INVESTMENT CLIMATE -- HONG KONG AND MACAU - 2005-6

Edited by: Prof. Mentz

Openness to Foreign Investment

Hong Kong pursues a free market philosophy, andthere is minimum government interference in the economy. The Hong Kong Government welcomes foreign investment. It offers neither special incentives nor does it impose disincentives for foreign investors. Hong Kong's well-established rule of law is applied consistently and without discrimination. There is no distinction in law or practice between investments by foreign-controlled companies and those controlled by local interests. Hong Kong is a member of the World Trade Organization in its own right and a separate customs territory. Hong Kong is a duty free port, except for a small number of tariffs on products such as cigarettes and alcohol. There are no quotas or dumping laws. Foreign firms and individuals are allowed freely to incorporate their operations in Hong Kong, register branches of foreign operations, and set up representative offices without encountering discrimination or undue regulation. There is no restriction on the ownership of such operations. Company directors are not required to be citizens of, or resident in, Hong Kong. Reporting requirements are straightforward and not onerous.

Hong Kong's extensive body of commercial and company law generally follows that of the United Kingdom, including the common law and rules of equity. Most statutory law is made locally. The local court system provides for effective enforcement of contracts, dispute settlement, and protection of rights. Formalities are minimal in company incorporation and business registration. Foreign and domestic companies register under the same rules and are subject to the same set of business regulations. The Hong Kong Government's Invest Hong Kong encourages inward investment as a means of introducing new or improved products, processes, designs and management techniques. U.S. and other foreign firms can participate in government financed and subsidized research and development programs on a national treatment basis.

There is no capital gains tax, nor are there withholding taxes on dividends and royalties. Profits can be freely converted and remitted. Foreign-owned and Hong Kong owned firms are taxed at the same rate, 17.5 percent of profits. There are no preferential or discriminatory export and import policies that affect foreign investors. There are no direct subsidies to domestic industries.
There are no disincentives to foreign investment such as quotas, bonds, deposits, or other similar regulations. The Hong Kong Code on Takeovers and Mergers (1981) sets out general principles for acceptable standards of commercial behavior.

According to Hong Kong Government statistics, there were 3,609 regional operations of overseas companies in Hong Kong in 2004. The Government defines regional operations as: regional headquarters that control the operation of other branches in the region without frequent referrals to the parent company outside Hong Kong; and regional offices as offices that coordinate operations elsewhere in the region with frequent referrals to the parent company outside Hong Kong or a regional headquarters. The U.S. has the largest number of regional headquarters and offices in Hong Kong (813 companies), followed by Japan (713 companies) and the UK (316 companies). The major lines of business of the regional headquarters include wholesale/retail, import/export, finance and banking, manufacturing, and transport and related services.

The Hong Kong Government owns all land, granting long-term leases without transferring title. Local and foreign leaseholders are treated equally. The Government plays a significant role in the housing market: about 50 percent of homes in Hong Kong are rented from the Government or purchased with government assistance at below market rates.

With few exceptions, the Hong Kong Government does not attempt to limit the activities of foreign investors either in specified projects or sectors. Foreign investment in Hong Kong flows freely into the industrial sector as well as into services, franchises, restaurants, the entertainment industry, and the ownership of property, both residential and commercial. The telecommunications services market has been fully liberalized since January 1, 2003.

The exceptions to the Hong Kong Government's's open foreign investment policy are:

Broadcasting - Voting control of free-to-air television stations by non-residents is limited to 49 percent. There are also residency requirements for the directors of broadcasting companies.

Legal Services - Foreign lawyers are able to practice foreign and international law in Hong Kong. Foreign lawyers can apply to take the Hong Kong Bar Examination and, if successful, practice Hong Kong law. Foreign law firms may not hire local lawyers to advise on Hong Kong law, but may themselves become "local" firms after satisfying certain residency and other requirements. They may thereafter hire local attorneys, but must do so on a 1:1 basis with the foreign lawyers. They also can form associations with local law firms.

On June 29, 2003, Hong Kong and China signed the Closer Economic Partnership Arrangement (CEPA), a free trade agreement granting Hong Kong's manufacturers and service suppliers preferential access to the Chinese market. CEPA was implemented on January 1, 2004, providing tariff-free treatment for Hong Kong-origin goods in 374 categories as well as preferential access to 18 Mainland service sectors. Preferential access for five types of value-added telecommunications services was implemented on October 1, 2003.

Hong Kong and China signed the second phase of CEPA on August 27, 2004 to liberalize further the trade in goods and services. As of January 1, 2005, Hong Kong-origin goods in 529 additional categories can be exported to China tariff-free; as of January 1, 2006, another 184 products will enjoy this treatment. Additionally, starting from January 1, 2005, Hong Kong service providers enjoy preferential treatment in eight new service sectors. U.S. and other foreign firms with a significant presence in Hong Kong are eligible to take advantage of CEPA concessions to enter the mainland market.

Conversion and Transfer Policies

There are no restrictions on conversion and inward or outward transfer of funds for any purpose. The HK Dollar is a freely convertible currency that, since late 1983, has been linked to the U.S. Dollar at an exchange rate of HKD7.8 = USD 1. Government authorities are committed to exchange rate stability through maintenance of the linked rate. There is no allocation of foreign exchange.

Expropriation and Compensation

The U.S. Consulate General is not aware of any expropriation actions in the recent past. Expropriation of private property may occur if it is clearly in the public interest, but only for well-defined purposes such as implementation of public works projects. If this is the case, expropriations are to be conducted through negotiations, in a non-discriminatory manner in accordance with established principles of international law. Due process and transparency are to be observed. Investors in and lenders to expropriated entities are to receive prompt, adequate, and effective compensation. Property may be acquired under the State Land Resumption Ordinance, the Land Acquisition Ordinance, the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance or the Roads Ordinance. These ordinances provide for payment of compensation. If agreement cannot be reached on the amount payable, either party can refer the claim to the Land Tribunal.

