The Wall Street Journal, December 28, 1994
Why China Needs Hong Kong's Legal System
By Martin C.M. Lee
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- 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 point:
- -- 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 law.
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