TIMID REFORM, ASSET BUBBLES AND POLITICAL IMPASSE—HONG KONG'S PROBLEMS PERSIST

By Robert Keatley, Editor

Hong Kong began the new decade with continuing uncertainty about both its political and economic futures, and no reliable guidelines in sight. The old year closed with relative calm and no immediate crisis on hand, yet there were indications that serious problems might be only months away.

The best news was that Hong Kong had weathered the worst of the global financial meltdown relatively well, thanks in large part to a sound banking system that didn't require government handouts and to benefits from the strong Chinese economy next door. Also helping was spending on some huge infrastructure projects. Of course, there were economic troubles: exports declined, unemployment rose, retailing slumped and tourism faltered, among other things. But none of these reached emergency levels and by yearend most economic statistics were recording gains once more.

Yet beneath the surface glitter and upbeat trends lurked some worrisome trends for this wealthy city. For one thing, the gap between rich and poor continued to widen and the government had no serious plans for narrowing it. In fact—despite warnings from many quarters—it continued to reject spending proposals that might alleviate the worst conditions on grounds these would constitute unsound economic policy over the long term. In addition, there were other warnings about a dangerous asset bubble, thanks to flows of "hot money" from China and elsewhere that drove up real estate and share prices to seemingly unsustainable heights in a high-risk trading frenzy. The stock market's Hang Seng Index rose 52% in 2009, the most for 10 years, and some real estate prices set record highs.
As December ended, there were signs that the property market surge was ending, and fears that the bubble might burst. If asset prices dropped sharply at a time when a growing share of Hong Kong's populace lived uncomfortably close to the subsistence line, the city could face major economic and political challenges before long. In fact, Chief Executive Donald Tsang sounded a negative note about the economic outlook at yearend. "I am rather pessimistic" he told a Beijing audience. "A second trough may well emerge in the middle of [2010]."

The political outlook appeared no brighter, for the promised evolution to universal suffrage seemed stalled. To be sure, the government in November did unveil reform proposals that would modestly enlarge electoral rolls for the scheduled 2012 balloting for both chief executive and legislature. But these didn't satisfy politicians who want a clear road map for the still-elusive introduction of full local democracy, something promised by Beijing as the "ultimate aim" but not yet delivered. In fact, many critics called the tentative government plan a retreat from earlier reforms that failed to win legislative approval in 2005. Thus some political leaders have vowed to seek a showdown unless the government offers major concessions—which it shows no signs of doing.

No Resolution in Sight

This suggests the basic structural problem of Hong Kong politics won't be resolved anytime soon.

The issue is this: the chief executive is nominated and elected by a small (800 members at present) committee dominated by Beijing loyalists, and all senior officials are appointed. This means the executive branch has no public mandate and limited direct accountability to the people it serves. By contrast, half the Legislative Council (Legco) is popularly elected with the rest chosen in small elections by special interest groups called functional constituencies. This gives Legco a high degree of public accountability but sharply restricted powers; under the current rules, for example, it cannot initiate spending bills. This division has brought great frustration to all concerned, with many Legco sessions deteriorating into little more than highly emotional attacks on executive plans—causing great public dismay about the entire political process. A yearend poll by Hong Kong University found only 18% of respondents claiming satisfaction with the performance of legislators, a four-year low.

The government reform proposals for 2012 are open for public comment and suggested changes until February 19, after which it will formulate a final version; no specific date has been set. However, officials have said the new terms will not explain precisely how universal suffrage will be implemented for the 2017 election of a new chief executive, or for choosing all Legco members in 2020. China frequently has said it would permit universal suffrage in those years but has made no guarantees; Hong Kong's democrats want a specific plan included in the pending reforms.

There is also the ongoing issue of Legco's functional constituency seats, generally filled by members willing to follow the Beijing policy line; many are businessmen whose top priority is to protect their mainland investments. Though democrats want all seats filled by popular election by 2020 at the latest, there have been recent indications that neither the Hong Kong nor Chinese governments may let this happen for fear such voting might produce unreliable allies. Instead, they seem ready to revise the existing system in ways that would continue to guarantee seats for a large and obedient legislative bloc—and call it universal suffrage no matter how others might define that term. Democrats want the functional constituencies abolished.

The government proposals fall far short of these demands. They would merely increase the election committee to 1,200 members from 800 for the 2012 voting, while increasing Legco to 70 members from 60—with only five newcomers to be chosen by popular vote in geographical constituencies. The main gesture to democracy is that the five new functional constituency members would be chosen by elected members of district councils, local government units that look after neighborhood matters (the 102 appointed members could not vote). Otherwise, the 2012 rules would be little different from those for the 2007 and 2008 elections.

