Hong Kong Brief - February 2009
Overview
Hong Kong is governed by the Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China (the Basic Law), passed by China's National People's Congress (NPC) in 1990. Drafted by representatives from both China and Hong Kong, and incorporating the undertakings made in the 1984 Sino-British Joint Declaration on the Question of Hong Kong, the Basic Law serves as Hong Kong's 'mini-constitution'. Under the Basic Law, Hong Kong, including the Kowloon Peninsula, reverted to Chinese sovereignty on 1 July 1997. Hong Kong has since continued the role of international trading and financial hub established under British rule.
The Basic Law establishes unique arrangements for the government and political development of Hong Kong. It promises to preserve Hong Kong's way of life and capitalist system for 50 years from 1997, to give the territory a 'high degree of autonomy' consistent with the 'one country, two systems' principle and provides for independent executive, legislative and judicial powers.
Although the Basic Law ascribes formal responsibility for foreign and defence policy to Beijing, Hong Kong is allowed to maintain and develop limited international relations, and to conclude and implement agreements with states, regions and international organisations. It does so in areas such as the economy, trade, shipping, fishing regulation, communications, tourism, culture and sport. Hong Kong is a member of the World Trade Organization (as a separate customs territory) and the Asia-Pacific Economic Cooperation (APEC) forum.
Political overview
Chief Executive
Under Hong Kong's 'executive-led' system, a form of government substantially inherited from the British colonial administration, the Chief Executive (CE) heads the government and is responsible for implementing the Basic Law and other laws of Hong Kong. He or she makes policy decisions and has the power to initiate legislation. According to the Basic Law, the CE is 'accountable to the Central People's Government and the Hong Kong Special Administrative Region'.
The CE is appointed by Beijing after election by an 800 member Election Committee. The 800 members of the Election Committee are themselves elected through a limited franchise from a number of professional, business and community bodies, Hong Kong deputies to the NPC, and Hong Kong members of the Chinese People's Political Consultative Conference.
Mr Donald Tsang Yam-kuen became Hong Kong's second CE on 21 June 2005 after the Election Committee elected him unopposed. Mr Tsang succeeded Mr Tung Chee Hwa, Hong Kong's inaugural CE who, citing health reasons, resigned on 12 March 2005. Mr Tung was mid-way through his second five-year term.
Mr Tsang was returned to office on 25 March 2007 in the first contested CE election since handover. He was re-elected with 649 of the 800 Election Committee votes available, while his pro-democracy Civic Party opponent Mr Alan Leong won 123 votes.
Executive Council
The CE appoints and leads the 30-member Executive Council (ExCo) whom the CE consults on major policy matters. ExCo reviews all major policies and draft legislation before they are submitted to the Legislative Council (LegCo). ExCo Members may not serve beyond the term of office of the CE who appointed them.
The Administration
The Administration is the executive arm of government. It is organised into a number of policy bureaus, departments and agencies. The Chief Secretary for Administration, holding the second most senior position in the government, oversees the Bureau Secretaries and has major input into policy development. The Bureau Secretaries chosen by the Chief Executive have roles similar to ministers in the Westminster system of government. They are expected to defend government policy before LegCo and to advise the CE on policy. Bureau Secretaries are supported in their role by the bureaus, each headed by a Permanent Secretary.
Legislative Council
The major functions of LegCo are to enact laws, examine and approve budgetary matters, monitor the government's performance and debate issues of public interest. LegCo also endorses the appointment and removal of judges of the Court of Final Appeal. It cannot initiate bills involving government expenditure and so has a limited role in policy development. Its meetings are open to the public.
LegCo's 60 members are currently elected by a combination of individual and collective voting. Five geographic constituencies return 30 directly elected members and 28 'functional constituencies', representing occupational and professional groups, return the remaining 30 members. At present, direct elections to LegCo occur only through the geographic constituencies, while the franchise of the functional constituencies is restricted to the membership of relevant professional, business and corporate bodies.
On 7 September 2008, Hong Kong elected the fourth term LegCo. Despite the low turnout (45.2%), pan-democratic candidates gained 58.1% of the popular vote, but the balance of power remains with pro-government parties given their predominance in functional constituencies. Pro-democracy candidates claimed 23 seats: 19 of the 30 directly-elected seats (one more than in 2004) and 4 out of the 30 functional constituency seats. This ensures pan-democratic parties retain the veto power on any electoral reform package the Government may propose in the coming months for the 2012 twin election for the CE and LegCo.
