This is the seventh article on Hong Kong’s so-called deep structural contradictions.

 

The historical development of Hong Kong has, in my opinion, always been defined by its relationship with the Chinese Mainland. The changing permeability of the “border” between Hong Kong and the Mainland symbolizes the changing dynamics of the relationship. This fundamental factor has shaped Hong Kong’s development for over 2,000 years and especially the recent past. It prescribes the conditions and sets forth the forces that in their totality determine the choices people in the territory face in political, economic and social affairs. This historical context is important for putting into perspective the nature of the British contribution to Hong Kong, both positive and negative aspects, and also the many economic and social policy debates that are surfacing now and will be faced in the years ahead.

 

Hong Kong as a political and legal entity separate from Xinan County (新安縣), of which it was a part of, was created after the British arrived in 1841. Before then, Hong Kong and the area in its vicinity had a long, rich history. To believe otherwise is to fall into one of two traps: either seeing Hong Kong’s history from the British perspective of creating an economic miracle from a barren rock, or seeing it from the Chinese perspective as a representation of the humiliation of a great civilization.

 

While much is still unknown about that early period, evidence from archaeological findings and written records suggest that the waters and area around Hong Kong were a busy crossroads of trade and cultural intercourse between East and West and a gateway to China from the south. As early as the fourth century, the “Tuen Mun area” (which would include modern-day Lantau, today’s Tuen Mun (屯門) and Nantou (南頭) in present-day Shenzhen) was the first port of call for mercantile fleets after crossing the South China Sea.

 

Dynastic Changes and Development

 

Historically the Pearl River estuary region was well known for its salt pans.  The most productive ones were located on the eastern coast, from Huangtian (黄田) and Nantou in present day Shenzhen to Tai O on Lantau, and Kowloon Tong and Lam Tin in Kowloon. After the Han (BC 206 – AD 220) conquest of Nanyue in AD 111, an imperial outpost to administer the salt monopoly was established in Panyu (to the northwest of present-day Hong Kong).

 

During the Tang Dynasty (AD 618 – AD 907) trade flourished in the city of Guangzhou, which had a monopoly over foreign trade, and the reported colony of foreign traders was over 100,000 strong.  During the Song Dynasty (AD 960 – AD 1279) the administration of the government salt monopoly was relocated to present-day Kowloon City next to the old Kai Tak airport, known as Guanfu Chang (官富場).

 

For many centuries the Tuen Mun area served as an outer port for Guangzhou, a naval base, a center for religion, and a production center for salt.  As a naval base the Tuen Mun Garrison (鎮) was founded in AD 736. As a religious center Tuen Mun played host to Buddhist monks and Islamic mullahs.  It is therefore not accidental that today’s Tuen Mun and Lantau are still renowned for their Buddhist, Taoist, and Catholic monasteries. Another name for Tuen Mun Shan was Beidu Shan (杯渡山) after the Chinese name of the well-known Indian Buddhist monk. The British gave it a different name, Castle Peak (青山).

 

The Tuen Mun area declined after the Mongols successfully invaded China and founded the Yuan Dynasty (AD 1260 – AD 1368).  In the war against the Mongols the area was punished after its inhabitants supported the ill-fated last Song emperors in the final resistance. Customs points were subsequently moved from the Tuen Mun area north up the Pearl River to Huangpu, and Tuen Mun was reduced to a mere anchorage.

 

The subsequent Ming Dynasty (AD 1368 – AD 1644) was inward oriented and for many years banned most forms of foreign trade, except tribute trade. This led to the growth of a large illicit trade, coastal piracy and numerous military adventures in which foreigners — primarily Portuguese and Japanese — were also engaged. Trade was finally legitimized because it was impossible to stamp out piracy, but the Tuen Mun and Guanfu area did not recover. 

 

The worst was yet to come during the Qing Dynasty (AD 1644 – AD 1911), when the Ming loyalist Zhen Chenggong retreated to the Island of Taiwan. He continued to harass the China coast, forcing the Qing court to adopt a policy of “moving the territories” (遷界) in 1622. All land within twenty-five kilometers of the sea coast was abandoned. The population had to be evacuated and the buildings demolished so that no food or assistance would be available to the loyalists. The area of present-day Hong Kong and its vicinity was seriously affected. 

 

The policy of “moving the territories” was subsequently abandoned in 1669, but re-population was only allowed after 1683. Most of those who came were Hakkas. Trade was restored in a number of coastal cities but was later restricted to the city of Guangzhou and the Macau settlement. Tuen Mun and Guanfu ceased to be an outer port for Guangzhou and became mainly a lair for pirates who preyed on the lucrative trade.

