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  Compiled from various sources, including The New Republic, and The San Jose Mercury.,


SAN JOSE MERCURY

ENTER THE DRAGON: BUILDING THE CHINESE POWERHOUSE 6/26/94

Published: June 26, 1994

By LEWIS M. SIMONS  and MICHAEL ZIELENZIGER

Mercury News Staff Writers

JAKARTA, Indonesia -- A worldwide network of little-known but stunningly  rich ethnic Chinese is forging a powerful new alliance with China that is reshaping Asia -- and could eclipse American and Japanese influence in the region.

These overseas Chinese control family-run business empires that already dominate much of Asia. Now they are investing billions in China, helping their ancestral homeland become the world's fastest-growing economy.

Together, China and its approximately 56 million offshore cousins are likely to become the most important commercial and political force in the dawning Pacific century.

The prospect of a Greater China causes concern in parts of Asia. Many  non-Chinese feel threatened as China encourages overseas Chinese to invest in the mainland by appealing to their loyalty and offering opportunities for giant financial rewards.

Little scrutinized by the West, the far-flung network of Chinese enterprises already:

-- Invests eight of every 10 dollars streaming into China.
-- Dominates the economies of Malaysia, Indonesia, Vietnam, Thailand and the Philippines, where ethnic Chinese are only minorities of the population. It also runs the dynamic economies of Taiwan, Singapore and Hong Kong, where Chinese are the majority.
-- Presents the United States with an enormous challenge to its Asian  ambitions, since it could realign the economic and political balance of power in the region.

After fighting in vain for increased market access to Japan, U.S. businesses now fear that Greater China is becoming another door shutting them out. With limited entry to Asia's growing markets -- including China, the biggest market in the world -- American businesses will be hard-pressed to compete with Asian rivals growing wealthy in their own back yard.

''We have to pay attention to the overseas Chinese as an economic network, a commercial network, and as a very important new and growing phenomenon in the world economy,'' said Jeffrey Garten, the U.S. undersecretary of commerce, who once worked for an overseas Chinese shipping firm in Hong Kong. ''A better understanding of overseas Chinese and a more strategic approach to developing closer ties with them is absolutely critical.''

Alliances defy boundaries

Yet neither Washington nor Tokyo knows quite how to deal with the overseas Chinese, whose alliances defy national boundaries, whose deals are usually done in private, and whose network moves more quickly than any government's.''This is a feature of the world economy we have to understand better, but I don't. It's a phenomenon that's only become important in the last decade,'' Garten said.

Concentrated throughout Southeast Asia, the overseas Chinese entrepreneurs  are gaining prominence and attention at a critical juncture in Asia's development. U.S. political influence in the region has reached a plateau with the end of the Cold War. Japanese economic might has stagnated under recession and political disarray. As Asian nations grow more prosperous and sure-footed, they are beginning to feel less dependent on Western leadership.

For many Asian countries, however, the prospect of a Greater China is rekindling old fears of Chinese expansionism, particularly as Beijing's military spending soars. Japan and other Asian nations, according to Japanese economic strategist Kenichi Ohmae, worry that the new financial links, combined with strong family and ethnic ties, will enable China to ''pull the overseas Chinese back'' into its sphere of influence.

''We're not just concerned, we're awed,'' said Philippines Secretary of the Interior Rafael Alunan. ''China will clearly be the major player in Asia in a decade or so and we see the overseas Chinese as part and parcel of the whole package.''

The ethnic Chinese have led the boom that has transformed Southeast Asia from a financial backwater to an economic powerhouse in one generation, replacing Japan as Asia's newest success story. Operating through a web of family-based companies, they have amassed breathtaking fortunes by doing business with other overseas Chinese in unique style: Multimillion-dollar deals are put together, quietly, through trust and connections, without contracts or government oversight.

''The overseas Chinese are by far the most important force in Asia-Pacific today,'' said Japanese strategist Ohmae. Harvard Business School Associate Professor John Kao asserted: ''Their network is as broad as any on the planet.''

With their new wealth, the overseas Chinese have abandoned their ramshackle Chinatown shops for glittering glass-and-steel headquarters on such prestigious boulevards as Jakarta's Jalan Sudirman and Bangkok's Silom Road

In Jakarta, one of Southeast Asia's cesspools barely more than a decade ago, the signs of their success are vivid. The ethnic Chinese account for only 3 percent of Indonesia's population but control 85 percent of the nation's wealth and have produced some of the richest families in the world, billionaires whose multinational corporations extend across the Pacific. The skyline of the increasingly vibrant Indonesian capital is dominated by world-class office towers, hotels and shopping malls -- virtually all Chinese-financed.

