The stakes involved in Hong Kong's reversion to Chinese sovereignty are tremendous for China. Should things go well, the People's Republic of China (PRC) will reap enormous benefits. China's economy will continue to profit in myriad ways from its Hong Kong connections, with the latter's extraordinary concentration of skills, know-how, and capital. China's international prestige will also grow, as the nation demonstrates its ability to deal with a complex, modern society in a fashion that nurtures success. Indeed, few developments could more powerfully enhance a favorable view of China in the international arena, and Beijing is keenly aware of this. In addition, prospects for peaceful resolution of the Taiwan issue will brighten if Hong Kong reversion goes well. China rightly is giving the reversion its highest priority in 1997. ("Reversion" refers both to the handover on July 1, 1997, and to China's subsequent management of the Hong Kong issue.)

    For the people of Hong Kong, too, the stakes are enormous, as a botched reversion could undermine the fundamentals - rule of law, freedom of speech, strong financial markets, and a totally open economy - on which their success is built. If things go well, Hong Kong's future is very bright. It will partake fully of the benefits of extremely close integration with the world's fastest growing major industrial economy, even as it promotes continuation of that record of outstanding growth. Hong Kong relies not only on China's markets but also on its capital. Success regarding reversion will maintain the mix of factors that has assured Hong Kong's prosperity in recent years. Failure could produce tragedy.

    U.S. stakes in the outcome are also extremely high. Perhaps no issue is more consequential to the United States in Asia than the nature of the Sino-U.S. relationship. Almost all the major issues confronting American diplomacy in Asia - the dangerous situation in North Korea, tensions between China and Taiwan, and the fundamental U.S. interest in assuring stability, security, and prosperity in Asia with full U.S. participation in the region - will become more tractable if Sino-U.S. relations improve and far more costly, dangerous, and difficult if they do not. But the Beijing-Washington relationship has been deeply strained since 1989, and improvements that began to emerge in late 1996 are still nascent and fragile.

    In this context, Hong Kong's successful reversion will move American images of China in directions favorable to a closer, more trusting relationship across the board. Hong Kong can thus play an important role in changing the negative perception of Beijing that took root in America following the 1989 Tiananmen massacre and that has posed enormous domestic political obstacles to attempts to build ties with China ever since. An American perception that reversion has gone seriously awry, moreover, may precipitate a cascade of problems that severely strain all aspects of the Sino-U.S. relationship, with wide-ranging repercussions throughout Asia. Currently, other Asian countries worry about growing Chinese strength and encourage the United States to manage its relationship with China accordingly. These other pressures on the U.S. will also be affected by the approach China takes to the Hong Kong Special Administrative Region (SAR), which will become the official designation of Hong Kong as of July 1, 1997.

    All sides, in short, want Hong Kong's reversion to go well, in part because they recognize that reversion will have major repercussions - for good or ill - for overall Sino-U.S. relations. America's and China's interests in the success of the post-July SAR coincide more than most observers assume. Nevertheless, the reversion process will require extraordinary dexterity and sensitivity on both the part of the United States and China, as well as Hong Kong, to avoid a situation that produces rancor and discord between Washington and Beijing. To understand the connections between reversion and Sino-U.S. relations, it is necessary to consider in some detail how the situation looks from the viewpoints of China, the United States, and Hong Kong. Differences in underlying perspectives on this issue can shape understandings that may, in turn, drive reality.


    China's Perspective on the Hong Kong Issue

    China's concerns revolve around five basic issues: correcting an historical wrong, maintaining domestic political stability, blunting British efforts that might complicate and undermine the reversion, making reversion serve China's economic and foreign policy interests, and preventing reversion from infringing upon the personal interests of key political leaders in Beijing.

