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- HONG
KONG THE COUNTRY AND ITS ECONOMY
- HONG KONG EXECUTIVE SUMMARY
- HONG KONG
- HONG KONG
SERVICES DIRECTORY
- MAP OF HONG KONG
Hong
Kong Economy and Currency
Hong
Kong economic success story is inextricably linked
up with China, although the decisive factor forcing
the transition from a trading to an industrial
territory was the Korean war in 1950 and the subsequent
United Nations embargo on China to which Hong
Kong adhered. Hong Kong's role had historically
been that of both an entrepot for trade and point
of contact between China and the West. Today the
territory is the crowded entry point to the Asia
Pacific region and offers unique access to the
fastest growing economy and the biggest potential
market in the world, the People's Republic of
China.
Statistics
alone give an impressive view of Hong Kong economic
future. Although the territory's population is
7m people it nonetheless ranks as the world's
3rd largest financial center (after New York and
London) the 9th largest economy and the 11th largest
exporter of services. Growth rates in the 30 years
preceding the onset of the Asian economic crisis
in 1997 averaged 7% culminating in GDP per capita
exceeding that of Britain, Canada and Australia.
The
external assets of the banking sector are the
world's 5th largest, forex turnover is the world's
6th largest and the Hong Kong stock market has
the largest market capitalization in Asia outside
of Japan. The territory has the largest representation
of international banks in the world including
80 of the top 100 institutions and is the regional
headquarters of over 900 multinational companies.
Since
1992 the territory has had the world's busiest
container port with throughput increases of up
to 20% per annum. Its shipping register is considered
a quality register and ranks 14th in the world.
The
Closer Economic Partnership Arrangement (CEPA)
between Hong Kong and the Chinese mainland has
brought considerable benefits to both business
enterprises and the Hong Kong economy as a whole,
according to an Administration study on CEPA's
economic impact.
The
2005 study covered trade in goods and services
and the Individual Visit Scheme (IVS) and assessed
the economic impact of the first phase of CEPA
(CEPA I) since its introduction in January 2004.
For
trade in goods, more than 90% of the responding
companies considered that CEPA I was beneficial
to the Hong Kong economy, and 89% considered that
the trade pact had been beneficial to the manufacturing
sector.
In
2004, more than 3,000 certificates of origin were
issued under CEPA I, involving products with a
total value of $1.15 billion, which enjoyed tariff
free treatment on importation into the Mainland.
However,
for trade in services, it was found that whilst
78% of the responding companies considered that
CEPA I was beneficial to the Hong Kong economy,
only 46% thought that it had benefited their own
industries.
The
study found that more than 660 companies had obtained
Hong Kong Service Supplier certificates in 2004,
and revealed that 27% of them had already set
up operations under CEPA I in the Mainland.
Furthermore,
companies in the 18 sectors covered in CEPA I
increased their capital investment in Hong Kong
by $1 billion in 2004 due to CEPA. The amount
is expected to surge to $4.5 billion in 2005.
Meanwhile,
mainland residents made 4.26 million trips to
Hong Kong in 2004 under the IVS scheme, accounting
for 34.8% of all the Mainland visitors or 20%
of total visitors. These IVS visitors generated
an additional $6.5 billion in tourist spending
during the year.
Hong
Kong is a major services centre for the Mainland
and particularly for Guangdong, providing such
supporting infrastructural facilities as ports
and airport and institutional services like banking,
insurance and other business services. Its role
as an entrepot for the Mainland has become increasingly
important over the years.
According
to the results of the 2006 Annual Survey of Wholesale,
Retail and Import and Export Trades, Restaurants
and Hotels released today (November 29) by the
Census and Statistics Department (C&SD), total
receipts (i.e. sales and other receipts) of hotels
and boarding houses, restaurants, import and export
trade, retail trade and wholesale trade increased
by 19.0%, 12.0%, 8.8%, 8.7% and 7.1% respectively
in 2006 as compared with 2005. For all the above
industries taken together, total receipts increased
by 8.9% in 2006.
The
SAR's overall fiscal situation deteriorated sharply
in 2001 and 2002, with continuing deflation accompanied
by very low growth, and a ballooning budget deficit,
which the government had to admit in 2002 was
becoming structural. Chief Executive Tung Wha-Chung
ruled out the introduction of a sales tax or other
new taxes in 2002 but vowed to balance the books
in the course of three to five years. The SAR's
budget for 2003/2004 introduced increases in personal
and business taxation, cuts in public expenditure
including civil service pay, and a programme of
disposals of public assets. In October, 2003,
Financial Secretary Henry Tang raised the government's
budget deficit forecast to a record HK$100 billion
(US$12.93 billion) pushing back the government's
target for eliminating the deficit by two years
to 2008/2009. Improvements in economic activity
in late 2003 however caused PwC to say in January
that the deficit might be as low as US$7bn for
the year to April.
