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Hong Kong and the US-China New Cold War

Will Hong Kong be a “Free World outpost” or a bastion for “Red China”?

Hong Kong and the US-China New Cold War

China and Kong Hong national flags are displayed outside a shopping center in Hong Kong on June 28, 2017 to mark the 20th anniversary of Hong Kong’s handover to China.

Credit: AP Photo/Kin Cheung

Over the past few months, Hong Kong, a former British colony and now a special administrative region under Chinese sovereignty, has emerged on the radar of the United States.

On February 27, 2019, the U.S. consul general in Hong Kong, Kurt Tong, delivered an unusual speech “cautioning” about the sustainability of Hong Kong’s autonomy under the “one country, two systems” (OCTS) model. In his speech, Tong highlighted the importance of maintaining Hong Kong’s autonomy in the “free and open Indo-Pacific” (FOIP) region. On March 21, 2019, the U.S. State Department published its annual report on Hong Kong, which found that the region’s autonomy has been “diminished” in consequence of China’s interventions, though it was still “sufficient” to justify continued differential treatment from the United States. On April 25, 2019, the State Department issued a high-profile statement expressing its concerns on the proposed Extradition Bill, which, when passed, will authorize the Hong Kong government to extradite people to China and put an end to Hong Kong’s 178 year-long separate legal jurisdiction. On May 4, 2019, Tong issued a more direct warning in a media interview, saying that “the concern of the U.S. is if the distinctions between Hong Kong and the mainland are blurred and the OCTS framework is less clear, then may be there would need to be adjustments in U.S. policy.”

People may be surprised by Washington’s attention to Hong Kong, a territory only 1,106 square kilometers in size. But if one looks closer at the United States’ extensive, but usually under-discussed, geopolitical interests in Hong Kong then we should not be surprising to see Washington step in — particularly as the U.S. and China move toward a new Cold War.

U.S. Interests in Hong Kong

The U.S. presence in Hong Kong could be traced back to 1843, when it set up its first consulate;but U.S. interests in Hong Kong only became prominent during the Cold War period, when the United States replaced Britain as the dominant geopolitical power in Asia. During World War II, Washington originally took the view that Britain should return Hong Kong to China, then under Kuomintang control, but the rise of “Red China” in 1949 changed its position toward Hong Kong. Located along the “Bamboo Curtain” that demarcated communist governments and the “Free World” in Asia, Hong Kong was seen by the United States as a friendly outpost in the Cold War.

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In its 1960 confidential report, the U.S. National Security Council stated that the overriding objective of the United States was “(c)ontinuation of Hong Kong’s status as a Free World outpost.” For this purpose, Washington adopted a two-pronged approach: On the one hand the United States supported the British Hong Kong government to consolidate its rule by improving its defense (providing a joint strategic deterrent with Britain against Chinese attack) and supporting its industrialization (improving the well-being of the Chinese refugee population). On the other hand, the United States made use of the status of British Hong Kong as a separate jurisdiction located in proximity to the People’s Republic of China to pursue its strategic aims, such as establishing the United States’ largest overseas intelligence apparatus in the U.S. consulate-general in Hong Kong (which housed a large-scale CIA station and FBI attaché) and conducting anti-communist propaganda via the U.S. Information Service (appealing to mainland Chinese, Hong Kongers, overseas Chinese, and Asian readers).

In the post-Cold War period, the general impression was that Hong Kong’s value to the United States had become economic — Hong Kong is now the United States’ 19th largest trade partner (and the single-largest contributor to the U.S. trade surplus) and a major business operation base for U.S. companies in Asia (U.S. companies ranked first among non-local companies, having 290 regional headquarters and 434 regional offices in Hong Kong in 2018). Nevertheless, a close examination will reveal that Hong Kong is still playing a considerable role in promoting U.S. strategic interests in Asia.