Judiciary
Hong Kong's legal system is based on English Common Law. Under the Basic Law, the judiciary is independent of the executive and legislative branches of government. The Court of Final Appeal replaced the British Privy Council as the highest appellate court in Hong Kong on 1 July 1997.
The power of final interpretation of the Basic Law rests with China's National People's Congress Standing Committee (NPCSC). The NPCSC has exercised this power on four occasions. These concerned the right of abode (1999), universal suffrage (2004 and 2007) and the term of the Chief Executive (2005).
Political Developments
The Basic Law sets out electoral arrangements for the CE and LegCo elections from handover until 2007 but is silent on how the political system will develop subsequent to this except in stipulating that the 'ultimate aim' is to elect both by universal suffrage. The methods and timetable for achieving universal suffrage continue to be an important issue in Hong Kong. In December 2007, the NPCSC ruled out universal suffrage for the 2012 CE and LegCo elections, stating that universal suffrage may be implemented for the 2017 Chief Executive elections and after that for LegCo.
Economic overview
Hong Kong is a major international and regional financial centre and arguably amongst the freest economies in the world. It was the world's 12th largest trading economy in 2007 and is home to some of the region's most important corporate headquarters. It is a major provider of services to China and the East Asian region. Hong Kong's economic prospects now depend largely on its links with China and its role as an entrepot and services centre, as well as a financial centre for the southern China region.
An open and free economy, Hong Kong benefited from trade growth and expansion in the global economy which took place between 2001 and mid 2008. But the region has not been immune to the negative impact of the current global financial crisis and has been particularly affected by the economic slowdown in China and the decrease in demand from key re-exports markets in the United States and Europe. According to a mix of Hong Kong government and private sector financial service companies, Hong Kong's GDP fell 1.4% in the second quarter of 2008 and a further 0.5% in the third, but might still grow 3-3.5% in 2008 on an annualised basis. Unemployment was 3.4% in the third quarter of 2008, and is likely to worsen in the near term as more lay-offs are expected in key sectors like the financial industry, and enterprises either cancel or delay their expansion plans.
Inflation eased from its peak in the first half of 2008, as energy and food prices decreased and the domestic property market softened. According to the Composite CPI, overall consumer prices rose by 3% in September 2008 against 6.3% in February 2008. Although unlikely in the short term, deflation has become a possibility.
To stimulate the economy and ameliorate, the impact of the global financial crisis, the Hong Kong Government has introduced a number of measures to support employment, guaranteed bank deposits and facilitated credit for struggling small and medium enterprises.
A Services Based Economy
Services account for some 91.2 per cent of Hong Kong's GDP compared with 3.2 per cent for manufactures.
While manufactures accounted for around 94 per cent of Hong Kong's import-export trade in 2007, these are primarily re-exported to or from China. Manufactures actually produced in Hong Kong are largely specialised, high value-added and technology-intensive products. Locally produced export items include computers, electronic parts and components, special industrial machinery, optical and photographic equipment, fine clothing, jewellery and printed material.
Foreign Trade
Openness to international trade has been fundamental to Hong Kong's economic history and success. Hong Kong's top three trading partners are China, the US and Japan. Hong Kong's top exports include Chinese-made electrical machinery and appliances, clothing, TVs, VCRs, radios and telecommunications equipment.
Economic Relations with China
China is Hong Kong's top trade and investment partner - in 2007, it accounted for 47 per cent of Hong Kong's merchandise trade. Hong Kong companies have invested heavily in mainland China, particularly in the adjacent Pearl River Delta of Guangdong province. The transfer of Hong Kong's labour-intensive manufacturing sector to the mainland coincided with Hong Kong's transformation into a services-based economy.
Both Hong Kong and China have recently announced policy changes which mark steps in China's financial market reform and the continuation of Hong Kong's role as China's predominant global financial centre. These measures include: China's State Council permitting financial institutions to issue renminbi bonds in Hong Kong; amendments to the Hong Kong Stock Exchange listing requirements; agreement on investigating cross-border crimes and regulatory breaches; and a decision to increase the investment opportunities under the qualified domestic institutional investor scheme. These changes will assist Hong Kong to maintain its relevance to Chinese companies seeking international listings, and to position itself to offer quality investment opportunities to soak up excessive Yuan liquidity as China moves progressively to open its capital account.