Dispute Settlement

The U.S. Consulate General is not aware of any investor-state disputes in recent years involving U.S. or other foreign investors or contractors and the Hong Kong Government. The Hong Kong Department of Justice is also not aware of any such disputes. Private investment disputes are normally handled in the courts or via private negotiation. Alternatively, disputes may be referred to the Hong Kong International Arbitration Center. The Hong Kong Government accepts international arbitration of investment disputes between itself and investors. Following reversion to Chinese sovereignty on July 1, 1997, Hong Kong applies provisions of the International Center for the Settlement of Investment Disputes (ICSID), known as the Washington Convention, and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Hong Kong has also adopted the United Nations Commission on International Trade Law (UNCITRAL) model law for international commercial arbitration.

Hong Kong and China signed a Memorandum of Understanding (MoU) in June 1999 on an arrangement parallel to the New York Convention for the reciprocal enforcement of arbitral awards, since the New York Convention, being an international agreement, is no longer applicable to the enforcement of arbitral awards between Hong Kong and China.

Hong Kong's legal system is firmly based on the rule of law and the independence of the judiciary. Courts of justice in Hong Kong include the Court of Final Appeal, the High Court (composed of the Court of Appeal and the Court of First Instance), the District Court, the Magistrate's Courts, the Coroner's Court, and the Juvenile Court. There are also a Lands Tribunal, Labor Tribunal, and other statutory tribunals.

Performance Requirements/Incentives

Consistent with its non-interventionist economic philosophy, Hong Kong imposes no export performance or local content requirements as a condition for establishing, maintaining or expanding a foreign investment. Hong Kong offers no special privileges to attract foreign investment. There are no requirements that Hong Kong residents own shares, that foreign equity be reduced over time, or that technology be transferred on certain terms. All of Hong Kong is a duty-free zone. Subject to non-discriminatory application of excise taxes and restricted entry in some sectors, as noted above, local and foreign firms are free to take advantage of investment opportunities as they arise.

Right to Private Ownership and Establishment

Hong Kong law and regulations provide for the right of foreign and domestic private entities to establish, own and dispose of interests of business enterprises. Foreign investors are allowed, except for the sectors noted above, to engage in all lawful forms of remunerative activity. The Hong Kong Government does not generally engage directly in business activity via public enterprises. Business privileges, franchises and land development rights are granted on the basis of competitive equality.

Protection of Property Rights

Hong Kong's commercial and company laws provide for effective enforcement of contracts and protection of corporate rights. Hong Kong has filed its notice of compliance with the trade-related intellectual property requirements of the World Trade Organization. The Intellectual Property Department, which includes the Trademarks and Patents Registries, is the focal point for the development of Hong Kong's intellectual property regime. The Customs and Excise Department is the principal enforcement agency for intellectual property rights (IPR). Hong Kong has acceded to the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, and the Geneva and Paris Universal Copyright Conventions. Hong Kong also continues to participate in the World Intellectual Property Organization, as part of China's delegation. The Hong Kong Government devotes significant attention and resources to IPR enforcement. Implementation of laws passed in recent years, including aggressive raids at the retail level, has significantly reduced illegal production and retail sales of copyright and trademark protected products. The Hong Kong courts have imposed longer jail terms for violations of Hong Kong's copyright ordinance. The Hong Kong Government has conducted public education efforts to encourage respect for intellectual property rights. Nevertheless, pirated and counterfeit products remain available at the retail level throughout Hong Kong. In addition, end-use piracy of software and textbooks, the rapid growth of peer-to-peer downloading via the Internet, and the illicit importation and transshipment of pirated and counterfeit goods, including optical discs and name brand handbags and apparel from China and elsewhere in the region, are continuing problems. Hong Kong authorities took steps to address these problems by: continued monitoring of suspect shipments at points of entry; establishing a task force to monitor and crack down on peer-to-peer (P2P) piracy over the Internet in December 2004; and prosecuting software end-use piracy. The task force made its first arrest for distributing unauthorized movies via this technology in January 2005. Another vulnerability is the fact that health authorities continue to permit the registration of generic drugs for marketing without regard to whether these products infringe on valid patents. Despite extensive consultations with industry, no progress has been made on closing this loophole.

The Government continues to refine its IPR law. In July 2003, the Legislative Council passed an IPR bill that liberalized the parallel importation of computer software.

The Copyright Ordinance protects any original copyright work created or published by any person anywhere in the world. It provides for rental rights for sound recordings and computer programs but not films. It provides for enhanced penalty provisions against copyright piracy and additional legal tools to facilitate enforcement. It decriminalizes parallel imports of copyrighted products one year after their release anywhere in the world, but maintains civil penalties. In March 2004, the Legislative Council passed an amendment to the Copyright Ordinance that facilitates enforcement against and prosecution of the illicit reproduction of printed works. The bill took effect September 1, 2004. In addition, the bill maintains criminal liability for business-related end-use piracy of computer programs, movies, television dramas, and musical recordings while continuing to exclude the business-related end-use piracy of printed works from criminal liability. These provisions will stay in effect through July 2006, by which time the Hong Kong Government intends to propose a new amendment to the Copyright Ordinance covering end-use piracy. In December 2004, it launched a public consultation on the appropriate scope of end-user criminal liability and "fair use" protections.

The Patent Ordinance allows for granting of an independent patent in Hong Kong based on the patents granted by the UK and the Chinese Patent Offices. The patent granted in Hong Kong is independent and capable of being tested for validity, rectified, amended, revoked and enforced in Hong Kong courts.

The Registered Design Ordinance is modeled on the EU design registration system, with certain modifications. To be registered, a design must be new. The system requires no substantive examination. Protection is for an initial period of five years, and may be extended for four periods of five years each, up to a maximum of 25 years.

Hong Kong's trademark law is TRIPS-compatible and allows for registration of trademarks relating to services. All trademark registrations originally filed in Hong Kong are valid for seven years and renewable for 14-year periods. Proprietors of trademarks registered elsewhere must apply anew and satisfy all requirements of Hong Kong law. When evidence of use is required, such use must have been in Hong Kong.

