THE FOURTH QUARTERLY REPORT OF THE SPEAKER'S TASK FORCE ON THE HONG KONG
                                 TRANSITION

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                             HON. DOUG BEREUTER


                                 OF NEBRASKA


                       IN THE HOUSE OF REPRESENTATIVES


                           Tuesday, August 4, 1998


  Mr. BEREUTER. Mr. Speaker, this Member rises today to submit the Fourth
Quarterly Report of the Speaker's Task Force on the Hong Kong Transition. It
has been slightly more than one year since Hong Kong reverted to Chinese
sovereignty on July 1, 1997. Prior to that historic event, and at your
request, Mr. Speaker, this Member formed the House Task Force on Hong Kong's
Transition. In addition to myself as chairman, the Task Force is bipartisanly
balanced in its membership, including Representative Howard Berman (D-CA).
Representative Sherrod Brown (D-OH), Representative Eni Faleomavaega (D-AS),
Representative Alcee Hastings (D-FL), Representative Jay Kim (R-CA),
Representative Donald Manzullo (R-IL) and Representative Matt Salmon (R-AZ).

  To date, the task force has prepared four quarterly reports assessing how
the reversion has affected Honk Kong. The fourth report, which I submit
today, covers the period of April through June, 1998, during which there was
no actual visit to Hong Kong by the Task Force. (A visit had been scheduled
during the July 4th district work period, but scheduling difficulties forced
cancellation of the visit.) Despite a number of concerns about the ailing
economy, as well as concerns in the areas of freedom of expression, the
independence of the media, and the protection of intellectual property
rights, we continue to describe the situation as "so far, so good." Most
notably, Hong Kong held remarkably successful elections for the first post-
reversion Legislative Council.

  Mr. Speaker, this Member submits the Task Force report and asks that it be
printed in full in the Record.


The Speaker's Task Force on the Hong Kong Transition: Fourth Report, July 23,
                                    1998


                 (Presented by Hon. Doug Bereuter, Chairman)


  The following is the fourth quarterly report of the Task Force on the Hong
Kong Transition. It follows the first report dated October 1, 1997, the
second report dated February 25, 1998, and the third report dated May 22,
1998. This report focuses on events and development relevant to United States
interests in Hong Kong between April 1, 1998, and June 30, 1998--the fourth
quarter following Hong Kong's reversion to China.

  It has been one year since Hong Kong reverted to Chinese sovereignty on
July 1, 1997. Looking back at those last few weeks of June, 1997, we recall
that the reversion was viewed with a mixture of excitement and trepidation.
Many observers, both in Hong Kong and abroad, worried aloud that Beijing
might be unable to resist the temptation to meddle in Hong Kong's internal
affairs, despite China's commitment in the Joint Declaration to "one-country,
two-systems" and its agreements to grant Hong Kong autonomy over all matters
except foreign affairs and defense for fifty years. Skeptics questioned
whether Hong Kong would continue its traditions of freedom of expression and
were concerned about the apparent roll back in democratization of the new
electoral system. Businessmen wondered whether Hong Kong would maintain the
rule of law upon which its international commercial prominence is based.
Other observers, concerned with security issues, questioned Hong Kong's
continued ability to maintain effective export controls.

  The fourth quarter following revision can briefly be summed up as both
"good news and bad news." The good news was that Hong Kong's citizens
confounded political pundits by turning out in record numbers for the first
post-reversion election of its Legislative Council. The bad news was that the
financial crisis which had engulfed much of southeast Asia from mid-1997
finally, unfortunately, made its impact on Hong Kong.


