter task is made difficult by the fact that both the chief executive of Hong Kong and the Provisional Legislative Council were, in essence, appointed by Beijing.

The replacement of the 1995 democratically elected Legislative Council (Legco) by the Provisional Legislative Council on July 1, 1997, was provided for in the Basic Law, Hong Kong’s constitution. Developed by China’s State Council in consultation with select citizens of Hong Kong and approved by China’s National People’s Congress, the Basic Law sets out the rules by which Hong Kong is to function, including its system of governance. The Provisional Legco was designed as a transitional body whose purpose was to revise Hong Kong’s colonial laws to bring them in line with the new Basic Law. These revisions included the electoral code. Although the new system is not fundamentally different from that set up by the British over the last 12 years of their rule in Hong Kong—select portions of the Legislative Council’s 60 seats continue to be filled through open elections by three constituencies—there is great concern, both in Hong Kong and internationally, over whether the electoral process established by the Chinese-appointed provisional government of the Hong Kong SAR is free and fair. By adopting the fundamentals of the British-designed system, they also adopted its legacy: complexity and inequality of representation. The changes made by the Provisional Legco have only served to increase that complexity and inequality of representation.

Although the current system, as determined by the Basic Law, is designed to evolve and become more equitable, it reflects the conservative approach China has taken to the long-term transition and assimilation of Hong Kong into the mainland. The current system strengthens the representation of those sectors of Hong Kong society that are deemed the most trustworthy by the PRC government. This fact is no doubt apparent to those members of the Hong Kong electorate who are eager to participate in the political process, and it is certain to cause some amount of disaffection and alienation. In addition, the Election Affairs Commission, responsible for overseeing this complex process, has had very little time to fully educate and motivate the electorate. This, too, will undoubtedly lead to the disenfranchisement—and further alienation from the process—of large sections of the population.

However, this system is designed to evolve. The Legislative Council elected in May 1998 will serve only two years. Each succeeding Legco will serve four years and be returned by an electoral formula designed to increase the democratic nature of the body. According to the Basic Law, the ultimate aim is the election of all the members of the Legco by popular suffrage after 2007. The Basic Law provides a mechanism that allows changes to the composition of the Legco in 2007 if there is “clear community support” on this matter. Such alterations would require an amendment to the Basic Law, which must be made with the endorsement of a two-thirds majority of all the members of the Legco and the consent of the chief executive, who is himself indirectly elected by an Election Committee. This amendment must then be reported to the Standing Committee of the National People’s Congress for the record.

The responsibility for maintaining this schedule and the introduction of the possibility of full and equal enfranchisement for the people of Hong Kong is shared by three groups: the people of Hong Kong, who must fully exercise their right to vote; the government of the SAR, which must administer all aspects of the electoral process equitably and maintain the trust of the people; and the People’s Republic of China, which must honor its commitment to the one country, two systems policy, which has allowed the possibility of a smooth transition of Hong Kong to Chinese sovereignty. The 1998 Legislative Council elections will clearly be a test for all three.

Free and Fair Elections

The concept of free and fair elections is basic to the idea of democracy and the right of citizens to select their political representation. Though the electoral process is only one part of the system of democratic governance, it is the most fundamental and observable mechanism through which people participate in their government. In 1994 the Inter-Parliamentary Union (IPU) developed a clear set of legal criteria to define what constitutes “free and fair” (see Appendix 3). The Declaration on Criteria for Free and Fair Elections, unanimously adopted, was based on the principles laid out in the 1948 Universal Declaration of Human Rights (which established that “the will of the people shall be the basis of the authority of government”) and on the 1966 International Covenant on Civil and Political Rights. These criteria can be separated into two categories: the rights and responsibilities of the people to participate in political and electoral processes, and the rights and responsibilities of the government to develop and administer those processes. In judging Hong Kong’s 1998 elections against the criteria laid out by the IPU, the following items stand out:

• the right of every voter to exercise his vote equally with others
• and have that vote accorded equal weight with others;
• the responsibility of the government to initiate or facilitate civic
• education programs to educate the populace on election procedures
• and issues;
• the responsibility of the government to ensure that election
• officials and poll workers are properly trained and act
• impartially; and
• the responsibility of the government to ensure the integrity of
• the voting and counting process, whose procedures should be
• undertaken by trained personnel and subject to monitoring or
• impartial verification.