The
SAR's economic performance improved rapidly in
2005, with gross domestic product rising 7.3%
in the year.
In
July, 2006, the Hong Kong government announced
that a $14 billion surplus was recorded for the
2005-06 financial year, an improvement of $9.9
billion over the revised estimate of $4.1 billion
announced in the 2006-07 Budget. Revenue for the
year amounted to $247.1 billion, and spending
to $233.1 billion. Revenue was $5.4 billion better
than expected, largely as a result of higher collections
in stamp duties, profits tax, salaries tax and
land premiums towards the end of the financial
year.
Meanwhile,
spending was $4.5 billion lower than forecast
as a result of strenuous efforts to rein in expenses
and spend only where necessary.
On
March 31, the fiscal reserves stood at $310.7
billion, up $14.7 billion compared with the balance
of $296 billion at March 31 last year.
Hong
Kong's economy expanded briskly in the 2007 second
quarter, with gross domestic product accelerating
to 6.9% growth in real terms over a year earlier,
up from a revised 5.7% in the first quarter, according
to the territory's government.
Forecast
GDP growth for 2007 as a whole has been revised
to 5%-6% from 4.5%-5.5%, while the forecast consumer
price inflation rate stayed at 1.5%.
Government
Economist Kwok Kwok-chuen told reporters on Friday
that the upward revision has taken into account
the better-than-expected outturn of a 6.3% GDP
growth in the first half of 2007, and also the
range of uncertainties prevailing in the external
environment.
He
stated that, barring any abrupt adverse changes
in the external environment, the economy is set
for further solid growth in the second half of
the year.
As
to the inflation outlook, Mr Kwok said higher
food prices, renminbi appreciation and the recent
weakness of the US dollar will continue to exert
cost pressure from the external front. Nevertheless,
the sustained rapid rise in labour productivity
and continued expansion in productive capacity
on the supply side will provide an offset, he
suggested. Moreover, various one-off factors including
the rates concession for two quarters, the recent
public housing rental cut, and the implementation
of the Pre-primary Education Voucher Scheme, will
also help to keep the headline inflation at a
moderate level for the rest of the year.
"With
the actual outturn of consumer price inflation
so far largely in line with expectations - 1.5%
for the first half of 2007 - the forecast rate
of increase in the Composite Consumer Price Index
for 2007 as a whole is maintained at 1.5%,"
Mr Kwok said.
Reviewing
the city's economic situation in the second quarter,
Acting Principal Economist Andrew Au revealed
that merchandise exports grew 11.3% in real terms.
While exports to the Mainland stayed vibrant on
the back of a buoyant economy, those to the European
Union and Japan showed faster growth, thereby
offsetting the softness of the US market. Further
weakening of the US dollar also helped.
Financial
services recorded a spectacular performance, while
many business and professional services also held
up well. Exports of services continued to show
distinct growth, rising 10.9% in real terms, underpinned
by the surge in offshore trade, buoyant financial
market activities, and sustained expansion of
inbound tourism.
Domestically,
private consumption expenditure rose 6.6% in real
terms in the second quarter, supported by rising
income, better job prospects and improved financial
positions of households. Overall investment spending
picked up to a strong 11.1% growth in real terms.
Investment in equipment and machinery re-accelerated
to double-digit growth amid strong business confidence,
while construction and building activity saw a
notable rebound, albeit from a low base.
The
labour market improved in the second quarter,
with the seasonally adjusted jobless rate edging
down to 4.2%, the lowest since mid-1998. Wages
and earnings continued to rise, while job vacancies
surged to a post-1997 high in March. Looking ahead,
Mr Kwok observed that the global economic environment
is still largely positive.
While
the economy see-sawed, business interest in the
SAR remained undimished. In January 2004, Government
promotional agency Invest Hong Kong announced
that 2003 was the department’s best year in terms
of attracting investment into the city, with 142
foreign companies successfully assisted to set
up or expand operations in Hong Kong during the
previous 12 months, representing an increase of
21% compared to 2002. The inflow of international
companies continued unabated during 2005 and 2006.
Levels
of foreign direct investment (FDI) into Hong Kong
have also maintained high levels, according to
the ‘World Investment Report 2003’ released by
the United Nations Conference on Trade and Development
(UNCTAD). The territory was named again as the
best-performing host economy for FDI in Asia.