As the overseas Chinese in Indonesia and other nations have prospered, they have built mutually profitable business and personal relations with political leaders of their host countries

Now, with their new wealth and influence, the overseas Chinese are positioned to help catapult China forward. Chinese officials, seeking investments to propel the economy, actively remind the overseas Chinese of their ancestral and cultural ties to the mainland. Government representatives recently have mounted trade missions to the United States to persuade Chinese-Americans there to bring their money and talents back home.

''You know we Chinese are smart and hardworking,'' Chen Chong, a senior representative of Beijing's Ministry of Electronics Industry, told a group of Chinese-American software designers last fall at a dinner meeting in Sunnyvale. ''But we need a boost from you, our brothers, to move ahead and make our nation strong.''

The deluge of overseas Chinese money into mainland China began after the Tiananmen Square massacre in 1989. When Western investors turned and fled after the Chinese government's crackdown on political dissidents, overseas Chinese rushed in to help China continue its efforts to open and modernize its economy.

Accustomed to bloody crackdowns in cities like Bangkok, Jakarta and Kuala Lumpur, the overseas Chinese recognized immediately the Asian pattern of stifling political dissent to propel economic progress. They believed the crushing of budding democracy in Beijing would actually hasten leader Deng Xiaoping's market reforms, not slow them down. They voted by opening their wallets.

This immediate expression of confidence in China's future earned them the gratitude of the communist leadership. Provincial organizers launched an extensive recruiting drive among the ethnic Chinese tycoons of Southeast Asia, despite Beijing's official policy of not meddling in the region

Drawing on their Chinese guanxi -- ''connections'' -- to win governmental blessing, these overseas Chinese collectively have invested more of their immense wealth in the mainland than have all of the world's leading corporations, building everything from hotels to cement factories. With their help, China's economy grew 13 percent last year -- compared to 3 percent for the United States.

''Directly and indirectly, the overseas Chinese and their investments are the most important force in China today,'' said Vincent Yip, associate professor at the International Business Development center of Northwestern University

''Without these ethnic Chinese, China would not be what it has become today.''

According to some estimates, between 75 and 90 percent of the roughly $90 billion in foreign investment in China to date has come from overseas Chinese. ''But both the total investment and the ethnic Chinese share probably are much higher because of the huge underground flow of funds,'' said Yu Chu-Kun, a specialist in overseas Chinese affairs at Tokyo's Keio University.

Their prominent position is particularly evident in such coastal enclaves as Guangdong, Shanghai and Fujian, their ancestral homelands

In these booming areas, the overseas Chinese have an unmatchable advantage over U.S. and other Western businesses, which use conventional methods to win customers in a culture where personal contacts and family ties mean far more than contracts and legal procedures.

''You Americans bring your accountants and lawyers,'' said Sukanto Tanoto, an Indonesian-Chinese businessman who is scouting projects on the mainland. ''We are like Nike -- we just do it.''

Some scholars believe the idea of a unified Greater China is more theory than destiny. They point to a natural tension between mainland Chinese and many overseas Chinese whose families fled repression by warlords before the turn of the century and later the communists in search of economic opportunities across Southeast Asia.

And, to be sure, the rest of the world is not being completely locked out of the bustling new China. U.S. companies with the most advanced high technology or long-established brand names are finding growing markets for their goods

Some U.S. and Japanese firms are even learning to use overseas Chinese as their partners for winning business in China.

But the overseas Chinese are clearly dominant, at least for now, and are continuing to pour billions into the mainland, motivated partly by profit, partly by their cultural ties.

''To most of us, China is just a good place to make quick profits,'' said Choedchu Sophonpanich, a member of the family that owns Bangkok Bank, the largest financial institution in Southeast Asia. ''But, it is a special place, too, because of culture, language -- roots, I guess you'd say.'' His company opened its first China branch last year in Shantou because ''it's where my grandfather came from to Bangkok in the late 19th century,'' a common sentiment among the ancestor-worshiping Confucian Chinese.

Many ethnic Chinese also bask with quiet satisfaction in the successes of their homeland, no matter what they may think of the communist leadership

''It's not that we're loyal to China,'' said Washington Sy Cip, a Manila-based Chinese-American, who owns the largest accounting firm in Southeast Asia. ''But we take a certain pride in China's accomplishments as stories keep coming out on how China's economy will surpass the United States' in 20 years or so.''

Fear of a Greater China This pride must be held close to the chest, however. Throughout the region, there is a popular perception that eventually China will assert its interests more aggressively and unify the overseas Chinese, whose financial fortunes are increasingly tied to the mainland.

Asians also recognize -- with trepidation -- that China is focusing its enormous energies not only on economic reform but on military buildup.

According to unofficial estimates, defense expenditure by the People's Liberation Army is in the range of $100 billion a year, 2 1/2 times what Japan spends.