After the 1997 handover back to Chinese control, given the strategic location of Hong Kong, the U.S. consulate-general in the territory kept reporting directly to the State Department in Washington, rather than to the U.S. embassy in Beijing; The U.S. Navy still regularly makes port calls to Hong Kong because it is the “closest to deployment tracks” of U.S. vessels; U.S. C-17 military aircraft regularly operate in Hong Kong’s airport to deliver supplies to the U.S. consulate-general. Most notably, different U.S. administrations still implicitly treat Hong Kong as a “Free World outpost,” holding on to the expectation that after reverting to China Hong Kong would become a “change agent” driving China’s liberalization. For example, U.S. President Bill Clinton praised Hong Kong as “a catalyst of democratic values” when making a speech about U.S. policy toward China on May 28, 1993; the same theme has also been repeated in a recent speech made by Kurt Tong, who emphasized the “demonstration power” of Hong Kong in showing China global best practices.

The United States’ extensive geopolitical interests in Hong Kong were institutionalized by the 1992 U.S.-Hong Kong Policy Act (USHKPA). The USHKPA recognizes Hong Kong as a nonsovereign entity distinct from China under U.S. laws (in terms of trade, investment, immigration, transport, international agreements and membership, etc.) and indicates U.S. support for its democratization. The USHKPA also mandates the State Department to keep a close eye on the state of Hong Kong’s autonomy, with the president being authorized to suspend part or all of the differential treatment should it be deemed “not sufficiently autonomous.” The USHKPA therefore provides Washington with a policy tool to step into Hong Kong affairs after the handover, if necessary.

Chinese Interests in Hong Kong

We can only have a full geopolitical picture if we also look at China’s interests in Hong Kong since the Cold War.

Hong Kong has always been seen by Beijing as crucial to the survival of the Chinese Communist Party (CCP) regime. In February 1949, before the founding of the People’s Republic of China, Mao Zedong had already decided not to retake Hong Kong and instead leave it to the British, a policy later formally termed by Zhou Enlai as “long-term planning, full utilization.” By keeping Hong Kong as a separate jurisdiction in the name of British Hong Kong, China successfully circumvented the blockade imposed by the United States since 1949. During the Cold War period, Hong Kong functioned as the single-largest contributor of foreign exchange to China (estimated at over 173 million pounds in 1966, about a third of the total); the only entrepôt for “smuggling” sanctioned Western technology, equipment, and medicines to China and exporting Chinese food products; a business operation base for Chinese enterprises; and an intelligence center for Chinese agents. Without Hong Kong, it is questionable whether the CCP could have survived the U.S. blockade and the Sino-Soviet split from the 1950s to ‘60s.

Hong Kong still functions as the single most important capital provider to China by serving as the largest source of inward direct investment (usually constituting 60 to 70 percent of China’s FDI), a major listing place for Chinese companies (a total of 1,146 H-shares, Red-chips and Mainland private enterprises have been listed in Hong Kong’s main board in 2018), and an important source of bank loans (in 2018 the total amount of Hong Kong banks’ net claims on bank and nonbank customers in China exceeded HK$713 billion).

The irreplaceable value of Hong Kong to China was clearly the reason behind  Beijing’s decision in the 1980s to extend Hong Kong’s status as a separate jurisdiction beyond 1997 in the name of the “Hong Kong Special Administrative Region” (HKSAR). From the Deng Xiaoping regime to the Xi Jinping regime, Hong Kong has proven itself as indispensable to Beijing’s survival.

In recent years, as China has aggressively expanded its influence, Beijing leaders are trying to transform Hong Kong into a “Red China outpost” because its internationally-recognized status as a separate jurisdiction provides the best vehicle for offshore Chinese influence operations. For example, many Chinese companies have transformed themselves into “Hong Kong companies” for the purpose of exporting China’s outward direct investment (in 2017 HK$179 billion flowed from China to Hong Kong), including the infamous Nicaragua canal deal executed by Chinese businessman Wang Jing through a Hong Kong-registered company called HK Nicaragua Canal Development Investment in 2013.

