ters relating to foreign affairs and defense, have to date been scrupulously observed. So far, Beijing has honored its commitments that the Hong Kong people will continue to enjoy the social and economic systems, life-style, and rights and freedoms that they previously enjoyed. The HKSAR continues to enjoy executive, legislative, and independent judicial power. A year after the handover, the problems facing Hong Kong relate not to the return to Chinese sovereignty, but rather to the financial and economic crisis that has affected the entire Asian region. Unemployment has risen to 4.2%, a fourteen-year high; retail sales are off 14% for the first half of 1998; the stock market has fallen some 50% from its peak; and in the first quarter of 1998 Hong Kong experienced negative growth (2%), for the first time since 1984. Pressure on the Hong Kong dollar, which is linked to the U.S. dollar at a rate of HK$7.8 = US$1, has caused a rise in interest rates, leading to a sharp correction in property prices, down 35-40% so far from their 1997 peak levels. Hong Kong's economy remains susceptible to external factors, notably the economies of China, the U.S., Japan, and the EU, as well as risks from interregional shocks from Indonesia, Korea, and Thailand.In 1997, however, Hong Kong's economy continued to perform well. Its open, services-dominated economy achieved a real growth rate of 5.3%. Inflation averaged 5.7% in 1997, and foreign currency reserves totaled US$92.8 billion at year's end, the world's seventh largest. A tradition of prudent fiscal management has generally enabled Hong Kong to realize budget surpluses.The keys to Hong Kong's economic success its free-market philosophy, entrepreneurial drive, absence of trade barriers, well established rule of law, low and predictable taxes, trans-parent regulations, and complete freedom of capital movement should enable Hong Kong to make it through the current regional downturn, and to be among the f...