    China's perspective on the Hong Kong issue is steeped in the country's history over the past 150 years. In the most fundamental sense, China views itself as having suffered from aggression by imperialist countries for more than a century before the 1949 communist victory in the Chinese civil war. Such aggression ultimately produced the destruction of China's millennia-old imperial system and the dismemberment of the country. The widely-accepted starting point for this disastrous decline was the Opium War (1839-42), which Britain fought in order to maintain the right of British traders to import opium from India to China. At the conclusion of that war in 1842, China ceded in perpetuity a key location for British traders, what is now called Hong Kong Island, and in 1860 ceded a small portion of the peninsula across the harbor, to Britain. Undoing that historical affront has been a national aspiration ever since.

    Britain forced the Qing dynasty government in 1898 to grant a 99-year lease on the remainder of present-day Hong Kong, while China was still reeling from its defeat in the Sino-Japanese War of 1894-95. That lease will expire on July 1, 1997. Given the highly integrated development of the economies in the leased and ceded territories, Britain long ago concluded that it could not hold onto the ceded area once it gave back the leased territories. On July 1, all of Hong Kong reverts to active Chinese sovereignty.

    The fundamental lesson the Chinese take from this history is that China views Hong Kong as its own territory that was stripped away under foreign encroachment. While it recognizes that this is now a very different place from the rest of the country, one that must be treated with great sensitivity, China will not tolerate foreign actions that seem to suggest that Hong Kong is anything other than sovereign Chinese territory or that China's assumption of full sovereignty is anything other than justified and legitimate. Foreign criticism that conveys the impression that China has less than full sovereign rights over Hong Kong almost certainly, therefore, is doomed to trigger vitriolic responses from Beijing and to conjure up memories among China's people of past imperialist bullying.

    Beijing nevertheless sees potential dangers in postreversion Hong Kong. The specter of the 1989 Tiananmen movement looms large here. During the protests that spring, Hong Kong residents sprang to life in support of the democracy advocates on the mainland. People of Hong Kong contributed substantial sums of money to support the movement in China, and they voiced their support in the media and on the streets. In the wake of the June 4 massacre, huge demonstrations erupted in Hong Kong, and even a portion of China's own political and media apparatus in Hong Kong openly empathized with the demonstrators.

    Beijing remains deeply concerned about potential political unrest in China. The mainland media are filled with admonitions to maintain stability, and nary a leadership pronouncement is made that does not highlight this theme. China worries that, should unrest recur, Hong Kong citizens might again play a major role in providing resources and critical support. Beijing, therefore, wants to make sure that legal powers exist to control such a situation in Hong Kong should the need arise.

    It is in this light that one can understand the Chinese abolition of Legco, the Legislative Council elected under British sovereignty and dominated by a Democratic Party highly critical of Chinese intentions for Hong Kong. In January 1997 a preparatory body of 400 people who were not democratically elected chose a new provisional legislature to replace Legco, giving roughly half the seats to members of the existing Legco and the other half to various individuals, some of whom were the pro-China candidates who had lost their 1995 electoral bids to Legco. British Governor Christopher Patten denounced this procedure as illegitimate, and democracy activists in Legco decided to challenge its legality in court.

    China's perspective is understandable as it argues that the electoral reforms passed over its objections violated the 1984 Sino-British Joint Declaration's affirmation that the laws currently in force in Hong Kong would not be changed before reversion. But the Chinese side too readily adopted extralegal remedies to the situation. The Basic Law contains no mention of a "provisional legislature," and thus the Chinese approach raises legitimate concerns about Beijing's future fidelity to that document. Beijing could instead have rolled back the few clauses in the electoral law that defined the scope of the new functional constituencies and held new elections.

    The Legco fiasco thus highlights the various ways in which trust is eroding on both sides, with resulting decisions that are deeply disturbing to all concerned. It also highlights the reasons that - and the extent to which - China is determined to sweep aside the results of what it considers to be provocative British efforts in the 1990s to violate the limits on the agreements embodied in the Joint Declaration and the Basic Law.

