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By Robert Keatley, Editor, January 2007

The final months of 2006 found public discourse in Hong Kong dominated by politics and pollution, plus occasional concern about the long-term outlook for an economy that in the meantime continued to thrive.

The immediate political question was whether or not Hong Kong soon would have its first-ever contested election for the post of Chief Executive. As January began, it seemed likely that it would—though nothing would be certain before the 800-strong election committee formally endorses one or more candidates in February. In any case, it seems all but guaranteed that incumbent Donald Tsang will gain a full five-year term in March—when the final choice will be made—though first he may have to engage in public debate about what his policies should be. If so, his opponent would be barrister Alan Leong, backed by a loose coalition of pro-democracy political parties.

At times, however, the pollution issue seemed to override everything. Due mainly to rapid industrialization in nearby Guangdong Province—which has turned former rice paddies into factory sites—Hong Kong has become plagued by air and water pollution of growing intensity. As a result, there is concern about the safety of its fresh water supplies from rivers across the border and, more obviously, about the thick smog that can cover the city at any time of the year. This has brought a rising chorus of calls for action, notably from business circles worried about its potentially adverse economic effects.

Meantime, the economy flourished. The government’s official growth forecast for 2006 was raised to 6.5%, with at least 5% expected in 2007 despite a possible slowdown in the American market. Retailers did well, partly because of the increasing flow of flush shoppers from China. Moreover, sales for the Christmas season were up 7% from a year ago and set a record. The finance industry enjoyed a boom as initial share offerings by big Chinese banks and others put Hong Kong near the top worldwide as a place for raising capital. Rents soared and pricey gourmet restaurants opened to serve the wealthy young merchant bankers who swarmed through Lan Kwai Fong after dark. Unemployment fell to a five-year low of 4.4% and inflation stayed near the 2% mark. The distressing days of an Asian financial crisis that began in 1997 seemed a distant memory.

The big political test came December 10, when a record 56,000 of those voters eligible to cast ballots in a highly restricted poll—a 27% turnout—selected 427 of the 800 members of the offical election committee that will convene in March to choose the chief executive, after first naming the candidates in February. (The other 373 automatically gained seats due to their positions in society or government.) Voting was limited to representatives of those business, professional and interest groups allowed to help choose election committee members, a system tilted toward business interests that usually are ready to vote as Beijing prefers.

But this year a loose alliance of political parties that favor quicker progress toward universal suffrage for local elections joined forces to back candidates who favored a competitive race for the government’s top job. Of the 137 candidates for the election committee supported by this alliance, 114 won seats, with the greatest success coming in the education and legal professions. (They won no seats in the corporate sectors.) When combined with votes of sympathetic committee members who got seats automatically, such as 20 or so popularly-elected members of the Legislative Council (Legco), Mr. Leong at yearend seemed assured of the minimum 100 nominations needed to get on the ballot.

However, politics in Hong Kong are seldom that straightforward. By all accounts, Beijing officials were upset by a result that indicated less than complete control over the selection process, even though there’s little doubt that a vast majority of the 800 committee members will vote for Mr. Tsang in the end.

According to various reports, some newly-elected committee members were under pressure from people speaking for Beijing to renounce their promises to nominate Mr. Leong; the not-so-subtle message was that their business or professional careers could suffer unless they do. There were also reports of China-supported efforts to nominate a third candidate, splitting the vote and ensuring that neither opposition figure could gather the necessary 100 nominations to win a ballot place. However, in late December Tsang Yok-sing, former chairman of the pro-Beijing Democratic Alliance for the Betterment and Progress of Hong Kong, said that it “didn’t make sense” to have a third candidate in the race.

In February, the 800 election committee members will meet to officially put names on the ballot for the post of chief executive. They’ll meet again in March to select a winner. Although Donald Tsang had not formally declared his own candidature by yearend, he seemed certain to run and have an overwhelming majority vote at both committee meetings. This seemed certain after the blessings he received in meetings with President Hu Jintao and other Beijing leaders at the end of December, who praised him highly for leading Hong Kong back to prosperity.

