Hong Kong Brief

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 Election Committee, whose 1,200 members 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. Chief Executives are appointed for a period of five years.

Mr Leung Chun-ying was sworn in as Hong Kong's third CE on 1 July 2012, having won the election on 25 March 2012. Mr Leung's predecessor Mr Donald Tsang Yam-kuen became Hong Kong's second CE on 21 June 2005 after the Election Committee elected him unopposed. He was returned to office on 25 March 2007 in the first contested CE election since the handover. Already having served two terms, Mr Tsang was ineligible to stand for re‑election in 2012. Hong Kong's inaugural CE, Tung Chee-hwa, resigned mid-way through his second term on 12 March 2005 citing health reasons. (See political developments)

Executive Council

The CE appoints and leads the 30-member Executive Council (ExCo) whom the CE consults on major policy matters. The 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 bureaux, 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 CE have roles similar to ministers in the Westminster system of government. They are expected to defend government policy before the LegCo and to advise the CE on policy. Bureau Secretaries are supported in their role by the bureaux, each headed by a Permanent Secretary.

Legislative Council

The major function of the Legislative Council (LegCo) is to enact laws; examine and approve budgetary matters; monitor the government's performance; and debate issues of public interest. The 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.

Legislative Council elections were held on 9 September 2012, with all 70 LegCo members elected for a term of four years. Five geographic constituencies returned 35 members by universal suffrage using a proportional representation party-list system. Functional constituencies, representing occupational and functional groups, returned 30 members. The franchise of the functional constituencies is limited to the membership of these groups, an electoral base of less than 230,000 compared with a total voting population of around 3.4 million. The remaining five members were elected on a proportional basis in a single Hong Kong-wide constituency by all the voters who did not have a vote in the functional constituencies. The electors of these five “super seats” constituted about 90 per cent of the total voting population.

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 five occasions: concerning the right of abode (1999), universal suffrage (2004 and 2007), the term of the Chief Executive (2005) and law of sovereign immunity (2011).

Political Developments

Currently no institutions of government in Hong Kong are elected through universal suffrage, although universal suffrage in Chief Executive and LegCo elections is the "ultimate aim" of constitutional development under the Basic Law. The Basic Law sets out steps for introducing more democratic governance between 1997 and 2007 but is silent on what happens after that date.

In December 2007, the NPCSC ruled out fully democratic elections for the CE and LegCo in 2012 but left open the possibility of universal suffrage-based elections for the CE in 2017 and the LegCo thereafter (2020 at the earliest). In February 2008, the Hong Kong government established a Task Group on Constitutional Development to study options for the election of the CE and the formation of the LegCo in the 2012 elections, within the framework laid down by the NPCSC's declaration. Following public consultation, on 24 June 2010 the LegCo passed an electoral reform package for the 2012 elections of the CE and the LegCo. The NPSC approved the reforms in August 2010. Under the new arrangements, the Election Committee for CE elections increased from 800 to 1200 persons and the number of LegCo seats to be contested increased from 60 to 70. Of the ten new LegCo seats, five represent functional constituencies and five represent geographic constituencies. This maintains the 50:50 split between functional and geographic constituency seats required by the December 2007 NPCSC Decision.

Mr Leung Chun-ying was sworn in as Hong Kong’s third CE on 1 July 2012, having won the election on 25 March 2012 by a margin of 689 votes to 285 over his principal rival Henry Tang, the former Chief Secretary for Administration. The third candidate, Chairman of the Democratic Party Albert Ho, received 76 votes. A significant number of the Election Committee abstained.

Parties in the LegCo are traditionally divided between the Pro-establishment and Pan-democrat camps. In the 2012 election the Pro-establishment camp won 43 seats including 17 geographic constituencies, 2 “super seats” and 24 functional constituencies. The Pan-democrat camp won 27 seats including 18 geographic constituencies, 3 “super seats” and 6 functional constituencies. As the Pan-democrat camp holds more than a third of LegCo seats, it has the power to veto constitutional changes.