        POLITICAL PARTICIPATION--A SURPRISINGLY ENTHUSIASTIC POPULACE


  On May 24, Hong Kong held its first election for its Legislative Council
(LegCo) under the new, controversial election law adopted by the post-
reversion, Beijing-appointed legislature. The new law rolled back key
provisions of election reforms finally instituted by the last British
colonial governor, Chris Patten, in 1995. For example, it maintained the
original formula of twenty LegCo members to be directly elected by popular
vote, thirty to be elected by "functional constituencies" (initiated by the
British in 1985), and ten to be chosen by an Election Committee. However, the
"functional constituent" electorate was reduced from approximately 2.7
million voters under the 1995 British reforms to about 180,000 voters. Of
course, the widespread view in Congress is that direct election is preferable
to functional constituencies and that the members elected by the special
Election Commission make the process less than fully democratic.

  Because of the complex and cumbersome electoral system, many observers
predicted voter apathy and a low turnout. Happily, these predications proved
wrong. Despite torrential rains, a record 53.3 percent of eligible voters
cast ballots, compared to 35,8 percent in 1995. The Democratic Party and its
allies won 65 percent of the popular vote, but were held to only 20 of the 60
seats because of the complex elections rules. The Democratic Party alone won
43 percent of the popular vote and will be the largest party in the new
LegCo. In effect, Hong Kong's voters have created the first opposition bloc
in the history of communist-ruled China.

  Following the election, seven parties crossing id"eological lines and
representing 41 of the 60 members of the new legislature agreed on a
blueprint to create jobs and revive Hong Kong's ailing economy. In an
extraordinary challenge to C.H. Tung's notion of executive-led government,
the coalition threatened to block all of the administration's legislation and
funding unless it played ball. The two sides averted a showdown by agreeing
to a dialogue aimed at finding solutions to Hong Kong's economic troubles.

  Many Hong Kongers now hope that the high voter turnout and strong showing
of the Democrats and their allies will hasten the pace toward full universal
suffrage. President Clinton buoyed those hopes during his July 1-3 visit to
Hong Kong (the first by a sitting president), when he called for "more
democracy, not less, and faster, not slower, strides toward political
freedom." Accelerating the pace toward universal suffrage, however, would
require amendment of the Basic Law, Hong Kong's mini-constitution, which
stipulates that a fully directly elected LegCo will not be considered before
the year 2007. Amendment, however, requires approval by both the chief
executive and China's National People's Congress, and thus is viewed as
highly unlikely.


                     RULE OF LAW--FREEDOM OF EXPRESSION


  As we have noted in earlier reports, international confidence in Hong Kong
is based on the commitment of Hong Kong's authorities to the rule of law
inherited from the British. An integral part of this is the "check" on the
abuse of authority provided by the free expression of opinion. During this
quarter, we find again that the people of Hong Kong largely continue to
express themselves without restraint. On June 4, for example, more than
16,000 protesters held the first commemoration of the Tiananmen Incident
since reversion. While the crowd was lower in number than in 1997, the high
turnout belied skeptics who had predicted interference. Similarly, political
activists protesting Japan's occupation of the Diaoyu Islands (Senkakus) have
operated freely. Hong Kong authorities report that it has not denied any
application for a demonstration permit since reversion and that the number of
demonstrations has actually increased from an average of 80 per month prior
to reversion to between 150 and 160 per month.

  Hong Kong's media also continues to practice its traditional vibrant style
of journalism without overt interference from authorities in Hong Kong or
Beijing. Nonetheless, concerns of self-censorship continue. The Hong Kong
Journalists Association, in its recently issued annual report, noted that
self-censorship was "nor worse" than in the year prior to reversion. It
noted, however, that concerns were on the rise about the self-censorship of
reporting on independence-related activities in Tibet, Taiwan or Xinjiang.
Recently, for example, the Western media gave considerable attention to a
local Hong Kong television reporter who claimed that his report on the
independent movement in Xinjiang was kept off the air for political reasons.

  This aspect of freedom of expression and how it applies to expressions
about certain sovereignty issues in China is especially important because
Hong Kong's Legislative Council will soon be considering a measure to define
subversion. Moreover, Chief Executive Tung has widely stated that he believes
Hong Kong people should not be freely expressing their support for
independence for places like Taiwan, Tibet and Xinjiang. Therefore, a crucial
test of Hong Kong's adherence to free expression will be whether mere
expressions of support for independence for those areas will be punishable
under law.