 

There is circumstantial evidence to suggest that trading activities resumed in Hong Kong after the Chinese navy, with the support of Portuguese vessels, eradicated the largest pirate-group led by Zheng Yisao (鄭一嫂) and her common law husband Zhang Bao (張保) after a lengthy engagement in 1810 off Chek Lap Kok. In any case, by the mid-1830s, the British opium traders were regularly mooring their supply ships in Hong Kong waters. 

 

From this limited record of Hong Kong’s early history we can appreciate that the area’s fortunes rose and fell with its changing relationship with the Chinese mainland over almost two millennia. Two points stand out. First, the history of the territory was very much connected to the history of China. Hong Kong had long been a trading and information hub of China because its geographic location and physical endowments made it a natural crossroads for trade and cultural intercourse. Second, the territory thrived during the Tang and Song dynasties, when the government in China pursued an open-door policy, and it declined during the Yuan, Ming and early Qing dynasties, when policies became inward looking. The forcible opening of China during the late Qing dynasty heralded a new chapter in Hong Kong’s development after the territory was lost to Britain following the Opium Wars.

 

Population Inflows from The Mainland

 

British rule provided Hong Kong with some insulation from the policies on the Mainland. Hong Kong could pursue its own natural historical advantages in trading activities with limited interference. This also dovetailed with British interests to use Hong Kong primarily as a trading post. Given the importance of trade to Hong Kong’s economic livelihood, it is not surprising that Hong Kong was declared a free port. Although the opium trade dominated at the beginning, over time the trade in other merchandise trade grew with the expansion of Mainland-related entrepôt trade.

 

One of the distinguishing features of trade in this era was the difficulty of navigating China’s customs bureaucracy and penetrating the domestic market. British traders relied heavily upon Chinese middlemen, even for the opium trade. Trade during the late Qing period was primarily organized as a restrictive monopoly operated by a cartel of Chinese merchants or compradors, who were able to bridge economics and politics, language and cultural barriers. The Chinese merchant class soon accumulated vast wealth.

 

As the economy expanded, workers from the Mainland streamed into Hong Kong.  During 1842-1949, population flows between Hong Kong and the Mainland were unrestricted except during the war years. Workers who came to Hong Kong were predominantly men in search of jobs. The earliest available records show that in 1845 out of an estimated total population of 23,817 there were 19,201 men, 2,862 women, and 1,754 children. The balance of the sexes improved much later as more families settled in Hong Kong. Nevertheless, large numbers of people would continue to move back and forth between Hong Kong and the Mainland. It was not uncommon for 10-20% of the population to leave Hong Kong and return to the Mainland in any one year, and in some years the figure was as high as 35%.

 

The easy flow of population between the Mainland and Hong Kong suggests that standards of living between the two areas were close to each other. The border was highly permeable and was not a barrier to entry and exit. This implies that although the Chinese merchant class accumulated huge fortunes from trade, it is unlikely that the vast majority of the laborers prospered. Indeed, life in Hong Kong was far less glamorous and exciting than life in Shanghai, which would become the leading industrial and commercial center of China.

 

The predominance of recent migrants and sojourners within the population generated very few demands on the government to provide public assistance or services. Private charities and missionaries became the main sources of social support. On the whole it was both possible and expedient for the government to adopt a “light handed approach” to economic and social policy. Public expenditure and revenue were kept simple, and for many years the government opium monopoly provided most of the public revenue. Only the indigenous rural inhabitants in the New Territories were well-organized enough to defend their own interests with considerable success, even to this day.

 

Three Transforming External Factors

 

The development of Hong Kong took a dramatic turn as a result of three events. First, shortly after the Chinese Communist Party came to power, the border with the Mainland was effectively closed on the China side to prevent people from leaving. Second, Hong Kong’s historical advantage in entrepôt trade was rendered obsolete after the outbreak of the Korean War because of the United Nations embargo against trade with China. Third, from 1945 to 1950 the population of Hong Kong swelled from 600,000 to 2.1 million as many escaping the ravages of a civil war streamed into Hong Kong and provided the necessary human capital to support the post-war economic miracle. The combination of these three exogenous events turned Hong Kong into an economic entity disconnected from the Mainland for the first time in its history.

 

The new arrivals were mainly laborers and farmers, but also included numerous entrepreneurs and professionals from Shanghai. These businessmen brought management and technical know-how and market knowledge from one of the most advanced economic centers in Asia. They represented numerous industries, including trading, manufacturing, retailing, banking, movies, shipping and the professions. The range of skills was much broader than the trading activities that had predominated Hong Kong.