The concern is particularly felt in Southeast Asia, where relations between resident Chinese and indigenous peoples have never been free of suspicion and where the new wealth of the ethnic Chinese has fueled resentment. In Indonesia, Malaysia and the Philippines, for instance, gut-level fear of Chinese expansionism has periodically led to anti-Chinese violence

Only two months ago, mobs in the Sumatran commercial center of Medan rioted against local ethnic Chinese business owners, killing one, injuring dozens more and destroying their property. This outburst drew a warning from China's Foreign Ministry -- which, in turn, produced complaints of Beijing interference from Indonesian officials.

Most of the governments of Southeast Asia are content for now with their resident ethnic Chinese taipans pumping money into mainland China. Savvy investors return at least part of their profits to the host country and maintain their spending on domestic projects.

Even the richest and most politically connected ethnic Chinese feel the pressure to prove their loyalty to their host countries. Anthony Salim, president of the Jakarta-based Salim Group conglomerate, the largest Indonesian-Chinese player on the mainland, said his company's investments in China ultimately will benefit Indonesia.

''We don't invest in China because we're Chinese,'' insisted Salim, whose $8 billion-a-year company employs 150,000 people in 22 countries, including the United States, where it owns California-based United Savings. ''We believe we're doing the right thing.''

Nevertheless, the sense that Greater China will someday be a dominant influence on Asian affairs is growing stronger in the region.

''Any major power will eventually act as a major power,'' said Leo Suryadinata, an Indonesian-Chinese political scientist and author at Singapore's National University. ''The only real question is whether Chinese expansionism will take the form of troops and territorial ambitions -- or economy and culture.''

MERCURY CENTER CODE: N013 ID: me49054c

Transmitted: 94-06-26 17:21:02 EDT


The NEW REPUBLIC

06/06/94

Is China the next Iran? SHAH DENG?

By James Mann

Over the next few weeks, if you listen for even a short time to the wrangling over what the Clinton administration should do about trading with China, you are going to hear something like this: China is in the midst of dramatic economic growth. When China gets rich enough and develops a middle class, it is going to follow the same path as its East Asian neighbors, Taiwan and South Korea. With economic growth, China's politics will be transformed

Through some evolutionary process, it will eventually waltz its way from a repressive one-party state into a democracy.

Secretary of State Warren Christopher heard several renditions of this argument when he met with the American Chamber of Commerce in Beijing last March. "The trend line [on human rights] is moving in the right direction, and what is driving it is economics," Phillip Carmichael, the chamber's president, lectured. The foreign policy establishment is on message as well "Economic reform, we believed, would in the long run lead to political liberalization, the surest way to ensure human rights for all in China," former secretary of state James Baker wrote recently about the Bush administration's China policy.

Unfortunately, the whole China-will-evolve-into-democracy argument is at best complacent and at worst simply wrong. It's wrong about the relevance of Asian models like Taiwan and South Korea to China's history. It's wrong about the role of the United States. Most of all, it's wrong about China. If there is any model at all for modern-day China, it is not, in fact, to be found in contemporary Asia, but in the Iran of the late 1970s.

The United States has always understood China by falsely analogizing it to other countries. In the 1950s the analogy was the Soviet Union, an identically rigid totalitarian state. Now, the false analogies are Taiwan and South Korea--East Asian states that have made an inevitable transition to democracy, it is argued, thanks to economic growth. The new analogies are just as inaccurate. There was nothing inevitable about either country's democratic revolution. These two countries, whose populations combined amount to one single Chinese province, were brought to democracy after quiet American pressure. The United States began with the leverage of economic aid.

From 1950 to 1965 Taiwan received an average of $100 million per year in nonmilitary aid--more than 6 percent of its gross national product--making it the largest beneficiary of American assistance. In a smaller way, South Korea benefited from the same sort of American support.

But U.S. economic influence--and fast economic growth--didn't translate into automatic democratization. To be sure, during the late 1980s, once-authoritarian governments in Taiwan and South Korea opened the way for popular elections. But in both cases, the governments were responding to considerable American encouragement. The American role was dramatic in the case of South Korea. During the summer of 1987, in the midst of a political crisis that included street demonstrations, Reagan administration officials (in Washington and in Seoul) went to great lengths--both in public speeches by Assistant Secretary of State Gaston Sigur and in private diplomatic contracts--to persuade South Korean President Chun Doo Hwan to step aside and open the way for the country's first presidential elections.

In Taiwan, America's part in galvanizing political change was slower and more indirect. In the late 1980s, during the last years of his life, Taiwanese President Chiang Ching-kuo lifted martial law and opened the way for an opposition party. At the time, Taiwan faced growing diplomatic isolation and was under intense pressure from Congress to democratize. At one point the chairman of the Senate Foreign Relations Committee, Claiborne Pell; the chairman of the House Foreign Affairs Subcommittee on Asia, Stephen Solarz; and its ranking minority member, Jim Leach, formed the Committee for Democracy on Taiwan. There also was subtle goading from the Reagan administration.

