Hong Kong Brief - July 2008
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.
LegCo’s last elections were held in 2004. Pro-democracy candidates won 63 per cent of the popular vote but the system of functional constituencies ensured the balance of power remained with pro-Beijing parties. Pro-democracy candidates won 25 seats: 18 of the 30 directly-elected seats and 7 of the 30 functional constituency seats. The total number of pro-democracy legislators increased to 26 following a December 2007 by-election. The next LegCo elections are scheduled for September 2008.
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).
Recent 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 11th largest trading economy in 2006 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.
Although slowing in recent years, the Hong Kong economy continues to perform well, with estimated growth of 6.4 per cent in 2007. On the back of China’s strong export performance, Hong Kong’s merchandise re-exports rose 10.8 per cent in 2007 while services exports rose 14 per cent, reflecting strong offshore trade and inbound tourism, particularly from mainland China. Inflow of foreign direct investment grew from US$33.6 billion in 2005 to US$42.8 billion in 2006. Unemployment eased from 4.8 per cent in 2006 to 4.0 per cent in 2007. Following nearly six years of deflation, CPI inflation increased from 1 per cent in 2005 to 2 per cent in 2007, and is showing signs of increasing in 2008. The Government recorded a consolidated account surplus of HK$123.6 billion for 2007-08.
A Services Based Economy
Services have replaced manufactures as the key to Hong Kong’s economy, accounting for some 91.2 per cent of Hong Kong's GDP compared with 3.2 per cent for manufactures.
While manufactures accounted for around 85 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 47.5 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
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) is one of the fastest growing economies in the region.
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. 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, around 16,000 student visas were issued to Hong Kong passport holders. There are also many tertiary courses offered by Australian institutions operating in Hong Kong.
Hong Kong is Australia’s 19th largest merchandise trading partner. In 2007, Australian merchandise exports were worth $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 zinc, crustaceans, aluminium, and copper. Our major imports from Hong Kong are telecommunications equipment, jewellery, computers and computer parts.
Hong Kong was Australia’s fourth largest source of foreign investment in 2006, with $38.5 billion invested in a variety of sectors. Hong Kong is Australia’s ninth largest investment destination with $16 billion.
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. Australian companies such as Leighton Holdings and Meinhardt Engineering are winning construction contracts for major infrastructure projects. The Hong Kong Government’s commitment to growth will offer more opportunities for projects covering construction, telecommunications and associated technical and business services in particular.
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 and vegetables, dairy products and wine.
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, and this consumer trend is also extending to organic and functional cosmetic and beauty products.
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 tariffs on the import of wine and beer on 27 February 2008. This will boost exports of Australian wine to the Hong Kong market.
Infrastructure
In 2005 a consortium that includes Leighton Contractors (Asia) Ltd, and John Holland Pty Ltd won a $340 million contract to design and build an underground railway station and tunnel infrastructure for the Kowloon Canton Railway Corporation. The contract, part of the Kowloon Southern Link project, is scheduled for completion in 2009.
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 construction, 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.
More information on specific export opportunities in Hong Kong.