The Greater Pearl River Delta
Growth in the Greater Pearl River Delta (comprising Hong Kong, Macau and nine mainland municipalities known as the Pearl River Delta Economic Zone - Dongguan, Foshan, Guangzhou, Huizhou, Jiangmen, Shenzhen, Zhaoqing, Zhongshan and Zhuhai) slowed in the second half of 2008. Small and medium Hong Kong investors in the region, often engaged in low-value added export-oriented manufacturing, have come under pressure by rising costs, tight credit and the provincial government's policy decision to encourage high-value added activities.
In recent years, companies such as Cathay Pacific and Hong Kong and Shanghai Banking Corporation (HSBC) have begun to move back-office processing and software development jobs to the delta on a large scale to take advantage of the cheap, skilled labour force. The past decade has seen an increasing number of large Chinese enterprises (the so-called 'red-chip' companies) either listing on the Hong Kong stock market to take advantage of foreign investment concessions, or locating their marketing divisions in Hong Kong for easier access to world markets and advanced services.
Mainland and Hong Kong Closer Economic Partnership Arrangement
Since January 2004, the China-Hong Kong Closer Economic Partnership Arrangement (CEPA) has accelerated integration between Hong Kong and mainland China. CEPA gives favourable treatment to Hong Kong manufactures and services that meet rules of origin criteria. To be certified as a Hong Kong Service Supplier (HKSS) under CEPA, a company must be incorporated in Hong Kong and engage in substantive business operations there for three to five years. The non-discrimination against foreign-owned companies under these criteria has allowed some Australian companies to benefit from HKSS certification and thereby gain greater access to mainland China.
Further liberalisation measures have been introduced in subsequent updates to CEPA. The fifth update, CEPA V, came into effect on 1 January 2008, increasing liberalisation in services across a wide range of sectors. The latest phase also enhanced cooperation in finance, convention and exhibition, and mutual recognition of professional qualifications.
Bilateral relationship
Australia and Hong Kong enjoy a strong relationship built on mutual cooperation and people to people links. Foreign Minister Stephen Smith visited Hong Kong in May 2008, meeting with CE Tsang as well as other senior members of Hong Kong's Government and local business leaders. Hong Kong's Secretary for Justice, Mr Wong Yan Lung; Secretary for the Environment, Mr Edward Yau; and Secretary for Development, Mrs Carrie Lam, visited Australia in 2008.
The Australian Consulate-General represents the Australian Government in Hong Kong. In Australia, the Hong Kong Government is represented through the Hong Kong Economic and Trade Office based in Sydney. About 55,000 Australians reside in Hong Kong and 72,000 people of Hong Kong origin live in Australia.
Bilateral Economic and Trade relationship
Hong Kong is Australia's sixth largest source of international students and Australia is the major English-speaking overseas destination for full fee-paying students in Hong Kong. In 2007, over 19,000 Hong Kong students were enrolled in Australian institutions. Many tertiary courses are also offered by Australian institutions operating in Hong Kong.
Hong Kong is Australia's 20th largest merchandise trading partner. In 2007-2008, Australian merchandise exports were worth over $2.8 billion and imports totalled $1.4 billion. Reflecting Hong Kong's role as a key regional entrepot, as well as strong Australian education and tourism exports, services account for an unusually large proportion of total trade value. Services exports to Hong Kong were worth nearly $1.6 billion and imports were worth over $1.7 billion in 2007. Australia's major merchandise exports are crustaceans, zinc, pearls and gems, and aluminium. Our major imports from Hong Kong are telecommunications equipment, jewellery, computers and printed matter.
Hong Kong was Australia's fifth largest source of foreign investment in 2007, with $41.7 billion invested in a variety of sectors. Hong Kong is Australia's tenth largest investment destination with $17 billion invested in 2007.
Australian Trade and Investment Strategies
Hong Kong has one of the world's most open economies. The transparent regulatory system presents few market access difficulties for overseas business people. Given this environment, the Australian Government's strategy focuses on market development and ensuring that our business sector is aware of developing opportunities. Australia and Hong Kong work together in the WTO and APEC on trade liberalisation and facilitation. The Consulate-General is active in helping Australian exporters and investors resolve specific problems as they arise, for instance with quarantine or customs processes.