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Hong Kong’s status as a separate customs territory and an independent shipping registry also serves China’s interests well by allowing it to circumvent U.S. export controls (e.g. China purchased U.S.-made satellites via a Hong Kong-registered company called Asia Satellite Telecommunications) and sanctions imposed by the UN (e.g. oil smuggling by a Hong Kong-registered ship called Lighthouse Winmore to a North Korean vessel in December 2017). Even HKSAR passports and Hong Kong’s separate membership in international organizations have been found to be useful for China to expand its influence, as shown by the frequent use of HKSAR passports by mainland elites such as Huawei’s chief financial officer Meng Wanzhou (who was found to hold three HKSAR passports with different numbers). Hong Kong’s separate status also effectively gives China a second vote in international organizations, as shown in the vote to revoke Taichung’s hosting rights for the East Asian Youth Games in July 2018 (China and its two SARs, Hong Kong and Macau, all voted in favor of calling off the games).

Last but not the least, after the United States started to pressure ZTE and Huawei in April 2018, Beijing immediately announced in May 2018 its decision to make Hong Kong the national innovation hub. The open secret of this announcement is Beijing’s plan to make use of Hong Kong’s separate status to import Western technology; for this purpose Beijing also correspondingly expedited its plan to incorporate Hong Kong into its more direct jurisdiction through the Greater Bay Area (GBA) plan. According to China’s GBA Outline Development Plan, Hong Kong will be put under the leadership of a high-level GBA leading group chaired by Chinese Vice Premier Han Zheng, meaning that the territory’s autonomy could be more “fully utilized” by Beijing.

Clearly, in the process of transforming Hong Kong into a “Red China outpost,” China is trying to change the “inner content” of Hong Kong’s autonomy without breaking the “outer shell” of the OCTS model — to use the official line of Beijing, this means that “the central government exercises overall jurisdiction over the HKSAR,” as promulgated by PRC State Council’s 2014 White Paper. In other words, China does not intend to completely get rid of the OCTS model, but it is aiming to hollow out the autonomy of Hong Kong so that the OCTS model could be “fully utilized” for its own interests. This geopolitical background explains China’s heavy-handed approach to suppress Hong Kong’s democratic movement in recent years. Any move toward a greater degree of democratic self-government will disrupt Beijing’s plan to transform Hong Kong into a tool for PRC influence.

Hong Kong at the Forefront of U.S.-China Struggles

The major lesson that could be drawn from the above geopolitical history is that Hong Kong has always been at the forefront of U.S.-China struggles.

In the bipolar Cold War period, when the United States adopted a containment policy to check the spread of communism from the Soviet Union and its allies, including China, Washington positioned Hong Kong as a “Free World outpost” under this umbrella policy. Concurrently, China resisted U.S. containment policy by “fully utilizing” the status of Hong Kong to bypass the U.S. blockade.

Since the visit of President Richard Nixon to China in 1972, different U.S. presidents from Jimmy Carter to Barack Obama have sought to “engage China in the hope that it would become better integrated into the international community.” In this light, Hong Kong’s role in U.S. policy evolved into some form of change agent helping to liberalize China under the American engagement policy; concurrently China is fully aware of the U.S. attempt to promote “peaceful evolution” of the CCP regime and that Hong Kong is a “Trojan Horse” of the whole U.S. strategy. Therefore in the early post-handover period, China adopted a defensive approach, trying to prevent the “well water” of Hong Kong from intruding into the “river water” of China. More than four decades after 1972, it is obvious that the U.S. engagement policy has failed to liberalize China and the U.S. expectation that Hong Kong could be its change agent proved to be a fantasy. Instead, China emerged as a new superpower under the unprecedented model of “authoritarian capitalism” and in recent years Beijing also gained ground by transforming Hong Kong into its own Trojan Horse.

The Trump administration, since taking office in January 2017, has altered the direction of U.S. policy toward China by abandoning the traditional engagement approach and exploring a competitive approach, confronting Beijing on various fronts from trade and technology to intelligence and military affairs. But one critical issue remains unanswered: What is the place of Hong Kong in the new China policy of the Trump administration?

U.S. Options in Hong Kong

Conceptually, there are three broad options for the United States.