In both cases, there was no simple relationship between growth and liberalization, just as in China. Indeed, China's recent acceleration of growth has led to an intensification of political repression. Certainly, there is greater diversity in China's cultural life today. But that is only true so long as individuals don't engage in politics or criticize the government in public. People are free in China only insofar as they stay away from politics. In fact, those Chinese who want to challenge the government face the same choices they faced in 1989: shut up, go underground or leave the country

The recent roundups of dissidents during the Christopher trip to Beijing (and during similar visits to China by French, Japanese and Australian leaders) make clear how little progress there has been. In fact, in 1994 alone there have been at least eighty-eight new arrests and trials of political and religious dissidents. Democracy activist Wei Jingsheng, who was released from prison in September, when China hoped to land the 2000 Olympics, was thrown back in jail in April.

Assuming that China's economic progress will inevitably lead to democracy is dangerous because it ignores the possibility of other outcomes. If China continues to grow, to develop a private sector and to build up its military forces while stamping out all political opposition, it could develop a new form of Asian fascism. Anyway, if we're in the questionable business of comparing China to much smaller Asian neighbors, why choose Taiwan instead of Singapore, a state that has managed to blend economic growth with authoritarian repression? (The example of Singapore also puts the lie to another piece of wishful thinking: that modern communications technology will lead to a democratic China. Singapore has computers and fax machines, but not much democracy.) Actually, the best and most useful model in understanding where China stands today comes from outside East Asia: China now seems comparable in many respects to the Shah's Iran of the 1970s. Like the Shah's Iran, China is a large, often chaotic country with deep traditions and intense national pride. Like Iran under the Shah, China is governed by an authoritarian leader, together with an army and security apparatus, but without any political institutions through which dissent can be expressed. In the Shah's Iran and Deng Xiaoping's China, rapid economic growth created new classes of wealth, widening the gap between rich and poor and arousing intense popular resentment toward nepotism and corruption of those who profited from the reforms. According to a recent study of the Chinese economy by University of Washington Professor Nicholas Landy, "the gap between urban and rural living standards continues to be very much wider than elsewhere in Asia.... China's overall income inequality exceeds that in Taiwan and South Korea, and is comparable to that observed in several South and Southeast Asian countries." The case of Iran under the Shah also provides a classic example of how short-sighted it can be to fail to encourage an authoritarian regime to open up legitimate channels of dissent. For a nation in the midst of rapid economic growth and social upheaval, the result can be a series of ultimately unsuccessful efforts at repression, resulting, in the end, in revolution.

Indeed, the Chinese regime is now trying to cope with a new wave of social unrest. Peasants have been complaining about being paid in government ious for their harvests. Increased productivity in agriculture has caused millions of peasants to leave for cities, where they have become a new "floating population," hanging around the train stations without work or roots.

In China's urban areas, meanwhile, inflation is running at about 25 percent; the price of vegetables alone is up 50 percent. And bankruptcy laws and other efforts to reform overstaffed, inefficient and unprofitable state enterprises are proving to be the most sensitive of all China's economic reforms: Chinese workers are threatened with loss of the "iron rice bowl" guarantees such as lifetime job security and company-supplied housing that were the implied trade-offs for low wages.

Over the past two years there have been scores of reports from Chinese cities of work actions, strikes and efforts to form unauthorized trade unions. By all indications, it is not students and intellectuals who worry the Chinese leadership now, but workers, and the regime is going to great lengths to make sure there is no urban unrest. That is the reason for the recent crackdown.

These developments inside China are the best demonstration that economic change and growing prosperity will not lead inevitably to democratic reforms. (There's also the small problem of how, or by what mechanism, the Chinese Communist Party will give up its monopoly on political power or fade away.) Rather, in the absence of accompanying political reform, growth may well lead to greater social instability, requiring a series of crackdowns which, in the end, will not work. What of the hope that an emerging middle class will someday induce China to become democratic? That's not likely, either, given the intensity of regional differences in China. If a middle class emerges anywhere, it will probably be in selected cities like Guangzhou and Shanghai.

Without some kind of nationwide political change, these pockets of middle-class prosperity could well become a powerful force for a centrifugal breakup of China. In recent years the gross national product per person in Shanghai has been about 3.5 times the national average, and the growth rate of south China's Guangdong Province has been twice that of the nation as a whole.

Many American businessmen, for all their professed optimism about the rosy future for Chinese political pluralism, understand that things are not so simple. How else to explain why one of the policy changes U.S. companies have recently been seeking in Washington is a resumption of the federal program through which the Overseas Private Investment Corporation (opic) insures American investment in China against political risks, such as violence, confiscation and expropriation? There has been no opic program in China since 1989. Apparently, American companies want the U.S. government to hold their hands in the unstable market of China.

