Talking Point

Anniversary angst?

How Hong Kong has changed since its 1997 handover and what lies ahead

Xi-Jinping-w

Chinese President Xi Jinping and his wife Peng Liyuan arrive at Hong Kong’s airport on Thursday

When Margaret Thatcher agreed to hand Hong Kong back to China on July 1, 1997, the Chinese agreed to the principle of “one country, two systems” in which the territory’s way of life would remain unchanged for 50 years.

The original wording on this political guarantee, Chinese diplomats would later recount, was that the system would “remain unchanged for at least 50 years” because Beijing’s leaders at that time didn’t want the British colony to become just another Chinese city.

British records – declassified in 2013 – have since suggested that Deng Xiaoping thought that Hong Kong should maintain its different identity well beyond 2047, as China’s paramount leader wanted it to be part of efforts to change the Chinese system as well.

“Some Japanese friends had asked why China had set a period of 50 years after 1997 for the duration of the agreement. The reason was that China hoped to approach the economic level of advanced countries by the end of that time… The maintenance of Hong Kong’s stability and prosperity accorded with China’s interest in modernising its economy,” Deng told Thatcher in 1984, after the Sino-British Joint Declaration was signed. Deng predicted an evolution: “The possibility of change after the first 50 years of the next century was even less because by then economic exchanges with other countries would have resulted in China and other countries having come to depend upon each other.”

China has since grown into the world’s second biggest economy (or the biggest depending on whether you use purchasing power parity as the measure). And, far more quickly than Deng foresaw, Hong Kong’s value to the Chinese looks increasingly insignificant in economic terms. According to World Bank data, its economy accounted for one fifth of mainland China’s in 1997, but the ratio has dwindled to less than 3% today.

Tomorrow, Hong Kong will commemorate the 20th anniversary of its return to Chinese sovereignty. But is that 50-year guarantee from Beijing still gilt-edged? What has changed over the past two decades and what changes await?

What has the international media said about the anniversary?

In June 1995, Fortune penned a cover story with the catchy title “The death of Hong Kong”. It predicted that Hong Kong would lose its role as an international financial hub under Chinese rule, adding that English would give way to Chinese as the spoken language and that corruption would soon take root.

In June 2007, the American magazine confessed that it had jumped to its conclusions too prematurely. “Oops! Hong Kong is hardly dead,” it acknowledged. “What’s clear is that economic concerns have won, and that – at least economically – China has left Hong Kong alone to thrive under its ‘one country, two systems’ pledge.”

Fortune’s about-turn came at a time when Hong Kong stocks were on a bull run – the benchmark Hang Seng index hit an all-time high in October 2007.

But its initial verdict doesn’t seem as far fetched today. In terms of the spread of graft, even the former chief executive Donald Tsang was jailed for corruption this year. Tsang’s number two official and a leading property developer were also found guilty on graft charges and given lengthier sentences in 2014 (see WiC355).

And the media circus that has descended on Hong Kong this month has also been focusing on the territory’s darker side. Chris Patten, the last British governor of the former colony, gave this assessment to TIME: “What’s happened in the last few years — perhaps the last two or three years particularly — is Beijing gradually applying a tighter grip to Hong Kong’s windpipe. And you see that in all sorts of ways. You’ve had abductions in the streets [see WiC354], you’ve had a steady but remorseless squeeze on freedom of the press [see WiC311]. And of course, the cutting off of democratic development [see WiC244].”

The BBC was also in reflective mood, noting that many had wondered in 1997 whether a freer and more affluent Hong Kong would eventually “infect China with democracy”.

Twenty years on and some fear the exact opposite seems to be unfolding.

“Hong Kong was the golden goose in China,” Martin Lee, a leading Hong Kong democrat told the British broadcaster this month. “I couldn’t have thought that China’s economy would develop so quickly… and Hong Kong’s bargaining power would diminish so fast.”

How will China celebrate the anniversary?

Hong Kong – memorably described by Lord Palmerston as “that barren rock” – was surrendered to British rule in the wake of China’s defeat in the First Opium War.

That seminal event in 1842 is consistently decried by the Chinese government as the starting point for “the century of humiliations” in which China’s sovereignty was picked apart first by the Western powers and then by the Japanese.

Hong Kong’s 1997 handover was therefore a moment of great rejoicing and unsurprisingly the Chinese media has a nationalistic narrative for this week’s anniversary.

“Hong Kong’s development in the 20 years since its return to China has broken the prophecy that sung the blues over the region’s prosperity,” the People’s Daily celebrated in awkward prose.

Xinhua also noted the reliance of the city on the motherland and said that the Chinese government has been making “every possible effort” to support Hong Kong.

“Basic necessities, including about 95% of live swine, 100% of live cattle, 90% of vegetables and 70% of flour on the Hong Kong market are supplied by the mainland,” the news agency says. “Moreover, about 70 to 80% of Hong Kong’s fresh water is provided by the mainland” (although most Hongkongers seem oblivious; see WiC353).

