HONG KONG: EXECUTIVE SUMMARY

Hong Kong Was A British Colony . . .

Hong Kong is a former British colony in South-East China, near Canton and Macau. With a surface area of 404 sq miles, Hong Kong is densely populated with 7m people. The capital city at Victoria, on Hong Kong Island, boasts one of the world's finest natural harbours. Hong Kong has one of the world's busiest international airports.

Mean January and July temperatures are 16° C and 28° C respectively. 90% of average rainfall of 85 inches falls between April and October. Typhoons occur between July and October.

Chinese and English are the official languages of Hong Kong. 99% of the people are ethnic Chinese. About 10% of the population are Christian with the balance being followers of Buddhism or Taoism. The major non-Chinese elements of the population are from the Philippines, British Commonwealth countries, the USA, Portugal and Japan.

. . . . But Is Now Again A Part Of China

Since 1st July 1997 Hong Kong has been a special administrative region (SAR) of the People's Republic of China. The constitution is known as the "Basic Law" and is modeled on the constitution of the People's Republic. Under the guiding principle of "one country, two systems" which was established before the handover the Chinese Government agreed that Hong Kong's capitalist system would remain unchanged until the year 2047.

The SAR's administration is headed by a Chief Executive, appointed by China. The Chief Executive appoints the Executive Council of Government. A legislative body, the Legislative Council passes laws and controls expenditure; its members are elected but the arrangements are undemocratic, so that the Executive can control a majority. This arrangement, established by the British, has not been changed since the handover.

The SAR maintains a common law system; the regulation and taxation of business and financial services follow Western patterns.

Hong Kong Is The Economic Gateway To China . . . . .

Hong Kong has thrived historically as a trading entrepot serving many Asia Pacific countries, and also as a low-cost manufacturing centre, although latterly the rise of cheaper Asian competitors has driven the SAR more into the provision of services, particularly financial services.

At the time of writing, Hong Kong is the world's 3rd largest financial center (after New York and London), the 9th largest economy and the 11th largest exporter of services. GDP per capita exceeds 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 3,000 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 government has consistently followed business friendly policies and continues to do so. Other Asia-Pacific countries and cities such as Shanghai or Singapore may mount effective competition to Hong Kong as financial/trading hubs, but they will probably not be able to replicate Hong Kong's unique blend of Western expertise and Chinese knowledge. As China opens up to the world through its membership of the WTO, Hong Kong is both the natural conduit for Chinese exports towards the West, and the obvious base for international companies taking part in opening up China's expanding economy.

. . . . And Has A Highly Attractive Fiscal Environment

Hong Kong is not an 'offshore' jurisdiction as such, but has low tax rates which are levied only on Hong Kong-source income.

There is no capital gains tax, no withholding tax, no sales taxes, no VAT, no annual net worth taxes and no accumulated earnings taxes on companies which retain earnings rather than distribute them. Individuals pay no tax on investment income or capital gains, whether resident or not.

Hong Kong's 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.

However, Hong Kong's economy suffered considerably during and after the Asian crisis in the late 1990s. Continued deflation and low property prices were accompanied by higher unemployment and depressed levels of trade, leading to tax increases in the 2003/2004 budget.

Economic growth was muted in 2002 and 2003, but 2004 saw a major turnaround to 7.5% growth; in 2005, gross domestic product rose 7.3% and in the first quarter of 2008 GDP increased 9.6%.

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. However, a HKD5.7bn deficit was recorded in the first two months of the financial year in 2008, and the government has forecast a budget deficit of HKD7.5bn for the 2009/10 financial year.