Why China Needs Hong
Kong's Legal System
By Martin C.M. Lee
- In an irony of history, the world is now realizing that what China
most needs is what Hong Kong has. Not our vast capital reserves or our
free port, but our most valuable -- and most threatened -- inheritance
from the British colonial government: the rule of law.
- A November survey of 500 corporate executives in 32 countries in Fortune
magazine rated Hong Kong above New York and London as the worldís
best city for doing business. Our fair and efficient legal system, the
bedrock of Hong Kong's economic success, is set to be one of the first
casualties when China takes over Hong Kong in 1997. What investors stand
to miss most is our level playing field, transparent system and predictable
rules governing civil and criminal disputes.
- Quite a few international investors are finding out that corrupt cadres
and state-run companies take Deng Xiaoping's command "to get rich
is glorious" all too literally. And without the rule of law, when
deals in China go sour, they can go very sour. Several recent cases in
- -- Lehman Brothers had aggressively pursued state-owned clients in
China. But when Lehman recently asked two government-owned businesses to
pay off an almost $100 million debt, the Chinese companies denied they
owed any money. Lehman is now pursuing its onetime clients for breach of
contract in a New York court. An anguished Lehman executive in New York
was left protesting, "China can't go around stiffing people like this."
- -- Last month McDonaldís was stiffed too. Beijing authorities
reneged on a contract, handing the largest McDonald's restaurant in the
world an eviction notice for its prime location near Tiananmen Sqaure --
its 20-year lease notwithstanding.
- -- The bloom is also off the rose in China for U.S. company Ross Engineering,
which won a $6.6 million arbitration award against its state-owned former
joint-venture partner. During Commerce Secretary ron Brown's recent trip
to China, he and Ambassador Stapleton Roy met with Foreign Trade Minister
Wu Yi to ask if the international award could be collected. According to
a company representative present, she smiled and said "no."
- There are many more cases like these. A group of 31 foreign banks recently
wrote China's economic czar Zhu Rongji seeking help in recovering $600
million in bad debts owed by state-run industries.
- Such unpleasant legal surprises have suddenly given foreign businesses
cold feet. Beijing officials, who have never lived under the rule of law,
should be reminded by their friends that foreign investors need the assurance
of a reliable legal system, such as we have in Hong Kong. Most important,
the perils of investing in China should suggest how difficult it will be
to do business in Hong Kong once our rule of law is eroded.
- Hong Kong's independent judicial system acts to curb corruption and
preserve property and contract rights. But China is even now insisting
on a right to remove judges from Hong Kong's Court of Final Appeal, the
equivalent of the U.S. Supreme Court. Although this violates the Basic
Law, our post-1997 constitution, judges who want to keep their seats will
be under tremendous pressure to find in favor of the Chinese government
on major cases or those involving a lot of money.
- Gov. Christopher Patten could do more to help. Although he has the
power to reject China's efforts to control our highest court and to abolish
little-used repressive colonial laws that would give china vast powers
after 1997, he is refusing to do so in the interest of a "smooth transition."
Since China will appoint the executive branch and control the legislature,
Hong Kongís legal system is truly the last battleground for checking
abuses from Beijing.
- The Jurassic Communist Party leadership in Beijing simply does not
understand the underlying foundation of Hong Kong's system: the rule of
law, human rights, free markets and an increasingly democratic system of
government. They reject what they do not understand.
- Senior Chinese officials frequently threaten that Beijing will abolish
Hong Kong's Bill of Rights and our common law system. In 1997, our elected
legislature will be scrapped and we will have a China-appointed "provisional"
legislature rubber-stamping any laws Beijing wants passed. Look for new
laws on treason, the press, and taxation as well as electoral laws guaranteeing
all future legislatures will be under China's thumb.
- Business leaders and cadres in China's showcase boomtown, Shanghai,
talk rosily of Shanghai overtaking Hong Kong as the financial center of
the Pacific Rim in only 10 years. Investors doing business in both places
scoff at the notion. While the mainland has been rocked by constant economic
and political chaos, Hong Kong has grown to become the finance and service
heart of the Asia-Pacific region. It is our rule of law that protects contract
and property rights and keeps investments safe, in spite of upheavals on
the mainland like the Tainanmen Square massacre.
- Already Adam Smith's invisible hand is being replaced by the all-too-visible
hand of the People's Republic of China. Earlier this year, shortly after
Hong Kong entrepreneur and publisher Jimmy Lai criticized Chinese Premier
Li Peng in his magazine, Next, the Beijing branch of this popular clothing
store, Giordano, was closed down.
- As cadre corruption in China goes unchecked, the past three years have
seen 15 Hong Kong and overseas Chinese businessmen held hostage in China
because of commercial disputes. This number -- including Australian investor
James Peng, kidnapped last year in Macao and held in China ever since ñ
is just the tip of the iceberg. Other businessmen in similar situations
just pay up and shut up.
- The more than 900 U.S. firms doing business in Hong Kong and the many
people in China who count on Hong Kong as the countryís gateway
to the West should actively work to protect Hong Kongís rule of
law and status as an international financial center. They should do this
for self-preservation if not for principle. The very factors that make
China a risky and sometimes inhospitable business environment today may
have Hong Kong the same tomorrow -- with many more billions of dollars
in investment at stake.
- For Hong Kong to survivie, we must keep our system of free institutions
and rule of law. China's own lack of a rule of law hampers foreign investment.
Beijing would also do well to rethink its approach and appreciate hoe Hong
Kong 's truly independent legal system and free society are the best hope
for China's own efforts to establish a viable legal system and a rule of