Hong Kong has no specific ordinance to cover trade secrets. Under the Trade Description Ordinance, however, the Government has the duty to protect information being disclosed to other parties. The Trade Description Ordinance prohibits false trade descriptions, forged trademarks and misstatements in respect of goods supplied in the course of trade.

Transparency of the Regulatory System

Hong Kong's body of law and regulation recognizes the value of competition in economic endeavor. Tax, labor, health and safety and other laws and policies avoid distortions or impediments to the efficient mobilization and allocation of investment. Bureaucratic procedures and "red tape" are held to a minimum and are equally transparent to local and foreign investors. Hong Kong does not have an anti-trust law, nor does it support general competition legislation. It states that an all-embracing law would not be able to take into account the specific requirements of individual sectors. Currently, only the telecommunications and, to a lesser degree, the broadcasting sectors have competition regulations in place. For all other sectors, the Government has established a Competition Policy Advisory Group (COMPAG), chaired by the Financial Secretary, to review competition issues that have substantial policy or systemic implications. COMPAG has no investigative or enforcement authority. Certain sectors of the economy are dominated by monopolies or cartels, not all of which are regulated by the Hong Kong Government. These entities do not discriminate against U.S. goods or services, but they can use their market position to block effective competition.

Efficient Capital Markets and Portfolio Investment

There are no impediments to the free flow of financial resources. Non-interventionist economic policies, complete freedom of capital movement and a well-understood regulatory and legal environment have greatly facilitated Hong Kong's role as a regional and international financial center. Hong Kong's foreign exchange markets handled an average daily turnover of USD 102 billion in 2004, making it the sixth largest in the world and the third largest in Asia. Hong Kong has a three-tier system of deposit-taking institutions: licensed banks, restricted license banks, and deposit-taking companies. Only licensed banks can offer current (checking) or savings accounts. At the end of November 2004, Hong Kong had 133 licensed banks, 41 restricted licensed banks, 36 deposit-taking institutions, and 85 representative offices. The Hong Kong & Shanghai Banking Corporation (HSBC) is Hong Kong's largest banking group. With its majority-owned subsidiary Hang Seng Bank, and 298 branches, the group controls more than 36.1 percent of Hong Kong dollar deposits. The Bank of China (Hong Kong) is the second-largest banking group (300 branches), and controls 16.8 percent of Hong Kong dollar deposits. Twenty-nine American "authorized financial institutions" operate in Hong Kong. U.S. banks licensed in Hong Kong are listed in Chapter 11 Section F below. Most banks in Hong Kong maintain U.S. correspondent relationships.

Hong Kong's five largest banks, in terms of total assets (2003), are as follows:

Rank Institution Total Assets
(USD Billion)
1 Hong Kong & Shanghai
Banking Corp (HSBC) 275.5
2 Bank of China (Hong Kong) 97.8
3 Hang Seng Bank Ltd. 64.5
4 Standard Chartered Bank,
Hong Kong Branch 39.1
5 Bank of East Asia, Ltd 25.4

Sources: Companies' annual reports

Credit in Hong Kong is allocated strictly on market terms and is available to foreign investors on a non-discriminatory basis. The private sector has access to the full spectrum of credit instruments as provided by Hong Kong's banking and financial system. Legal, regulatory, and accounting systems are transparent and consistent with international norms. The Hong Kong Monetary Authority (HKMA) functions as a de facto central bank. It is responsible for maintaining the stability of the banking system and managing the Exchange Fund backing Hong Kong's currency. The HKMA, with the assistance of the banking sector, has upgraded Hong Kong's financial market infrastructure. Real Time Gross Settlement helps minimize risks in the payment system and brings Hong Kong in line with international standards. The Hong Kong Mortgage Corporation (HKMC) promotes the development of the secondary mortgage market in Hong Kong. The HKMC is 100 percent owned by the Government through the Exchange Fund. The HKMC purchases residential mortgage loans for its own retained portfolio and also repackages mortgages into mortgage-backed securities for sale. In 2003, the HKMC issued USD 1.4 billion worth of unsecured debt securities in the local debt market, raising the outstanding amount of debt securities to USD 4.7 billion.

In May 2004, the Legislative Council passed a law establishing the Deposit Protection Scheme that protects HKD 100,000 (USD 12,820) per depositor per bank. HKMA expects the scheme will start in 2006. While Hong Kong requires participation by locally licensed banks, overseas-incorporated banks may apply for exemption from participation if a comparable scheme in their home jurisdiction covers the deposits taken by its Hong Kong offices. In 2004, the Hong Kong Monetary Authority (HKMA) and Dun & Bradstreet (HK) Ltd. (D&B) jointly launched a Commercial Credit Reference Agency (CCRA) to collate information about the indebtedness and credit history of small and medium-sized enterprises (SMEs) and make such information available to members of the Hong Kong Association of Banks (HKAB) and the Hong Kong Association of Deposit Taking Companies.
Under the Insurance Companies Ordinance, insurance companies are authorized by the Insurance Authority to transact business in Hong Kong. Hong Kong has the highest number of authorized insurance companies in Asia. As of September 2004, there were 180 authorized companies. Of these, 89 were foreign companies from 22 countries. A number of the world's top insurance companies in terms of assets have branch offices or subsidiaries in Hong Kong.

With a total market capitalization of USD 852.5 billion and 1,092 listed firms at year-end 2004, Hong Kong's stock exchange ranked second in Asia after Tokyo, and ninth in the world in terms of capitalization. Hong Kong Exchanges and Clearing Limited (HKEx), a listed company, operates the stock and futures exchanges. The Securities and Futures Commission, an independent statutory body outside the civil service, has licensing and supervisory powers to ensure the integrity of markets and to protect investors.

In April 2003, the Government implemented a major modernization of the legal framework for Hong Kong's securities market designed to upgrade transparency and corporate governance, boost regulators' enforcement powers, and improve investor protections. To enhance market competitiveness, HKEx in the same month removed the rule on minimum brokerage commission rates for stock and futures transactions.

There are no discriminatory legal constraints to foreign securities firms establishing in Hong Kong via branching, acquisition, or subsidiaries. In practice, foreign firms typically establish in Hong Kong as subsidiaries. Rules governing operations are the same, irrespective of ownership. Portfolio investment decisions are left to the private sector. There are no laws or regulations that specifically authorize private firms to adopt articles of incorporation/association that limit or prohibit foreign investment, participation, or control.

The stock exchange plays a significant role in raising capital for Chinese state-owned enterprises. Chinese state enterprises raise equity (through the issuance of so-called "H" shares) in Hong Kong provided they meet Hong Kong regulatory and accounting requirements. These "H" shares are denominated in Renminbi, but must be purchased in Hong Kong Dollars. In 2004, a total of 107 Chinese enterprises had "H" share listings on the stock exchange, with market capitalization of USD 59.3 billion.

Hong Kong has made a concerted effort to develop a local debt market with the Exchange Fund bills and notes program. Maturities now extend to ten years. Hong Kong Dollar debt (public and private) has increased gradually, from USD 3.46 billion at the end of 1989 to USD 76.4 billion by the end-September of 2004. Regional infrastructure financing requirements and increasing investor demand are projected to stimulate further development of the local debt market. In May 2004, for the first time, Hong Kong issued bonds securitizing the revenues from Government tunnels and bridges. In June 2004, the governmental Hong Kong Mortgage Corporation established a USD 2.6 billion retail bond program. In July 2004, the Hong Kong Government issued its first sovereign bonds totaling USD 2.6 billion to raise cash for its public works program.
The Hong Kong Government requires workers and employers to contribute to retirement funds under the Mandatory Provident Fund (MPF) scheme. Contributions are expected to channel USD 3-4 billion per year into various investment vehicles. By the end of September 2004, the net asset values of MPF funds amounted to USD 13.8 billion.

The Exchange Fund Investment Limited (EFIL), established by the Government to dispose of the stock portfolio it purchased during the Asian Financial Crisis, completed its operations in January 2003. EFIL disposed of the stocks in the form of a mutual fund, the Tracker Fund of Hong Kong (TraHK). The Government decided to retain a portion of the stocks (worth about USD 410 million) as a long-term investment. The HKMA is responsible for the management of these stocks. TraHK is traded on the stock exchange.

Political Violence

Hong Kong is politically stable. The U.S. Consulate General is not aware of any incidents involving politically motivated damage to projects or installations.

Corruption

Hong Kong has an excellent track record in combating corruption. Many governments study Hong Kong's anti-corruption practices each year. U.S. firms have not identified corruption as an obstacle to foreign direct investment. The Independent Commission Against Corruption (ICAC) is responsible for combating corruption. The ICAC is independent of the public service and the ICAC Commissioner is responsible directly to the Chief Executive. A bribe to a foreign official is a criminal act, as is the giving or accepting of bribes, for both private individuals and government employees. Penalties are stiff. For example, a civil servant who solicits or accepts any advantage without special permission of the Government can receive one year's imprisonment and a HKD 100,000 fine if convicted. Individuals in both the private and public sector can receive up to 7 years imprisonment and a HKD 500,000 fine for offering, soliciting or accepting a benefit for performance or non-performance of an official duty.

Bilateral Investment Agreements

Hong Kong is negotiating a series of bilateral investment agreements -- the Hong Kong Government calls them "Investment Promotion and Protection Agreements" -- with major foreign investors. To date, Hong Kong has signed agreements with Australia, Austria, Belgo-Luxembourg Economic Union, Denmark, France, Germany, Italy, Japan, Korea, the Netherlands, New Zealand, Sweden, Switzerland and the United Kingdom. The Hong Kong Government has initialed agreements with Canada and Vietnam. It is negotiating agreements with Singapore and Thailand. All such agreements are based on a model text approved by China through the Sino-British Joint Liaison Group. The United States and Hong Kong held talks on a bilateral investment agreement in the late 1990s, but certain differences could not be resolved and negotiations were suspended. U.S. firms, however, are not at a competitive or legal disadvantage since Hong Kong's market is open and its legal system impartial.

OPIC and Other Investment Insurance Programs

Overseas Private Investment Corporation (OPIC) coverage is not available in Hong Kong. Hong Kong is a member of the World Bank Group's Multilateral Investment Guarantee Agency (MIGA).

Labor

In the 1980s and much of the 1990s, Hong Kong's unemployment rate hovered around two percent. Reflecting structural changes in the local economy and weak global economic conditions, the unemployment rate rose to a record level of 8.3 percent in May 2003. The job market has improved gradually since then, with the unemployment rate standing at 6.7 percent in October 2004. The Employees Retraining Board provides skills retraining for local employees to cope with ongoing structural change in the economy. To address a shortage of highly-skilled technical and financial professionals, the Government has made efforts to attract qualified foreign and mainland Chinese workers, though requirements for the latter group were tighter. However, as of July 2003, conditions for admitting mainland Chinese for employment were eased and aligned with those applicable to foreign nationals.

The average number of days lost due to industrial conflicts is one of the lowest in the world. In 2003, membership in Hong Kong's 644 registered unions totaled 668,532, a participation rate of about 21.8 percent. Hong Kong has implemented 40 conventions of the International Labor Organization in full and 18 others with modifications.

Local law provides for the right of association and the right of workers to establish and join organizations of their own choosing. The Government does not discourage or impede the formation of unions. Workers who allege discrimination against unions have the right to have their cases heard by the Labor Relations Tribunal. Although legislation does not prohibit strikes, in practice most workers must sign employment contracts that state that walking off the job is a breach of contract and can lead to summary dismissal. Collective bargaining is legal in Hong Kong, but there is no obligation on employers to engage in it. In practice, collective bargaining is not widely used. For more information on labor regulations in Hong Kong, please check the following website: www.justice.gov.hk/home.htm (click on Chapter 57 "Employment Ordinance").

