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influence the nomination process of the candidates for chief executive and some form of functional representation in the legislature may still be retained in the future, even when “universal suffrage” is introduced. While the battle for democracy seems to be settled, at least temporarily, the Hong Kong SAR government will still have to manage the gradual reform of the political system by treading between the central government and the pro-democracy advocates before 2017.

13.4.3 The Economic Dimension

Hong Kong’s capitalist economy is separated from that of the Mainland under OCTS. Not only can Hong Kong maintain its own currency and run its own finance, monetary affairs, and external economic relations, it can also administer its own customs and immigration systems. Hong Kong does not have to pay tax to the central government or contribute to the maintenance of the PLA garrison. Since 1997, Hong Kong has experienced two recessions—the first one from late 1997 to 1998 caused by the Asian financial crisis and the second one from mid 2001 to early 2002 sparked off by the September 11, 2001 terrorist attacks and the bursting of the hi-tech bubble, as well as one near recession in mid 2003 engendered by the severe acute respiratory syndrome (Sung, 2007). It was only in late 2006 that Hong Kong’s GDP per capita reached the level in 1997, and it has not yet been successful in fully transforming itself into a knowledge-based economy. In view of the huge impact of the economic downturn, such as high unemployment and deflation and the Mainland’s accession to the WTO, the Hong Kong SAR government has become much more proactive in deepening economic and financial relationships and promoting coordination in development planning between Hong Kong and the Mainland since 2001.

13.4.3.1 Expanding Intergovernmental Links

In the initial one or two years after 1997, the Hong Kong SAR government did not move quickly to seek economic cooperation with the Mainland. Collaboration with Mainland authorities was largely limited to the technical or administrative domain. Owing to the competing views and interests of the different governments involved and their concerns with the repercussions for OCTS, intergovernmental mechanisms between Hong Kong and the Mainland have expanded only in a gradual manner since unification (Cheung, 2006). In the first 3 years after 1997, there were only a small number of liaison channels between the two, focusing mainly on issues where cooperation and coordination were indispensable, such as public security, water supply, and boundary management.25 However, under the initiative of C. H. Tung, the Hong Kong/Guangdong Cooperation Joint Conference was established in 1998 to promote cooperation across different policy areas between Hong Kong and Guangdong, its neighboring province. The framework has now become the umbrella for coordinating all key areas of cross-boundary cooperation.

The Office of the Hong Kong SAR in Beijing, inaugurated in 1999, was the only official unit- in-residence in the Mainland from Hong Kong until 2002. In response to repeated calls from the business sector demanding the setting up of more government offices in the Mainland, the Hong Kong SAR government finally established the first Economic and Trade Office in the Mainland in Guangzhou, the provincial capital of Guangdong, in 2002, to liaise between Hong Kong businesses and their Guangdong counterparts and to organize trade and investment promotion activities in the province.26 This network was later extended to two more major cities, Shanghai and Chengdu.

25See http://www.cab.gov.hk/upload/20050704094423/Annex.xls.

26Website of the Economic and Trade Office in Guangdong, http://www.gdeto.gov.hk/eng/about/role.htm.

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The Hong Kong SAR government also reorganized its internal structure in early 2006 by reframing the Constitutional Affairs Bureau as the Constitutional and Mainland Affairs Bureau in order to manage the growing intergovernmental links.

13.4.3.2 Fostering Closer Economic Partnership and Financial Relations

The conclusion of the CEPA agreement between Hong Kong and the Mainland is an unprecedented effort in deepening the economic relationship between both areas. After extensive lobbying by the local business community, the Hong Kong SAR government negotiated with the relevant Mainland authorities regarding a free trade area in early 2001 in order to tap the “first-mover” advantage after China’s WTO entry. However, the formal CEPA agreement was only signed in June 2003 at a time when the Hong Kong economy was in the midst of an economic downturn and a deepening political crisis. Beijing approved the CEPA arrangement not only to facilitate Hong Kong’s restructuring into a robust service economy and expedite closer integration with the Chinese economy, but also to relieve its economic difficulties that were considered a key source of its political discontent. Aside from providing zero-tariff for products of Hong Kong origin entering the Mainland, the CEPA arrangement facilitates the entry of Hong Kong service suppliers to the Mainland and introduces various measures on trade facilitation for Hong Kong businesses, starting from January 1, 2004, about 2 years before China had to open up in accordance with the schedule of the WTO.27 The Hong Kong SAR government has also been active in lobbying Beijing to relax the relevant rules so that Mainland enterprises can invest in Hong Kong.28 Further, the central authorities allowed the residents of four cities in Guangdong province to travel to Hong Kong on an individual basis starting from July 28, 2003, under the “Individual Visit Scheme.” Tourism between Hong Kong and the Mainland has flourished since 2003 and 49 cities with a population of 270 million are now covered by the scheme.29 In 1997, some 2.3 million Mainland people had visited Hong Kong, but by 2008, the number had increased seven times to almost 17 million, and the share of tourists from the Mainland in the visitor total jumped from 21% in 1997 to 57% in 2008.30

The Hong Kong SAR government has also been actively promoting financial cooperation with the Mainland and Hong Kong continues to serve as the leading center for China’s firms to raise equity capital.31 In 1997, there were only 98 Mainland firms were listed in the Hong Kong stock exchange. however, by the end of 2008, 465 Mainland affiliated companies were listed in the Hong Kong Stock exchange.32 T he market capitalization of Mainland-affiliated companies on the Hong Kong stock exchange only represented 16.3% of the total in 1997, but by the end of 2008, they contributed 60% of the total market capitalization and 71% of the annual equity

27The CEPA arrangement has been broadened further since 2004. A total of six supplements to the CEPA were concluded by May 2009.