The Hong Kong market development program, the responsibility of Austrade, uses a series of exhibitions to target specific sectors such as education, information technology, food and beverages, natural health and beauty products, and building materials and technology. Austrade also coordinates Australian business missions to Hong Kong in high potential sectors, as well as visits to Australia by key Hong Kong buyers and specific market development activities for individual Australian companies. Many exporters use Hong Kong as a test market for China and other regional markets. Austrade has four posts covering the Greater Pearl River Delta: Hong Kong and Guangzhou and sub-offices in Macau and Shenzhen. This network allows Australian business people to take full advantage of the increasingly integrated Hong Kong and Guangdong economies.
Export opportunities
Australian companies are well-established and actively involved in the Hong Kong economy across a wide range of industry sectors.
The Hong Kong Government's plans to stimulate the region's economy by committing to ten major infrastructure projects and a number of minor district-level works provides further opportunities for civil engineering, design, construction and associated business services. The Hong Kong Government's renewed focus on green building (environmentally sustainable) offers commercial opportunities for Australian providers of green building materials, design and construction. Australian companies such as Leighton Holdings and Meinhardt Engineering are very active in Hong Kong.
A number of Australian software companies have established market niches for specific corporate and government solutions. Opportunities also exist for developers of multimedia content for wireless and mobile applications following the introduction of 3G telecommunications services in 2004, and for Australian health and medical technology.
Australia is an 'Acceptable Inspection Regime' under the Hong Kong Code on Unit Trusts and Managed Funds, opening the door to marketing of Australian managed funds in Hong Kong. Despite this recognition, there are still restrictions on marketing Australian unit trusts and managed funds in Hong Kong. Hong Kong financial legislation requires that the trustee and the manager of a managed fund must be different, whereas in Australia the manager and the trustee can be (and usually are) the same entity. As a result few, if any, Australian funds are marketed in Hong Kong.
Australia is an important source of high quality food and beverages for Hong Kong's hotel and restaurant sector, particularly fresh and chilled seafood, premium fruit, nuts, vegetables and dairy products. Hong Kong's strategy to become a wine trading and distribution centre for the Asian region presents opportunities for Australian wine producers and for providers of wine-related services, such as wine storage and auctioning.
As local consumer tastes diversify, there is also a growing market for Australian processed food products as well as for organic, functional and health foods and beverages. Opportunities in organic (made from certified organic ingredients) and functional (which add nutrients or some other health and well being benefits) cosmetics and beauty products are also growing, underpinned by the growing movement for well being and leisure.
Hong Kong is also a gateway market for Australian exporters seeking to enter the Chinese market, as Hong Kong represents a viable test market for new products and is also an important source of potential business partners for new exporters to the region.
Austrade's Hong Kong country page has more information on specific export opportunities and export assistance.
Trade successes
Food and Beverage
The Hong Kong government eliminated duties on wine and beer on 27 February 2008. This budget measure has helped boost exports of Australian wine to the Hong Kong market: in the year ended September 2008, the value of Australian wine shipped to Hong Kong increased by 25% to A$35 million.
Ship-building
Western Australia-based Austal, the world's largest builder of fast ferries, is the major supplier of passenger ferries between Hong Kong and Macau, a route that carries over 14 million passengers a year. Austal has built over 50 vessels operating in the Pearl River Delta region. In 2008, Austal delivered two new ferries to New World First Ferry and signed a contract for four additional 47.5 metre passenger catamarans with Cotai WaterJets (Macao) Ltd, adding to the initial ten-vessel contract signed in 2006 by sister company Venetian Marketing Services Limited (VMSL).
Entertainment
Laservision, Australia's leading international sound and light entertainment producer holds a Guinness World Record for the 'World's Largest Permanent Light and Sound Show', 'Symphony of Lights', which is one of Hong Kong's major tourism draw cards. Engaged by the Hong Kong Tourism Commission to put on the nightly show, Laservision has further expanded in 2008 to include 44 of the city's prominent buildings and skyscrapers.
Other exports
Many smaller Australian companies are also enjoying substantial trade successes and conducting business ventures in Hong Kong and the Pearl River Delta. Australian businesses are actively engaged across many of Hong Kong's industry sectors, not only in food and beverage, ship-building and entertainment, but also in manufacturing, information technology and other services.
TradeWatch Contacts
If you would like more information on trade and economic conditions in Hong Kong, please email the Department of Foreign Affairs and Trade at tradewatch@dfat.gov.au.