    The very negative coverage of these Chinese decisions by the Western press - which generally has portrayed them in terms of a dictatorial China reversing the long-term democratic development of a free Hong Kong under Britain - has simply increased fears in Beijing that the major Western powers have shared Britain's desire to undermine the reversion process. The Chinese may substantially misunderstand the impulse behind Western reactions, but based on its fundamental historical experience and its concerns about a repetition of 1989, China simply does not fully trust the goodwill of the United States or other countries in regard to the Hong Kong issue. Beijing is very wary about the potential spoiler role of Western powers.

    Hong Kong plays a major role in China's economy. Since the start of the PRC's reforms in the late 1970s, roughly 60 percent of all China's foreign trade has gone through Hong Kong. About 75 percent of all the direct foreign investment in the PRC has followed a similar course. Much investment from Taiwan and elsewhere is funneled through Hong Kong, and the links between Hong Kong and the overseas Chinese business circles throughout Southeast Asia have multiplied in recent years.

    Fundamentally, Hong Kong as of 1997 serves as the front office for a great deal of production that takes place in China, with the Hong Kong-based part of the effort providing expertise on finance, world markets, sales, and shipping. Indeed it is now somewhat artificial to speak of distinct Hong Kong and mainland economies. The Hong Kong economy would long ago have lost its international competitive edge in key sectors (such as electronics) had its firms not been able to move most of their operations across the border to China during the 1980s.

    Given the importance of Hong Kong to China, the success of the reversion will be watched carefully at the highest levels in Beijing. Complicating the issue is the fact that the Chinese leadership will convene in August to reach final agreement on the new leadership lineup that will be presented to the Fifteenth Congress of the Chinese Communist Party in the early fall. As in any political system, leaders are especially sensitive to developments that reduce their prestige at critical moments in a political succession. Politics at the very top of the Chinese system are too opaque to permit us to specify the precise personal implications of various Hong Kong scenarios for contenders for top posts; but certainly if reversion should go badly, the atmosphere for the meeting at which critical decisions will be made will be a tough one, with many recriminations and likely calls for a hard-line approach to dissent and disruption.


    American Perspectives

    America's concerns regarding Hong Kong encompass both interests and values. About 1,000 U.S. firms own property in Hong Kong and conduct business there, and U.S. entities have $13 billion invested in Hong Kong. Some 37,000 U.S. citizens live in Hong Kong (figures are from July 1996), and violations of their legal rights would cause consternation in the United States. The American military has also used Hong Kong as a port of call, with about 60 to 80 ship visits per year in the mid-1990s. And the United States has its most important consulate general in Hong Kong. These objective U.S. stakes in Hong Kong are sufficient in themselves to assure Washington's continuing attention to events in the Hong Kong SAR.

    The United States also sees Hong Kong as embodying broader foreign-policy concerns. Put simply, at a time when the United States is trying to gauge the overall implications of China's rapid rise in the international arena, Washington is looking at Chinese behavior in Hong Kong as a reliable indicator of the extent to which Beijing can be trusted to adhere to all of its publicly articulated commitments. Thus the way in which the situation in Hong Kong plays out will affect Washington's overall level of trust when negotiating agreements with the PRC. On this basis alone, significant failures would substantially complicate U.S.-China relations. Finally, Washington will also view Hong Kong's postreversion experience in terms of America's long-term efforts to support democracy and freedom around the world.

    Democratic activists from Hong Kong have cultivated close ties with some members of the U.S. Congress. The United States will be loath to see developments that move this society in the wrong direction on the protection of human rights. Washington will pay close attention to rights legislation adopted by the SAR government after July 1. Substantial deterioration in the fairness or procedural integrity of Hong Kong's judicial system, reduction in freedom of expression (both individually and in the media), limitations on freedom of religion, and any narrowing of the scope of the democratic process will raise the temperature in Washington.