28The Chief Executive’s Policy Address 2001, para. 82, http://www.policyaddress.gov.hk/pa01/e82.htm.

29See the discussion paper for the Professional Services, Information and Technology and Tourism Focus Group of the Economic Summit on “China 11th Five-Year Plan and the Development of Hong Kong.” See http://www. info.gov.hk/info/econ_summit/eng/pdf/paper_10.pdf.

30Census and Statistics Department, the Government of the Hong Kong Special Administrative Region, Hong Kong Annual Digest of Statistics 2003 (Hong Kong: Census and Statistics Department, 2003), p. 200; http:// www.censtatd.gov.hk/products_and_services/products/publications/statistical_report/general_statistical_ digest/index_cd_B1010002_dt_detail.jsp and Hong Kong Tourism Board and http://www.tourism.gov.hk/ english/visitors/visitors_ind.html.

31Given the complexity of the subject and the many developments in the past decade, this section aims only to highlight some examples of the deepening financial cooperation between Hong Kong and the Mainland.

32http://tpwebapp.hktdc.com/print/print.asp?url=http://www.hktdc.com/main/economic.htm.

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trading turnover.33 It would be difficult to enhance Hong Kong’s role as the financial center of the Mainland without the direct sponsorship of the governments on both sides. Hong Kong’s banking and financial sector has collaborated with the Hong Kong SAR government in such an endeavor. In May 2001, the Hong Kong SAR government recommended a set of measures to the central authorities in order to foster financial cooperation between Hong Kong and the Mainland. These included, for instance, allowing Mainland institutional investors to invest in stocks and funds in Hong Kong under a “Qualified Domestic Institutional Investor” (QDII) arrangement (Hong Kong Economic Times, August 8, 2001, p. A3). In response to the active request and lobbying from the Hong Kong SAR government, the Mainland authorities also promulgated the “Qualified Foreign Institutional Investor” (QFII) Scheme in 2002, which allows qualified overseas investors, including those from Hong Kong, to invest in the stock markets of the Mainland. In April 2006, the arrangements over QDII were officially promulgated by the central authorities, which will help to strengthen Hong Kong as an asset management center in Asia. Since 2004, in view of the growing passenger and business flows between Hong Kong and the Mainland, the central government also began to allow Hong Kong’s banks to handle various Renminbi (the Chinese yuan) businesses. The deepening economic and financial relationship between Hong Kong and the Mainland is an apt example of intergovernmental cooperation under OCTS.

13.4.3.3Seeking Cooperation and Coordination in Regional and National Development

In order to explore the opportunities promised by China’s economic growth, the Hong Kong SAR government has stepped up its efforts in seeking cooperation with provinces and cities in the Mainland. Several agreements have been signed between the Hong Kong SAR and other Mainland cities and provinces, such as Shanghai (October 2003), Beijing (September 2004), and Hainan (November 2004).34 C. H. Tung and Donald Tsang are both strong advocates of closer cooperation with the Mainland. The most important aspect of intergovernmental cooperation involves Hong Kong and Guangdong, the province neighboring Hong Kong. However, owing to competing interests and perspectives and other factors, intergovernmental cooperation between the two areas did not expand to a wider spectrum until after 2001 (Cheung, 2006). For instance, in view of the duplication of infrastructural facilities in south China and the inadequacies of Hong Kong’s connectivity with its hinterland, the Hong Kong government tried to work closely with the neighboring Guangdong province and requested the central authorities to help coordinate the construction of cross-boundary infrastructure, such as the Hong Kong- Shenzhen-Guangzhou Express Rail Link and the Hong Kong-Zhuhai-Macao Bridge, since 2001. The bridge project was, however, perceived by the authorities in Guangdong as mainly benefiting Hong Kong. Hence, it was not until early 2008 that the three cities involved agreed on a financing agreement, after several years of delay. Further, in 2004, the Hong Kong SAR government participated in the Pan Pearl River Delta regional cooperation framework promoting economic cooperation among nine provinces in the southern and southwestern part of China and the two SARs (Hong Kong and Macao) in order to find a niche for its investment in the relatively less

33These refer to the market capitalization in the main board of the Hong Kong Stock Exchange, see http://www.hkex. com.hk/data/chidimen/CD_TO.htm, http://www.hkex.com.hk/data/chidimen/CD_MC.htm and http://www. yearbook.gov.hk/2008/en/pdf/E04.pdf.

34See the discussion paper for the plenary session of the Economic Summit on “China 11th Five-Year Plan and the Development of Hong Kong,” http://www.info.gov.hk/info/econ_summit/eng/pdf/paper_1.pdf.

©2011 by Taylor and Francis Group, LLC