  Beijing authorities, however, continue to bend over backward to avoid the
appearance of direct interference. At the time of Chinese Prime Minister Zhu
Rongji's early April visit to France, a senior Chinese foreign minister
official rebuked a Hong Kong television reporter accompanying the visit after
the reported asked Zhu what he felt about the demonstrators. The subsequent
uproar over this perceived threat to press freedom led premier Zhu to
publically criticize the Chinese diplomat for having a "bad attitude." The
controversy eventually died down.

  A fair and independent judiciary is another critical element of
international confidence in Hong Kong. In general, the Hong Kong judiciary
continues to operate independently and without taint of political influence.
During the past quarter, we noted no new instances, as we did in the previous
quarter, which would call into question the judiciary's independence or its
vulnerability to Chinese influence.

  On a more positive note, the Hong Kong government clarified in April that
the first official post-handover human rights report to be submitted to the
United Nations by the SAR government will not be amended by Beijing. This
report is submitted under the International Covenant on Civil and Political
Rights and the International Covenant on Economic, Social and Cultural
Rights. The report will be submitted through Beijing, but will not be subject
to Beijing's review.


                            ECONOMIC DEVELOPMENTS


  Ironically, the greatest immediate threat to Hong Kong's prosperity stems
not from its reversion to China but from the external events of the Asian
Financial Crisis. It just posted its second quarter of negative growth
following a 2% contraction in the first quarter of 1998. It is now clear that
Hong Kong is in a recession for the first time in 13 years. Almost no one
(including Hong Kong officials) predicts an early turnaround.

  This negative growth led to an unemployment rate of 4.5 percent in for the
months April-June, a 15 year high, concentrated in the retail, restaurant and
transport sectors. Retail sales dropped 16 percent in April over April 1997,
due largely to reduced tourism, a marked correction in the asset markets and
reduce local consumer demand. Additionally, Hong Kong's real estate bubble
has burst and commercial and residential property prices at the end of June
were 40% below their bubble-priced highs of 1997, returning to their 1996
levels. The Hang Seng Index has followed the real estate downward slide,
falling at one point to 40% below its all time high of August last year. It
ended June at 8,543 points. The market did not respond positively to the
government's stimulus package (described below), and also remained concerned
about the Japanese economy, China's commitment to maintaining the renminbi,
and regional economic woes. Finally, Hong Kong's tourism industry has been
badly affected by the decline in visitors from the flagging economies of East
Asia, and Hong Kong is now projecting a minus six percent growth in tourist
arrivals and a decline of eight percent in tourism revenues in 1998.

  The positive news in Hong Kong is that the Hong Kong Government is
responding. Chief Executive Tung proposed a stimulus package of $5.67 billion
U.S. dollars in June. The multi-part package is aimed in part at easing the
credit and liquidity crunch by immediately exempting interest income earned
locally from profits tax and setting up a credit guarantee system for small
to medium businesses. The government also suspended all land sales until next
March--thus reducing the downward pressure on the real estate market--while
at the same time increasing assistance for new home buyers. It also imposed a
freeze on pay raises for top civil servants. The stimulus package will force
the highly efficient civil service to wipe out an anticipated budget surplus
and to run a deficit of $2.7 billion U.S. dollars in 1998-1999--the largest
deficit since the early 1980s. In earlier measures, the government eased
travel requirements for travelers from both Taiwan and the mainland in an
effort to boost tourism. Confidence in the Hong Kong dollar remained high,
with the ratio of Hong Kong dollars to total bank deposits in May unchanged
from April's 57.7 percent, and the ratio of foreign currency to total bank
deposits ending the month of May at a healthy 42.3 percent.