    America's fundamental approach to the Hong Kong issue is reflected in the United States-Hong Kong Policy Act of 1992, which provides the framework for U.S. treatment of the SAR. Based on Beijing's concept of "one country, two systems" and its promises of a high degree of autonomy for Hong Kong, this act stipulates that the United States will continue to treat Hong Kong as a separate territory after reversion. This provision is extremely important to Hong Kong's trade interests, its ability to acquire sensitive technologies barred from export to China, its representation in international organizations, and its bilateral agreements with the United States on such matters as immigration, visas, educational exchanges, and the extradition of criminals. The United States-Hong Kong Policy Act requires the president to withdraw this differential treatment if Hong Kong no longer enjoys effective autonomy. This act also affirms that the United States has foreign-policy interests in democratization and human rights in Hong Kong and mandates that annually through the year 2000, the secretary of state report to Congress on, among other things, "the development of democratic institutions in Hong Kong." As noted above, China flatly rejects the legitimacy of Washington's concerns with internal developments in the SAR.


    Hong Kong's Perspective

    Many in Hong Kong worry about both Beijing and Washington. Hong Kong is a thoroughly modern society whose citizens recognize that they will assume much of the burden of making reversion a success. The Basic Law gives critical prerogatives to Beijing in terms of appointing or approving the appointments of key individuals, conducting the SAR's foreign and defense policies, determining emigration levels from the PRC to Hong Kong, and retaining the authority to amend the Basic Law in the future. Yet it contains numerous provisions that explicitly assure continuation of Hong Kong's distinctive system in everything from legal affairs to social issues such as freedom of religion and freedom of the press. Much will depend on the skill of the Hong Kong government and conduct of the Hong Kong people to shape how this unique experiment will work out.

    The position of the chief executive (the SAR counterpart to the British governor) is likely to prove particularly important. Tung Chee-hwa is the first person to occupy this pivotal post. Tung has long-standing ties to the PRC, Taiwan (where he has had significant business dealings and has relatives in high places), and the United States. Although much of the Western press has derided Tung as a lackey of Beijing, this judgment is too simplistic. He is a reasonable and potentially very good choice.

    Any postreversion leader in Hong Kong must work to maintain Beijing's confidence, even as he educates Beijing about the requirements of Hong Kong. The evidence to date suggests that Tung will take care to reassure Beijing that Hong Kong will not become a threat to the mainland's stability and will not act in ways that severely embarrass the national leaders. His public pronouncements have stressed the importance both of working effectively with Beijing and of enhancing Chinese values in Hong Kong. This latter prescription is evocative of the rhetoric of Singapore's Lee Kuan-yew, who built a highly successful but fundamentally authoritarian government. Hong Kong's culture has for many years been far more freewheeling than that of Singapore, and the issue is whether Tung will be able to strike a balance that maintains the confidence of the Hong Kong populace in the future.

    Hong Kong residents in general know that they have a lot of work to do to make reversion a success. Key players sense keenly the rudimentary level of understanding of Hong Kong in most of China, the symbiotic relationship between business and officials on the mainland, and the temptation that Hong Kong poses for PRC entities anxious to become active in this lucrative market. Levels of corruption in business and government have already started rising, reflecting the ethics of increasingly active mainland Chinese business people and widespread expectations about the future. Chinese firms, which are playing a growing role in Hong Kong's economy, traditionally depend on political connections as part of their strategy for success, and political interference in the market (perhaps via mainland firms' pleas to Beijing to help them out in Hong Kong) may begin to appear in Hong Kong. Hong Kong's financial and legal systems may experience some erosion of professional standards, and some newspeople have reportedly already begun to engage in self-censorship out of fear of a tightening policy toward the media.

    Many Hong Kong residents have acquired foreign residence rights, and many businesses have established escape mechanisms to move operations and capital out of Hong Kong rapidly, should the situation warrant. Moreover, an intricate game is already being played in Hong Kong of developing ties to powerful mainland interests.