Starting last week, an exhibition at China’s National Museum in Beijing showcased “Hong Kong’s achievements since its return to the motherland” and all seven of the Standing Committee of the ruling Politburo have paid it a visit.

Xi Jinping also arrived in Hong Kong on Thursday to spend three days in the city. Besides convening the celebration for the anniversary, the Chinese leader will also officiate at the swearing-in of Hong Kong’s new political boss Carrie Lam on Saturday.

In preparation for Xi’s visit the Hong Kong police have set up the largest security cordon ever seen in the city and at the time of writing aircraft are swooping low over WiC’s office, enforcing a n0-fly zone.

Beijing will be sending its aircraft carrier Liaoning for a two-day port call next week too – symbolically docking this symbol of national pride.

How about the local mood?

When Xi Jinping was last in Hong Kong in 2008 – then as China’s vice president – he sparked a heated debate over Hong Kong’s judicial independence by saying that there should be “mutual understanding and support among the executive authorities, the legislature and the judiciary”.

Zhang Xiaoming, head of the central government’s liaison office in Hong Kong, caused a further stir in 2015 when he seemed to dismiss the separation of powers by arguing that the chief executive (Hong Kong’s leader) is superior to the other two branches of government.

The disagreements reflect very different interpretations of the rule of law and how it should be applied. But the remarks have also heightened fears that Hong Kong is losing its protections from Chinese interference. “The central government’s outpost [the liaison office] has abandoned any pretence at remaining low key,” The Economist noted last week, reflecting that in the early years after the handover that office was all but invisible.

Defenders of the principle of “one country, two systems” say that they are fighting a series of slow but subtle changes in Hong Kong’s political culture that sum up to a process of “mainlandisation”. Anxiety among ordinary Hongkongers has also spilled over into epithets that scoff at mainland visitors – calling them “locusts” (see WiC136) – and the rise of younger, more radical “localists” has fractured the pro-democracy camp, leading to the rejection of political reforms in 2014 that would have allowed universal suffrage in electing the chief executive this year (see WiC287).

A small but vocal group has even been advocating for Hong Kong to become independent, a movement that would have been unthinkable 20 years ago.

That suggestion has prompted hardline intervention from Beijing, with China’s top legislature passing a ruling last year barring two pro-independence lawmakers from taking office in Hong Kong.

Carrie Lam, the new chief executive, has admitted that the younger generation seems more unsettled by Hong Kong’s prospects. “I will confess that in recent years there has been a feeling of disconnect. Some people, especially young people, are feeling that they are not connected adequately with the government and with our own country. We need to do more in engaging young people,” she told the BBC, insisting that she will not be a “Beijing puppet” and that she will stand up for the city.

Are mainland China and Hong Kong converging?

Commercially, mainland Chinese companies have much more of a presence in Hong Kong today. In 1997 the majority of blue-chip firms in the city’s key stock index were local conglomerates controlled by a small group of real estate tycoons. Today the benchmark Hang Seng is dominated by Chinese firms (six out of the top 10 stocks are mainland-controlled). China has also started to integrate Hong Kong’s financial and economic systems more closely with those of the mainland. The Stock Connect schemes, which allow investors in Hong Kong to buy shares in Shanghai and Shenzhen and vice versa, have both started operations. A similar programme is being put in place for the debt markets and the State Council has confirmed that a Bond Connect will launch soon.

There are also massive infrastructure projects nearing completion that will bond Hong Kong with southern China in transport and logistical terms. The Hong Kong-Zhuhai-Macau bridge, the world’s longest manmade sea crossing, is due to cut driving times from central Hong Kong to Zhuhai from four hours to 45 minutes. A high-speed railway linking the city to Shenzhen and Guangzhou will serve as another new connection to China. Travel time to Guangdong’s provincial capital will be 48 minutes and it will take just 14 minutes to get to Shenzhen.

Like the bridge, construction of the railway is behind schedule. Political hackles have also been raised by proposals to incorporate mainland customs and immigration procedures inside the West Kowloon terminus. That’s just another sign of ‘one country, two systems’ being compromised, China’s critics have warned (see WiC307) – although on a practical level many of the speed advantages would be negated were it not to happen.

The new transport connections are crucial to the concept of the “Guangdong-Hong Kong-Macau Greater Bay Area”, a policy initiative unveiled by Chinese Premier Li Keqiang in March (see WiC358). The idea is to embed Hong Kong into a “one-hour circle” within the Pearl River Delta so that – as Xinhua puts it – “people can work in one city and sleep in another”. On the one hand, the plan seems set to stimulate growth in the local economy. But on the other, it presupposes fewer barriers between Hong Kong and its gigantic neighbour. Convergence with more of the cities in Guangdong province could be transformational. An obvious example is what happens to the city’s property prices. If more Hongkongers are willing to reside (or work) in Chinese cities, why should prices stay so high? Apartments in Shunde – potentially an hour away in travel time – are five times cheaper, for instance.