It is important to note that the criteria laid out by the IPU do not recommend any specific electoral system. That system is generally determined by the system of governance, which, in turn, is generally designed by the ruling elite and reflects the priorities of that elite. For the sake of continuity and stability, the Chinese government has adopted the system created by the British. It has also, as reflected in the Basic Law, adopted the British commitment to increasing the democratic nature of the Hong Kong government. The notable exception to this was the dissolution of the Legislative Council on July 1, 1997—before its term expired—and the arguably undemocratic appointment of a Provisional Legislative Council. In addition, in adopting the British system, the Basic Law adopted the inequalities inherent in it.

The British System

The British founded the colony of Hong Kong in order to promote trade in support of the British Empire. Hong Kong’s first constitution, the Charter of the Colony of Hong Kong (1843), created the Legislative Council as an advisory board to the governor, who was empowered, with the advice of the council, to enact all laws and ordinances of the colony.

As the colony grew, so did the Legco. In 1850 the first two “unofficial” members were appointed to the council in recognition of the influence of their trading companies. In 1884 the Legco was enlarged to twelve members—seven official and five unofficial, including the first Chinese member.

The first change in the nature of the Legco came in 1917, when new Letters of Patent were issued from the British government to replace the 1843 charter. This new patent enhanced the power of the Legco by requiring the governor to seek its advice and consent before he passed new laws. It was not until 1985, however, that the first effort was made to add an element of representational democracy to the territory’s governance through the introduction of constituencies, legally defined bodies or units of representation. Over the next ten years, that representation grew incrementally but at an expanded pace.

The extension of a limited franchise and the first election of a portion of the Legislative Council took place in 1985. Eleven of the 57 members of the 1985 Legco were government officials (down from 29). Of the remaining 46 nonofficials, 22 were appointed by the governor, 12 were elected from 9 functional constituencies—composed of organizations considered most relevant to Hong Kong’s society by the government—and 12 by an electoral college constituency made up of members of urban councils and district boards—the lowest levels of government in the colony. The introduction of the electoral college allowed, albeit indirectly, for the concerns of the general population of Hong Kong to be included in the Legco’s deliberations. Comprised of a mix of appointed and directly elected officials, these bodies elected representatives to the Legco from among their membership.

The introduction of “functional constituencies” to the Legco reflected the intent of the colony’s government to maintain the formula that facilitated Hong Kong’s development, namely colonial government working with the business community, while expanding the representational nature of its legislative body. The functional constituencies broadened the voice of the professional community. Nine constituencies returned 12 seats: commercial (1 seat), industrial (1 seat), trade union (2 seats), financial (2 seats), social services (1 seat), medical (2 seats), education (1 seat), legal (1 seat), and engineering (1 seat). Three qualifications were necessary to register in a functional constituency: residence in Hong Kong for 7 years prior to registration; an age of at least 21; and membership in an organization represented by a functional constituency or registration as a professional (e.g., voting members of trade unions or chambers of commerce, teachers in government-approved schools, government-licensed accountants and doctors). Having met those qualifications, an individual could register in only one constituency.

To run for election, an individual had to be a registered member of the electorate, a member of one of the constituencies, and resident in the colony for at least ten years. In 1988 two more appointed seats were replaced by two elected members from the commercial and industrial functional constituencies.

In 1991 universal suffrage was introduced to Hong Kong. The introduction of geographic constituencies allowed for direct representation of those eligible voters not represented by the functional constituencies. Of the 61-member council, 21 seats were allotted to functional constituencies and 18 to geographical constituencies. The number of government officials on the body was reduced to four: the governor, the chief secretary, the financial secretary, and the attorney general. The governor remained president and member of the Legco but systematically absented himself from its meetings. He appointed a deputy president from among the elected members to chair the sittings and take over his functions in that body. Eighteen seats remained appointed.

With the appointment of Christopher Patten as governor of Hong Kong in 1992 came a whole host of new reforms aimed at more fully enfranchising the Hong Kong electorate and strengthening local governance. In 1993, the governor ceased to be a member of the Legislative Council. In February he handed over the presidency to a member elected by the members who were not officials. In 1994 the Hong Kong legislature approved the proposal to make the partly appointed, partly elected urban councils and district boards fully elected and to expand their number to 18. Each urban council and district board became responsible for the management of affairs and allotment of funds within its boundaries. The Legco also lowered the voting age to 18, approved the expansion of functional constituencies to 18, and abolished “corporate voting” (whereby, for example, within the banking sector a vote had been cast by one representative of each bank rather than by the total of those employed by that sector). The nine new functional constituencies were: primary production, power, and construction; textiles and garments; manufacturing; import and export; wholesale and retail; hotels and catering; transportation and communications; finance, insurance, real estate, and business services; and community, social, and personal services.