    In short, maintaining the fundamental factors that have assured Hong Kong's success to date - a completely international economy, the free flow of information, a neutral regulatory environment, a high quality civil service, an equitable legal system, and a highly developed financial market - will take enormous skill and exertion as the barriers are lowered between Hong Kong and the huge mainland system, which functions according to sharply different principles and dynamics.

    Hong Kong's government will thus have to work hard to shore up the vital elements of the domestic system against possible erosion by both Beijing and the many PRC entities that will play some role in the SAR. Very likely the greatest problem for Hong Kong will not be that the PRC wants to impose a socialist dictatorship (it does not), but rather that in so many "nonpolitical" arenas standard practices in the PRC may impact negatively on the way Hong Kong traditionally conducts its affairs.

    Finding workable accommodations may become far more difficult because of existing divisions within the Hong Kong community. In admittedly overly simplistic terms, major business leaders who have already developed extensive ties with the PRC favor policies that stress stability in Hong Kong and pose minimal risk of exacerbating PRC-SAR tensions. Less well-to-do Hong Kong residents tend to focus more on quality of life in the SAR and are concerned about issues such as corruption, erosion of press freedoms, loss of human-rights protection, constraints on religious freedom, narrowing the scope of elections, and so forth. Hong Kong has one of the best trained civil services in the world, and many of its members are concerned lest political criteria begin to intrude on the professionalism they highly value.

    People in Hong Kong also worry about potential U.S. heavy-handedness. They recognize, on the whole, that they will have to deal skillfully with Beijing to preserve their style of life and the system that has served them so well. The United States can play a constructive role here, giving China positive incentives and sober advice to help assure that reversion preserves the system it is mandated to maintain. But it is also possible that the United States will assume the worst about every Beijing initiative and react with criticisms and threats that infuriate Beijing in instances in which most Hong Kong residents would opt for a more muted approach. In looking at U.S. policy toward China since 1989, few in Hong Kong give Washington high marks for skillful handling of the PRC leadership. There is concern in Hong Kong that overly assertive U.S. criticism might stiffen Beijing's attitude and thus exacerbate the problems that Hong Kong faces in fleshing out the "one country, two systems" framework.


    Hong Kong as a Factor in Sino-U.S. Relations

    The dynamics of Hong Kong's reversion will play an extremely important role, both directly and indirectly, in Sino-U.S. relations. As indicated above, fundamental interests are sufficiently parallel to permit this to become an important building block in the construction of an improved Sino-American relationship, but sharply differing perspectives and fears may turn it instead into a serious stumbling block.

    A major potential problem stems from the nature of the Chinese system, the essentials of which differ almost wholly from those of Hong Kong. The PRC is a massive developing country in which the government plays an enormous role in all aspects of the economy. The Chinese media are less tightly controlled than before but still are not in any meaningful sense free. The leaders tend to discount the notion that stability and progress can result from the free flow of ideas and market-determined successes and failures. Despite many years of market-oriented reform and loosening of controls over all aspects of society, the sensibility of the Chinese leaders remains, in short, profoundly statist and authoritarian in its approach to achieving prosperity, stability, and security. It is thus not easy for Beijing to understand the dynamics of Hong Kong even if it sincerely wishes to do everything to enhance the success of the SAR.

    China's leaders will thus have to gain a better understanding of Hong Kong quickly if things are to go relatively smoothly. But it is not yet clear to whom Beijing will give greatest credibility among the competing voices providing advice on Hong Kong: Hong Kong tycoons with close ties to the national leaders? Chief Executive Tung and members of the SAR government? Officials in the mainland offices in Hong Kong, such as the Foreign Affairs office, the New China News Agency office, and so forth? Mainland Chinese who have substantial investments and activities in the SAR? The apparatus of the SAR Communist Party? It is not very likely that these various sources will provide complementary views to Beijing, especially on subtle issues such as where to draw the line between necessary freedom and instability. Each will argue that it represents the most astute understanding of the SAR and its needs.