Foreign Trade Zones/Free Ports

Hong Kong is a free port without foreign trade zones.
Hong Kong's modern and efficient infrastructure supports Hong Kong's role as a trade entrepot and regional financial and services center.  Rapid growth has placed severe demands on that infrastructure, requiring major new investments, particularly in transportation and shipping facilities.  Hong Kong has plans to invest USD 18.6 billion over the next five years with the goal of enhancing its competitiveness as a regional center.  Significant elements include a planned expansion of container terminal facilities, additional roadway and railway networks, major residential/commercial developments, community facilities, and environmental protection projects.  In May 2004, the Legislative Council passed a bill allowing the Hong Kong Government to issue USD 2.6 billion bonds to fund infrastructure or other investment projects. Airport: In the first 11 months of 2004 Hong Kong's international airport at Chek Lap Kok handled daily an average of 592 flights, 92,630 passengers, and more than 7,734 tons of cargo.  Seventy international airlines operated some 4,000 scheduled flights per week between Hong Kong and 130 cities around the world.  Hong Kong is a major gateway to China.  There are direct flights from Hong Kong to nearly 40 mainland cities.  The demand for services to China is growing.  The Hong Kong airport is in the world's top ranks in terms of passenger and cargo throughput.

With 24-hour operations, two all-weather runways, an ability to cater to all types of commercial aircraft, and high-speed transport links from the terminal to the city, the airport is well positioned to meet Hong Kong's aviation needs in the coming decades.

The airport has a multi-modal marine cargo terminal that provides vessel services between 17 ports in the Pearl River Delta and the airport. One of the air cargo handling facilities, Asia Airfreight Terminal, is constructing a new terminal to triple its air cargo handling capacity. To strengthen Hong Kong's position as the economic gateway of China and Asia and to boost revenues, the Airport Authority is building SkyCity, which will include construction of a world-class exhibition center, Asia World-Expo; SkyPlaza, an office and retail complex; SkyPier, a cross-boundary ferry terminal; and a nine-hole golf course.

The organization responsible for safety oversight, the Civil Aviation Department, plans to introduce satellite-based Communications, Navigation, Surveillance/Air Traffic Management (CNS/ATM) Systems. The new equipment will enhance flight safety and efficiency as well as maintain Hong Kong's status as a center of international and regional aviation. The project will take 15 years.

Shipping and Port Activities: Hong Kong enjoys one of the best natural deep-water ports on the Chinese coast.  With continued high economic growth and industrialization in China, the development of deep-water ports at Yantian and Gaolan in southern China should complement Hong Kong's facilities over the medium term.  Over the longer term, the Hong Kong port will face increased competition from those ports and from Shanghai, which are improving their service efficiency.

Hong Kong's container port is one of the world's busiest.  In the first 11 months of 2004, Hong Kong's eight privately-operated container terminals and mid-stream operators handled 20.2 million twenty-foot equivalent units (TEUs) of cargo.  Some 80 international shipping lines are providing over 400 container liner services per week connecting to over 500 destinations worldwide.

With the completion of the six-berth Container Terminal 9 in November 2004, Hong Kong's container terminal handling capacity is 18 million twenty-foot equivalent units (TEUs) a year, which will be able to cope with the forecast growth in demand to the end of this decade. The container terminals handle about 60 percent of the Port's total throughput. The river trade terminal, mid-stream operators and other facilities handle the remaining 40 percent. The Hong Kong Government commissioned a study on "Hong Kong Port - Master Plan 2020" to formulate a competitive, sustainable strategy and a master plan for Hong Kong's port development, including the location of a new container terminal and related infrastructure, for the coming twenty years. The study has been presented to industry for consultation and will be presented to the Legislative Council in early 2005. Taking into account the comments received, the Government will work out an action plan to implement the recommendations of the study.

Roads and Railroads: Hong Kong's roads have one of the highest vehicle densities in the world.  In October 2004, there were 530,562 licensed vehicles and about 1,934 kilometers of roads, or 275 vehicles per kilometer of road.  This high vehicle density, combined with difficult terrain and high density building development, poses a constant challenge to transport planning, road construction and maintenance.  To cope with worsening traffic congestion, largely due to the rapid growth in the number of private cars, the Highways Department has launched an extensive road construction program.  The Highways Department has budgeted USD 4.2 billion for road projects through 2007-08.  Hong Kong will also build a bridge from the Western tip of Lantau Island to Macau and Zhuhai, paving the way for accelerated development of the Western Pearl River Delta region.  Authorities had not yet decided on the location of the landing sites in Macau and Zhuhai as of the end of 2004. (See Section G.)

Two railway corporations manage Hong Kong's metro and rail systems:  the Mass Transit Railway Corporation (MTRC) and the Kowloon-Canton Railway Corporation (KCRC). The MTRC operates a five-line metro system, including a line to the airport.  The KCRC operates lines that extend further into the New Territories and to the Hong Kong/Mainland border. The oldest track is a 34-kilometer rail line that services towns in the northeastern New Territories and also provides border crossing and freight service into China.  In addition, KCRC also operates a Light Rail Transit System in the northwestern New Territories.  In December 2003, KCRC opened the West Rail, which is a 30.5 kilometer twin-track passenger railway with nine stations running between the northwestern New Territories and urban Kowloon. 

Hong Kong is working on a massive expansion of its rail system.  Investment in Hong Kong's domestic and cross-boundary rail networks in the next decade is expected to exceed in scale the USD 20 billion spent on the transportation facilities associated with the airport.  Most of the projects involve linking existing lines or creating extensions to new points of interest, such as the Disneyland Resort Line. One project will create a second border crossing into mainland China at Lok Ma Chau, with a rail line that will extend over a new bridge and link up with the Shenzhen Metro.  The MTCR is building a line that will extend to the southern part of Hong Kong Island. The KCRC plans to construct a freight line connecting Kwai Chung Port with the Lo Wu border crossing.

