One country, two systems isn’t working. Time for a Hong Kong governor

The governance experiment was introduced a quarter of a century ago with the best of intentions, but it has ultimately failed
Rather than playing the blame game, isn’t it time to try a different management approach?

Neil Newman

Published: 9:30am, 18 Oct, 2021

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THE FIFTY-YEAR TRANSITION

The fifty-year period of “one country, two systems” following the handover of Hong Kong in 1997 was formulated to ease the city’s transition to a politically, financially and culturally different mainland China by 2047, principally by allowing Hong Kong to maintain its capitalist system.

Until around 2013, it seemed to have worked fairly well as the People’s Liberation Army never appeared on the streets of Central and Kowloon with cattle prods as some had feared, prosperity in mainland China was on the way up, Hong Kong tourism was booming, and the Olympics drew international visitors to the region with Hong Kong as a stop-off and much money was sloshing around. Contrary to the worst fears of the city’s residents in 1997, Hong Kong was doing very well.

Then cracks started to appear. Unhappiness with the direction in which the city was headed combined with lack of progress on socioeconomic issues such as housing, rising costs of living, erosion of standards of living, lack of free speech and rising wealth inequality. The result was unrest and a government crackdown on those showing their discontent.

Today, Hong Kong’s remaining large-scale businesses, finance and property are feeling the knock-on effects and have been put under severe stress. The city has the worst-performing stock market among developed economies, commercial property is suffering, and its people and their businesses are leaving.

In recent years, as every resident and international observer knows, Hong Kong has not been a happy place. And I now wonder if the original governance agreement that was devised in the early 1980s of “one country, two systems” is at fault and whether it should be considered a failed experiment. Perhaps it is time for a rethink, especially in light of how China has changed since 1997 when its economic prowess and love of capitalism had barely been seen.

Until 1997, Hong Kong had never had its own constitution or a fully elected government as since 1843, with the exception of a few years when the Japanese said the territory was theirs, the governor of Hong Kong was the appointed representative of the British government, the president of the Executive Council and commander-in-chief of the British forces stationed in its far-flung colony. After the handover the British army packed up their old kit-bags and the military obligations were handed over to the commander of the PLA Hong Kong Garrison and the civil functions became the responsibility of the Chief Executive, of which there has been four: Tung Chee-hwa, Donald Tsang, Leung Chun-ying and today, Carrie Lam.

Chief Executive Carrie Lam Cheng Yuet-ngor attends a forum titled ‘The Chinese Communist Party and One Country, Two Systems’ in Wan Chai. Photo: Nora Tam

A NICE EARNER

With the job of Chief Executive comes a very good salary – a carryover from the generous compensation former governors enjoyed – making the Chief Executive one of the best-compensated leaders in the world. However, with it came the responsibility of making “one country, two systems” work in the best interests of Hong Kong.

The cracks appeared early, with the first Chief Executive even questioning the validity of the voting process in the new government as only a committee of 1,200 people selected by the Central Government, not the general population, would vote, raising criticism it was hardly democratic. But the office soldiered on and made sure that the pay rises continued, from HK$3 million for the Chief Executive in 2005 to HK$5.2 million (US$670,000) annually today. By comparison, that is 39 times more than the salary of the president of China.

By 2016, epoxy glue was literally being used to keep things together. I noticed during a rare visit to Hong Kong by Zhang Dejiang, the chairman of the National People’s Congress, that the paving stones outside the office in Admiralty had been glued down overnight to stop people throwing them at him. At the time I thought it rather odd that a visiting dignitary, more usually greeted by people waving little flags as they meet, greet and do some baby-kissing, would be received in such a manner; high security, police mobilised and protests. As we know, things have since got considerably worse.

Hong Kong riot police fire tear gas during an anti-government protest in May 2020. Photo: AP

THE BLAME GAME

Everyone stands in a circle pointing fingers: at Beijing for reneging on the 1997 deal, the Americans for interfering, the Brits for causing the socioeconomic problems in the first place and, heaven forbid, blame also falls on Hong Kong’s legislature for poor management. But, blame is a reaction to the the symptoms of a system that perhaps should now be seen as not fit for purpose. It was a governance experiment, a good idea at the time, but as it turns out, the tools given to Legco didn’t work.

As the government embarks on yet another plan to alleviate the housing issue by moving the focus of Hong Kong’s Central and Kowloon districts to the northern border and creating the second half of what will be one massive city of 2.5 million residents spanning the border with yet another “silicon valley” plan, one has to ask: Will anyone actually want to live and work in a bisected city with armed border patrol?

Seven “checkpoints” are planned for Qianhai city, a bisecting boundary wall, and others at railway stations – coincidentally the same number that separated East and West Berlin during the Cold War. We all know what happened to the Berlin wall over time.

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If we include the Lantau reclamation, new roofs for a total 3.3 million people are being built this side of the border. But will the demand be there when they are completed, or will these turn out to be a new ghost city? It seems Shenzhen is struggling to fill its commercial property today and prices are collapsing for the same in Hong Kong. If the jobs aren’t there, or the skill-sets don’t match, or the money has gone, will people move in?

Hong Kong is lost. Its financial industry is in trouble, not from a cash crunch, but structurally, with the worst-performing developed stock market, a shrinking IPO schedule and a fading commercial property market. With travel now near impossible, for all intents and purposes Asia’s World City is closed to international businessmen and tourists, even as much of the world is opening up and living with Covid-19. Socially, it is losing its identity to a boiling pot of unhappy residents – so much so that Luo Huining, the head of Beijing’s representative office in Hong Kong, recently visited the most awful side of Hong Kong to see it first hand: the subdivided flats and infamous wire-mesh “cage homes”.

The flags of mainland China and Hong Kong. Photo: Dickson Lee

TIME FOR A CHANGE

As Carrie Lam’s tenure draws to a close, perhaps a back-to-basics approach is a good idea. After all, if something doesn’t work or is not fit for purpose, we normally want to fix it or come up with something better.

Perhaps the alternative is this: Hong Kong returns to the old style of management with a governor and dispenses with the “voting” that isn’t really democratic. Integrate Hong Kong into mainland China now, and do it in a way such that the mainland feels grateful for the investment and effort. And somehow get rid of the border controls that make travel so difficult. For example, driving from Hong Kong to Macau should be quick and easy, as should living in Shenzhen and working in Hong Kong.

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None of this would be easy. The original 1997 agreement that resides with the United Nations would have to be carefully renegotiated, getting the original parties onside with a new plan that will benefit Hong Kong. Dealing with wealth inequality, as China has begun to do on the mainland, would be a longer-term project, starting with a better deal for people buying flats and lowering the cost of living. The newly appointed governor should in my view be a respected Hongkonger who could help turn a new leaf for the city in both the eyes of Beijing and the rest of the world which is carefully watching the city’s fate.

It seems such a long time ago that young Hongkongers were celebrating in the street at the dawn of the new era and seeing the backs of the British. But those people are not happy now. Hong Kong remains the second most expensive place to live in the world (after Zurich), with the most expensive property – all controlled by some of the highest paid government officials who have shut the city. Its people are simply not getting value for money.

Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets