Part 1: From colonialism to confusion

Henry C K Liu

First appeared in Asia Times on Line on May 14, 2003

The current severe acute respiratory syndrome (SARS) crisis highlights an obvious fact: that Hong Kong is an inseparable part of China, regardless of the artificial separation in the "one country, two systems" (OCTS) arrangement.

On July 1, 1997, China regained sovereignty over Hong Kong after one and a half centuries of shameful colonial occupation. What should have been the beginning of an era of renewed national pride and prosperity for the residents of Hong Kong, more than 90 percent of whom are Chinese, degenerated instead into half a decade of confused identity crisis and shocking economic contraction with no end in sight. The departing British had 15 years to set Hong Kong up as a time bomb for China, by disguising colonialism, the most evil of political institutions, into a haven of bogus democracy and sham freedom, and by presenting a colonial command bubble economy as a faked model of free-market fundamentalism.

Love is blind and infatuation disguises faults as virtues. As Rudyard Kipling fell in love with the pageantry of colonialism and saw racial exploitation as the "White Man's Burden", Milton Friedman, Nobel economist, fell in love with colonial Hong Kong, seduced by the wine-and-dine hospitality of its colonial masters and elite compradores. Friedman mistook Hong Kong's colonial economic system as a free market, despite Hong Kong's highly orchestrated colonial command economy.

For 156 years, Britain deftly manipulated the economy of Hong Kong, as a jewel in the British imperial crown, to opportunistically respond to changing global geopolitical forces for Britain's benefit. Even during the best of times, the average local Chinese small and medium businesses had to operate under the dictates of British colonial policy and at the mercy of monopolistic British trading firms and banks, not to mention that the average worker never had it good at all. British monopolies needed an unregulated supply network of ruthless predatory competition to keep costs low, by disguising the institutional slavery they lorded over as a free market. It was a system of survival not of the fittest, but of the fittest slaves, the ultimate of a divide-and-rule stratagem.

Friedman even apologized for Hong Kong's discretionary currency board despite his trademark monetarist advocacy for free-floating exchange rates set by foreign-exchange market forces. The linked-exchange-rate mechanism for the Hong Kong dollar was introduced by the British in 1983 as a political expediency in response to the 1982 Sino-British Joint Declaration on the return of Hong Kong to China by 1997. It was not based in the slightest on alleged monetary insights that have since been conjured up to justify the political decision. Popularly known as the peg, the linked-exchange-rate mechanism was the central factor behind Hong Kong's bubble economy in the early 1990s and has locked Hong Kong in a steadily downward spiral since the Asian financial crises that began in 1997.

From 1935-67, Hong Kong operated a classic colonial currency board pegged to the pound sterling, as part of the sterling hegemony of the British Empire, in which private British banks, not the government, issued the currency, a practice that continues today. Instability in the value of the pound in the late 1960s pushed Hong Kong to switch to a gold-backed US dollar peg. In 1946, the Bretton Woods regime came into existence, thereby forbidding the importation of gold for private purposes in signatory nations. Britain was a signatory but Portugal was not. Thus a Macau-to-Hong Kong gold-smuggling operation flourished until 1974, two years after the United States took the dollar off gold, in effect abolishing the Bretton Woods system of fixed exchange rates, when Hong Kong abolished a law that requires a special license to import gold. The tiny Portuguese colony of Macau became one of the world's biggest importers and re-exporters of gold during this period.

After the United States in 1971 suspended the Bretton Woods system of fixed exchange rates tied to a dollar pegged to gold at US$35 an ounce, the US dollar too came under periodic attack, resulting in the dollar sinking in free float. Hong Kong then decided also to let its currency float, which worked reasonably well until the commencement of Sino-British negotiations on the return of Hong Kong to China, which unleashed wild speculation against the Hong Kong dollar, a precarious colonial currency whose days were numbered. By the end of October 1983, Hong Kong pegged its currency to the US dollar at a rate of 7.8:1, in effect devaluing the Hong Kong dollar by 50 percent from its previous normal market fix of around 5:1.

To the chagrin of Hong Kong's colonial administration, Friedman publicly suggested that after 1997, "the only choice is for the Hong Kong dollar to be absorbed by the yuan and for Hong Kong's foreign reserves and foreign assets to be taken over by China". It was a rational suggestion, and if the Hong Kong Special Administrative Region (SAR) government had followed it, Hong Kong would be prospering at 9 percent growth now, along with the rest of the Chinese economy, instead of negative growth from deflation caused by a freely convertible overvalued currency.

The bogus democracy promoted by the last British governor, Chris Patten, and the free-market myth created by Friedman's fantasy have fueled Hong Kong's eager self-delusion. The so-called rule of law, so frequently touted these post-colonial days in Hong Kong, merely meant that no local Chinese business ever won a case against any British trading firm in 150 years of colonial justice. Hong Kong's low-tax myth is merely a cover-up for the exorbitant land tax disguised by the government's century-old, unseemly role as chief land speculator. Throughout its history, Hong Kong's economy has always been driven by geopolitical conditions rather than by free-market fundamentalism, much less by democracy or the rule of law.

What most analysts miss is that Hong Kong's future is dependent not on China's adherence on its OCTS policy of non-interference in Hong Kong's internal autonomy, or on the continuation of a fantasized free-market system, or rule by colonial law disguised as rule of law. Rather, it depends on whether Hong Kong can again recognize changes in the global geopolitical landscape since the end of the Cold War to reorient a new useful role in it.