Foreign Direct Investment Statistics

Table 1: Position of Inward Foreign Direct Investment by Major Investor Country/Territory, as at end of 2002. Country USD Billion % Share of Total

China 76.2 31.2
Bermuda 27.0 11.1
Netherlands 26.3 10.8
United States 23.9 9.8
British Virgin Isl. 21.1 8.6
Japan 18.1 7.4
Singapore 9.4 3.9
United Kingdom 7.2 2.9
Australia 5.7 2.3
Cayman Islands 3.6 1.5
Others 25.5 10.5
TOTAL 244.0 100.0

 

Source: Hong Kong Census and Statistics Department
Note 1: Excluding inward direct investment from offshore financial centers, which were originally from Hong Kong.
Note 2: USD 1 = HKD 7.8

Table 2: Position of Inward Foreign Direct Investment by Major Economic Activity, as at end of 2002.

USD Billion % of Total

Investment holdings
Real estate and various
business services 102.1 41.8%

Wholesale, retail and
Import/export trades 42.0 17.2

Banks and deposit-
Tasking companies 34.4 14.1

Insurance 10.8 4.4

Financial institutions
Other than banks and
Deposit-taking companies 10.7 4.4

Communications 8.8 3.6

Manufacturing 8.7 3.6

Transport and related
Services 7.4 3.0

Construction 4.4 1.8

Restaurants and hotels 3.1 1.3

Other activities 11.7 4.8

TOTAL 244.0 100.0

Source: Hong Kong Census and Statistics Department
Note: Excluding inward direct investment from offshore financial centers, which were originally from Hong Kong.

Table 3: Position of Outward Foreign Direct Investment by Major Resident Country/Territory, as at end of 2002.

Country U.SD Billion %Share of Total

China 108.1 49.8
British Virgin Isl. 68.7 31.6
United States 4.1 1.9
Malaysia 3.6 1.6
Singapore 3.3 1.5
Thailand 2.7 1.2
United Kingdom 2.6 1.2
Taiwan 1.9 0.9
Bermuda 1.9 0.9
Panama 1.9 0.9
Others 18.4 8.5
TOTAL 217.2 100.0

 

Source: Hong Kong Census and Statistics Department
Note: Excluding outward direct investment of offshore financial centers which were channeled back to Hong Kong.

Table 4: Position of Outward Foreign Direct Investment by Major Economic Activity, as at end of 2002.

USD Billion % of Total

Investment holdings
Real estate and various
business services 101.2 46.6%

Wholesale, retail and
Import/export trades 27.2 12.5

Manufacturing 16.9 7.8

Communications 9.3 4.3

Transport and related
Services 7.9 3.7

Financial institutions
Other than banks and
Deposit-taking companies 5.9 2.7

Restaurants and hotels 4.9 2.3

Insurance 3.5 1.6

Banks and deposit-taking
Companies 3.2 1.5

Construction 2.6 1.2

Other activities 34.6 15.9

TOTAL 217.2 100.0

Source: Hong Kong Census and Statistics Department
Note: Excluding outward direct investment of offshore financial centers that were channeled back to Hong Kong.

Table 5: Amount and Growth of U.S. Investment in Hong Kong in 2001/2002/2003 in USD Millions.

Year Amount Percent Change
2001 32,494 18.4
2002 41,571 27.9
2003 44,323 6.6

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct Investment Position Abroad on a Historical Cost Basis.

Note 1: The U.S. Department of Commerce estimates the total U.S. direct investment position in Hong Kong at historical cost (the book value of U.S. direct investors' equity in, and net outstanding loans to, their foreign affiliates).

Note 2: U.S. Department of Commerce statistics differ from HKG statistics. Per Table 1 above, the latter indicates total U.S. investments of USD 23.9 billion at year-end 2002.

Note 3: Preliminary figures for 2003.

Table 6: Hong Kong's Pledged and Actual Direct Investment in China in USD Billions and Percent Share of Total Investment in China.

Year Amt Pledged Invested Share of Total
1999 13.3 16.4 40.6
2000 17.4 16.2 39.8
2001 20.7 16.7 35.7
2002 25.2 17.9 33.9
2003
(Jan-Jun) 19.8 10.5 34.7
1978-2003 394.1 216.0 45.2

Source: PRC Ministry of Commerce.

Table 7: Major Foreign Investor Firms.

United States: American International Group, AT&T, Bank of America, Caltex, Citigroup, Coca-Cola, Compaq Computer, CSX, Disney, ExxonMobil, Federal Express, Goldman Sachs, IBM, JP Morgan Chase, Kodak, Merrill Lynch, Morgan Stanley, Motorola, Pacific Waste Management, Pepsi.

Japan: C. Itoh, Citizen Watches, Daido Concrete, Hitachi, Jusco, Mitsubishi, NEC, Nishimatsu, Nomura, Olympus, Uny.

United Kingdom: HSBC, Inchcape Pacific, Jardine Matheson, Lloyds, P & O Shipping, Standard Chartered Bank, Swire Pacific Group.

Continental Europe: Carlsberg, Hong Kong Petrochemicals (Italian/Korean/Chinese joint venture), Siemens, Heraeus, Philips, Bouygues/Dragages, Bachy-Soletanches, Banque National de Paris, Banque Indosuez, Chanel, Cartier, Christian Dior, Remy, Ericsson, Asea Brown Boveri, Tetrapak, Electrolux.

China: Bank of China (Hong Kong), Beijing Enterprises, China Everbright, China Investment and Trust Corporation (CITIC), China Merchants, China Mobile, China National Offshore Oil Corporation (CNOOC), China National Petroleum Corporation, China Ocean Shipping Co (COSCO), China Overseas Construction, China Resources, China Travel Services, China Unicom, Guangdong Enterprises, Lenovo Group, Petro China, Shanghai Industrial, Yue Xiu Enterprises.

Asia: San Miguel Brewery, News Corp., Pioneer, Sime Darby, Shangri-la/Kerry Trading, Park View Properties, Lippo Group, C.P. Pokphand, LG, First Pacific Group.