  Despite its considerable economic woes, Hong Kong still maintains the third
largest holding of foreign currency reserves in the world. With $96.2 billion
U.S. dollars, they are behind only Japan and China in that category.
Moreover, Hong Kong has not jettisoned its free market ideology and ranks 2d
on the competitiveness rankings of the World Economic Forum and 1st in the
Heritage Foundation's ranking. Negative economic growth and rising
unemployment has put strong pressure on authorities to "untie" the "peg" that
has bound the Hong Kong dollar to the U.S. dollar at HK $7.8 to one U.S.
dollar for the past 15 years. Hong Kong authorities have repeatedly assured
skeptics that they have both the foreign exchange reserves and the political
will to maintain the U.S./Hong Kong dollar linked exchange rate system.


                                TRADE ISSUES


  While the Asian Financial Crisis has seriously jolted and hurt Hong Kong's
economy, it has also highlighted Hong Kong's serious and unhealthy dependence
on entreport trade between the United States and China. Entreport trade is
one of the few economic areas still registering positive growth as compared,
for example, to exports from domestic manufacturing in Hong Kong.

  For Hong Kong, its reliance on entreport trade is both good and bad. The
United States is still growing and buying more and more Chinese manufactured
goods. This provides an excellent export market for Hong Kong. Nevertheless,
the bad news for Hong Kong is that our current trade deficit with China ($50
billion last year and projected to be $60 billion this year) is politically
and economically unsustainable. And if the China trade deficit issue is not
addressed by increased market access for U.S. firms to China, then Hong Kong
could get hit with collateral damage from a frustrated America and the U.S.
Government--even if it does everything right.

  The pirating of movies, audio and software compact discs continues to be
the most serious bilateral trade issue between the United States and Honk
Kong. In recent months. Hong Kong has stepped up its anti-piracy enforcement
efforts and implemented a new copyright law. The new law, among other things,
gives officials greater enforcement capabilities against illicit production
facilities. Hong Kong customs authorities, which have had primary
jurisdiction for enforcing IPR legislation, were recently joined by Hong
Kong's highly respected Independent Commission Against Corruption (ICAC),
which combats corruption and triad-related crime. The ICAC in April carried
out a "mega-raid" that netted over eight million video compact discs in the
course of an investigation against one of Hong Kong's most senior customs
officials (subsequently charged with tipping off a pirating syndicate about
planned raids). Not long after, customs followed with a raid which yielded an
additional 2.2 million compact discs. Further productive raids were made in
June.

  Despite these efforts, the intellectual property rights (IPR) situation in
Hong Kong remained sufficiently troublesome of warrant its designation by
USTR on the Special 301 Watch List for the third year in a row on may 1,
1998. The ongoing IPR problem was demonstrated again when a pirated pre-
release version ("beta version") of "Windows 98" appeared on Hong Kong
streets well before the official release of the software in the United
States. The local media reports that Hong Kong authorities are considering
stronger measures to combat piracy, including applying the Organized and
Serious Crime Ordinance to violators (which would allow their assets to be
seized) and punishing landlords who lease shops to retailers of pirated
material.

  Money laundering also remains a very serious concern in U.S. bilateral
relations with Hong Kong. As we have noted in earlier reports, the same
favorable factors that make Hong Kong one of Asia's most important financial
centers also make it attractive to criminals wishing to conceal the source of
their funds through money laundering. It is important that Hong Kong work
harder with the international community to improve its laws and enforcement
in this vital area. We note, in that regard, that Hong Kong is a member of
the Egmont Group (the international group which combats money laundering) and
that Taiwan joined in June. Some observers expect Taiwan's inclusion to
create a new dynamic in East Asian efforts to fight money laundering.


                         SECURITY AND RELATED ISSUES

 
  There are three primary security related issues with Hong Kong--ship
visits, PLA activities and export controls. First, the U.S. Navy continues to
enjoy an excellent relationship with Hong Kong in terms of ships visit. With
the loss of Subic Bay as a major installation, these port-of-call visits have
become extremely important for the effective functioning of our naval forces
in East and Southeast Asia. The relationship with Hong Kong port authorities
since the reversion has been outstanding. We are unaware of any security
problems in the 65 port calls since the reversion. As an added benefit, the
resident People's Liberation Army (PLA) officials certainly have developed a
better appreciation of the power and flexibility of the U.S. Navy.