The OCTS policy erroneously accepted Hong Kong's colonial regime as democratic and free-market, instead of the colonial governance and command economy that it actually was. The Basic Law, Hong Kong's mini-constitution drawn on the OCTS principle, contains defining clauses on the political and economic systems of Hong Kong that are mere fantasies of Anglo-US propaganda. The Basic Law in essence condones a continuation of Western neo-imperialism under Chinese sovereignty for another 50 years. As such, these constitutional clauses constrain the government of the SAR from any attempt to face reality and provide solutions to real problems it is facing. The artificial constitutional segregation of Hong Kong from China is now creating difficulties in Hong Kong's effort to be integrated with the booming economy of the Pearl River Delta. China has no need for Hong Kong compradorism in this era of direct contact. Neither do China's trading partners in the West.

Moreover, world trade has changed under a decade of US-imposed globalization, and is changing again with its impending collapse and restructure. Hong Kong, as an international trading center on Chinese soil, must change with the new geopolitical landscape to survive. There are increasingly undeniable indications that British propaganda to disguise colonial rule as neo-liberalism has trapped Hong Kong under Chinese sovereignty into a state of policy paralysis and rendered it impotent in disengaging itself from a downward spiral of dysfunctional obsolescence. Hong Kong will prosper only if China replaces Britain in Hong Kong and sets policies for a command economy to serve the geopolitical interest of China, as the British had done for one and a half centuries.

At the early part of the 19th century, Hong Kong was little more than a backwater cove in southern China, with no indication it would one day be turned into a world trade center by geopolitics. All through the 19th century, China had no interest in overseas trade. Thus a natural deep harbor on its coast on the South China Sea was of little significance to the Chinese economy. In the early 1800s, Hong Kong was home mostly to indigenous farmers and fishermen, pirates and smugglers. At that time, China's reluctant contact with an increasingly intrusive West took place up the Pearl River, at Canton, more correctly known as Guangzhou, some 145 kilometers north of Hong Kong. It was in Canton that traders from Britain, France, the United States and elsewhere in the West lived and worked in a small segregated enclave strictly regulated by Chinese officials. British ocean-going ships found Hong Kong's deep harbor useful for unloading and loading cargo to be barged up the Pearl River to Canton. Trade developed only slowly and in China's favor, because the Chinese economy had more to offer the Western economies than it needed in return.

The British soon found a remedy for this trade imbalance, which was draining silver steadily from the Bank of England. They illegally imported opium grown mostly in British India to China, where opium sale and use had been banned since 1729 under the reign of Emperor Yung-zheng (1723-35), and its importation and cultivation were made illegal under Emperor Jia-qing (1796-1820). It was in Canton that the illegal opium trade flourished, with great profit for the British. By 1840, the British were importing 40,000 chests of opium to China annually, selling at a price of $2,075 (Stg160) per chest that cost the British $25. US traders, such as the Delano family, as in Franklin Delano Roosevelt, also made great fortunes shipping Turkish opium to China and returning with Chinese tea and porcelain to Boston in Yankee Clippers. Much of the wealth in Boston came from this narcotic trade and provided capital for the westward expansion of the United States. This illicit massive transfer of wealth from China, one of the world's richest and largest economies at the time, played a key role in financing the economic development of Europe and North America in the 1800s.

Opium addiction in China grew to epidemic proportions within a short time, ravaging all levels of Chinese society. Qing Dynasty authorities appointed a special commissioner in Canton in 1840, with orders to stamp out the insidious opium trade. A week after his appointment, special commissioner Lin Zexu ordered his troops to surround the international enclave in Canton, and demanded that the British drug dealers turn over all of their opium contraband. After a six-week standoff, the British drug dealers surrendered more than 20,000 chests of the narcotic, which Lin burned in public.

These British opium traders, led by the East India Co and Jardine Matheson & Co, a leading British firm still operating in Hong Kong today, provoked a belligerent response from the British military with the First Opium War of 1840-42. The Opium War was depicted in British-issued textbooks used in colonial Hong Kong schools as a war to protect private property rights. On January 26, 1841, a British naval party landed on the northwestern shore of undefended Hong Kong, raised the Union Jack, and occupied the island as a navy base to make war farther north. China's outdated navy and army were no match for British naval cannons. The First Opium War ended with the Treaty of Nanking in August 1842, the first of many "unequal treaties" Western imperialist powers imposed on the decaying Qing dynasty over the next half-century. That treaty forced China to acknowledge, among other humiliating terms, British extraterritorial privileges in five Chinese trading ports. It also ceded the island of Hong Kong to the British.

Less than two decades later, the Second Opium War (1856-60) ended with another British victory and the Convention of Peking, through which London claimed perpetual control of Stonecutters Island and the Kowloon Peninsula on the Chinese mainland across from Hong Kong Island. By the century's end, other European powers and Japan had demanded and received countless concessions from a Qing Dynasty in its final stage of collapse. With the security of Hong Kong as a pretext, the British demanded a 99-year lease on what came to be known as the New Territories - land farther into China, beyond the Kowloon Peninsula. That lease began on July 1, 1898, and expired on July 1, 1997.

To understand this history properly, one needs only imagine that the United States had lost its "war on drugs" and had to cede New York City and a good part of New Jersey to Colombia, whose government had come under the influence of drug lords. The new government of the Republic of China, upon its establishment after the 1911 revolution that overthrew the decrepit Qing Dynasty, immediately declared null and void all unequal treaties imposed on China during this period of national shame. The People's Republic, established on October 1, 1949, holds the same position.

Settlement in the new British colony of Hong Kong grew slowly at first; the population rose from 32,983 in 1851 to 878,947 in 1931. Recurring social unrest in reaction to British racial oppression gave rise to Chinese xenophobia that acquired nationalistic overtones in Hong Kong. Historically, Chinese society had been a multi-ethnic melting pot until the arrival of European imperialism. Such nationalistic agitation lay hidden behind a veneer of stability and prosperity propped up by the ruling British with the help of a subservient local elite who were rewarded with leftover monopolistic royal charters considered not lucrative enough by the British trading firms themselves. Hong Kong began to prosper economically because it served the geopolitical interests of its colonial master, without any hindrance from ideological delusion about free market and democracy.

