The Sun Comes Up
Deng Xiaoping's enduring wish was that he would be alive to see the handover of Hong Kong to China this summer. His death in February at the age of 92 robbed him of that chance. However, his legacy will continue to influence the state of Chinese internal and international politics for a long while yet. In this issue of Trendline, Control Risks' Asia analysts examine the implications both of Deng's death and of the handover. Jake Stratton asks what effect Deng's death will have on the climate for foreign business in China.
For most Chinese, Deng Xiaoping will forever be associated with the dictum that 'to get rich is glorious'. His modification of communism into 'socialism with Chinese characteristics' opened up numerous avenues of wealth for ordinary people. Deng's radical reforms triggered rapid economic growth and opened up China to foreign investment on an unprecedented scale. The depth of these reforms is such that their essence - the creation of a 'socialist market economy' - will survive him by many years. Even those conservative elements of the Chinese Communist Party (CCP) which were deeply suspicious of Deng's actions now view his reforms as irreversible. Deng's death does not therefore mark any kind of turning point in Chinese economic policy and political ideology.
Although the direction of economic reform appears set, the pace of this reform has become a major battleground between conservatives and progressives. This debate began in earnest in the early 1990s, just when Deng's political stature was declining. Since Deng's last great campaign - a tour of south China in early 1993, when he urged more rapid economic reform - the advocates of caution have been ascendant. They argue (with some justification) that China's vast size and staggering diversity simply cannot sustain rapid change without the attendant destabilising consequences of unemployment, crime and perhaps even regional separatism. This conservatism has meant that China's vast loss-making state sector remains in a state of limbo: China's leaders are understandably reluctant to take rationalising measures which are economically imperative but socially perilous.
In the short term, the political ramifications of Deng's death are not as alarming as some commentators fear. By the time of his death, his political influence had waned considerably. He had held no formal political posts since 1989, and had not been seen in public since 1994. For the past few years, Deng's anointed successors have been exploiting this, consolidating their positions through key appointments and judicious use of the subservient state media.
A genuine successor to Deng has not emerged and indeed may never do so. As well as being President, Jiang Zemin holds the key posts of CCP secretary-general and head of the armed forces. Yet Jiang is very much the product of CCP history, an apparatchik who trained as an engineer in the Soviet Union during the Sino-Soviet romance of the 1950s. Grey suited and bespectacled, he is hardly the kind of revolutionary character the CCP once demanded at its helm. Firebrand politics has been consigned to the party's past, to be replaced by consensus leadership through the State Council. The strongman era characterised first by Mao Zedong and then by Deng has gone out of fashion.
China therefore remains open for business not in spite of Deng's death but because of it. By cutting the link between the modern CCP and its revolutionary past, Deng's death has deprived the party of much of its political legitimacy. The collective leadership is now more than ever aware that, for the CCP to justify its rule (it has, of course, never been elected to power), it must honour its pledge to drag China into the modern era and add it to the ranks of developed countries.
The CCP is not afraid to admit that this intimidating task cannot even be considered, let alone achieved, without foreign assistance. Foreign capital and technology will be the foundations on which the modern China will be built. In order to avoid the mistakes of last century, when the Western powers used their trading footholds to carve China into competing spheres of foreign influence, Beijing will regulate foreign involvement carefully. Strategic industries will not be sold into foreign hands, and in many sectors foreign companies may be frustrated by restrictive regulations. But even so, opportunities for foreign companies with superior technology and expertise will accelerate.
China and the West have much reason to be grateful for Deng's longevity. Rumours of his impending death first began to circulate in 1990, when the wound of the Tiananmen massacre was still raw and riotous economic growth in the south and southeast seemed out of control. Had Deng 'gone to meet Marx' at this point, China could have been thrown into a catastrophic power struggle. As it is, the long and stately decline which preceded his death has given China every hope of a peaceful and prosperous transition into the next millennium.