In monetary terms, Hong Kong attracted US$13.7
billion in FDI in 2002 holding the position as
the second largest recipient of FDI in Asia, after
mainland China (US$52.7 billion).
Hong
Kong continues to be the largest external investor
in the Mainland. Hong Kong's total external financial
assets exceed US$1 trillion.
Hong
Kong's Mainland investment concentrates largely
in Guangdong where industrial investment, primarily
outward processing arrangements, still predominates.
Nevertheless, over the years, Hong Kong businessmen
have extended the scope of their investment from
industrial processing to other sectors such as
hotels and tourist-related services, real estate,
retail trade, infrastructural construction and
various business and communications services.
The
Government's policy is strictly non-interventionist.
Subsidies and protection from competing imports
are virtually non-existent. Hong Kong does not
retaliate against countries that impose trade
restrictions on its exports. The territory's biggest
asset is its non-discriminatory low tax regime,
a model fiscal system to which other jurisdictions
should aspire.
During
the negotiations preceding the handover of the
territory in 1997 it was agreed that Hong Kong
would be allowed to maintain an independent taxation
system in which China would not interfere and
these rights are incorporated into articles 106-8
of the Basic Law. Furthermore article 116 of the
Basic Law guarantees that the territory
will remain a free port and a separate customs
area from the mainland.
The
financial center compares very favorably with
other regional financial centers such as Australia,
Malaysia, Singapore and Labuan. Hong Kong does
not offer the discriminatory tax breaks available
through Singapore's "Operational Headquarters
and Pioneer Status" corporate products, Malaysia
"Free Trade Zone" facilities and Thailand
"Industrial Estates" policy. Nor has
it had to follow Malaysia in setting up a separate
financial center in Labuan with a view to compensating
for the negative impact burdensome local taxes
on inward foreign investment.
With
businesses and individuals paying a maximum of
17.5% and 16% tax respectively, with future decreases
announced, it is not surprising that the territory
has become a favorite destination for foreign
investors. Unusually low tax rates are further
complemented by a policy of only taxing Hong Kong
source income, generous deductible allowances
and above all the complete absence of withholding
tax, interest tax, capital gains tax and VAT thereby
making the territory the ideal location for companies
engaged in financial services.
The
insurance industry accounts for about 4% of GDP
and employs about 50,000 people. Recent initiatives
have promoted the reinsurance sector and introduced
captive insurance. The insurance industry has
registered double digit growth for nearly a decade.
Hong Kong is also a major transshipment and re-export
center, activities which in turn lead to continued
strong demand for trade support services such
as banking, finance and shipping. Other industries
include the manufacture of garments, textiles,
electronics, and toys, ship-building & repair,
cement, steel rolling and the export and processing
of fish and fish products.
The
official currency is the Hong Kong dollar (HK$)
which was pegged to the United States dollar in
2000 at
a rate of US$1 = HK$ 7.7972.
The
US dollar continues to be the appropriate anchor
for the Hong Kong dollar for the foreseeable future
and no change is needed to the Linked Exchange
Rate System, a Monetary Authority study found
in September, 2006.
With
the renminbi not being a freely convertible currency
nor a reserve currency, it is technically not
possible for it to be a currency anchor, the HKMA
has concluded.
In
July, China's State Council said it was set to
ease restrictions on the trading of the Chinese
currency, the renminbi, in Hong Kong under an
agreement between the Mainland and the Special
Administrative Region to expand the scope of the
Closer Economic Partnership Arrangement (CEPA).
Under
proposals being studied by Beijing, Hong Kong
importers could be allowed to settle direct import
trades from the Mainland in renminbi, while financial
institutions in the Mainland could issue renminbi
financial bonds in Hong Kong on a pilot basis.
Additional
new measures under CEPA will also cover goods
and services, and enhanced cooperation on intellectual
property protection.
In
the services sector, 10 areas will see new liberalisation
measures. They are legal services, construction,
information technology, convention and exhibition,
audiovisual, distribution, tourism, air transport,
road transport, and individually owned stores.
Some
of the moves targeting legal services include:
- Waiving
the requirement regarding the number of full-time
lawyers employed by Mainland law firms that
operate in association with Hong Kong law firms;
- Waiving
the residency requirement for representatives
stationed in representative offices of Hong
Kong law firms in the Mainland;
- Allowing
Hong Kong residents qualified for practice in
the Mainland to act as agents in matrimonial
and succession cases relating to Hong Kong;
- Allowing
Hong Kong barristers to act as agents in civil-litigation
cases in the Mainland in the capacity of citizens;
and
- Allowing
Hong Kong residents who have acquired Mainland
lawyer qualifications or legal professional
qualifications to undergo internships in a branch
office of a Mainland law firm set up in Hong
Kong.