Economic Overview

Hong Kong is a major international and regional financial centre and arguably amongst the freest economies in the world. It is a leading world trading entity and is home to some of the region's most important corporate headquarters. In 2012, Hong Kong topped the World Economic Forum's Financial Development Index. It is a major provider of services to China and the East Asian region and the mainland's designated centre for the internationalisation of the Renminbi. Its economic prospects now depend largely, but not exclusively, on its links with China.

Following the global financial crisis, Hong Kong was particularly affected in 2009 by the slowdown in China and the decrease in demand from key re-exports markets in the United States and Europe but recovered quickly. GDP grew 6.8 per cent in 2010, underpinned by growth in exports (especially to the Mainland and other Asian markets) and buoyant domestic consumption. Overall Hong Kong's economy grew by 5.0 per cent in 2011, driven by strong domestic demand and rising incomes but quarterly data reveal a pattern of deceleration (GDP growth of 7.6 per cent in Q1, 5.3 per cent in Q2, 4.3 per cent in Q3 and 3.0 per cent in Q4.) Even more muted growth (between 1-2 per cent) is expected in 2012. The government's concern about the impact of the Eurozone debt crisis and US difficulties on the territory's exports is reflected in its 2012-13 budget, which contains a range of stimulus measures to cushion the economy against any major downturn.

Pearl River Delta Integration

The Pearl River Delta (PRD) comprises Hong Kong, Macau and nine mainland municipalities of neighbouring Guangdong Province (Dongguan, Foshan, Guangzhou, Huizhou, Jiangmen, Shenzhen, Zhaoqing, Zhongshan and Zhuhai). Integration in the PRD began in the early 1980s, when Hong Kong industrialists were amongst the first to set up export-oriented factories in the region, taking advantage of China's opening-up policies and Guangdong's lower production costs.

The process of integration has accelerated and widened in scope in recent years, as China's central authorities and the governments of Hong Kong and Guangdong seek to speed up the economic development of the Pearl River Delta by enabling better flow of people, goods and capital in the region. While the Closer Economic Partnership Arrangement (CEPA – see below) remains the primary framework for integration in the region, the Outline of the Plan for the Reform and Development of the Pearl River Delta, issued by China's State Council in late 2008, provides a national strategic blueprint for the long-term development of the region. Infrastructure projects such as a bridge linking Hong Kong, Macau and Zhuhai (commenced in November 2011, due to be completed in 2016) and a high-speed rail link to Guangzhou via Shenzhen (commenced in January 2010, due to be completed in 2015) are expected to improve transport links with the region.

Growth in the export-dependent region slowed during the Global Financial Crisis, as demand from traditional centres of consumption (US, Europe and Japan) diminished considerably and suddenly. Growth in the Pearl River Delta began to recover in early 2009 and continued until key European and other markets began to contract in 2011. Long term prospects for the region are closely linked to the state of the global economy.

The Closer Economic Partnership Arrangement (CEPA)

Since January 2004, the China-Hong Kong Closer Economic Partnership Arrangement (CEPA) has accelerated integration between Hong Kong and mainland China. The 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 the CEPA, a company must be incorporated in Hong Kong and have engaged 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 the CEPA, enhancing services across a wide range of sectors. These include enhanced cooperation in finance, convention and exhibition services, and mutual recognition of professional qualifications. Supplement IX, the most recent update, was signed on 29 June 2012 and provides for a total of 43 services liberalisation and trade and investment facilitation measures across 22 service sectors.

Internationalisation of the Renminbi

Mainland authorities have undertaken a series of regulatory reforms to broaden the international use of the Renminbi (RMB – China's currency), particularly in regional trade settlement and financial products. Hong Kong has played a unique role in this strategy, first as a testing ground and now as a centre for off-shore RMB business.