The 1911 revolution led by Sun Yatsen against the Qing Dynasty was hatched in Chinese communities overseas. Hong Kong was one of its operating bases due to the fact that British authorities were not proficient enough in the Chinese language to detect and suppress Chinese revolutionary activities under their noses. However, any anti-imperialist expression of disrespect to the British crown or hostility toward British authority was swiftly and firmly suppressed with imprisonment and/or deportation. Even after World War II, it was a criminal offense to remain seated or not to stand at attention when "God Save the King/Queen" was performed prior to sporting events and at the end of movies.

During the early decades of the 20th century, Hong Kong served as a refuge for those fleeing social disorder on the mainland during the Taiping Uprising that broke out in 1851 and during the Northern Expedition against warlords after the founding of the Republic in 1912. The outbreak of three large labor disputes, namely the first general strike in support of the Manchurian Railway workers' strike (1920), the Seamen Strike (1922) and Guangdong-Hong Kong General Strike (1925-26) reflected widespread revolutionary/nationalistic attitudes and the close linkage between Hong Kong residents and their mainland compatriots. These strikes were all brutally suppressed by the British to keep the Hong Kong economy humming, with the approval of the elite compradore class.

In 1927, the Kuomintang (Nationalists) escalated their campaign against the Communists. Mao Zedong established a rural guerrilla base in 1928. The Japanese occupied Manchuria in 1932 and the Chinese Communist government declared war on Japan, but the Sino-Japanese war did not formally break out until 1937 after the Xi'an incident, which brought about a united front against Japanese aggression. As Japanese forces advanced into China, hundreds of thousands of displaced Chinese sought refuge in British Hong Kong, bringing the colony's population at the outbreak of World War II to about 1.6 million. At the height of the influx, 500,000 homeless people were sleeping in the streets as a result of British indifference for the welfare of the colonial subjects.

Life was harsh and undignified for all of colonial Hong Kong's Chinese residents, not just the new refugees. The densely populated slums where the Chinese lived were regularly ravaged by disease, fires and typhoons and by criminal elements condoned by the British colonial administration as necessary for doing the dirty work for British opium smuggling. Primitive conditions mixed with unregulated foreign traffic made the colony without public hygiene vulnerable to recurring epidemics of new diseases.

Hong Kong society was segregated between privileged, wealthy British masters and the Chinese they employed and ruled through local compradores. Hong Kong Chinese were not allowed out after dark by a policy of race curfew. They were barred from European residential districts and parks except as servants. Most Westerners in Hong Kong treated the Chinese as "a degraded race" - in the words of a missionary. "You cannot be two minutes in a Hong Kong street," wrote another observer of the time, "without seeing Europeans striking coolies with their canes or umbrellas." An example of these racial tensions surfaced in 1857, when a Chinese baker was accused of attempting to poison his Western clients by lacing their bread with arsenic. The incident caused no fatalities, and the baker was later acquitted for lack of evidence, but not for lack of motive.

Hong Kong's fortunes rose in the 1850s and '60s as refugees flooded the colony, fleeing from the social chaos in China associated with the economic dislocation from the resultant drain of silver from widespread opium addiction and periodic foreign invasion and ruinous war reparations. The new arrivals helped the colony evolve from a drug-trading outpost into a permanent settlement, providing a productive base to serve British economic imperialism.

Western apologists stress British contribution to the development of a market economy in Hong Kong through its laissez-faire policy. What Britain actually did was to transfer wealth accumulated from imperialistic exploitation of China to Britain through an offshore island on the China coast ruled by British colonialism. Thus the argument that British colonialism built a prosperous world city on a barren rock by virtue of a superior economic system was as ridiculous as Kipling's "White Man's Burden" bringing civilization to India.

Professor Hui Po-Keung of Lingnan University, Professor Tak-Wing Ngo of Leiden University and others have written on Hong Kong's colonial compradore politics and monopolistic middle-man capitalism and the propagandistic dissemination of mythical free-market ideology in Hong Kong, despite total British control of the colonial command economy. These research findings refute the myth that Hong Kong's economic success was a result of a laissez-faire policy, or the outcome of free-enterprise response to free markets. Evidence showed that British colonial policies dictated Hong Kong's commercial and trade development to support British interests, while discouraging any local industrialization before World War II, and also blocking opportunities for industrial upgrading in the 1960s that would have enabled Hong Kong to compete independently in world markets.

The British colonial government in Hong Kong handled conflicts between China and Japan during the 1930s strictly on evolving British global geopolitical interests. British actions obstructed China's fight to preserve territorial integrity against Japanese occupation of Manchuria for fear of antagonizing a rising Japan and on the principle that foreign occupation of semi-colonial China was the international norm. The then British-owned South China Morning Post did not depict Japan in the early 1930s as the aggressor in China, lest such a depiction reflect on British occupation of Hong Kong itself as aggression.

After the Japanese seizure of Manchuria in 1939, British policy had been to appease Japanese aggression as a natural effect of geopolitical Darwinism. From the July 7 Lugouqiao incident of 1937 that formally launched the Sino-Japanese War to the fall of Hong Kong to Japanese forces on Christmas Day in 1941, British policy on China, known in the British Colonial Office as "Passage of Hong Kong", was divided into two phases. The first phase, before the fall of Guangzhou to Japan in October 1938, allowed Hong Kong to supply China on a profit basis. The League of Nations had advised its members, of which Britain was one, not to interfere with China's defensive war against Japan. The second phase, after Japanese occupation of Guangzhou, closed Hong Kong off from legally providing any supply for China.