For now, American businesses are once again attracted by the lure of a huge China market--just as they have been, on and off, since the nineteenth century. They're forgetting that in the past, the result for Western businesses has always been disillusionment, both because China's economy is cyclical and because China's agenda is never the same as that of the Western companies. And it certainly isn't the same as that of Western democracies.

Tong chuang yi meng, the Chinese say: same bed, different dreams. Of course, the notion that the United States can single-handedly bring democracy to China is as unrealistic as believing that capitalism alone will do the trick. But there are still good reasons, moral and practical, for trying hard to coax China to open up its political system. Doing so would lessen the chances for the sort of massive instability that could threaten not only China's huge population, but the rest of Asia. It would also be the surest way to ensure that China's future economic growth is of a sort that can lead to a sustainable future, like South Korea's, and not a cataclysm, like Iran's.

James Mann, who covers national security issues for The Los Angeles Times, is author of Beijing Jeep (Touchstone)

Transmitted: 94-05-25 18:35:57 EDT


The NEW REPUBLIC 08/22&29/94

Enter the Dragon By Andrew J. Nathan

A Borrowed Place: The History of Hong Kong by Frank Welsh (Kodansha America Inc., 592 pp., $32.50)

Hong Kong's 6 million people, 98 percent of them ethnic Chinese, have the world's tenth largest trading economy, a 5.5 percent annual growth rate and a gdp per capita in excess of Mother England's. Compared with Britain, Hong Kong also has a better infrastructure, better social services, cleaner streets and a better-educated population.

Queen's Road Central bustles with young executives--sleek, smart, with foreign mbas, many of them women, many running family firms that manufacture in South China and sell in Paris and New York. Multistory malls such as Pacific Place and Ocean Terminal display Chinese dried mushrooms and Rolex watches, antique calligraphy and Hermes scarves, Scotch whiskey and dried tiger's penis. Hong Kong residents worship at the world's largest outdoor Buddha, attend classes at some of the world's most sophisticated universities, bet at the race track and dress up in black tie and ball gowns for the Annual Ivy Ball, attended by hundreds of U.S. university graduates.

A taxi ride from Central brings you to mountain paths threading through the woods of Tai Tam Reservoir. On the back of the island, beaches look out on scores of small rocky islands whose fishing villages and seafood restaurants can be reached by ferry. Seagoing cargo ships thread their way into the deep-water harbor. The harbor draws Victoria Island together with Kowloon peninsula in a living sculpture of glittering skyscrapers, decorated with ferries, freighters and planes moving in and out of Kai Tak Airport.

Frank Welsh, an English businessman and writer, has written a history not so much of Hong Kong as of British rule there, a study in colonial rather than in Chinese history. Drawing chiefly on British archives and memoirs, he presents a parade of merchants, generals, ambassadors, financial secretaries, governors and the mens' wives, showing them as alternately affable, pompous, visionary and eccentric. I have always wondered about Nathan Road, Kowloon's main commercial street. It turns out to be named after its builder, Sir Matthew Nathan, governor from 1904 to 1907, bachelor engineer and also founder of the Kowloon-Canton Railway.

Welsh gives about 300 pages to the colony's first fifty years, the remaining 250 to a gallop through the twentieth century. He tells an affectionate story of foibles and follies, half-intended wars, business ventures, hot weather, fever, gambling, prostitution and public works. The book is a parade of the droll and the quotable, except for episodes of war and diplomacy where the tone becomes appropriately sober. Welsh has used only a few Chinese sources, spelling Chinese personal and place names wrong almost as often as he spells them right.

Welsh puzzles over how Britain got involved on this "barren rock" and how it made a go of it. The colony remained until the 1950s "a colonial backwater," a trading post linking the Chinese and the British economies. The international order that emerged after World War ii was marked by a growing international division of labor in manufacturing and by burgeoning trade. It was the fall of China to communism that made it possible for Hong Kong to take advantage of those trends with a combination of cheap refuge labor and entrepreneurs from Shanghai and Ningbo.

While China isolated itself under Mao, its exiled capitalists in its lost territory built a paradigm of an export-oriented economy, of the sort that the mainland now wants to emulate. Hong Kong started with textiles and other low-quality goods and followed Japan up the value-added ladder, moving ahead of competitors into more capital- and technology-intensive products. After Deng Xiaoping opened up China, Hong Kong shifted its sweatshops to the mainland, while retaining engineering, design and marketing functions in the air-conditioned towers of Central and Kowloon. And as the rest of East Asia boomed, Hong Kong took advantage of its location, facilities and freedoms to become the center of regional banking, lawyering, shipping and media, to develop a major stock market and to nurture some of the biggest global investors.