Commencing in 2004, Hong Kong banks were allowed to introduce limited RMB retail banking services, including deposit taking, currency exchange, remittances, credit and debit cards and cheques. In June 2007, mainland financial institutions began issuing RMB-denominated bonds in Hong Kong. Since May 2009, eligible overseas banks with subsidiaries in the mainland have also been permitted to issue RMB bonds in Hong Kong. In August 2010, the People's Bank of China announced a pilot scheme to permit foreign central banks (which would include the Reserve Bank of Australia), RMB clearing banks in Hong Kong and Macau, and other authorised banks (called 'participating banks') to invest in the mainland's interbank bond market.

A pilot program for cross-border trade settlement in RMB was launched in July 2009. This scheme allowed mainland designated enterprises in Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai to use RMB as the transaction currency when trading with designated non-mainland enterprises in Hong Kong, Macau and ASEAN member countries. This gave mainland exporters the ability to price their goods in RMB, as well as being able to recycle their export proceeds on- and off-shore. In June 2010 the program was expanded to allow designated enterprises in 20 mainland cities and provinces to use RMB as the transaction currency, for all trade transactions, and with anywhere in the world. Since that date RMB trade settlement has been extended to cover the entire country, RMB can be used for direct investment in the mainland and mainland enterprises are able to issue RMB-denominated bonds.

Hong Kong is designated as the mainland's official offshore RMB centre and has infrastructure in place to directly link its offshore operations with onshore RMB trade on the mainland, which is frequently used by other financial centres. Combined with its links to the mainland, institutional framework and regulatory environment, this provides Hong Kong with a strong competitive advantage compared with other financial centres. As a result, Hong Kong is the world's largest offshore RMB centre – processing just under 80 per cent of all offshore RMB payments.

During a visit to Hong Kong in July 2012, Deputy Prime Minister and Treasurer, Mr Swan, co-hosted a Renminbi Cross-border Trade and Investment Forum with Hong Kong Finance Secretary, Mr John Tsang. At the Forum, Mr Swan announced a new high-level dialogue between senior business leaders from Australia and Hong Kong on RMB trade and investment. The dialogue aims to increase collaboration between the two economies and broaden RMB trade settlement, particularly in Australia's key commodity exports. It also seeks to facilitate the development of new RMB-denominated financing and investment products and closer RMB banking and financial links.

Bilateral Relationship

Australia and Hong Kong enjoy a strong relationship built on mutual cooperation and people to people links. Recent high level visits from Australia include: Deputy Prime Minister and Treasurer, Mr Swan, in July 2012 (to co-host the Renminbi Cross-border Trade and Investment Forum); Minister for Transport and Infrastructure, Mr Albanese, in December 2011 (to attend the 9th Ministers' Forum on Infrastructure Development in the Asia-Pacific Region and associated meetings); Parliamentary Secretary for Trade, Mrs Elliot, in November 2011 (to participate in Cosmoprof Asia and for bilateral meetings); Governor-General, Her Excellency Ms Quentin Bryce, in May 2011 (for a meeting with the Australian community); Minister Assisting the Minister for Tourism, Senator Sherry, in April 2011 (for meetings with representatives from Hong Kong government and business); Minister for Financial Services and Superannuation, Mr Shorten, in January 2011 (to attend the Asian Financial Forum); and Minister for Trade, Dr Emerson, in November 2010 (for discussions with Hong Kong Secretary for Commerce and Economic Development).

In 2011 four of the six State Premiers visited Hong Kong: Mr Baillieu (September), Mr O'Farrell (July), Ms Bligh (July) and Mr Rann (April).

Then Hong Kong Chief Executive, Donald Tsang, visited Australia in June 2011. His program covered Melbourne, Perth, Karratha, Canberra and Sydney. Tsang's program in State capitals included meetings with the Premier of Victoria, the Premier of Western Australia and the Western Australian Minister for Mines and Petroleum. In Canberra he held discussions with the Prime Minister, the Minister for Foreign Affairs and the Leader of the Opposition. Other high-level visits from Hong Kong include Chief Secretary for Administration in October 2009; Secretary for Transport and Housing in November 2009; Secretary for Food and Health in April 2009 and the Secretary for Financial Services and the Treasury in March 2009.