Britain's neutrality in the Sino-Japanese war enabled British Hong Kong to trade with both China and Japan at the same time, supplying war materiel to both warring parties. This compensated for the drop in trade in Hong Kong resulting from the rapidly deteriorating war economy in China. The security of the British Empire, of which Hong Kong was a crown jewel, was conditioned on non-antagonistic British-Japanese relations. British interests in China would face unwanted threats and British status in the Far East would face further decline if German global expansion in alliance with Japan's Greater East Asia Co-Prosperity Sphere were to strengthen. Demonstrations and protests from Hong Kong Chinese against British and other Hong Kong companies trading with Japan were suppressed and calls for a boycott of Japanese goods were disallowed by the colonial government in the name of free trade and law and order.

Britain's policy of neutrality, together with Japan's blockade of the Chinese coast, made Hong Kong's Victoria Harbor and the Kowloon-Canton Railway critically important. Hong Kong became a vital route for transporting goods, commodities and munitions by sea from overseas and by train via Guangzhou to Wuhan, where Chinese forces were staging a desperate defensive battle. After Japanese destruction of the Chinese section of the Kowloon-Canton Railway in October 1937, the British agreed to Chinese proposal of building a Kowloon-Guangzhou highway as a replacement route in early 1938, as a commercial consideration. It was also a policy consistent with British geopolitical interest in preventing total Japanese military success in China, so as to avoid the possibility of Japanese pressure turning against British interests once Japanese control of China was total. The plan to import nine British-made airplanes to China from Hong Kong in November 1937 was allowed by the British Colonial Office despite strong protests by Robert Craigie, the British ambassador to Japan.

The geopolitically induced trade helped relieve the Hong Kong economy from some of the global effects of the Great Depression of the 1930s. Combining patriotism with financial benefits, Hong Kong Chinese took a leading role in supporting Chinese war efforts against the Japanese through the utilization of the Kowloon-Canton Railway and Victoria Harbor and later the Kowloon-Guangzhou highway. The British announced that keeping Hong Kong open to the mainland was crucial to China's future, while the US secretary of state applauded the "Passage of Hong Kong" as enhancing China's ability to resist Japanese invasion. Both Britain and the United States hoped that China could tie down Japanese expansionism enough to spare Hong Kong and US interests in the Pacific, particularly the Philippines, from Japanese aggression.

Hong Kong's closeness to the approaching war zone, Japan's growing threat to Hong Kong, and Britain's apprehension on a two-front war in Europe and Asia caused Britain to discontinue a tilt toward China after Japanese occupation of Guangzhou in October 1938. The Japanese, having taken Guangzhou, were more determined to cut off supplies to China from Hong Kong. When the Nazi-Soviet non-aggression pact was signed in August 1939, Britain tried to persuade Japan to withdraw from the Axis cause by offering de facto recognition of Japanese occupation of China. British appeasement of Japanese aggression in China continued until the attack on Pearl Harbor, Hawaii, on December 7, 1941.

The Chinese government's proposal to establish an aircraft-reassembly factory in the New Territories in August 1937, as well as a Hong Kong company's proposal to build two military steamers for Guangzhou in January 1938, were refused by the British under the second phase of the Passage of Hong Kong. Immediately after the fall of Guangzhou, British governor Alexander Northcote stopped all transshipment of munitions and weapons from Hong Kong to the mainland. In December 1939, the British government prohibited the reassembly of four US-made passenger planes in Hong Kong. The planes had been purchased by the Chinese government. In June 1940, in a desperate last-ditch effort to appease Japan, the British formally closed the Passage of Hong Kong and terminated British tolerance for the supply of munitions, weapons, fuel, and gasoline to China. Hong Kong banks were forbidden to handle aid funds destined for China from overseas Chinese communities. Nevertheless, massive smuggling of military materiel to China and underground financial transactions continued to benefit the Hong Kong economy.

When Japan began bombing Shanghai in November 1937, it unleashed a massive influx of refugees into Hong Kong, the greatest in its history since the Taiping Uprising in the 1850s. The population grew by 50 percent, while slum housing expanded by 8 percent only. The 650,000 refugees created problems of crisis proportion on already overburdened, substandard housing conditions while the British pampered themselves in their luxurious villas on the Peak lamenting over cocktails on the uncouth manners of the lesser breed.

During the Japanese occupation of Guangzhou, armed resistance was mounted by the Dongjiang (East River) guerrillas, originally formed by patriot Zeng Sheng in Guangdong province in 1939, comprising peasants, students and seamen. Among its members was the revolutionary sculptor Zhang Songhe, later a member of the 5th, 6th and 7th People's Political Consultative Conference, who became the chief editor of the Pictorial of the Guangdong and Guangxi column of guerrilla forces. His masterpieces include the sculpture of Anti-Japanese Guerrilla Warfare on the Monument to the People's Heroes in Tiananmen Square, sculptures in Shijiazhuang Martyrs' Mausoleum, the design of the Monument to Martyrs in Shenzhen and sculptures on the Dongjiang Monument to Martyrs.

When the British surrendered Hong Kong to Japan in December 1941, the Dongjiang guerrilla force had more than 6,000 fighters. In the wake of the British retreat, the guerrillas picked up abandoned weapons and established bases in the Japanese-occupied New Territories and Kowloon. Applying guerrilla warfare, they targeted traitors and collaborators, protected patriotic traders in Kowloon and Guangzhou, attacked the occupation police station at Tai Po, and set off bombs at Japanese-controlled Kai Tak Airport. In addition, the guerrillas rescued British prisoners of war, notably Sir Douglas Clague, Professor Gordon King, and David Bosanquet. One of the guerrilla force's significant contribution to the Allied cause was their rescue of 20 American pilots who parachuted into Kowloon when their planes ran out of fuel after the Dolittle raid on Tokyo.