The number of geographic constituencies was expanded to 20: Hong Kong Island Central, East, South, and West; Kowloon Central, Northeast, East, Southeast, South, Southwest, and West; and New Territories Central, Northwest, North, Northeast, East, South, Southeast, Southwest, and West.

Because of these reforms, the 1995 Legislative Council for the first time became a fully elected body. Of a total of 60 members, 20 were elected from 20 geographical constituencies, 30 from functional constituencies, and 10 by an Election Committee comprised of the members of the district boards, all of whom were elected by the members of their districts.

Changes in the System

The British do not deny that the introduction of democracy to Hong Kong was late in coming. Their reasoning for the delay was not so much that the people of Hong Kong were not ready for democracy as it was concern over China’s reaction. The Chinese were well aware that in other British territories the introduction of elections was a prelude to independence, which China would never accept.

Included in the 1984 Joint Declaration (the agreement between the PRC and the UK for the return of Hong Kong Island, Kowloon, and the New Territories) was Chinese acceptance of a British proposal that the post-1997 legislature be “constituted by elections.” This phrase, however, was vague. On the basis of that ill-defined agreement, the British concluded that it would be right to prepare the way for this wholly elected post-1997 legislature by introducing elected members to the Legislative Council gradually before 1997.

In periodic consultation with both the Chinese government and the general population of Hong Kong, the British embarked on the reforms that led to the 1985, 1988, and 1991 Legislative Councils. In 1993, after 17 rounds of failed negotiations with China, the British decided to proceed unilaterally with their proposed electoral reforms. Claiming those reforms to be counter to the Basic Law, which had not yet been written, China refused to recognize the 1994 Electoral Law which governed the 1995 Legco elections and the results of those elections. This impasse effectively ended efforts by Governor Patten and the Legco to obtain China’s approval for a “through train” that would allow the 1995 Legco to fulfill its four-year term, beginning under British rule and ending under Chinese. The Chinese government declared its intention to dissolve the body on July 1, 1997.

In December 1995, in preparation for the transfer of sovereignty over Hong Kong, China established a 150-person Preparatory Committee to oversee the transition, which included recreating the membership of the bodies that governed Hong Kong, from the chief executive and the legislature down to the urban councils and district boards. Of this committee 94 members were Hong Kong residents. The Preparatory Committee, in turn, established a 400-member Selection Committee, consisting of Hong Kong citizens, to select the members of these bodies. Declared provisional in nature, these bodies were to govern until the Special Administrative Region had formulated its own election laws and could hold elections. However, the candidates for those positions were all self-nominated.

The formula for the formation of the 1998 Legco and all future Legcos is stipulated in Hong Kong’s Basic Law—which has set the number of seats on the body at 60. Much like the 1995 elections, the first SAR Legco will be returned from three electoral bodies: a functional constituency (30 seats), a geographic constituency (20 seats), and an Election Committee (10 seats). However, the new law passed by the Provisional Legco in preparation for these elections significantly changes the nature of these constituencies, their respective representative weight, the systems by which they vote, and the nationality restrictions on the body.

The Election Committee

Unlike the 1991 and 1995 elections, the Election Committee no longer consists solely of members from the urban councils and district boards. Under the new laws, the 800-person committee is formed through an election process whereby the members of the professional sector, the grassroots and religious sector, the provisional urban councils and district boards, and the Hong Kong deputies to the Chinese People’s Political Consultative Conference delegate 714 members. The remaining 86 seats on the committee are reserved for the SAR’s 35 National People’s Congress deputies and 60 Provisional Legislative Council members. Nine people are members of both bodies.

The weight of individual votes varies from sector to sector. For example, while the 53,575 voters in the education sector will return 20 members of the Election Committee, the 100 Hong Kong deputies to China’s People’s Political Consultative Conference will choose 51. The hotel industry, with 81 corporate constituents, will elect 11 members while the agricultural and fisheries sector, with 164 members, will elect 40 seats. Forty members from the religious sector will be appointed after consultations rather than by election. The religious sector consists of six groups: the Catholic Diocese of Hong Kong, the Chinese Muslim Cultural and Fraternal Association, the Hong Kong Christian Council, the Hong Kong Taoist Association, the Confucian Academy, and the Hong Kong Buddhist Association.