MACAU

Openness to Foreign Investment

Macau became a Special Administrative Region (SAR) of the People's Republic of China on December 20, 1999. Macau's status since reverting to Chinese sovereignty is defined in the Sino-Portuguese Joint Declaration (1987) and the Basic Law, Macau's constitution. Under the concept of "One Country, Two Systems" articulated in these documents, Macau is promised a high degree of autonomy in economic matters and its economic system is to remain unchanged for 50 years. Since reversion, the Macau Government has maintained a transparent, non-discriminatory and free market economy. Macau has separate membership in the World Trade Organization (WTO). The Government hopes to diversify Macau's economy by attracting foreign investment and is committed to maintaining an investor-friendly environment. Corporate taxes are low. The tax rate is 15 percent for a company's net profits greater than USD 37,500 (300,000 patacas). For net profits less than USD 37,500, the tax ranges from 2 percent -15 percent. In his November 2004 annual policy address, Chief Executive Edmund Ho said that his administration planned to submit a proposal to the Legislative Assembly in 2005 to lower the rate of corporate income tax so that it is closer to the personal tax rate. The top personal tax rate is 12 percent, and a 12-13 percent corporate tax rate would be one of the lowest in the world.

The Government is seeking to develop Macau into a commercial and trade service provider for China, particularly the West Guangdong region. It also aims to facilitate trade and economic cooperation between China and Portuguese-speaking countries. In 2002, the Government ended a long-standing gaming monopoly when it awarded two gaming concessions to consortia with U.S. interests. This opening is significantly boosting the U.S. business profile and investment in Macau. In addition, a third U.S. gaming concern plans to team up with the former monopolist to build a large Las Vegas-style casino.

Macau and the PRC implemented a free trade agreement, the Closer Economic Partnership Arrangement (CEPA), on January 1, 2004. The agreement is similar to the Hong Kong-PRC CEPA. It provides for market opening in 501 product and 26 service sectors and provides for trade facilitation measures. Not all the products are exactly the same as those in the Hong Kong-PRC CEPA. In December 2003, the Government started the construction of the cross-border industrial zone located between northern part of Macau and Zhuhai. It is expected that manufacturers will be able to begin operating in the industrial zone in March of 2005.

Macau is heavily dependent on the gaming sector and tourism industries. In addition, a single product category, textiles and apparel, accounts for approximately 83 percent of its exports.

Foreign firms and individuals are free to establish companies, branches and representative offices without discrimination or undue regulation in Macau. There are no restrictions on the ownership of such establishments. Company directors are not required to be citizens of, or resident in, Macau.

The Government is liberalizing the telecommunications sector under a law passed in August 2001. Macau has liberalized the mobile phone market and Internet services. It has issued three mobile telephone licenses to two foreign companies and one local firm. In September 2004, the Government invited tenders for a license operating a Code Division Multiple Access (CDMA) network. The Government is still evaluating the five bidders' proposals.
Certain requirements are imposed on three professional services sectors as described below. Under Macau law (Decree Law 14/95/M, 22/96M and 22/97/M), qualified professionals and executives may apply for the right of temporary residency.

i) Education - an individual applying to establish a school must have a Macau Certificate of Identity or have the right to reside in Macau. The principal of a school must be a Macau resident.

ii) Newspapers and magazines - applicants must first apply for business registration and register with the Government Information Bureau as an organization or an individual. The publisher of a newspaper or magazine must be a Macau resident or have the right to reside in Macau.

iii) Legal services - lawyers from foreign jurisdictions who seek to practice Macau law must first obtain residency in Macau. They also must pass an examination before they can register with the Lawyer's Association, a self-regulatory body. The examination is given in Chinese or Portuguese. After passing the examination, foreign lawyers are required to serve 18-month internship before they are able to practice law in Macau.

Conversion and Transfer Policies

Profits and other funds associated with an investment, including investment capital, earnings, loan repayments, lease payments, and capital gains, can be freely converted and remitted. The domestic currency, Macau Official Pataca (MOP), is pegged to the Hong Kong Dollar at 1.03 and indirectly to the U.S. Dollar at an exchange rate of approximately MOP8 = USD 1. The Monetary Authority of Macau, the de facto central bank, is committed to exchange rate stability through maintenance of the peg to the Hong Kong Dollar. Although Macau imposes no restrictions either on capital flows or foreign exchange operations, exporters are required to convert 40 percent of foreign currency earnings into MOP. This legal requirement is not applied to tourism services.

Expropriation and Compensation

The U.S. Consulate General is not aware of any expropriation actions. Expropriation of property may occur if it is in the public interest. In such cases, the Macau SAR Government will exchange the private property with an equivalent public property based on the valuation and conditions of the property. The exchange of property is in accordance with established principles of international law. There is no remunerative compensation. Dispute Settlement

The U.S. Consulate General is not aware of any investor-state disputes involving U.S. or other foreign investors or contractors and the SAR Government. Private investment disputes are normally handled in the courts or via private negotiation. Alternatively, disputes may be referred to the Hong Kong International Arbitration Center.

Macau has an arbitration law (Decree 55/98/M), which adopts the United Nations Commission on International Trade Law (UNCITRAL) model law for international commercial arbitration. The Macau SAR Government accepts international arbitration of investment disputes between itself and investors.

Macau's legal system is based on the rule of law and the independence of the judiciary. Macau has commercial and bankruptcy laws (Decree 40/99/M). Courts in Macau include the Court of Final Appeal, Intermediate Courts and Primary Courts. There is also an Administrative Court, which has jurisdiction over administrative and tax cases. These provide an effective means for enforcing property and contractual rights. Commercial and bankruptcy laws are written under the Macau Commercial Code (Decree 40/99/M).