Founded in January 1942, the Guangdong Renmin Kangri (People's Anti-Japanese) Guerrillas were established to reinforce other anti-Japanese forces in the Dongjiang (East River) and Zhujiang (Pearl River) deltas. The third and fifth branches under Cai Guoliang, which were sent to Hong Kong and Kowloon, became known as Gangjiu Dadui (Hong Kong-Kowloon Battalion). Led by Wong Kwun-fong and Lau Hak-tsai, the guerrilla force attacked traitors and enemy forces, while growing farm produce and protecting civilian lives in Hong Kong. In addition, the guerrilla force extended its influence in April 1942 over Lantau Island, enhancing communication with Macau and Guangzhou.

The spread of guerrilla activities into cosmopolitan Hong Kong Island assisted Chinese intelligence on Japanese strategies and operations. Furthermore, the force played an important role in saving British and other foreign figures of the Allied cause, and 89 of them - 20 British, 54 Indians, eight Americans, three Danes, two Norwegians, one Russian and one Filipino - were saved from enemy hands. However, because of Japanese control of Guangzhou and British appeasement policy, and the subsequent British surrender on Christmas Day 1941, Hong Kong was officially closed to Mainland Free China contact until the end of World War II.

On December 8, 1941, one day after Pearl Harbor, just hours after Tokyo ordered attacks on the Philippines and the Malay Peninsula, Japanese troops swept across the border from occupied China into Hong Kong's New Territories. Japanese forces quickly destroyed the colony's weak defenses, manned by fresh British troops recently redeployed from Singapore and still unfamiliar with Hong Kong geography. British commanding officers did not take seriously the idea that an "Asiatic" army could ever defeat the British Army that had been invincible for more than a century in Asia. The only effective resistance was from the small Hong Kong Volunteer Force of local Chinese youths. By Christmas Day, the British had surrendered, which brought nearly four years of brutal Japanese occupation.

The pending defeat of Japan in 1945 raised a new question of who should rule Hong Kong after the war. At the beginning of World War II, US president Franklin D Roosevelt had argued that the British should return Hong Kong to the China after the war. But at the Yalta summit in 1943, Roosevelt gave in to British prime minister Winston Churchill's insistence that Britain did not fight the war merely to give away the empire.

The British moved quickly to regain control of Hong Kong after hostilities ceased. Tokyo had ordered the Japanese forces in Hong Kong to surrender to the British. The Nationalist Chinese government held back its troops at the Hong Kong border. Franklin Gimson, Hong Kong's colonial secretary, left his prison camp as soon as he received word of the Japanese surrender, and declared himself the colony's acting governor. Gimson set up a provisional government, which welcomed a British naval fleet into Hong Kong harbor several days later. British Rear Admiral Sir Cecil Harcourt then formally accepted the Japanese surrender of Hong Kong.

Hong Kong's postwar recovery was swift. Eight months after the Japanese surrender, the colony's civilian administration was restored. Traditional colonial discriminatory taboos were relaxed in the postwar years. Chinese were no longer restricted from public beaches, parks or European residential districts, or from owning property on Victoria Peak.

World War II disrupted the socio-economic structure of colonial Hong Kong. After the Japanese surrender in August 1945, Chinese civilians returned in force to Hong Kong at the rate of almost 100,000 a month, most expecting China, as a member of the victorious Allies, to recover the Japanese-occupied colony from British imperialism, but they were sadly disappointed by events. The population, which by August 1945 had been reduced to about 600,000, rose by the end of 1947 to an estimated 1.8 million. The Chinese economy was deteriorating under the Nationalist policy of elitist capitalism, which was entirely antithetical to Chinese historical conditions. Soon afterward, as the Nationalist government began to lose support from the masses, and its army faced defeat in civil war at the hands of the People's Liberation Army, Hong Kong received a population influx unparalleled in its history. Hundreds of thousands of Chinese - mainly from Guangdong Province, Shanghai, and other commercial centers - entered the colony during 1948-49 and, by the spring of 1950, the population had swelled to an estimated 2.2 million. Since then, it has continued to rise from population inflow from China and now totals 6.5 million.

Modern Hong Kong rose from the ashes of World War II, created partly out of an urgent necessity to deal with one of the greatest refugee crises of its time. Hong Kong's economy slowed when the United States placed an economic embargo on China after the founding of the People's Republic on October 1, 1949, but the Korean War broke out in 1951 and brought new economic life to Hong Kong. It was during this period that the shipping sector of Hong Kong got its start, leasing anything that floated to the US Navy to fill the sudden rise in demand by trans-Pacific military transport.

But Hong Kong also played a critical role in supplying China unofficially. While Chinese soldiers were being killed in Korea by US-British troops, with the son of Mao Zedong among those killed, freedom of speech in Hong Kong consisted of open advocacy for the violent overthrow of the Chinese government. At the same time, any call for passive resistance to Western imperialism and British colonialism was censored and punishable with imprisonment in the colony.

Even today, the English-language press in Hong Kong remains predominantly anti-China under the guise of press freedom. When the SARS problem first broke out, the Hong Kong English-language press was full of criticism of alleged Chinese government cover-up as typical of totalitarianism, despite the fact that the main motivation had been to avoid market panic. But when Toronto adopted in essence the same approach to the SARS scare to protect its economy, the Western press was full of editorials expressing understanding.

The Korean War had a fundamental geopolitical impact on Hong Kong and its economy. The US embargo and blockade against China, plus the interference by the US 7th Fleet in the reunification of Taiwan, made Hong Kong the needed window to the outside world for an isolated China. China took advantage of a British Hong Kong as a base to run the US blockade, and for intelligence work in Taiwan and in the United States and its allies.