The Crown Colony consists of three parts. Victoria Island, thirty-two square miles, was ceded in perpetuity in 1841 (with treaty confirmation in 1842) after a handful of young British merchants and naval officers picked a fight with the Chinese empire and won what became known as the Opium War. This displeased Prime Minister Lord Palmerston, who wrote, "You have obtained the Cession of Hong Kong, a barren island with hardly a house on it.... Now it seems obvious that Hong Kong will not be a Mart of Trade." In 1860, after another clash, Britain acquired the peninsula of Kowloon, comprising nearly four square miles, aiming to protect the island from pressure from other foreign powers. In 1898, during the "scramble for concessions," the colony added the 365-square-mile New Territories, again with a view to buffering the existing territory from outside pressure.

The New Territories, however, were not acquired outright, but by a ninety-nine-year lease, in the style of fin de siecle imperialism. Hence the magic date 1997, which is at the center of the Sino-British troubles marking the end of Hong Kong's colonial life. They stem from the same source as the Opium War at its beginning--in Welsh's words, "a clash of cultures [that] was inevitable... given the supreme self-confidence of both parties." If Britain had not raised the issue of 1997 in 1979, the Chinese might not have done so, either. They considered the Unequal Treaties, as they called them, illegal anyway. This meant they could take back Hong Kong whenever they wanted, which was no time soon as long as the colony kept producing foreign exchange for the motherland. As T.L. Tsim, a Hong Kong columnist, put it, the Chinese view was, "We don't think there is a problem. If you still think there is a problem, it is your problem." But the British feared declining business confidence due to uncertainty about 1997. So a few years after Mao's death in 1976, when Sino-Western relations were warming, they privately offered to stay in Hong Kong beyond the end of the lease and continue to run the territory in the mutual interest of London and Beijing. Deng Xiaoping had to say no.

In 1982 Margaret Thatcher visited Beijing fresh from her Falklands victory, aiming to talk sense into the old man. She took the line that the original treaties were still valid, apparently angling to prolong the British presence indefinitely. Deng found this infuriating. The Hong Kong stock market plunged. The late, legendary David Bonavia of The Times wrote of Thatcher's visit, "Seldom in British colonial history was so much damage done to the interests of so many people in such a short space of time by a single person." After two more years of negotiations, the Chinese and the British issued a Joint Declaration in 1984, which they hailed as guaranteeing the stability and prosperity of Hong Kong. China would resume sovereignty in 1997. Until then, Britain would govern. In 1997 Hong Kong would become a Special Administrative Region (sar) under a Basic Law to be written by China's national legislature. For at least fifty years beyond that, Hong Kong would enjoy "a high degree of autonomy" and maintain its social system unchanged, under Deng's concept of "one country, two systems." (By separate agreement with Portugal, tiny neighboring Macao reverts to Chinese control in 1999. "The runup to '97," however, revealed misunderstandings buried in the Joint Declaration. For Britain, exit with honor from its last colony required "mak[ing] possible the widest democratic participation by the people of Hong Kong in the running of their own affairs," in the words of Hong Kong Governor Chris Patten. This was in keeping with the British practice of decolonization elsewhere and with democratizing trends in the post-cold war era.

Moreover, the previously apolitical residents of Hong Kong wanted political reform. Until then always psychologically on the way from someplace to someplace else (as Welsh's title suggests), the people of Hong Kong were shocked that the Joint Declaration and the Basic Law were written without any real input from them. The prospect of merging into the chaotic mess north of the border concentrated their minds on the value of their security, prosperity and freedom. On vacation trips to China, they found themselves treated as future wards by scruffy mainlanders. Hong Kongers responded with a mix of "fear, hostility, condescension and aversion," in the words of Hong Kong sociologist S.K. Lau.

The killings in Beijing on June 4, 1989, sparked vast anti-China demonstrations in Hong Kong. When the prc's National People's Congress adopted the Basic Law in 1990, it contained numerous provisions designed to keep power in the hands of Beijing. A pro-democracy group swept twelve of the fourteen seats it contested in Hong Kong's 1991 Legislative Council elections, the first in which any LegCo members were directly elected.

Meanwhile, Beijing's reluctance to approve financing for an expensive new Hong Kong airport undermined the conciliatory policy of Britain's hitherto dominant China-policy "mandarins," Sir Percy Cradock and Hong Kong Governor Sir David Wilson.

A few weeks before the newly arrived Governor Patten introduced the most sweeping of a series of British reform proposals, he told some visitors, including me, that he intended to persuade Beijing that accountable government would make Hong Kong easier rather than harder to rule after 1997.

Welsh points out that the shift in 1971 from appointing governors with Colonial Office careers to appointing those with Foreign Office backgrounds reflected a change in priorities from administering Hong Kong to dealing with Beijing. By the same token, the appointment in 1992 of Patten, a former m.p., former minister of environment, former chairman of the Conservative Party, talented campaigner and close ally of Prime Minister John Major (and early in his career, an aide to New York Mayor John Lindsay), reflected the importance in British politics of a graceful departure from Hong Kong, as well as the fact that such a departure would need the Hong Kong people's support.