First, Washington can keep its existing “principled hands-off approach,” i.e. issuing warnings to China about the erosion of Hong Kong’s autonomy but taking no action under the USHKPA. This approach is understandable given that the United States recognizes Hong Kong as part of the sovereign territory of China and restrains from having any direct involvement in Hong Kong affairs. But the downside of this option is also obvious. The United States has adopted this option since the 2014 Umbrella Movement, but its repeated warnings so far have not helped prevent the continuous erosion of Hong Kong’s autonomy. In fact, Washington is now facing the risk of becoming a toothless tiger on the Hong Kong issue as China finds that its warnings are not backed by any action. Most importantly, under this option China will be able to easily transform Hong Kong into a “Red China outpost” and the territory’s differential treatment will become the biggest loophole of any U.S. sanctions imposed on China.

Second, the United States can impose territory-wide sanctions by suspending part or all of the differential treatment granted to Hong Kong under the USHKPA. This option could be quickly executed under the existing USHKPA by way of presidential executive orders. This would make sense if the United States sees the OCTS model as becoming a threat to its national interests and it does not have the leverage (or it is already too late) to stop China from transforming Hong Kong. This option, even if adopted partially (e.g. imposing a technology export ban), will greatly undermine Hong Kong’s role as an international financial center and therefore deal a severe blow to the Chinese economy, given China’s irreplaceable reliance on Hong Kong’s financial sector. However, this is a “nuclear option” because its territory-wide nature will not only hurt Beijing and its local collaborators in Hong Kong, but also all the citizens of Hong Kong who, for decades, have kept fighting for democratic self-government. Also, suspending part or all of the differential treatment for Hong Kong under the USHKPA will effectively mean that the United States is taking the lead to practice a “one country, one system” policy toward Hong Kong, which is a deviation from the longstanding policy to support Hong Kong’s autonomy under the OCTS model. That would also be contradictory to Washington’s attempt to incorporate Hong Kong into the FOIP framework as mentioned by Kurt Tong.

Third, the United States can impose individual/entity-targeted sanctions for infringement of Hong Kong’s autonomy under the USHKPA, such as freezing the assets and denying entry of those pro-CCP persons/entities who are seen by Washington as undermining Hong Kong’s autonomy. Procedurally, this could be done by incorporating relevant provisions into the existing USHKPA or adopting the pending Hong Kong Human Rights and Democracy Act. The rationale of this option is to distinguish pro-CCP persons/entities from the citizens of Hong Kong. This approach also recognizes that most of Beijing’s interventions — such as the disqualification of democrats by district officers, the rejection of Victor Mallet’s visa renewal by immigration officials, the ban on Hong Kong National Party by police officers and the passage of a co-location arrangement by pro-CCP legislators — were actually carried out by local collaborators in the HKSAR government and Legislative Council. This option would kill two birds with one stone: It would increase the cost for pro-CCP local collaborators to execute Beijing’s interventions, providing an effective check against further erosion of Hong Kong’s autonomy; it would also complement advocacy for democratic self-government by Hong Kong democrats, reviving Hong Kong’s position as a “Free World outpost” at the forefront of FOIP. But it is almost certain that China would have a strong response to this option, setting up Hong Kong a battlefield for a U.S.-China showdown. Unless the United States has a clear, feasible plan to sustain Hong Kong’s autonomy in the long run and has the determination to push ahead, adopting this option may only inject political instability into the territory.

Where Are the Voices of Hong Kongers?

In this emerging U.S.-China new Cold War, where are the voices of Hong Kongers? Should Hong Kong’s people align with the United States or China, or adopt some form of nonalignment? Room for small entities is always limited under the geopolitical games of the big powers, but there are also numerous historical examples of the “leverages of the weak” like Austria and British Hong Kong in the Cold War.

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In any case, Hong Kongers should not be mere spectators, otherwise they will become pawns on the geopolitical chessboard; they must get their voices heard and defend Hong Kong as an internationalized autonomous region open to the whole world. Of course, the HKSAR today is not British Hong Kong and the regional context has changed quite significantly. But no matter how narrow the bridge is, Hong Kongers must try to cross it.

Brian C.H. Fong is a comparative political scientist from The Education University of Hong Kong. He is now editing a book volume entitled China’s Influence: Centre-Periphery Tug of War Across the Indo-Pacific (with Andrew J. Nathan and Wu Jiehmin).