Of course, the sky-high property prices in the city have also been contributing to the frustrations of younger Hongkongers.

All the same, younger activists say they are determined to keep Hong Kong separate and distinct from the rest of China.

“There are rifts, some [young people] are recalcitrant and don’t want to open their hearts,” Pony Ma, the chairman of internet giant Tencent, lamented last week at a summit discussing Hong Kong’s future within the Bay Area.

An economic answer?

Tencent’s Ma is media shy so it was significant that he was ready to speak out on a sensitive topic at a sensitive time. He also called for preferential policies to create a world-class technology hub in the region and Bloomberg noted that the conference was putting the likes of SF Express’ Wang Wei and DJI’s Frank Wang into the limelight, alongside executives from Hong Kong developers New World Development and Henderson Land.

This combination seemed symbolic, the news agency said, with some of the youngest Chinese tycoons in one camp and – in the other – some of Hong Kong’s richest property moguls: those who have dominated the local economy since the late 1970s.

Perhaps there’s a sense that the new breed of Chinese businessmen can reinvigorate Hong Kong, winning over some of the political opposition. The dominance of the quasi-cartel in Hong Kong’s real estate market is also coming under threat. In 1997 mainland companies accounted for just 1% of land purchases in government auctions but the figure jumped to 40% last year. One of the most acquisitive buyers is HNA Group (see WiC362), which has spent more than $3 billion on residential projects in Hong Kong. And its chairman Chen Feng told Oriental Daily this week that it plans to sell residential units to its staff in Hong Kong at “low cost”, with the ambitious objective of helping to “consolidate Hong Kong’s property prices” (i.e. drive them lower than current levels).

In fact, concerns about the property market were part of the reason that the UK and China started talks on Hong Kong’s sovereignty in the 1970s. At the time businesses were reluctant to invest in real estate that had leases expiring after 1997 and banks were declining mortgages that ran for more than 15 years.

That same topic was always going to resurface as the clock ticks down on the expiry of the Basic Law in 2047, and some journalists have raised concerns about the legitimacy of Hong Kong’s property titles beyond 2047, when the ‘one country, two systems’ framework reaches its 50-year limit.

Many residential mortgages in Hong Kong carry 30-year terms – so will the banks still be willing to grant 30-year loans on Monday morning, when technically the debt’s duration will run past 2047?

The Hong Kong Monetary Authority confirmed last year that the Hong Kong government has the power to grant land leases running beyond 2047 and local media has been reporting that major banks such as Bank of China (Hong Kong) and Hang Seng have said they will continue to extend 30-year mortgages as per usual.

However, doubts remain. “China has offered no clarity on what will happen to Hong Kong beyond 2047, when the pledge that Hong Kong could keep its own government and laws expires,” the Guardian writes. “The one factor that may force Beijing’s hand to publicly announce a plan is the economy. If the cloud of uncertainty remains, it could lead to a decline or complete collapse in property prices as buyers wonder what will happen if they purchase using 30-year mortgages.”

What happens next?

It will be Carrie Lam’s job to negotiate some form of post-2047 resolution with Beijing, reaching an agreement in the coming decade (assuming she serves two terms). In the best case scenario Lam might be able to get a deal in which ‘one country, two systems’ runs for another 50 years. If she fails, history suggests there will be a panic in the property market towards the end of her second term.

With prices of Hong Kong property already among the world’s highest, a correction is long overdue and the looming question of what happens after 2047 could be a trigger in seven to eight years (the last time the nervousness set in when 1997 was only 20 or so years away).

In the meantime, analysts are speculating about what Hong Kong might look like in 2047. At current growth rates, Hong Kong will become even less significant to China three decades from now – perhaps accounting for just 0.3% of national GDP. Pessimists think it will become ‘just another Chinese city’ (among 300 or so others), no longer special or particularly important – in contrast to its status in 1997 as the gateway to investing in China.

Indeed if ‘one country, two systems’ is not renewed as a principle past 2047, Hong Kong will lose all of its main privileges. It’s a Special Administrative Region today, but on July 1, 2047 Hong Kong could look very different. First up, the border could go. More significant still it might be required to use China’s civil code (i.e. no more English common law, its chief differentiator). Its tax rates might well become the same as in China as a whole (bad for its retail sector). It exchanges too the Hong Kong dollar for the renminbi. In other words, it becomes a ‘normal’ Chinese city.

That is still 30 years away, which seems some distance into the future. But the woman who served as the city’s top civil servant at the time of the handover warned this week that Hong Kong’s autonomy had already been eroded and that its unique identity was under more immediate threat. Former Chief Secretary Anson Chan is an outspoken critic of how Beijing has handled Hong Kong’s return to Chinese sovereignty and she kept up her criticism as the anniversary approached. “The rate of deterioration is alarming and if we don’t arrest it, we do not have to wait for 2047 for ‘one country, two systems’ to exist only in name,” she told CNN.


© ChinTell Ltd. All rights reserved.

Brought to you by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.