No one who has met Patten doubts his commitment to democratic government, except the Chinese leaders. Where Britain saw honor, the Chinese saw perfidy.

Their view has been described in the serialized memoirs of Xu Jiatun, Beijing's chief representative in Hong Kong from 1983 until his defection shortly after the 1989 crackdown. China expected the British to return power in Hong Kong "to China, not to the people of Hong Kong." (Hong Kong, after all, had no sovereignty.) That which China was planning to keep unchanged for fifty years was not a new democracy created during the waning years of British rule, but the same executive-led system that the British found adequate for 150 years and that would have been as easily dominated from Beijing as it had been from London.

The Chinese suspected Britain of using democratic reform to sow dragon's teeth of chaos, nurturing (in Xu's words) "pro-British forces which could be relied on to continue to rule Hong Kong after 1997 as a regent of London even in the absence of British rule." They feared people such as Martin Lee, the leader of the United Democrats, a ramrod Lincoln's Inn barrister with a clipped British accent, who has given up drinking tea and coffee to get in shape for the political imprisonment he anticipates after 1997.

In the eyes of the Chinese, Patten has violated previous understandings and common sense. He reversed the practice of consulting the Chinese in advance of major decisions and denied them the veto they felt was implicit in the concept of "convergence" between the pre- and post-1997 systems. He spoke with irony, understatement and logic, and acted as if he thought words meant what they said, in Beijing's eyes all signs of weak reason or bad will.

Beijing called Patten in ascending order a "political prostitute," a "two-headed snake," and "the triple violator" (for violating the Joint Declaration, the Basic Law and some pre-Patten diplomatic letters).

Patten proposed to transform the Legislative Council from an appointed advisory body into an autonomous legislature, with a majority of its members accountable to the electorate through competitive elections in geographic and functional constituencies. He envisioned LegCo functioning on the Whitehall model of public debate and legislative supremacy. Chinese leaders wanted elections in which party-selected representatives would be confirmed in a display of public consensus. They expected LegCo to serve as a "flower vase" akin to Beijing's National People's Congress. Patten argued that the choice was his and LegCo's, since Britain still ruled Hong Kong and his proposals were not inconsistent with the letter of either the Joint Declaration or the Basic Law. The Chinese answered, in effect, that it was their Basic Law and they knew what it meant. The contretemps revealed two different concepts of "a high degree of autonomy," two different concepts of law and two different concepts of national honor.

China's leaders have large interests at stake. Reform in Hong Kong (as in Taiwan) increases pressure for democratization in China. The prosperous province next door, Guangdong, may be the place where domestic political control comes unbuttoned. Other restless regions, such as Tibet and Xinjiang, may ask for democratic self-rule on the Hong Kong model. Abroad, a weak response in such a crucial place to a challenge from a weak power would reduce the credibility of Beijing's demands that countries such as France and the United States respect Chinese sensitivities in Taiwan and Tibet. The Sino-British agreement granted Hong Kong a quasi-independent foreign policy in technical areas such as aviation, gatt membership, attendance at international trade meetings, Interpol membership, Olympic membership and so on. In 1992 the U.S. Congress adopted the McConnell Act, expressing an American national interest in Hong Kong's freedom and prosperity. A democratic Hong Kong is more likely to invite foreign interference in internal disputes with the home government in Beijing.

To stave off such problems, the Chinese leaders prefer to confront Britain now instead of the people of Hong Kong later. Beijing's chief policymaker for Hong Kong, Lu Ping, warned residents in a recent speech that the value of Hong Kong to China has been and will be its economic value...

Of course there are always a handful who are so naive [as] to think that they can turn Hong Kong into a political city in order to influence the mainland in the sense of politics. If that were the case, Hong Kong would be of negative value instead of positive value to China. This [would be] disastrous for Hong Kong.

Inside the colony the confrontation has produced strange partnerships. In the words of the sociologist Paul C.K. Kwong, on one side is a peculiar alliance of high official[s] and Chinese tycoons, which is trying to maintain a colonial structure encrusted until recently in a polity featuring a political appointment-cum-consultative system.... On the other side is a lameduck colonial government which is wooing the public, the middle class, the smaller businessmen and international capital to support its hastily drawn-up blueprint of quicker democratization. "We're all investing in China," an elegant businesswoman told me at a dinner in Hong Kong a few months ago, adding with a wrinkled nose, "We don't like Patten." Hong Kong's "property boys," as some call them, encounter the corruption, lawlessness and arbitrariness that are part of doing business in China but tell themselves that "things in China are done on a handshake," "I have connections that will protect me" and "the most important human right is to have enough to eat." They persuade themselves that China's current 12 percent growth rate will continue, the Chinese army won't split after Deng, the collective party leadership will hold together, economic growth will improve human rights and outside investment will subvert the police state from within. The Hong Kong elite expresses more anxiety about the economic consequences of American human rights pressure on China than about the impact of human rights violations themselves on political stability in China and Hong Kong.