  The second security concern is related to the influence of the PLA and the
Chinese defense industries in Hong Kong business. Certainly, there is concern
regarding the PLA's surreptitious acquisition of militarily sensitive
technologies. We have no evidence to date of direct involvement by PLA
entities in Hong Kong (estimated at nearly 200 companies) in acquisition of
sensitive technology. Yet to the extent that PLA entities operating in Hong
Kong are engaged in arms trading or acquisition of Western technology, Hong
Kong's relations with the U.S. will be put at risk. Their activity, or lack
thereof, will be an important determinant in future congressional attitudes.

  The implementation of export controls is a third area of security-related
concern. We are pleased to note no new incidents of export control violations
to report this quarter. Hong Kong continues to exercise autonomy as a
separate customs territory within China and to demonstrate vigorous
enforcement of its strict export control regime. United States officials
continue to conduct pre-license and post-shipment inspections. Moreover, U.S.
and Hong Kong customs officials continue their close cooperation and, in
July, will hold the second in the most recent series of consultations on
licensing, enforcement and the exchange of information.


                                    MACAO


  The Portuguese colony of Macao will revert to Chinese rule on December 20,
1999, after 442 years. Like Hong Kong, this territory of 500,000 people, 95
percent of whom are ethnic Chinese, will become a Special Administrative
Region with a "one country, two systems" formula for the next 50 years. As we
noted in our previous quarterly report, however, a number of the transition
issues for Macao are very different from those faced by Hong kong. Unlike
Hong Kong, for instance, the legislature elected under colonial rule will
remain in place.

  While U.S. interests in Macao are not nearly as large as those in Hong
Kong, they nonetheless require our continued attention. For example, the
transhipment of textiles through Macao continues. But primary among our
economic concerns is Macao's role as a manufacturing center for pirated
goods, particularly pirated compact discs. To date, Macao has yet to develop
adequate legislation, enforcement mechanisms and manpower to tackle this
problem. Macao also lacks legislation on money laundering. It is in U.S.
interests to press Macao's authorities to move forward expeditiously to
correct those shortcomings.

  As we noted in our third quarterly report, Macao's Portuguese
administrators have still not made adequate arrangements to replace
themselves with local Macanese officials and are well behind where the
British were 18 months before the handover of Hong Kong. They have also
allowed the law and order situation to deteriorate. Throughout the spring,
news reports of gangland slayings and attacks on public officials repeatedly
filled the news, seriously affecting Macao's tourism. China and Portugal
exchanged frequent barbs accusing each other of contributing to the growing
spiral of public violence. Finally, following the early May firebombing of
police chief's car, authorities performed a massive crackdown, netting two
dozen suspected triad society members, including Macao's most notorious
gangster, "Broken Tooth" Wan. Local police have now been reinforced by 20
criminal investigation experts from Portugal. We applaud strengthened
measures against organized crime. It will be difficult for the territory to
complete smooth transition unless it brings the intolerable situation under
control.


                                 CONCLUSION


  The Hong Kong Transition Task Force has ended our previous three quarterly
reports with the assessment "so far, so good." This time, we cautiously
repeat that assessment, but with a few caveats. On the economic front, we
recognize that the external forces affecting Hong Kong are beyond its control
and complicate the transition in unexpected and unpredictable ways. We were
encouraged by the demonstration of support for democratic institutions shown
in the May election and applaud those elements pressing to accelerate the
move toward universal suffrage. We continue to be satisfied with the
restraint shown by the Chinese government in its handling of Hong Kong, at
least to the extent visible to outside observers. We are concerned, however,
by what appears to be growing self-censorship, although we admit that the
phenomenon of self-censorship is difficult to document or quantify.
Undoubtedly, the coming months will bring new challenges to Hong Kong and the
region. It is important that the international community and Congress
continue to closely monitor developments there.