The Election Committee is formed by a first-past-the-post system—whichever candidate obtains the largest number of votes wins. An elector in an Election Committee subsector may cast any number of votes up to the number of seats for that subsector. For the election of the ten Legco members by the Election Committee the bloc vote system has been instituted. Each Election Committee member is required to cast all ten votes and the election result will be determined by first past the post.

The Functional Constituencies

The new law has delineated 28 functional constituencies. The scope of these constituencies has been significantly narrowed: They must be substantial and important in the community, clearly defined, and not based on ideology, dogma, or religion. The criteria for defining what is important and what is not is very much open to debate. In addition, the new law returns to the 1991 practice of corporate or organizational voting. The number of eligible voters for the 30 seats will be cut from 2.5 million in 1995 to fewer than 200,000.

Twenty-seven of the 28 functional constituencies return one member each to the Legislative Council. The labor functional constituency—namely, recognized labor unions—returns three seats to the Legco. In addition, there are two separate systems of voting for functional constituencies: preferential elimination and simple majority. Six functional constituencies will use the preferential elimination system. These include the Urban Council, the Regional Council, Heung Yee Kuk (rural council), agriculture and fisheries, insurance, and transportation. Under this system each elector casts a single ballot marking the elector’s preferences in descending order. In order to win, a candidate must obtain an absolute majority. If no candidate has a majority in the first round, the candidate with the least votes is eliminated and his votes are transferred to the other candidates in accordance with the next available preferences marked on the ballot. This process continues until one candidate obtains an absolute majority. In the remaining 24 functional constituencies, voting is conducted by the first-past-the-post system. In the labor constituency, each elector casts three votes.

The Geographic Constituencies

Under the new law, the number of geographic constituencies has been reduced from 20 to 5. The number of seats for each constituency varies according to the size of that constituency (see Appendix 4).

Unlike the first-past-the-post single-member constituency of the 1995 elections, the 1998 elections will adopt the “least remainder” system of proportional representation in a multimember constituency. Candidates with party affiliations will run on party lists and independent candidates are permitted to form single-candidate lists. Under this new system, the total number of votes cast in each constituency is divided by the number of seats in that constituency. This yields a quota, and each party list gains a seat for each quota of votes it wins. The remaining seats are then awarded to the lists with the greatest number of votes. (See Appendix 5.) Although the proportional system of representation is common in many countries, its application here has opened the provisional government to accusations that it is attempting to diminish the representation of the Democrats, who swept the 1995 Legco geographic constituency elections.

20 Percent Nationality Rule

Under Article 67 of the Basic Law, SAR permanent residents who are not of Chinese nationality or who have the right to reside in foreign countries may be elected members of the Legco, provided their number does not exceed 20 percent (i.e., 12 members) of the total membership of the council. Candidacy is open to foreign nationals in 12 functional constituencies: legal; accountancy; engineering; architectural, surveying, and planning; real estate and construction; tourism; commercial; industrial; finance; financial services; import and export; and insurance. The fact that foreign nationals can be elected to the Legco reflects China’s understanding of the international nature of the Hong Kong community. The restriction reflects the concern that the body remain predominantly Chinese.

Voting

The right to vote is universal in Hong Kong, but due to the arrangement of the various constituencies not all votes carry the same weight. All Hong Kong permanent residents aged 18 and above who ordinarily reside in Hong Kong are eligible to vote in the geographic constituencies. If an individual is also an elector in a functional constituency or a member of the Election Committee, he may exercise a second vote in the functional constituency or the Election Committee as appropriate. If he is both a functional constituency elector and a member of the Election Committee, he may exercise his second vote in the Election Committee, but not in the functional constituency. Thus, the elite created out of the functional constituencies and the Election Committee are allowed to vote twice. No provision has been made for absentee or postal voting, thus disenfranchising those Hong Kong citizens abroad.