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. Some 80,000 Australians reside in Hong Kong and around 75,000 people born in Hong Kong now live in Australia.

Bilateral Economic and Trade relationship

Hong Kong was Australia's seventh largest source of foreign investment in 2011, with a cumulative $39.4 billion in areas as diverse as electricity supply, food processing, light industry, insurance, engineering, hotels, telecommunications, electronic devices and biotechnology. Hong Kong is also an attractive investment destination for Australia ($20.4 billion at the end of 2011). Sectors of interest include insurance, building, road construction, telecommunications, banking and education.

Australia and Hong Kong share a long-established trading relationship. Hong Kong was Australia's 14th most important destination for merchandise exports ($3.0 billion) in 2011 and an important market for services ($1.7 billion in 2011). Two-way trade in goods and services amounted to $7.9 billion in 2011. Australia's major merchandise exports were gold, crustaceans, pearls and gems and telecommunications equipment and parts. Australia's major imports from Hong Kong were telecommunications equipment and parts, printed matter, jewellery and monitors, projectors and televisions. Bilateral services trade is centred on education-related travel, other personal travel and transport.

Australian Trade and Investment Strategies

Hong Kong's 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 including wine, 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 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 plans to stimulate the region's economy which includes committing to ten major infrastructure projects, including the high-speed railway link to Guangzhou and the Hong Kong-Macau-Zhuhai bridge. This creates potential opportunities for Australian civil engineering, design, construction and associated business services. The Hong Kong government's renewed focus on green (environmentally sustainable) building offers commercial opportunities for Australian providers of green building materials, design and construction. Australian companies such as Leighton Holdings and Meinhardt Engineering are already 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 and for Australian health and medical technology.

Australia is an important source of high quality food and beverages including wine 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 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 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 in February 2008, and in April 2009 Australia and Hong Kong signed a Memorandum of Understanding on wine related business. This MoU provides a framework for Australian expertise to contribute to Hong Kong's aim of becoming a wine hub in Asia and raise the profile of Australian wine in the territory. A three day 'Hong Kong International Wine and Spirits Fair was held in early November 2011. About fifty Australian wine and wine-related companies exhibited. An Australian wine master class and tasting session was delivered by Australian wine makers. Australia is now the second largest supplier of wine by value to Hong Kong.

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.

Building and Construction

TPI Commercial Joinery Pty Ltd, a specialist wholesale supplier of commercial bathroom and kitchen joinery, achieved success in the highly competitive Hong Kong construction sector. Through its Hong Kong distributor, Jardine Engineering Corporation (JEC), TPI's products were specified for the refurbishment of HSBC Bank's head office in Hong Kong, one of the biggest and most prestigious projects in the market. TPI also capitalised on the Asia-wide reach of corporations in the Hong Kong market. Companies operating in Hong Kong often have networks all over China and elsewhere in Asia, and by linking up with JEC, TPI found a partner with extensive operations throughout Asia. Through TPI's agreement with JEC and its long-term approach, TPI's commercial joinery products have since received market interest and commercial success in Singapore and Vietnam.

Health and Cosmetics

CSL Ltd is the largest collector, manufacturer and supplier of human blood plasma and blood products. It is a key industry player in Hong Kong and other parts of the region including Mainland China, Taiwan, Singapore and Malaysia, which send their plasma to CSL in Australia for manufacture.

As consumers increasingly look for natural, rather than chemical, cosmetic products, Australian firms have stood to benefit. Products made from Australia's unique, native flora are increasingly popular. Jasmine Skincare provides high-end organic skincare products produced from Australian raw ingredients. In addition to the 7 million people resident in Hong Kong, the Hong Kong market offers huge potential with 42 million visitors annually. Mainland Chinese tourists, who make up the majority of these visitors, have emerged as a major consumer group in Hong Kong's skincare and cosmetics sector due to their confidence in the quality and authenticity of products sold in Hong Kong. As such, Hong Kong operations have allowed Australian firms such as Jasmine Skincare to showcase their cosmetics and skincare products to a large visitor/consumer base.

Updated November 2012