IV.  POLITICAL ENVIRONMENT

A.   Nature of Bilateral Relationship with the United States

     The United States and Hong Kong conducted about US$20 billion
     worth of trade in 1993 and enjoy a stable, strong political
     relationship.

B.   Major Political Issues Affecting Business Climate

     Hong Kong will become a "special administrative region" of the
     People's Republic of China in 1997.  Under China's "one country, two
     system" formulation, Hong Kong is to have a high degree of autonomy
     for at least 50 years following the July 1, 1997 transfer of
     sovereignty.

     The outbreak of violence in Tiananmen Square in Beijing on June 4,
     1989 caused political and economic uncertainty in Hong Kong,
     resulting in large numbers of Hongkongers emigrating to other
     countries over the following months.  The "brain drain" problem,
     however, has abated over the last two years, with fewer applications
     for emigration and greater numbers of those who have emigrated
     since 1989 returning to Hong Kong.

     Hong Kong Governor Chris Patten in October 1992 unveiled modest
     proposals to expand the political franchise in the 1995 Legislative
     Council (Legco) elections to respond to popular demand for more
     representative government.  The PRC strongly opposed the
     Governor's proposals, viewing them as violations of the Sino-British
     Joint Declaration, China's Basic Law for Hong Kong, and agreements
     between the Foreign Ministers of China and the UK.  Talks broke off
     after seven months of negotiations in late 1993.  Without PRC
     agreement, the Hong Kong Government has proceeded to institute the
     Governor's reform proposals.  Beijing has indicated that it will roll
     back these reforms in 1997, and hold new elections under yet
     unspecified rules.

     The difficulties in Sino-British relations have affected cooperation on
     other issues:  bilateral negotiations on a financing agreement for the
     new Chek Lap Kok Airport project remain unconcluded, and there has
     been slow progress on approving proposals to localize and adapt
     current laws beyond 1997 in the UK-PRC Joint Liaison Group (JLG).

     Despite these political developments, business confidence in Hong
     Kong remains strong.  Chinese investment in Hong Kong is growing
     rapidly, and nearly 60 percent of Chinese's exports flow through
     Hong Kong.  This port is vital to their interests, and supplies much
     needed infrastructure support to the growth of South China.