In
construction, Hong Kong service suppliers will
be allowed to set up wholly-owned construction-engineering
cost-consulting enterprises in the Mainland. The
enterprise's performance in both Hong Kong and
the Mainland will be taken into account in assessing
its qualification in the Mainland.
Both
sides are committed to encouraging mutual recognition
of professional qualifications as part of the
services rules under CEPA. Accordingly, a mutual
recognition agreement between Mainland construction
supervising engineers and Hong Kong building surveyors
was signed on June 27 in Beijing, bringing the
number of mutual-recognition agreements or arrangements
under CEPA to 10.
Hong
Kong travel agents will be allowed to set up wholly-owned
or joint-venture operations in Guangdong Province,
to apply to operate group tours to Hong Kong and
Macau for residents of Guangdong Province on a
pilot basis.
Hong
Kong air-transport sales agencies may set up wholly-owned
agencies in the Mainland. The registered capital
requirement will be the same as that for Mainland
enterprises.
All
these measures will take effect starting from
January 1, 2007, and the Mainland will work out
the implementation rules.
Since
January 1, the Mainland has granted all products
of Hong Kong origin tariff-free treatment if applications
by Hong Kong manufacturers met the CEPA rules
of origin. Manufacturers may apply to include
products that did not meet the agreed rules of
origin in discussions that will be held twice
a year.
Agreements
on 37 product areas have now been worked out in
the rules-of-origin discussions in the first half
of the year, boosting the number of approved product
areas from 1,370 to 1,407.
The
37 products include aquatic products, food and
seasonings, chemical products, plastic and rubber
products, and mechanical and electrical products.
They will be eligible for zero tariffs starting
from July 1.
Increasing
intellectual property protection is another new
initiative under CEPA, aimed at facilitating trade
and investment. The Mainland Intellectual Property
Protection Coordination Centre will be set up
in Hong Kong to help in related information exchanges.
A
decision in September 2006, by Moody's ratings
agency to upgrade the SAR's long-term foreign
currency rating from A1 to Aa3, with a positive
outlook was welcomed by Hong Kong's Financial
Secretary Henry Tang. Moody's also upgraded Hong
Kong's foreign-currency bank deposit ceiling from
A1 to Aa3, with a positive outlook.
Mr
Tang suggested that the decisions show international
recognition of Hong Kong's improved public finances
and growth prospects.
"Hong
Kong has now achieved AA-category ratings by all
major international credit rating agencies. The
latest ratings are also the highest that have
ever been assigned to Hong Kong. The Moody's upgrade
is a major breakthrough as it has allowed Hong
Kong's rating to rise above that of the Mainland
by more than one notch," he noted.
Moody's
attributed the upgrade to Hong Kong's strong financial
position and large positive international investment
position, showing that Hong Kong has a degree
of resilience to any potential shocks emanating
from the Mainland.
The
ratings agency further argued that the large foreign
assets held by Hong Kong residents could help
Hong Kong weather potential economic or financial
shocks.
It
added that the upgrade was prompted by its belief
that the foreign currency bond rating should be
in line with the local one.
In
July, 2007, Fitch upgraded Hong Kong's long-term
foreign-currency sovereign rating to "AA"
from "AA-", with a "stable"
outlook.
Fitch
attributed the upgrade to Hong Kong's strong external
financial position, improving public finances,
high level of fiscal reserves and credible linked
exchange-rate system.
Fitch
also recognised that the jurisdiction's self-determined
exchange rate regime was an important manifestation
of Hong Kong's economic and financial-policy autonomy.
In
addition, based on the established 10-year track
record of political interaction between Hong Kong
and the Mainland, Fitch accepted that many potential
political risks identified in the early years
of Chinese sovereignty over Hong Kong could be
set aside.
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Hong Kong Import of Foreign
Capital
There
are no exchange controls in Hong Kong.
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Hong Kong Investments by Foreigners
Hong
Kong spectacular economic success is largely based
on a whole-hearted adherence to free and open
trade, the values encompassed in a British common
law legal system and a laissez faire non interventionist
attitude on the part of Government. As such there
are few if any significant barriers to investment
by foreigners. There are no restrictions regarding
ownership of real estate by foreigners in Hong
Kong but it should be noted that all land is owned
by the Government so that only leasehold estates
are available with most land comprising 75 year
renewable leases and a few areas comprising 999
year leases.
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