the framework set by the Basic Law, but it is also likely to intervene more fre- quently in the affairs of Hong Kong, and with less regard for the practices of com- petitive markets. If so, Hong Kong's eco- nomic skills should still play a strong po- sition in the development of South China. The colony may weii retain a special role as financial and economia cantar for the region, although with a reduced interna- tional profile.
A third scenario one more nega- tive for the future of Hong Kong - would be one in which China falls into political or economic disarray, and drags Hong Kong into its own crisis. In this case, Hong Kong could be fully absorbed into China, most likely in a context of unsta- bla Chinesa molitics. Of the three enanar- ios, we think the second one is the most likalu ta AAALIP Bad mivaa tha mizidna ai
economic development in China, we con- sider the crisis scenario the least likely.
Implicit in the three alternatives is the view that local residents accept the re- turn to Chinese rule as inevitable. This is suggested by, among other indicators, the absence of any serious pro-indepen- dence movement in Hong Kong. More generally, though not depoliticized, the focal population seems to value more economic stability than unlimited self- rule. The Basic Law appears to enjoy support because it provides a framework for a degree of political autonomy and for ongoing economic stability. Any reti cance ahsia China'a mila shouse thraugh a relatively small but steady migration out of Hong Kong. For those that remain, the main concem is to avoid political un- certainty and its negative effects on eco- nomic prospects. Confrontation with China is bound to be avoided because it would in all likelihood cause such eco- nomic instability. Conversely, a steady economy is likely to be assured as long as China's sovereignty is unquestioned.
Political Dynamics
China has always claimed sovereignty over the territory of Hong Kong. By the early 1980s several factors made it in. creasingly urgent to draw a more precise future for the colony. A part of Hong Kong's territory was to revert to China in 1997, a date that in 1982 already be- Gamò rélévani for some business con. tracts. Also, the Chinese government was designing a possible model for inte grating Taiwan into the mainland as a Special Administrative Region. Finally, China had been opening to economić re-
A confrontation scenario in the years ahead thus seems unlikely, but it is pos- sible that the interests of the local popu lation may clash with China's policies for the territory, and that a serious political crisis could develop. Although small, the risk for debt and déposit holders is that, in case of major political difficulties, hold- ore of assets dõnuminated in H.K. dollars wouki take flight into strong currencies. Under present arrangements, the Monetary Authority holds more than enough foreign assets to back its own monetary base (foreign exchange hold. ings were made public in 1991 for the first time, and they were valued at US$29 billion). However, these reserves are but a minor part of the total of Hong Kong's financial liabilities. In the event of a sé- vere crisis, there is likely to be a sharp
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uidation value would probably be insuffi cient to back the territory's liabilities to both residents and non-residents.
This crisis scenario remains remote, but there may be some friction between China and Hong Kong over various is- sues. In particular, China is increasingly involved on matters-economic, legal, and political-that will have an impact beyond 1997. For example, China has expressed concern that past fiscal sav- ings would not be depleted in the period up to 1997 - and the Chinese and British governments have that ine fiscai reserves on June 30, 1997 should not be long than Lugn5 billion. China aisü wants to maintain control over the evolu• tion of political institutions such as Legco, and the judicial framework. Periods of tension are thus likely to occur as 1907 approaches, but they should not develop into more permanent crises and their impact on financial stabilty is likely to be limited.
form and to international trade for several years; not coincidentally, China started several "Special Economic Zones" near Hong Kong, in part to take advantage of the colony's international standing, and in part to draw Hong Kong closer. These factors led to an agreement between China and Brain to return Hong Kong to Chinese rule. Hong Kong representatives nad no direct involvement in the negotia- tions process (1882-84), in part because Britain never developed channels of de- mocratic representation. Another factor is
Hong Kong 5
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