Performance Requirements/Incentives

To attract foreign investment, the Macau SAR Government offers investment incentives to investors on a national treatment basis. These incentives are contained in Decrees 1/86/M, 58/99/M, 23/98/M and 49/85/M and provided if companies can fulfill at least one of the following purposes: promoting economic diversification, contributing to promotion of exports to new unrestricted markets, promoting added value within their activity's value chain, or contributing to technical modernization. There is no requirement that nationals own shares. These incentives are categorized as fiscal incentives, financial incentives and land concessions. Fiscal incentives include full or partial exemption from profit/corporate tax, industrial tax, property tax, stamp duty for transfer of properties, and consumption tax. The tax incentives are consistent with the WTO Agreement on Subsidies and Countervailing Measures as they are neither export subsidies nor import substitution subsidies as defined in the WTO Agreement. Financial incentives include government-funded interest subsidies (ranging from 4-6 percent) on private bank Pataca loans for buying/leasing new equipment or construction/leasing of industrial buildings. Land concessions are granted to investors with a significant investment in Macau. In addition, Macau provides other subsidies for overseas promotions and applications for quality and environment management certification. Offshore companies are granted fiscal incentives and their managers and specialists who are not Macau residents are exempted from paying professional tax for the first 3 years of employment.

Right to Private Ownership and Establishment

Macau law and regulations provide for the right of foreign and domestic private entities to establish, acquire and dispose of interests in business enterprises.

Protection of Property Rights

Macau is a member of the World Intellectual Property Organization. Macau has acceded to the Berne Convention for the Protection of Literary and Artistic Works. Patents and trademarks are registered under Decree 97/99/M. Macau's copyright laws are TRIPS compatible and government offices are required to use only licensed software. The Macau SAR Government devotes considerable attention to intellectual property rights enforcement and coordinates with copyright holders. Source Identification Codes are stamped on all optical discs produced in Macau. Macau Economic Services (MES) uses an expedited prosecution arrangement to speed up punishment of accused pirate retailers. The Macau Government has devoted considerable resources to combating optical disc piracy in recent years and claims to have closed down all illicit optical disc production lines. Piracy of television signals (and much U.S.-origin program content) is rampant. The Macau Government does not have a clear position on whether there is criminal liability for commercial end-use piracy of copyrighted works. The Consulate General has raised these issues with Macau officials and continues to do so.

Transparency of the Regulatory System

The Government has transparent policies and laws that establish clear rules and do not unnecessarily impede investment. The basic elements of a competition policy are set out in Macau's 1999 Commercial Code.

Efficient Capital Markets and Portfolio Investment

Macau allows free flows of financial resources. Foreign investors can obtain credit in the local financial market. At present, there are 24 financial institutions in Macau, including 11 local banks and 13 branches of banks incorporated outside Macau. In addition, there are ten moneychangers, two cash remittance companies, two financial intermediaries, two exchange counters and one representative office of a financial institution. These institutions provide a range of credit instruments. Banks with capital originally from China and Portugal have a combined market share of about 66 percent of total deposits in the banking system. Total deposits amounted to USD 14.0 billion in September 2004. In September 2004, banks in Macau maintained a capital adequacy ratio at 16.1 percent, well above the minimum 8 percent recommended by the Bank for International Settlements. Accounting systems in Macau are consistent with international norms. Macau has no stock market, but companies can seek a listing in Hong Kong's stock markets. There is cooperation between Macau and Hong Kong financial regulatory authorities.

Under the Macau Insurance Ordinance, the Monetary Authority authorizes and monitors insurance companies. There are 11 life insurance companies and 15 non-life insurance companies in Macau. Total gross premium income from insurance services amounted to USD 198.2 million in 2003.

Offshore finance businesses, including credit institutions, insurers, underwriters, and offshore trust management companies, are regulated and supervised by the Monetary Authority. Profits derived from offshore activities are fully exempted from all form of taxes.

Political Violence

Macau is politically stable. The U.S. Consulate General is not aware of any incidents in recent years involving politically motivated damage to projects or installations.

Corruption

Macau's anti-corruption agency is called the Commission Against Corruption (CAC). The CAC has powers of arrest and detention. Its budget and manpower have been increased in recent years. The number of complaints of corruption handled by CAC has increased significantly as a result of these changes and a public outreach campaign. The CAC's overall effectiveness remains constrained by legislation limiting the scope of its authority to public, but not private sector corruption.

Bilateral Investment Agreements

Macau has signed investment protection agreements with Portugal and the Netherlands.

OPIC and Other Investment Insurance Programs

Overseas Private Investment Corporation (OPIC) coverage is not available in Macau.

Labor

Macau's recent high unemployment rate is decreasing. By the end of October 2004, the jobless rate was 4.5 percent, down from 6.1 percent in 2003. While the relocation of manufacturing facilities across the border to Zhuhai in China drove up unemployment rates, the increase in the number of gaming facilities and hotels are having a big positive impact on employment and some shortages of skilled workers are likely to develop. Macau has labor importation schemes for unskilled and skilled workers who cannot be recruited locally. The Government is considering additional measures. The current migrant labor pool is approximately 26,730, out of a total workforce of 223,000.

Foreign Trade Zones/Free Ports

Macau is a free port.

Foreign Direct Investment Statistics

According to the Enterprise Survey 2003 conducted by the Statistics and Census Service, there were 723 foreign direct investment companies in Macau, employing 28,623 workers. Hong Kong was the largest foreign investor in Macau, accounting for 72 percent of total foreign direct investment. Table 1: Stock of foreign direct investment by country, 2003

Country Amt USD Million %Share of Total
Hong Kong 2,580 72
China 443.4 12.4
Portugal 343.8 9.6
U.K. 85.4 2.4
U.S. 78.3 2.2
Others 54.9 1.5
TOTAL 3,585 100

Source: Statistics and Census Service

Table 2: Stock of foreign direct investment by industry, 2003

Secton Amount $USD % of Total

Cultural, recreational,
gaming and other services 2,105.1 58.7

Banks and securities 739.8 20.6

Industrial production 372.4 10.4

Transport, storage and
Communications 174.2 4.9

Hotels and restaurants 137.4 3.8

Construction 68.7 1.9

Insurance 90.3 2.5

Wholesale and retail -102.0 -2.8

TOTAL 3,585.8 100.0

* This is not an official statement of AAFM. This is merely a summary of public and governmental reseach...