One Country Two Systems: Political Ingenuity or Politically Ingenuine?

The BRB Bottomline: The inception and evolution of Hong Kong’s system of legal frameworks and institutions form the cornerstone of the city’s international and economic identity. Although they,  along with the city’s economic system, have helped connect China economically to the rest of the world, the tensions and contradictions inherent in the post-handover system have been laid bare by recent socio-political turmoil and challenges to the rule of law. Hong Kong’s judiciary and legal sector are at a crucial crossroads with not just the system itself, but with the semi-autonomous city’s economy, people, and future all at stake.

In June, Hong Kong’s Chief Executive Carrie Lam announced a controversial extradition bill, triggering peaceful mass protests across the city. Initial demonstrations have since morphed into a broader, increasingly complex campaign for government accountability and further political reform under the “five demands and not one less” slogan. In addition to the now-formalized withdrawal of the extradition bill, the five demands call for independent investigations into police brutality, the retraction of the classification of protestors as “rioters,” amnesty for arrested protestors, and universal suffrage for both Chief Executive and Legislative Council elections. 

Hong Kong, for a long time, has prided itself in its judiciary and legal institutions. Not only has the legal system been central to Hong Kong’s economic success, its core values are also foundational to Hong Kong’s sociopolitical identity. As of 1997, underpinning the city’s post-handover legal framework are the principles of “rule of law” and “one country, two systems” enshrined within the special administrative region’s constitution, known as the Basic Law. However, in the last six months, these key ideas are under the threat of being undermined and overturned, amid growing concerns over judicial independence and plummeting public confidence in the local police force and prosecution process.

The Consequences of China’s Rise to Prominence: Is Hong Kong Inconsequential?

Since the handover, the Hong Kong Special Administrative Region (HKSAR) has built a unique economic identity and reputation of its own: a financial hub, an export-heavy trading port, an attractive spot for foreign direct investment. Historically, Hong Kong played a key role in China’s economic strength and development, both as a significant source of economic productivity and as a point of connection between China and the West for trading and other policy purposes. However, China now no longer depends strictly on Hong Kong for economic output. In 1997, HKSAR’s economy was 18.4% of China’s now, it is 2.7%. The introduction of “Special Economic Zones” and “Coastal Development Areas” such as Shenzhen and Shanghai, and the subsequent opening up of China’s markets to international investors, provide alternative geographical locations to access the populated Chinese market. Riding the recent wave of Chinese technology and innovation, Shenzhen has now been “transformed into a hub for new giant tech firms such as Huawei, Tencent and ZTE” with high potential for further growth, while Hong Kong remains a step behind in the development of its high-tech and digital sectors.

So is Hong Kong still economically relevant to China? According to Yash Ghai, a retired professor at the University of Hong Kong, Hong Kong’s autonomy “is the imperative of the economic system”. It is this original though controversial “one country, two system” structure that has allowed Hong Kong’s capitalist society to prosper, and become one of the most open economies in the world. Hong Kong’s independent judiciary and unique liberties have tended to bolster trust and confidence in the city’s system of governance, making international investors more willing to take up local opportunities. Compared to China, Hong Kong has “a higher credit rating, lower risk-weights for bank and counterparty exposures, the ability to clear dollars easily, independent membership of the WTO…” among other advantages. 

However, with economic autonomy comes the unspoken question of political autonomy. Given the centralization of power in Hong Kong’s government and the lack of transparency in China’s involvement within the Hong Kong executive branch, it is unsurprising that the public feels alienated from the system. Furthermore, the rise of inequality in Hong Kong currently the special administrative region has one of the highest Gini coefficients in the world, at 53.9 has been fueled by the accumulation of capital and corporate wealth within the hands of a small fraction of the population. The legal system is a core to Hong Kong’s identity. But with the rise of political dissent and desire for autonomy, not only is the execution of Hong Kong’s basic law repeatedly challenged, but the legitimacy of the law itself is under heavy scrutiny. 

A Hung Jury: Is Hong Kong’s Constitution Well-meaning and Well-founded?

July 1st, 1997 the “Handover” placed Hong Kong in a 50-year limbo. Ending its 156 years under British colonial rule, Hong Kong became a “Special Administrative Region” with unique governing and economic systems separate from China as well as a constitutional jurisprudence built from scratch. The Sino-British Joint Declaration outlined the basic policies that the Basic Law should reflect. In accordance to the “one country, two systems” principle, Hong Kong was given a high-degree of autonomy (excluding foreign and military affairs), under a British-styled common law system and an executive, legislative, and impartial judiciary structure. 