But the democrats saw two important reasons for seeking a contest they seemed certain to lose. One would be to spark public debate about major issues, such as environmental controls, health care, education and the pace of political reform. This might inject some extra transparency into a policy-making process dominated by bureaucrats and appointees. The other goal would to demonstrate a widespread public desire for universal suffrage soon—perhaps in 2012—for the post of chief executive and all 60 Legco seats. They contend that introducing popular elections speedily will help guarantee long-term political stability and prosperity; Beijing and its friends in the Hong Kong business community generally argue the opposite.

Whatever their political inclinations, more and more Hong Kong citizens clearly are growing upset by environmental degredation. There is special conern about worsening air pollution that often makes it difficult to see across the harbor—even though new landfills continue to narrow that waterway. For one thing, assorted studies by experts conclude that it is raising community health costs due to an increase of respiratory and other diseases. And there are growing signs that environmental problems could undermine Hong Kong’s efforts to promote itself as a regional business center. So far the evidence is mostly anecdotal, but there are indications that some international companies are becoming reluctant to expand in Hong Kong because senior staffers don’t like the living conditions.

One example came in November when Merril Lynch, the financial firm, advised clients to sell shares in Hong Kong property companies and buy Singapore companies instead because pollution’s effects raised long-range economic concerns. This may have been no more than one broker’s effort to churn some stock sales, but formal complaints to the government by several foreign chambers of commerce were quite real. In meetings with Mr. Tsang, they urged a more vigorous effort to combat pollution and keep the city attractive to foreign business. And recent polls of business leaders found growing concern about decreasing air quality and its economic implications. For example, David Eldon, chairman of the Hong Kong General Chamber of Commerce and former chairman of HSBC Corp., has warned that pollution poses a risk to the city’s future prosperity.

During the year’s first 11 months, for example, Hong Kong’s skies were obscured by smog or haze for a record one-third of the time, according to official weather records. One annoying symbol: air pollution reached health-threatening levels on Christmas Day.

Some official statistics, however, indicated progress regarding certain pollutants and Chief Executive Tsang remained optimistic about long term trends. He said a new cross-border emissions-trading plan will cut pollution from power plants, which often burn low-grade coal, and that other joint efforts with Grangdong Province also will bring gains. He also said some new Hong Kong measures will likewise reduce air pollution from local sources. Yet critics claimed his optimism was based at least partly on misreading of the data and warned that new control efforts remained inadequate.

Through all this, another debate about Hong Kong’s fiscal future continued unresolved. For years, Mr Tsang has favored introduction of a goods and services (sales) tax to diversify government revenue sources and ensure that future social spending can be covered by current income (Hong Kong’s ability to have fiscal deficits is sharply limited by law). Pension and health care costs for an aging population are of special concern. But in a surprise move, Financial Secretary Henry Tang Ying-yen said December 5 that he was shelving plans for a GST in the near future, after spending months advocating its introduction.

The main reason: public opinion strongly opposed the tax, especially because the government is running large fiscal surpluses. But this leaves unresolved the question of how to fund social spending if health and pension costs rise as expected. The current revenue system relies heavily on proceeds from land sales to large property developers, and many economists contend such a revenue base is both too narrow and unreliable. The government is studying other possible new tax measures, such as an energy tax to fund environmental programs, but no major changes are likely soon.

At least two other issues earned public comment as the year ended. One concerned whether or not to ban heavily-pregnant mainland women from entering Hong Kong as visitors; critics said too many arrived for reasons of childbirth and thus gave the city expenses and obligations it should avoid. During the year’s first 10 months, 12,398 babies were born to non-resident mothers—the vast majority from China—a 20-fold increase from 2001.

Finally, demolition of the Star Ferry Terminal in Central District, a landmark since the 1950s, raised anew the question of preserving the city’s heritage. Despite public protests, the government went ahead with plans to run a new highway through that site and the adjacent Queen’s Pier. Conservationists claimed that bureaucrats were all too ready to destroy old buildings and public places whenever new projects came along; they said more attention should be paid to preserving sites that reflect Hong Kong’s special identity and history. As the quarter ended, Mr. Tsang said he got the message and shared it. He promised the government would “fully consider” the public’s “collective memory” when drafting future construction plans.

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