The Democrats Divide

How to respond has split the pro-democrat parties. The more agitated, fed up with what they call government stalling, want a public showdown if they find the final reform package unsatisfactory. They would do so by having one elected Legco member from each of Hong Kong's five geographic constituencies resign in protest, only to run again in subsequent by-elections. These races would be billed as referenda on government reforms, meaning that a vote to return the five members would be considered a vote against Chief Executive Tsang's proposals. If all five regained office, a chastened administration might then offer more substantive electoral changes. The Civic Party, led by lawyers and other professionals, former Chief Secretary Anson Chan and former legislator Martin Lee are leading proponents of this strategy.

But there's a major problem; the plan could fail. Polls suggest that two or three of the chosen five would lose to pro-government candidates, discrediting the entire pro-democracy movement rather than shocking the government into offering new concessions. This has caused other pro-democracy politicians to resist the plan, and divides the serious reformers into quarrelsome factions. At present, the democrats have a blocking minority in Legco if they stay united, meaning they can prevent reforms considered too limited from taking effect (as happened in 2005). But if they lost two or three seats in the by-elections, the government could probably push through its own version while largely ignoring the democrats. Or it could rush its plans along while all five seats were still empty.

As a result, the outlook for serious democratic reform by 2012 is not bright; the government might amend its initial plans slightly but seemed unlikely to change them much. Perhaps key to this impasse is the fact that Beijing has no interest in seeing political power pass to people it cannot control, whether in Hong Kong or elsewhere in China. All this could bring even more fractious relations between the Tsang government and its legislative opposition, exacerbating the basic structural issue of Hong Kong politics and satisfying no one. This might not impede the government in the short term but would add to a sour political atmosphere, and make dealing with practical issues more difficult in the future.
"We are paralyzing ourselves," worries a banker who believes the contentious nature of politics has slowed government decision-making in wasteful ways.

Where Has Social Mobility Gone?

It could also feed more basic dissatisfaction stemming from the growing rich-poor gap. Studies show that an increasing portion of Hong Kong's seven million people feel left out of the city's more affluent industries, such as finance, and that a once-sustaining sense of social mobility has evaporated. [For expanded discussion of the problem, see articles by C.Y. Leung and Leo Goodstadt in this issue of the Hong Kong Journal.] By some measures Hong Kong is one of the world's five richest societies, but about half its workers make less than US$1,300 per month, and many earn less now (in real terms) than they did in the 1990s. Researchers find that young people—including those fortunate enough to be in universities—feel especially disaffected and blame "the system" for denying them greater opportunity for advancement. Some predict violence against possessions of the conspicuously wealthy, even if more symbolic than substantive, as acts of protest—something little known in conservative Hong Kong since the Cultural Revolution of the 1960s.

The bursting of an asset bubble could aggravate this. Many economists believe the combination of surplus cash in China and elsewhere in Asia, plus "unreal" low interest rates worldwide, are channeling funds into property and other assets at unsustainable prices—without proper regard to risk. They also believe the U.S. and Europe, perhaps others, will raise interest rates later in 2010, reducing liquidity and forcing asset sales to meet loan payments. If so, prices would drop, perhaps sharply enough to cause a degree of economic panic. All that would have a strong and negative impact on Hong Kong, whose open markets cannot resist global pressures.

Manufacturing could provide another problem. Hong Kong's entrepreneurs (like those in Taiwan) have long since moved export-oriented businesses to the mainland, where they employ millions of factory workers. But these companies now face rising labor rates, environmental issues and other cost pressures as their global markets contract. Many exporters hope to begin feeding the huge Chinese domestic market as that nation "rebalances" its economy, but doing so is difficult and some will fail. At risk in Hong Kong is a portion of the 600,000 or so service jobs linked to those factories; any substantial layoffs could aggravate the latent social unrest that academic researchers find so worrisome. 

 All this should be treated with caution; no one is predicting social collapse, rioting in the streets or economic catastrophe—let alone a takeover by the Chinese army. Hong Kong remains a prosperous society with many civic freedoms and will remain so for years. But there are serious problems lurking beneath the surface glitz, with too little being done to resolve them. In the view of many analysts, the government doesn't listen enough, the politicians can't act with responsibility and the problems will become all too uncomfortably obvious unless better remedies are forthcoming.