Administration

In any system of elections, administration plays a key role in determining the free and fair nature, or credibility, of the process. The laws passed by the Provisional Legislative Council provide clear guidance on the qualifications necessary to register both as a voter and as a candidate. They also specify the bodies responsible for administering the elections process, namely the Electoral Affairs Commission—replacing in name only the Boundary and Election Commission, an apolitical three-member body composed of a nominee of the president of the Legco, a judge of the high court or the appeals court, and an appointee of the governor—and the Registration and Electoral Office—established in 1982 in preparation for the first popular elections of the urban councils and district boards. Both bodies are experienced in election administration, yet they face the same formidable challenge this year that they faced in 1995—preparing for a new system of elections governed by a complex set of procedures in a relatively short period of time.

Of the tasks required to see this election to its completion, effective voter information and education on the registration process is the most challenging. It will also affect voter turnout. In the 1991 and 1995 elections, the low voter turnout—39 percent and 35 percent, respectively—was blamed in large part on confusion over the registration process. Many potential voters were turned away from the polls because they failed to update their registration when they moved and thus were dropped from the register. The necessary reregistration of those people dropped from the functional constituencies when the law changed will compound this problem in 1998.

As before 1998, the Registration and Electoral Office is responsible for recording new applications and corrections, but there is no compulsory or automatic registration of voters in Hong Kong. It remains voluntary and dependent upon the individual. It is the responsibility of the Registration and Electoral Office to make that process as accessible as possible. In many countries there are organizations, such as the Women for Democracy in Paraguay or the New Perspectives Foundation in Russia, that focus on voter and civic education activities and effectively broaden the reach of the programs instituted by election officials in those countries. A lack of such nonpartisan organizations in Hong Kong makes the task that much more difficult for Hong Kong’s election officials.

Free and Fair?

In 1991, the concept of partnership in the governance process was expanded to include the general population of Hong Kong, but the focus remained on the driving force of Hong Kong’s success: its business elite. This is most clearly seen when examining the formula by which that Legco was elected. Although the franchise was extended beyond the business community to the population at large, the fact that corporate voting remained in place and that the functional constituencies had more seats gave the business elite proportionally greater representation.

Even within the geographic constituencies, representation was not equitable. For the 1991 Legco elections, Hong Kong was divided into nine double-seat constituencies—voters in each constituency could elect two individuals. However, the size of these constituencies varied greatly. Thus, Hong Kong East, with an estimated population of 794,900, was nearly twice the size of the smallest constituency, New Territories North, with a population of 392,400.

The series of reforms which created the system for the 1995 elections were designed to address these inequalities. The discrepancies in the geographic constituencies had led one member of the Legco to introduce a bill demanding that a legislative framework be developed to determine future demarcation of constituencies. This eventually led to the creation of the Boundary and Elections Commission in 1993. Initially created to review the electoral boundaries for the geographic constituencies in preparation for the 1995 Legco elections and recommend changes to the government, the Boundary and Election Commission was later charged with overseeing campaign activities and the election administration by the Registration and Electoral Office and resolving election-related disputes.

The repeal of corporate voting and the extension of functional constituency voting to the individuals employed in those industries was intended to address the inequality of corporate voting. While it did expand the representational nature of the functional constituencies, the fact that membership in these constituencies varied greatly meant that their proportion of representation in the Legco also varied. Finally, none of these reforms addressed the basic fact that the Hong Kong electorate could not change their system of governance. No matter how democratically representative the 1995 Legco may have been, Hong Kong remained a British colony until the July 1, 1997, handover.

Though the 1998 elections will be the most extensive and universal to be held in the People’s Republic of China, they also mark a step back in the development of the democratic process in Hong Kong. The parallels between the nature of this new system and its development and that of the colonial system and its development are remarkable but by no means coincidental. Just as London saw the business community as integral to the success of its colony and thus brought it into the governance process, so Beijing sees the business and professional community as key to the continued success of Hong Kong. But Beijing also saw the reforms instituted for the 1995 elections as a threat to that formula. The system for the 1998 elections is essentially an amalgam of the 1991 and 1995 systems, concentrating on the conservative approach of the 1991 system. Though the general electorate is given a voice in the legislative process, this new system gives a disproportional amount of representational weight to the business and professional elite of the SAR.

In judging the free and fair nature of these elections, it is important to assess both the administration of the system and the system itself. There is little doubt that the Electoral Affairs Commission and the Registration and Electoral Office will administer the process professionally and equitably. They are both experienced, professional bodies. The law makes no specific provision for the presence of domestic monitors for the polling and counting processes, but neither does it specifically disallow them. This is left to the discretion of the Electoral Affairs Commission.