 

Export-oriented manufacturing production replaced entrepôt trade to become Hong Kong’s new comparative advantage. Manufacturers were able to obtain credit from Hong Kong banks and to work with British trading companies in entering first the Commonwealth market and later the North American market.

 

The fact that the population constituted mostly recent immigrants probably reduced the level of lobbying for favors, which would otherwise have led to more government intervention. The British government in Hong Kong was considered to have a short-term horizon consistent with its lack of interest in indulging in grandiose schemes to promote economic development and its eagerness to ensure that Hong Kong would not become London’s burden. Furthermore, the British government probably recognized that its mandate to govern was, in the final analysis, at the pleasure of the Chinese government and with the acquiescence of the local population. Hong Kong’s business community was left unfettered to pursue economic gains through the market. This freedom, available to all on an equal basis, is in my view the most cherished value of those who grew up in Hong Kong in the post-war era.

 

The government’s choice of a “light-handed approach” to public policy has been considered to be a unique British contribution, even though Britain did not adopt it at home in the post-war period. Many believe that Hong Kong’s laissez faire economic system was responsible for the post-war economic miracle. Most likely, it was adopted more as a matter of necessity and out of both convenience and conviction since a “light handed approach” to governance was a sensible response to the ambiguities of Hong Kong’s political relationship with the Mainland.

 

Different Development Paths: Hong Kong & Singapore

 

An example of the Hong Kong government’s light touch was its response to the imposition of voluntary export restraints by the U.S. government through the Multi-Fiber Agreement. Uniquely among affected economies, it chose to give the quotas to the manufacturers immediately rather than administer them itself. The quotas were allocated in proportion to manufacturers’ historical production figures at no charge and quota holders were allowed to transfer the quotas freely at market prices and reap the profits. The outcome was that the textiles and garments industry developed efficiently and grew to dominate the world. It expanded overseas to take advantage of quotas that were not utilized in other parts of the world. Most importantly for Hong Kong, the government avoided the curse of corrupting officialdom as happened when the quota system was introduced elsewhere.

 

It is useful to consider Hong Kong’s development in contrast with Singapore’s. Singapore’s historical advantage, like that of Hong Kong, was in entrepôt trade and not manufacturing exports. But unlike Hong Kong, Singapore did not receive a sudden infusion of entrepreneurial talent nor did it lose its entrepôt trade due to war. It therefore had to take a more hands-on approach to develop its manufacturing base by attracting foreign investments. As a young nation with socialist origins struggling to find its rightful place among suspicious neighbors, the government embraced “top-down heavy-handed” development policies.

 

Incentives were provided to attract foreign investments into manufacturing, which has remained at 20-25% of GDP. The resources for these publicly favored initiatives were underpinned by forced savings mobilized through the Central Provident Fund that once required mandatory contributions of up to 40% of earnings. Loyalty from citizens was marshaled through a policy that, first, nationalized a portion of privately held land, and second, provided subsidized homeowner units to 80% of the population.

 

Hong Kong’s Entrepreneurial Spirit

 

Singapore’s entrepreneurial talent is to be found in its government and government corporations; its business skills are largely managerial rather than entrepreneurial. Hong Kong’s entrepreneurial and managerial talent is distributed the other way around.

 

The renowned entrepreneurial spirit of Hong Kong’s business community may well be the outcome of an immigrant population that is, to begin with, a highly self-selected group. Those who are prepared to move here are different from those who stay behind. The mover-stayer distinction is well-known. Movers are more entrepreneurial and able to take advantage of the free market policies of a government that provides them with clear, simple and predictable rules of the game. The free market environment has led them to excel at taking business risks and accumulating wealth.

 

When Deng Xiaoping made his historic trip to the south in 1992, the Pearl River Delta had already leaped pass Thailand to become the “Fifth Asian Dragon” in terms of export value. This was a mere 12 years after the opening of China. To a considerable extent this success was the result of Hong Kong businessmen who pursued opportunities by crossing the border.

 

I would like to invite the reader to conduct a thought experiment. Imagine 30 years ago, on the eve of China’s opening, two huge tug boats are commissioned: one to drag Hong Kong down to the southern tip of the Malacca Strait and the other to drag Singapore up to the Pearl River estuary. Would the Pearl River Delta have made a similarly successful leap? I doubt it very much.  Hong Kong was able to respond to China’s opening with agility because its free market environment endowed it with supply side flexibility.

 

 

Deep Structural Contradictions (7)

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