Although underground communist cadres came to Hong Kong in 1948 with an ultimate mission of liberating the territory, the eruption of the Korean War stabilized the geopolitical position of Hong Kong. Chinese tolerance for the continuation of British colonial rule was justified by China's geopolitical need for a window to the West. British official ignorance of Chinese political literature created a void that became the target of competition and occupation by the two ideological rivals: the Nationalists supported by US propaganda and the Communists.

During the Cold War era, global competition between the two superpowers became the backdrop of the rivalry between the Communists and the Kuomintang, making Hong Kong a key residual battleground in the ideological war in the Chinese language. British diplomatic recognition of the People's Republic and de-recognition of the Nationalist regime on Taiwan made outright ban of pro-Beijing activities untenable in British Hong Kong. On the other hand, Chinese non-recognition of British colonial rule of Hong Kong prevented Chinese diplomatic presence in the British colony. Until the return of Hong Kong to China on July 1, 1997, China was represented by the New China News Agency in Hong Kong, which served as a de facto diplomatic mission.

With its traditional entrepot role cut off by the US embargo against China in 1951, the colony was forced to develop local industries for export. Hong Kong took advantage of a continuous supply of cheap labor in the form of refugees, financed by flight capital from China, and the colonial government's traditional disinterest in regulating labor standards as long as land prices kept rising to keep government revenue flowing. But the main factor of growth of labor-intensive manufacturing was the special access to the US consumer market, kept open through a geopolitical understanding between the United States and the United Kingdom, in recognition of the strategic location of Hong Kong. This was the early kernel of globalization, with the US providing a market for goods too cheap to warrant production by high-paid US labor, and simultaneously giving US neo-liberalism an early experimental station for real-life "peaceful evolution" on the doorstep of communist China.

But unlike Japan, South Korea and Taiwan, Hong Kong did not get on a high-end manufacturing path for lack of any industrial policy. British colonial education, trade and finance policies kept Hong Kong in low-end manufacturing sweatshops for the narrow benefit of British trading monopolies and banks, which had never wanted to endow the colony with industrialization. At the same time, the Hong Kong government's long-standing land speculation that enabled a tax policy that attracted foreign investment further contributed to rapid growth of the low-end export sector. The colony began exporting in ever-increasing amounts cheap textiles, garments, low-end electronics, cameras and watches, plastic flowers, toys and many other low-priced goods made in small sweatshops, stamped "made in Hong Kong" to clear the US custom embargo on China.

But most of Hong Kong's wealth came from land speculation, with the colonial government as the chief speculator and beneficiary. This policy condemned labor in Hong Kong into perpetual under-education, low subsistence wages and sweatshop working conditions.

The influx of refugees from China continued unabated during the 1960s, providing ample cheap labor and occasional entrepreneurial human resources for the manufacturing workforce. The British colonial government left the refugees to fend for themselves, to live and struggle for survival under appalling, subhuman conditions.

In 1953, a tragic, spectacular night fire engulfed hillside shanty slums in the Shek Kip Mei squatter area on Christmas Eve, destroying tens of thousands of refugee squatter huts unreachable by firefighting equipment, leaving 53,000 homeless. The tragic event attracted the attention of the international media, and even became the backdrop of a best-selling novel about a bar girl: The World of Suzy Wong, which later was made into a Hollywood film. The British colonial government was finally spurred into reluctant action by world opinion, introducing a housing program for refugees with the construction of vast public-resettlement buildings - standard seven-story walk-up concrete structures with minimum facilities in a refugee city. With virtual dictatorial power, the colonial government managed to solve the housing problem for refugees in short order, although the result was little better than highrise concentration camps.

By the mid-1960s, escalating US involvement in the Vietnam War made Hong Kong a major supply point for the US military. Hong Kong's ports, shipping and logistics sectors grew further to serve the new geopolitical needs. The colony became a regular stop for US troops seeking "rest and recreation". It was also the West's main pre-satellite spy post into a China isolated by hostile US policy. Much of Hong Kong's prosperity during this period came from an economy that served the geopolitical aims of the United States in the Cold War. It had as much to do with free markets and democracy as cheese on the moon.

Hong Kong's "go-go" pace, while not the same as free-market dynamism, created typical problems many neutral cities such as Casablanca during World War II faced: espionage intrigues, organized crime, rampant prostitution and drug dealing, smuggling, polarization between rich and poor, ideological cynicism, political opportunism and official corruption. The colony's low-end manufacturing sector was unregulated, and the labor force had to work long hours in sweatshops under inhumane and unsafe conditions for less-than-subsistence pay with no health or retirement benefits or job security. Small entrepreneurs were forced to seek financing from predatory lenders. Child labor exploitation was routinely practiced. Human rights and civil liberties were never issues about which British colonialism cared much.

The Great Proletarian Cultural Revolution unfolded in China in 1966. While the issues raised in the Cultural Revolution on whether politics should be the determinant of the correct development path remain debatable to this day, the excesses associated with internecine political struggle of the decade-long upheaval left the nation exhausted and its economy in near-total collapse. The political cataclysm spilled over into Hong Kong. In 1967, a labor dispute at an artificial-flower sweatshop in Hong Kong quickly escalated into widespread violent street demonstrations. For several months, protesters clashed with police, overturned cars and buses, stoned hotel lobbies and shop windows, and in a general release of century-old, pent-up rage and hostility toward colonial capitalism, disrupting life and business in the colony. Several bombs were set off in a wave of terrorism. At one point, shots were fired across the border from China into Hong Kong.