The Sun Goes Down
Britain's imperial role in mainland Asia ends at midnight on 30 June 1997, when China resumes sovereignty over Hong Kong. The moment will represent the start of an era of great uncertainty for Hong Kong. The mood there appears generally upbeat, though it is unclear whether this reflects an understandable desire that the transfer of sovereignty proceeds smoothly or a genuine belief that the new political leadership will be able to deliver on their 'business as usual' message.
On the face of it, the optimist camp seems to have the weight of evidence on its side. Most large foreign-owned companies operating in Hong Kong have expressed their confidence in the territory's future - including widespread backing for the selection of shipping company owner Tung Che-hwa as chief executive designate to succeed Governor Chris Patten - and new firms are arriving daily.
Pragmatism, Hong Kong's credo since its origins as a base of contraband narcotics, continues to drive rather than reflect attitudes towards the future. The pragmatic view of Hong Kong's future under China is based on its utility to Beijing. Hong Kong's 6.4m population has created a huge amount of wealth, with per capita income standing at $24,500 and bank reserves totalling a massive $43bn. Capital from Hong Kong has transformed much of the immediate cross-border hinterland in Guangdong province, where millions of Chinese workers owe their livelihoods and rising prosperity to Hong Kong money and skills.
The conventional argument is that Beijing wishes to avoid damaging this 'golden goose,' not only in order to demonstrate the superiority of the Chinese blend of capitalism and socialism , but also so as not to compromise the far more important task of reuniting Taiwan with mainland China. These factors, the optimists maintain, will ensure that China exerts minimal influence on Hong Kong's ability to make money, while conceding Beijing's right to restore a political system based on oligarchic rule rather than universal franchise. Consequently, scepticism over the future has been largely dismissed as the embittered sentiments of disillusioned foreigners and over-Westernised locals.
While there is some truth in this, the fact remains that Hong Kong faces a radically different future after 30 June. Once the euphoria of the handover itself has faded, the new government will face political, legal and constitutional challenges from local activists and their powerful foreign supporters. These first skirmishes will be crucial, as they will establish precedents for both sides. Any harsh official reaction to criticism could rapidly involve China and the West alike, possibly making life uncomfortable for foreign companies and individuals operating in the territory.
Foreign business will have to distinguish between two separate manifestations of change: spontaneous events (such as street protests or unauthorised dealings by local or Chinese officials), and systematic policy measures which may threaten their assets, trading positions or reputations. In particular, the way in which commercial law is applied is absolutely critical - especially the issue of whether those with powerful connections in the Chinese system are able to avoid due process. This principle is likely to tested sooner rather later, and the reaction of the foreign business community will play a major part in determining the direction of the territory's economic future. The other great challenge which companies face is how to administer the effects of changed circumstances within their own organisations, particularly in the context of dealing with eroding expectations among their local staff and Hong Kong's declining attraction for expatriate employees.
On a broader level, a comparison with other Asian countries gives an indication of the range of possibilities facing Hong Kong over the next five years or so. At one end of the spectrum is Singapore, which combines high standards of physical security with low levels of corruption. At the other, Macau has high levels of corruption, an increasing problem from organised crime, and deteriorating standards of physical security.
Hong Kong is unlikely to attain the same high reputation as Singapore, not least because of questions about the future of the legal system. However, Hong Kong's institutions are strong enough to combat crime and corruption and - at least in the short term - the territory will benefit from the leadership of senior civil servants who have proved themselves in the 'British' system of government. For the next two to three years, therefore, the outlook is therefore relatively favourable.
Thereafter the range of possibilities broadens. There is no doubt that a variety of political and social pressures will challenge the new government's commitment to high standards of integrity and transparency. Even in the worst case scenario, however, Hong Kong is unlikely to descend as far as Macau or Shenzhen in neighbouring Guangdong province, though its corruption levels may come closer to, say, India or Thailand. It will be quite possible to do business in the new Hong Kong, just as it is, for example, in present-day Shanghai. But it may be less pleasant.
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23 July 1997