The one criticism that can be laid on the administration of the process concerns voter registration. Closing registration prior to the campaign period, which in itself is a prime motivator for people to register, acts as a disincentive for people to get involved in the process. To correct this, registration should be reopened for a short period prior to the elections to allow those who had not registered by January, the original closing date, to do so. Systemically, disproportional representation and the ability of select individuals to cast more than one vote makes it very difficult to represent this process as free and fair. Although the law provides for change to a more equitable system, the alterations for 1998 may very well serve to alienate significant portions of the electorate. The credibility of the process and the future Legco in the eyes of the Hong Kong electorate will be revealed, in large part, by voter turnout.

 

Appendix 1
Seats per Party in 1995 Legislative Council
Versus Provisional Legislative Council

Party	1995 Legislative Council	Provisional Legislative Council
Democratic Party	19	0
Liberal Party	10	10
Democratic Alliance for Betterment of Hong Kong/Federation of Trade Unions	7	11
Association for Democracy and PeopleÕs Livelihood	4	4
Hong Kong Progressive Alliance*	2	6
Liberal Democratic Federation*	1	3
New Hong Kong Alliance	1	2
123 Democratic Alliance	1	0
Independents	15	24
Total	60	60

* HKPA and LDF merged on May 26, 1997.

Source: Adapted from South China Morning Post, December 22, 1996.

 

Appendix 2
Major Political Parties in Hong Kong(March 1998)

Name	Founded	Political Identity
123 Democratic Alliance	March 1994	Liberal; close to Taiwan.
Association for Democracy and People’s Livelihood	1986	Liberal; sought accommodation with PRC authorities during transition.
Citizens Party	May 1997	Liberal.
Democratic Alliance for Betterment of Hong Kong	July 1992	Conservative; supportive of PRC authorities during transition.
Democratic Party	October 1994	Liberal; confrontational with PRC authorities during transition.
Frontier	August 1996	Very liberal; confrontational with PRC authorities during transition.
Hong Kong Progressive Alliance	July 1994	Very conservative; supportive of PRC authorities during transition.
Liberal Party	July 1993	Conservative; supportive of PRC authorities during transition.

 

Appendix 3
The Inter-Parliamentary Union’s Declaration on Criteria for Free and Fair Elections

I. Free and Fair Elections

The authority of the government can only derive from the will of the people as expressed in genuine, free, and fair elections held at regular intervals on the basis of universal, equal, and secret suffrage.

II. Voting and Elections Rights

1. Every adult citizen has the right to vote in elections on a nondiscriminatory basis.
2. Every adult citizen has the right to access to an effective, impartial, and nondiscriminatory voter registration procedure.
3. No eligible citizen shall be denied the right to vote or be disqualified from registration as a voter unless in accordance with objectively verifiable criteria prescribed by law, and as long as those laws are consistent with the State’s obligations under international law.
4. Every individual who is denied the right to vote or to be registered as a voter has the right to appeal to a jurisdiction competent to review such decisions and empowered to correct errors promptly and effectively.
5. Every voter has the right to equal and effective access to a polling station in order to exercise his or her right to vote.
6. Every voter is entitled to exercise his or her right to vote equally with others and have his or her vote accorded equal weight to that of others.
7. The right to vote in secret is absolute and shall not be restricted in any manner whatsoever.

III. Candidate, Party, and Campaign Rights and Responsibilities

1. Everyone has the right to take part in the government of their country and shall have an equal opportunity to become a candidate for election. The criteria for participation in government shall be determined in accordance with national constitutions and laws and shall not be inconsistent with the State’s international obligations.
2. Everyone has the right to join or establish a political party or organization for the purpose of competing in an election.
3. Everyone has the right:
   • To express political opinions without interference;
   • To seek, receive, and impart information and to make an informed choice;
   • To move freely within the country in order to campaign for election;
   • To campaign on an equal basis with other political parties, including the party forming the existing government.
4. Every candidate and every political party shall have equal opportunity of access to the media in order to put forward their political views.
5. The right of candidates to security with respect to their lives and property shall be recognized and protected.
6. Every individual and every political party has the right to the protection of the law and to a remedy for violation of political and electoral rights.
7. The above rights may only be subject to restrictions which are in accordance with law and reasonably necessary in a democratic society. Those restrictions include the interests of national security or public order, the protection of public health or morals, or the protections of rights and freedoms of others. Those restrictions on candidacy, the creation and activity of political parties, and campaign rights shall not discriminate on basis of race, color, sex, language, religion, political or other opinion, national or social origin, property, birth, or other status.
8. Every individual or political party whose candidacy, party, or campaign rights are denied or restricted shall have the right to appeal to a jurisdiction competent to review such decisions and to correct errors promptly and effectively.
9. Candidacy, party, and campaign rights carry responsibilities to the community. In particular, no candidate or political party shall engage in violence.
10. Every candidate and political party competing in an election shall respect the rights and freedoms of others.
11. Every candidate and political party competing in an election shall accept the outcome of a free and fair election.