Yet, the Basic Law was drafted during a time of political uncertainty, perhaps an ominous foundation and an early sign of the instability to come. Under Chinese sovereignty, people feared for civil liberties, especially with the Tiananmen square massacre in 1989. The Court of Final Appeal (CFA) was created with frictions between British and Chinese governments, and the Hong Kong democrats, with a compromise that it would be composed of one overseas judge and four local judges. And the Basic Law was perhaps too basic. Crafted with a language of vagueness that welcomed disagreement and political uncertainty, this section will address the broad controversial themes outlined in Hong Kong’s legal system today: the idea of “One Country, Two Systems”.

The question of “One Country, Two Systems” boils down from the macro concept of Hong Kong and Chinese relations to the micro concept of identity politics. Those who say “I’m Chinese” emphasize “one country”, whilst those adamant on being named “Hong Kongers” focuses on “two systems”. With Article 1 of Hong Kong’s Basic Law calling HKSAR an “inalienable part of the People’s Republic of China”, and Article 2 declaring HKSAR’s freedom “to exercise a high degree of autonomy and enjoy […] independent judicial power”, such provisions beg important questions of interpretation. White or black, blue or yellow, the current contentions between China and Hong Kong are reflected in the ambiguities inherent in this concept.

In 1987, Deng Xiao Ping stated, “If we don’t attach equal importance to both aspects, it will be impossible to keep the policy of ‘one country, two systems’ unchanged for several decades”. In the court case of “Democratic Republic of the Congo & Ors v FG Hemisphere Associates LLC [2011]”, Bokhary PJ expressed it is never a contest between “one country” and “two systems”: “at all times and in all matters, the principle operates as a whole”. Yet, living for 20 years in a completely separate system of capitalism and free political expression, perhaps it is expected that this divergence of culture, certain values, and norms should lead to a breaking point. 

With the disappearance of five Hong Kong booksellers (selling books that critiqued the CCP) and the introduction of the extradition bill, some Hong Kongers immediately deemed this as too much interference—the “loss of two systems”. Pro-establishment supporters are quick to remind them of the “one-country” aspect. It is difficult to find a balance that allows for “equal importance” when this simple claim holds such complex and polarizing political roots.

The Contradictions of Semi-autonomy and Judicial Independence

The original purpose of “The Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation Bill 2019”, more widely known as the “extradition bill”, was to prevent fugitives from Mainland China, Taiwan, and Macau from hiding out in Hong Kong. The bill surfaced when Chan Tong-kai, a Hong Kong citizen who killed his pregnant girlfriend in Taipei, could not be “extracted” from Hong Kong to face charges of murder. Whilst the bill may have closed a “legal loophole”, it might have opened another that holds heavy political implications for political persecution

China holds a lot of legal dominance over Hong Kong: judges are appointed by the Chief Executive (who is vetted by Beijing) and Article 158 holds that the National People’s Congress Standing Committee has the final power in interpreting the Basic Law. This power imbalance means that the extradition bill can be utilized against political dissenters and pro-democracy activists, “extracting” them from Hong Kong under this extradition law into Mainland China. Though the reason for pushing this bill appeared to be for a good cause, no one was certain whether it was shadowed with bad intentions. It was this uncertainty that led to the belief that Hong Kong was losing its “two systems”, and on the 31st of March 2019, thousands took peacefully to the streets, heralding the start of widespread protests.

Whilst the extradition bill was the direct cause of the 2019 protests, there were many other underlying forces that built up to this implosion. Hong Kong was promised full universal suffrage for the 2017 elections, based on Article 45 of the Basic Law: “the ultimate aim is the selection of the Chief Executive by universal suffrage upon nomination by a broadly representative nominating committee in accordance with democratic procedures.” However, in 2014 there were electoral reforms: the people were to vote between 2-3 candidates that were already handpicked from a “nominating committee”, no longer “true” universal suffrage. Hence, the “Umbrella Movement” and “Occupy Central with Love and Peace” sparked, with widespread sit-ins and protests asking for “real” democracy and the right to vote strictly for the Chief Executive.

A Shaken Economy: The Challenges of Autonomy

Political challenges do not seem to bode well for the economy. In Q3 of 2019, Hong Kong officially recorded a second consecutive quarter of negative year-on-year economic growth at -2.9%, bringing the semi-autonomous city into a technical recession. Forecasts for the rest of the year remain grim due to a sharp decline in revenue in the sectors of tourism, hospitality and retail, spurring the Hong Kong government to announce a HK$19.1 billion emergency stimulus package early on in the quarter in hopes of revitalizing public consumption and business confidence.

