Monday, March 21, 2011

China Breaches its “One Country, Two Systems” Policy for Macao

China resumed sovereignty over Hong Kong on July 1, 1997, and Macao on December 20, 1999.  They became respectively the HKSAR (Hong Kong Special Administrative Region) and MSAR.  Each was given a Basic Law, a mini-constitution, that sets forth the principles on which the two former colonies would be governed.  China promised a high degree of autonomy, stating that it would not impose its socialist system on the two capitalist entities for 50 years.  Guarantees included political, social, economic, cultural, and other rights.  This post deals with recent developments in Macao that erode an important article in its Basic Law.

Chapter V of Macao’s Basic Law deals with “Economy.”  Article 104 states that Macao “shall have independent finances,” and “shall use its revenues exclusively for its own purposes, and they shall not be handed over to the Central People’s Government.”  Moreover, “the Central People’s Government shall not levy taxes in the MSAR.”

Article 104 has now been breached.

First some background on Macao’s revenues.  Macao practices a conservative fiscal policy.  Rather than incurring annual deficits, Macao’s budgets typically produce annual surpluses.  The surplus in 2010 was Macao Patacas (MOP) 41.9 million.  (US$1=MOP 8.0)  Over the years Macao has built up large fiscal reserves, which stood at MOP 130.7 million on December 31, 2010.  Fiscal reserves equal 3.4 years of 2010 outlays.  Spending in the three prior years was much lower at MOP 18.9 million, MOP 25.9 million, and MOP 33.8 million respectively.

The principal source of public revenue in Macao is gaming tax.  Gaming tax constitutes between 85-90% of total tax revenues. In 2010, just under 25 million tourists came to Macao, of which 82.9% were from mainland China and Hong Kong.  Macao is the only region of China in which casino gambling is legal.  Macao’s taxes, and its accumulated fiscal reserves, have been largely paid by mainland China and Hong Kong gamblers.

On March 6, 2011, a Framework Agreement on Cooperation Between Guangdong and Macao was signed in Beijing, consisting of 38 articles in 8 chapters, totaling about 10,000 words..  It was accompanied by a lengthy interpretation document, a timetable for 2011, and an ongoing review of the work schedule.  The cooperation extends to creating a world class travel and leisure destination that brings together Macao, the neighboring Chinese city of Zhuhai, and all of Guangdong Province in one big tourism destination.  Other cooperative endeavors include development of renminbi business, upgrading of industry, the development of neighboring Hengqin Island (in which the new campus of the University of Macao will be located), and developing such sectors as Chinese medicine, education, and linkages between public services.

The agreement specifies that the Macao government shall provide scholarships for Guangdong students studying at tertiary institutions in Macao.  Other statements give Macao the lead responsibility in funding cooperative projects and activities.  I was unable to find any statements which specified that the Guangdong government shall provide financial support to Macao for any project or activity.  Should Guangdong banks lend money to Macao firms, it will be in the interests of the banks, not a requirement of the framework.

The word “shall” does not mean consider, think about, or discuss.  It means that Macao will pay for the activity, plain and simple.  The only issue is how many scholarships.

The chief executive of the MSAR is presumed to have signed the agreement on the basis of its mutual benefits for Macao and Guangdong Province.  However, it is difficult to imagine that he could have refused to sign.  Were he to refuse, it is likely that China, on behalf of the provincial government of Guangdong, would make Macao an offer it could not refuse.  China could, for example, restrict the number of monthly visits of mainland Chinese gamblers to Macao, as it has done in the past.

Even if the agreement rests on a mutual voluntary basis, the reality is that Chapter V, Article 104 of the Macao Basic Law has been abrogated.  Macao is required to spend tax revenue in support of Guangdong residents.  As the decade unfolds, it will be interesting to observe the extent to which Macao’s fiscal reserves bear a disproportionate share of the funds expended to achieve framework goals.

Neighboring Hong Kong holds fiscal reserves equal to two years current spending, but their value is far, far larger than Macao reserves.  Perhaps the Guangdong-Macao Cooperative Framework will be extended to Hong Kong in the not-too-distant future

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