Hong Kong’s Absorption into Mainland China

October 15, 2014 Posted by China Briefing Reading Time: 7 minutes

“One country, two systems” is fast running out of special treatment favors

Apartment Block in Tai Po, Hong Kong, in cheaper area of the territory, near to border with Shenzhen. Cost of 750 sq. ft. apartment: HKD6.2 million. Mortgage payments per month (20 years) HKD22,000. Average salary of Hong Kong Office Administrator per month: HKD21,000.

Op-Ed Commentary: Chris Devonshire-Ellis

On the afternoon of June 30th, 1997, I walked across the Shenzhen border at Louwu and into Hong Kong, taking the MTR straight into Central. There was nothing remarkable about the trip per se; I had completed it hundreds of times previously, with Dezan Shira & Associates offices already well established in both cities. Yet the date was of significance – it was the last day of Hong Kong being under British administration. At midnight, it would all return to China.

At that time there was doom and gloom. To many, China was still very much an unknown quantity. Fortune magazine had run a cover story, “The Death of Hong Kong” and two years previously, Jardines, the old British trading hong, and then the most powerful company in the territory, had redomiciled from Hong Kong to Bermuda, and thousands of Hong Kongers were acquiring secondary passports.

Today, the pressure is not so much directly about democracy, but the impact of decades of poor governance and neglecting the needs of Hong Kong’s population. This is manifesting itself in a desire to have a greater say, or at least be governed by leaders who can provide Hong Kong’s residents with a future and the ability to sustain themselves in their own city. The problem is that even this most basic of rights is being eroded.

In Hong Kong normal functions and facilities that are taken for granted almost anywhere else in the world are being denied to the territory’s new generation. Hospital fees are sky high, and the ability for mainland born mothers to have children in Hong Kong has both raised the price of local pre-natal care and reduced the numbers of available beds. When health scandals hit China, mainland mothers head to Hong Kong to buy imported baby formula, leading to chronic shortages.

Putting a child into a local kindergarten in Hong Kong costs between HK$4,000-6,000 a month (roughly US$10,000 per annum) and enrollment is restricted. Consider that for a second…that’s for a local kindergarten. If you wish to send your child to an international one – where English is taught – those fees can double.

Buying a house to live in has now become so expensive that it is now permanently beyond the reach of many young couples in Hong Kong. The real tragedy is the manner in which the Hong Kong government – elected or otherwise – has consistently let down its own populace. Hong Kong citizens are effectively being priced out of the market by wealthier mainland Chinese – right in their own backyard.

It didn’t have to be this way, and successive governments – even dating back well into the times of the British administration – are largely to blame, not the Chinese. While Singapore years ago adopted a policy of insisting that all Singaporeans contribute to a mandatory housing fund, Hong Kong sniffed at such suggestions. Government subsidized housing? A huge loss of “face” to anyone who lives there.

The result is that today in Singapore, the Housing and Development Board (HBD) scheme has allowed 90% of all Singaporeans to own their own homes. In Hong Kong, that benefit has been passed to property developers, not the people, and the opportunity has been lost. Keeping the price of Hong Kong property high is the mantra for Hong Kong-based developers, not serving the needs of the people. If those buyers come from the mainland, well that’s just another commercial opportunity ripe for the taking.

If the crowds of people protesting about democracy in Hong Kong really want to make a point, they should look at their own government and ask why there has been no affordable and subsidized public housing ownership scheme provided for them. Hong Kong’s problems today are not purely a result of Beijing’s interference. They are a result of Hong Kong having become so ultra-capitalist that the territory’s leaders have long lost sight of their own population. For apportioning blame, Hong Kong residents need to look far closer to home than Beijing.

The Hong Kong Government has also been lax in its relationships with other governments and trade bodies. Sitting right in the middle of Asia, Hong Kong’s largest trading partners have traditionally included the majority of its neighbors. Yet a short-sighted policy in terms of developing bilateral trade corridors has meant that incredibly, Hong Kong is not signatory to a Free Trade Agreement with any members of ASEAN – which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

Mainland China is signatory to an FTA with ASEAN but the terms of that agreement do no extend to Hong Kong. This means that it can be more advantageous to use a company in mainland China, rather than Hong Kong, to enact duty free and other important benefits. In this regard, Hong Kong’s Basic Law becomes irrelevant. All China needs to do to pull the plug on Hong Kong is to implement preferential tax policies in the Shanghai and Qianhai zones and Hong Kong will instantly lose its competitive advantage.

Accordingly, the debate over Hong Kong’s Basic law loses some relevance, as the territory is already firmly under Beijing’s administrative control. Plus, the law is so fatally flawed and full of ambiguity that almost anything goes. Consider the direct meaning behind the oft-quoted Chapter 1, Article 5, which reads, “The socialist system and policies shall not be practiced in the Hong Kong Special Administrative Region, and the previous capitalist system and way of life shall remain unchanged for 50 years.”

Fortunately, no-one has seen it sensible to challenge the use of post-1997 technology as unconstitutional. Yet for Hong Kong’s citizens, a double-headed axe hangs over them. Three times they have effectively been asked to stand by mainland China and the Communist Party, and three times they have refused: in the Chinese civil war, the Cultural Revolution, and the 1997 foreign passport grab, respectively. No wonder few in China have much sympathy. The reality is that Hong Kong was never promised full democracy by the CCP, and successive Hong Kong governments and vested business interests have left the territory’s own citizens with nowhere to go and nowhere to live.

Mao Zedong once described Hong Kong as a “pimple on the bottom of China.” The territory will survive long after the end of “one country, two systems” in 2047. But the average citizen of Hong Kong today will be living elsewhere in the Pearl River Delta by then, displaced, out-numbered and out-financed by mainland Chinese. Hong Kong’s status as a “Special Administrative Region” of China will then be over. Whether this is to be a tragedy or just pragmatism remains to be seen, but one thing is for sure: Hong Kong will no longer be as “special” as it once was, and in hindsight, it never was sustainable anyway.

Hong Kong’s average citizens – those whose ancestors once fled Communist China – will be reabsorbed back into mainland China. It is already happening; cities such as Foshan are de facto retirement homes for many previous Hong Kong residents no longer able to afford the cities cost of living. The new Hong Kong will be made up of the wealthy, pro-Beijing factions within Government and business, populated by wealthy mainland Chinese immigrants keen to claim the city as their own, together with a sprinkling of Mandarin-speaking expats providing financial services.

The Communist Party can then point to a successful Chinese city of their own, and not Britain’s making. They will call the shots, and ensure that those who once left the mainland have no choice but to return back to the fold. There will be no “Occupy Central” movements then.

And we have been here before. What is happening in Hong Kong is not new, it is just on a larger, contemporary scale. British Treaty Ports in the past included Beihai, Fuzhou, Guangzhou, Hankou, Ningbo, Shanghai, Shantou, Tianjin, Weihai, Wenzhou, Xiamen and Yantai. All were reabsorbed back into the mainland. The wheel is turning full circle, Hong Kong is not immune to this, and history is on the side of China when it comes to reclaiming its own.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email china@dezshira.com or visit www.dezshira.com.

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