    Fortunately, in the broadest terms the market will provide a strong safeguard to possible PRC missteps in the SAR. As noted above, many people and businesses have established exit options. Therefore China must maintain a sense of confidence among the people in Hong Kong if the SAR is to succeed. If confidence is lost, many individuals and firms will exercise the options they have already developed to depart for other shores. This type of market discipline should, moreover, elicit a pragmatic response from Beijing, as there would be no enemy to blame or foreign government to convince. This scenario may produce a substantial period of tension and adjustment but with a cautiously optimistic long-term prognosis.

    The issue of clashing perceptions is potentially more pernicious. The nubbin of the perceptions issue is that the United States feels it understands the dynamics of Hong Kong society because that society is westernized and modern, even if it is also Chinese. Beijing, by contrast, believes it understands the essence of Hong Kong because it is Chinese, even if it is also westernized and modern.

    The underlying reality is that Hong Kong is westernized, modern, and Chinese. British rule highlighted the first two characteristics, which have in fact become core dimensions of Hong Kong society. But Hong Kong is over 98 percent Chinese in ethnic composition, and in the future some redressing of this balance in favor of being Chinese is inevitable. The question is whether a workable balance will be achieved or whether a vicious cycle of missteps and distrust will produce decline and failure in the SAR. Should America regard the Hong Kong situation as slipping rapidly downhill, the resulting sharp U.S. criticisms may evoke tart Chinese responses. Beijing, after all, would likely regard this as U.S. collusion with Britain to reduce the chances of successful reversion or as U.S. interference in China's internal affairs. Such an escalation of rhetoric could solidify the most negative images each country has of the other and thus undermine the potential for major advances during the planned Sino-American summits of late 1997 and 1998.

    If the United States becomes sufficiently alarmed about developments in Hong Kong, it could indeed at some point take a combination of initiatives that would dramatically affect the situation. The gravest danger thus lies not in a conflict of interests but in escalating problems grounded in a conflict of perceptions. China views Hong Kong as a domestic issue and distrusts U.S. (and British) intentions. Many in the United States, influenced by articulate pro-democracy spokespersons such as Martin Lee, believe that China is moving inexorably to strip Hong Kong of its freedoms and subordinate it to repressive mainland interests. There is considerable potential danger that these contrasting outlooks will drive the realities of the SAR.

    Finally, Hong Kong, from July 1, 1997, will not only affect Sino-U.S. relations but will also be affected by them. In the past, warm relations between Beijing and Washington have typically coincided with periods of relative relaxation, confidence, and reform in China, while a chill in Sino-U.S. relations has often accompanied a period of tightening up, consolidation, and more muscular nationalism in China. The underlying cause-and-effect probably works in all directions - reformers seek better Sino-U.S. ties, Americans find it easier to be responsive when reformers seem to have the initiative - and U.S. responsiveness strengthens the hands of Chinese reformers. Hong Kong is likely to benefit when Beijing is in a more relaxed and tolerant mode. Conversely, if Sino-U.S. relations deteriorate to the point that the United States significantly restricts China's U.S.-bound exports, Hong Kong's economy will inevitably suffer, because much of that trade currently flows through Hong Kong. Indeed, any politically-induced problems in the Sino-American economic relationship pose challenges to Hong Kong's prosperity.


    Conclusion

    In sum, the 1997 Hong Kong reversion is a major issue in Sino-U.S. relations, with the potential to improve mutual images or intensify mutual suspicions. Both sides will watch developments closely, in part to peg the level of trust they can accord to the other. Few things could be more important in a year that is likely to mark an important turning point in the long-term direction of Sino-U.S. ties.

    Kenneth Lieberthal is a faculty member in the Department of Political Science and the Business School. The following is a condensed verious of his article "The Hong Kong Factor in Sino-U.S. Relations," which appeared prior to Hong Kong's reversion in the April 1997 edition of Asian Update.