British officials responded with a ruthless crackdown against the sudden release of pent-up nationalism, suspending what little civil liberty the colony had traditionally allowed, in the name of anti-communism, imprisoning thousands without trial and closing down left-wing Chinese-language newspapers. Official reports acknowledged that some 50 people were killed during the riots by excessive police force, with thousands more wounded.

To defuse a recurrence of social unrest, social and government reforms in Hong Kong followed, including the cleanup of the openly corrupt, scandal-ridden police force. At the same time, China made clear that it still considered Hong Kong a part of Chinese territory it would eventually reclaim.

It was at this point that British imperialism decided to solicit US assistance by the gradual adoption of bogus democracy and free markets as a new colonialism with a human face. The colonial government then began officially referring to Hong Kong as a territory, not a colony. British banking interests began nurturing a new breed of native compradores with special preferential bank credit. Their role was to pose as a national bourgeoisie to front for neocolonialism.

These new compradore tycoons, some speaking no English and unwashed by British upper-class education and mannerisms, dutifully bailed out British interests from the political risk of rising nationalism. They acquired British trading firms at inflated market prices with loans from British-owned Hong Kong banks, backed by profit they made in real-estate speculation, light manufacturing, shipping and retail finance and banking services for poor natives. The huge profit they squeezed from the colony were invested in British and US enterprises overseas that suffered huge losses, in a form of cross-border political transfer of wealth through the market mechanism. These new tycoons welcomed the new liberal colonialism as they benefited from token gestures of the end of racial discrimination.

The British finally allowed that rich Chinese should no longer be treated as subhuman, at least in public, setting them apart from the masses of the Yellow Herd as Honorable Whites who might even qualify for a knighthood from the queen. Compradores now could comfort themselves by claiming they were serving democracy and freedom rather than imperialism and colonialism. They posed as heroes of capitalism instead of running dogs of colonialism.

Colonialism, the administrative system of imperialism, like its slavery kin, is inherently evil. Yet the evil institution of slavery in US history did not prevent the emergence of great leaders from the South, such as George Washington and Thomas Jefferson. Similarly, the evil institution of colonialism in Hong Kong history did not prevent the emergence of a sensible administrator in the person of Murray MacLehose.

Fluent in Chinese and a student of Chinese culture and history, Crawford Murray MacLehose was first posted to Hong Kong in 1963 as a political advisor to ensure that colonial policy in Hong Kong supported evolving British policy on China. He held several other political posts in the British Empire before becoming Hong Kong's 25th British governor in 1971.

From 1971, when he assumed the post of governor, to 1982 when he left the post and returned to Britain, MacLehose, of a new breed of governors more in tune with the progressive British Foreign Office than the conservative Colonial Office, practiced an "enlightened form" of colonial administration with an eye on Cold War geopolitics. He moderated the traditional colonial attitude of aloof, discriminatory disinterest in Chinese community problems and needs. He also balanced the traditional policy of open government support for British monopolistic businesses with a new progressive social awareness. Reflecting the ideological wind from the British homeland under Labour control, MacLehose took an active role in social welfare (particularly public housing, medical care, colonial education, and protection of workers), and improved the living conditions of Hong Kong residents within the context of liberal capitalism and benign colonialism. The MacLehose administration accorded with Hong Kong's economic takeoff, laid a socio-economic foundation for the colony as a labor-intensive manufacturing center, and instilled a sense of respectable if not totally honorable identity for colonial Hong Kong residents.

MacLehose established the Independent Commission against Corruption (ICAC) to ensure rule by colonial law, even indicting mid-level British police officers and colonial officials who had run a police force and a regulatory regime known for widespread corruption. While the ICAC stopped administrative corruption in the colony, much of the regulatory regime of structural British preference remained in place and at the same time exempted US commercial interests from British protectionism. After a mass demonstration by off-duty policemen on Queensway in Central in 1976, the governor ordered an amnesty for all crimes of corruption committed before January 1, 1977, lest the entire police force had to be imprisoned. The rule of law indeed.

MacLehose initiated moves toward social welfare as effective and timely responses to mounting social and political turmoil, such as the riot against the Star Ferry fare increases in 1966 and the leftist anti-British-imperialism strikes and demonstrations in 1967. He handled deftly the student movement launched by Hong Kong University students in 1968-69, the movement to legalize the Cantonese language in 1970, and demonstrations in Queen Victoria Park in defense of Chinese sovereignty over the Diaoyutai Archipelago in 1971.

MacLehose's liberal responses and concessions protected British interests and stabilized British rule in Hong Kong by reducing the most visibly oppressive aspects of old-time colonialism. In contrast to the socio-political upheaval then raging in China, many in Hong Kong began to let the practical benefit of a peaceful life mask the political issue of national honor. The threat of communism was promoted as an anesthetic for British imperialism and colonialism with high effectiveness among the refugees, who were mostly members of the petty-bourgeois class that fled from communism in China.

The Vietnam War aborted president Lyndon Johnson's "Great Society" for the United States, but it brought economic benefits in the form of subsidized trade for Japan, South Korea, the Philippines, Singapore, Malaysia, Indonesia, Taiwan and Hong Kong. While the war created a backlash in US domestic politics against anti-communist mania, it strengthened a chain of anti-communist frontline bases in East and Southeast Asia, in which Hong Kong was a crucial link. Thus Hong Kong basked in the glory of geopolitical trade preference with the US. MacLehose became governor at the end of Hong Kong's tumultuous anti-colonial phase, but the economic fringe benefits from the Vietnam War gave Hong Kong a much needed and timely boost, which stabilized Hong Kong's economy at the beginning of MacLehose's benign rule.