The property boys are in some ways more intimately involved in China's economic development than the reformers in Beijing. It is not merely the magnitude of the investment funds passing through Hong Kong that matters, although the amounts in transit constitute two-thirds of direct foreign investment in the mainland. More important is the alchemy that occurs when tens of billions of dollars from China flow into the thousands of Hong Kong "shell companies" (also known as "false foreign devils") set up by Chinese enterprises and government offices in Hong Kong and are then reinvested back in China in private companies or joint ventures. In a dialectic worthy of Marx, the pass-through transforms money-losing socialist capital sodden with pension obligations, central government quotas, investment controls and profit remittance requirements into money-making capitalist capital responding with robber-baron keenness to domestic and international markets.

The result is an ambiguous kind of "property-rights reform," to borrow a euphemism beloved by both economic theorists and Chinese reformers. Just as the ancient Daoist philosopher Zhuang-zi did not know whether he was a philosopher dreaming he was a butterfly or a butterfly dreaming he was a philosopher, so China's state enterprises do not seem to know--or do not want others to know--whether they are socialist firms employing market techniques or capitalist companies renting government doorplates. In either case, Chinese state enterprises are eating their "stateness" away from within under the ardent tutelage of Hong Kong's patriotic capitalists. Patten has been unable to convince Beijing that the secret of Hong Kong's success is the rule of law, which would depend on a democratically elected, independent legislature (and an independent judiciary, another focus of debate). Having been rebuffed by Beijing in a series of talks that collapsed earlier this year, he has moved with LegCo support to implement his proposals without Chinese approval. Beijing in turn has threatened to dissolve LegCo and two other tiers of elected bodies in 1997 and start over. The stage is set for repression. Patten's gamble in this sense has already failed. He ultimately cannot win unless Beijing changes its mind about Hong Kong democracy.

But neither can he lose. A possible future British prime minister, Patten has gained an international reputation standing up to China and has no incentive to back down. He has chosen to place plates of glass around Hong Kong, in the words of an American diplomat, so that if the Chinese shatter them, at least the world will hear.

Should the glass shatter or slowly crack, Americans will become more aware of our interests in this once-borrowed place. Hong Kong is one of our major trading partners, and the center of our business presence in China and the Asia Pacific region. A healthy Hong Kong is a strong force for the "peaceful evolution" of China. Its successful integration into China would establish a worldwide precedent for the peaceful settlement of territorial issues, the coexistence of different social and economic systems and the solution of political and ideological problems by open competition. The crushing of Hong Kong's freedom would damage the post-cold war momentum toward democracy, hurt economic growth and political stability in the region and destroy a valuable way of life that embodies entrepreneurship, personal freedom and cultural pluralism.

There is, unfortunately, almost nothing America can do to avert a Hong Kong "train wreck." Expressions of concern are cheap, mfn trading privileges have already been abandoned as an instrument for influencing China and Beijing's leaders have shown they will pay any economic price to keep power. The only hope is that the modernization of China will bring wiser, more tolerant leaders to power in Beijing.

Yet the biggest threat to Hong Kong's future prosperity is not political repression, which the economy can survive within limits. Nor is it that Beijing will violate the principle of "one country two systems" as it understands it--as keeping a market system open and "letting the horses keep racing and the dancers keep dancing." It is that Hong Kong will be infected with the mainland's corruption. Xu Jiatun states that, in the late 1980s, 200 sons and daughters of high-ranking mainland cadres were doing business in Hong Kong. Many mixed public and private money, led extravagant lives and used their influence to gain positions and payoffs from Hong Kong businesses.

Some "worms turned into dragons," that is, became rich; others went bankrupt and fled. Hong Kong investors, traders, publishers and officials began their accommodations with people in power in Beijing and Guangdong the moment the Joint Declaration was signed. They started paying a tax in money and freedom that could easily grow large enough to undercut Hong Kong's competitiveness.

Hong Kong's hotel rooms are fully booked for June 30, 1997. At midnight the Union Jack will be lowered at Government House. The next morning, the city will look as beautiful as ever. Hong Kong will have survived. But barring unlikely changes in China, Hong Kong will have made an invisible transition, from a stable member of the developed world to an emerging market in a Third World dictatorship

Andrew J. Nathan is author of Chinese Democracy (University of California Press) and China's Crisis (Columbia University Press)

Transmitted: 94-08-09 12:21:19 EDT