IV. The Rights and Responsibilities of States

1. States should take the necessary legislative steps and other measures, in accordance with their constitutional processes, to guarantee the rights and institutional framework for periodic and genuine, free and fair elections, in accordance with their obligations under international law. In particular, States, should:
   1. Establish an effective, impartial, and nondiscriminatory procedure for the registration of voters;
   2. Establish clear criteria for the registration of voters, such as age, citizenship, and residence, and ensure that such provisions are applied without distinction of any kind;
   3. Provide for the formation and free functioning of political parties, possibly regulate the funding of political parties and electoral campaigns, ensure the separation of party and State, and establish the conditions for competition in legislative elections on an equitable basis;
   4. Initiate or facilitate national programs of civic education, to ensure that the population are familiar with election procedures and issues.
2. In addition, States should take the necessary policy and institutional steps to ensure the progressive achievement and consolidation of democratic goals, including through the establishment of a neutral, impartial, or balanced mechanism for the management of elections. In so doing, they should:
   1. Ensure that those responsible for the various aspects of the election are trained and act impartially and that coherent voting procedures are established and made public;
   2. Ensure the registration of voters, updating of electoral roles, and balloting procedures, with the assistance of national and international observers as appropriate;
   3. Encourage parties, candidates, and the media to accept and adopt a Code of Conduct to govern the election campaign and polling period;
   4. Ensure the integrity of the ballot through appropriate measures to prevent multiple voting or voting by those not entitled to vote;
   5. Ensure the integrity of the counting process.
3. States shall respect and ensure the rights of all individuals within their territory and subject to their jurisdiction. In time of elections, the State and its organs should therefore ensure:
   1. That freedom of movement, assembly, association, and expression are respected, particularly in the context of political rallies and meetings;
   2. That parties and candidates are free to communicate their views to the electorate and that they enjoy equality of access to State and public-service media;
   3. That the necessary steps are taken to ensure nonpartisan coverage in State and public media.
4. States should take the necessary measures to ensure that parties and candidates enjoy reasonable opportunities to present their electoral platform.
5. States should take the necessary measures to ensure the principle of the secret ballot and the ability of voters to cast their ballots freely and without fear or intimidation.
6. States should take the necessary measures to ensure the integrity of the voting and counting process, and that the procedures of which are undertaken by trained personnel and subject to monitoring or impartial verification.
7. States should take the necessary measures to ensure the transparency of the process, including, for example, the presence of party representatives and duly accredited observers.
8. States should take the necessary measures to ensure that parties, candidates, and supporters enjoy equal security and that necessary steps are taken to prevent electoral violence.
9. States should ensure that violations of human rights complaints relating to the electoral process are determined promptly within the time frame of the electoral process and effectively by independent and impartial authorities, such as an election commission or the courts.

 

Appendix 4
Number of Seats per Geographical Constituency

Constituency	Population	Seats
Hong Kong Island	569,244	4
Kowloon East	483,876	3
Kowloon West	411,466	3
New Territories East	595,341	5
New Territories West	708,444	5
Total	2,768,371	20

 

Appendix 5
Allocation of Seats Under List Proportional Representation Electoral System in a Hypothetical Constituency with 100,000 Valid Votes

Nomination List	Valid Votes	Initial Allocation of Seats*	Votes Remaining**	Allocation of Remaining Seats	Final Results
A	33,000	1	13,000	1	2
B	23,000	1	3,000	0	1
C	21,000	1	1,000	0	1
D	17,000	0	17,000	1	1
E	6,000	0	6,000	0	0
Total	100,000	3	40,000	2	5

* Based on a quota of 20,000 seats, arrived at by dividing 100,000 votes by 5 seats.
** Valid votes minus quota of 20,000.

Source: Hong Kong Special Administrative Region Government.