Historically, Hong Kong has been one of Asia’s top destinations for foreign direct investment and China’s primary channel for such inflows. Currently, Hong Kong accounts for two-thirds of China’s FDI, and has recorded year-on-year growth of +2.9% for the first 3 quarters of 2019, according to official data from the Ministry of Commerce. However, it is difficult to ascertain the severity of the impact of recent unrest given the lack of month-by-month data, and the fact that the FDI component of investment tends to be a lagging indicator of economic outlook. In fact, according to an estimate by Goldman Sachs analysts, up to $4 billion in dollar deposits outflowed in the past months from Hong Kong to Singapore, the “alternative financial carrier of the region”, while local-dollar deposits dipped -1.6% in August before recovering by +0.6% in September. Changes to deposits are more telling indicators of short-term sentiment, as the liquidity of deposits are often higher than that of large-scale, long-term investments requiring substantial periods of market research, planning, and implementation.

In the meantime, Hong Kong’s stock market index, the Hang Seng Index seems to be slowly recovering despite dropping just over 16% from its pre-protest peak in early April to its lowest point this year in mid-August, showing that perhaps, on the whole, investors are still somewhat confident in the government’s ability to shore up short-term economic weakness. Several recent IPOs among them Budweiser and ESR Cayman which had been previously delayed by protest, have also served to prop up previously severe year-to-date IPOs proceeds (compared to 2018) and improve investor confidence in the local market’s resilience.

Admittedly, there are other important diplomatic and political factors such as hitherto unstable US-China trade war talks, and shifting long-term policies and international relations priorities on the part of Beijing; but the escalation of recent events in Hong Kong, a lack of dialogue between the parties involved, and increasing diplomatic tensions have certainly not helped matters.

Perhaps more importantly, Hong Kong’s special status, built from its legal institutions, makes it an attractive location for both Chinese and international businesses. Hong Kong’s adherence to its rule of law system, according to the Peterson Institute for International Economics, underpins the numerous advantages Hong Kong possesses over potential alternative hubs in the mainland such as Shanghai and Shenzhen. A confidence in the rule and enforcement of the Basic Law form the basis of local effective market and regulatory frameworks, which, along with the free flow of capital allow foreign firms to safely enter and navigate the high-potential Chinese market, and allow Chinese firms to setup an “anchor point for global expansion”. However, due to recent clashes between government and increasingly disillusioned and radicalized protestors, and with no resolution in sight for Hong Kong’s worsening social and political climate, according to polls cited by the WSJ, nearly a quarter of US firms in Hong Kong “were considering moving capital or assets out of the city.”

In the long run, according to Sheng Liugang, associate professor at CUHK, there are signs that investments from the US, EU, and other international sources may look to fall over time and be replaced by investments from the mainland, as Hong Kong’s role as a “connector” between China and the rest of the world weakens.

Typhoon Signal No. 11: Can Hong Kong’s judiciary weather the upcoming storm?

As it stands, Hong Kong’s economy, although shaken by recent socio-political events, seems to be holding on. But as domestic conflict escalates, it becomes crucial that Hong Kong continues to pay close attention to metrics of macroeconomic and financial stability, and more importantly, bolster public sentiment to maintain levels of investment and expenditure conducive to economic growth. As a city with a tradition and reputation of being free market and well-supported by institutional frameworks, resorting to measures such as capital controls would only serve to highlight the desperation and lack of confidence on the part of the Hong Kong government, and worsen long-lasting damage to the city’s viability as a point of international trade and FDI.

And in the meantime, as placating as macroeconomic indicators are for now, the legal institutions and frameworks of Hong Kong now have to face an even more worrisome development. In mid-November, Hong Kong’s High Court ruled the government’s recent implementation of the anti-mask law under the colonial-era Emergency Regulations Ordinance (ERO) as unconstitutional in other words, a violation of the Basic Law. Amid rising tensions between the executive and judicial branches of the region, Beijing has verbally intervened, declaring that Hong Kong’s judiciary lacks the authority to rule on constitutional matters. Whether this threat to judicial independence materializes remains to be seen, but the rule of law in Hong Kong embedded in the city’s history and identity, appears to be at a crucial crossroads with not just the legal system itself, but the city’s economy, people, and future all at stake.


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