After the economic takeoff in the 1970s, primary and secondary education in the colony improved by government policy and quotas for tertiary educational institutions increased. In 1969, the Chinese University of Hong Kong, a conglomeration of US missionary educational institutions expelled from China, moved to Shatin on a new campus as Hong Kong's second officially recognized public university. Notwithstanding its institutional roots as an anti-communist propaganda machine, the Chinese University provided a counter base to Hong Kong University, the bastion of British colonial elitist education. In 1970, the government agreed to convert the former Hung Hom Industrial College into Hong Kong Polytechnic.

The literacy rate and level of education of the population rose, albeit still way below world-class standards and still infested with colonial mentality of rote learning and discouragement of independent, let alone revolutionary, thinking. To this defect was added the anti-communist propaganda financed from US sources. Doctoral and postgraduate education was non-existent even for professional schools. There was no basic research in the sciences and much of the education was focused on commercial job training for clerical and mechanical maintenance work. Much of the research in the social sciences produced in this period was little more than outright hostile intelligence gathering and anti-China propaganda.

Graduates of Hong Kong universities went predominantly into careers in the docile, apolitical Civil Service. Offspring of the elite went to universities overseas and returned to join family businesses that had nothing to do with their studies. Scions of wealthy families who were promising nuclear physicists were put to work in the plastic-toy business. The professions that prospered were law, medicine, accounting and architecture. Even then, overseas professionals were routinely called in for significant assignments. This is true even today. While Hong Kong has yet to adopt a rule-based competitive policy, it has never felt the need to adopt any affirmative-action program for local talent.

In addition, in the 1970s, with the spread of television, TVB (begun in 1967) exerted a strong influence with improved public communication, particularly in the imposition of Anglo-US anti-China propaganda on an uninformed and unthinking public poisoned by a colonial education. In the early 1970s, remnants of Qing Dynasty Manchu feudal laws were officially abolished, putting an official end to one colony, two legal systems. It may be said that the MacLehose regime signaled the beginning of Hong Kong's self-delusion in the name of modernization. In reality, MacLehose repositioned Hong Kong by giving it a central anti-China role in the Cold War.

During his time in charge, MacLehose oversaw a historic period of social reform and public investment that formed the foundation for unprecedented economic growth, including the building of Hong Kong's underground transit system. Lord MacLehose was knighted in 1983, a year after his retirement. These social programs formed the foundation of Hong Kong's subsequent economic success in the command economy, not the much-touted free-enterprise myth.

In retirement, Lord MacLehose summed up his opposition as governor, to any introduction of democratic elections in Hong Kong by saying: "If the communists won, that would be the end of Hong Kong. If the nationalists won, that would bring in the communists," in an interview in Britain's Daily Telegraph. Of course even MacLehose was not delusionary enough to contemplate the possibility of the British winning. British colonialism had no use for democracy until Britain was forced to return Hong Kong to China.

MacLehose, on October 10, 1979, reported the government's housing policy of creating between 40,000 and 45,000 units annually: "The housing program continues to be of prime importance, and in the review of public-sector expenditure it was rightly given very high priority ... None of the housing, amenities, schools and landscaped surroundings would be of any value without employment. And the new towns are not intended as dormitories. So the progress of industry in the New Territories is vital." Thus public housing and an industrial policy of low-end manufacturing for a geopolitically guaranteed US market put Hong Kong on the road to prosperity.

Eighteen years later, on October 8, 1997, Tung Chee-hwa made his first address as the first chief executive of the Hong Kong SAR under Chinese sovereignty. Again, housing was a key theme. The current system, he said, had "produced erratic price patterns and left potential home buyers and developers in the lurch". He set as a goal the production of 85,000 new public and private units annually within two years.

Tung's policy speech, which laid out a five-year plan for the SAR, went far beyond MacLehose's vistas. Hong Kong's new leader unveiled plans to cut the waiting times for public rental housing from six and a half years to four years by 2003 and no more than three years by 2005. He spoke of building major infrastructure links and developing technology parks to diversify the economy into the next century. And he announced concrete initiatives to alleviate the livelihood burdens of the SAR's expanding elderly population. Tung identified improving competitiveness and education as the key challenges facing the new Hong Kong - and launched comprehensive initiatives to achieve such goals. He stressed the rapidly growing ties - notably economic, cultural and technological - between Hong Kong and China, though he was careful to omit mentioning political ties. By doing so, he was turning the attention of a new generation of Hong Kong residents to the vast opportunities that awaited them in what was officially their motherland once more. But the arm's-length attitude on political integration with China means that this vast opportunity remains elusive to the Hong Kong economy.

Most critically, Tung's vision did not include any awareness of the new geopolitical landscape. The new Hong Kong SAR, by constitution, puts fundamental obstacles in the way of its needed integration into the new Chinese economy, while its former colonial role to serve Anglo-US interests in China is becoming inoperative. Hong Kong has yet to shed its compradore mentality or its compradore policy. It continues to look at China from the outside in, representing the geopolitical and economic interests of the West, by presenting its residual colonial system as the more superior of the two systems in OCTS, instead of an obsolete system that must be restructured in time.

When faced with economic collapse from Hong Kong's failure to restructure its economy to respond to the new geopolitical landscape, the new SAR government hangs on to obsolete myths of its colonial predecessor. Hong Kong's top leaders tirelessly mouth meaningless slogans of focusing on "sound fundamentals", rule of law, free markets, small government, sound monetary regime based on its dysfunctional currency peg, in subservient tribune to US neo-liberal globalization, which has destroyed the colonial command economy. To make matters worse, it has abandoned its public housing and other social programs started three decades earlier by MacLehose, in a panic attempt to save the over-leveraged real-estate tycoons at the expense of the future of the Hong Kong economy. While the new leaders continue to pin their hope for Hong Kong on external trade, they excuse lamely their dead-end policies by lamenting that Hong Kong has no control over external factors.

Missing the boat to renewal