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PRESS RELEASE
PRESS/TPRB/95
4 December 1998Hong
kong, china's free market system will help facilitate economic recovery Back
to top
Despite the present economic
difficulties, Hong Kong has maintained its traditional openness to both trade and
investment and has not taken any measures directly affecting imports or foreign direct
investment.
According to a new WTO report on Hong
Kong, China's trade policies and practices, the economic crisis which began in Thailand in
July 1997 and then spread to other countries in South-East Asia, seriously impaired Hong
Kong's economic performance and caused a dramatic slowdown in economic activity. Real GDP
is expected to decline by 4% in 1998 compared to robust growth of 5.3% in 1997.
The WTO's report and a policy statement
by the government of Hong Kong, China, will be the subject of two days of discussion at
the Trade Policy Review Body on 7 and 8 December 1998.
The WTO's report points out two main
events which marked Hong Kong since the last trade policy review in 1994. The first
concerns the Hong Kong's reversion to the People's Republic of China on 1 July 1997 and
its designation as a Special Administrative Region under the "one country, two
systems" framework. The second concerns the economic crisis in Southeast Asia. With
regard to the first, the report notes that there is no indication that Hong Kong's
traditional openness to trade and foreign investment has been affected by reunification.
In regard to the second, the report finds that even in the wake of the crisis, the
government does not appear to have attempted to influence the long-term structural
evolution of Hong Kong's economy.
A main feature of this evolution has
been the increasingly closer links with the fast-developing adjacent region of South
China. The report notes that the strong growth in cross-border trade and investment,
together with the relocation of the lower, value-added assembly-type manufacturing
operations to South China, has been accompanied by a growing demand for service-oriented
activities in Hong Kong. The outcome has been a continuing erosion of manufacturing share
of GDP, down to 7.3% in 1996 from 9.2% in 1994, while the share of services rose from
83.4% in 1994 to 84.4% in 1996. This continuous shift from manufacturing to services has
been reflected in the composition of Hong Kong's imports and exports and the substantial
and increasing trade deficit equivalent to 3.5% of GDP in 1997, compared to 1.4% in 1996.
Aside from declining regional demand, the increase in the deficit may be linked in part to
the recent sharp currency depreciations in
neighbouring countries, which weakened
the competitiveness of Hong Kong's exports. Notwithstanding these devaluations elsewhere,
the government remains strongly committed to the maintenance of its currency peg (in
relations to the US dollar), which is viewed as the cornerstone of Hong Kong's financial
and monetary system, even though it resulted in the Hong Kong dollar's effective
appreciation and higher interest rates.
Recent developments in Hong Kong's
trade policies include the modification of the rice control scheme, accession to the WTO
Agreement on Government Procurement, stricter enforcement of intellectual property rights
and the strengthening of some aspects of competition policy. With regard to the control
scheme for rice, government officials introduced in 1997 an optional quota system to
encourage competition among importers. This was partly in response to the urging of Hong
Kong's Consumer Council which sought to introduce competition clauses into the import
licenses to safeguard against anti-competitive behaviour.
The report notes that authorities in
Hong Kong believe that competition is best nurtured and sustained by allowing the free
play of market forces and keeping intervention to a minimum. The government has thus
eschewed an all-embracing competition law. The authorities are persuaded that Hong Kong's
high degree of openness to trade and foreign direct investment and its strong reliance on
market forces - together with sector-specific regulatory, administrative and in the case
of telecommunications, legislative measures - are sufficient to ensure highly competitive
markets both for goods and services. However, the Consumer Council, has identified sectors
where competition could be increased, including residential property, retailing,
wholesaling and distribution, banking telecommunications and energy. The report notes that
the government has recently established a body to handle complaints about anti-competitive
private practices. In addition, certain sectors, particularly telecommunications and legal
services, have been subjected to increased competition. The authorities are also studying
the possibility of increasing competition in the energy sector.
Other domestic calls for government
action focused on alleviating negative repercussions, notably the rise in unemployment,
due to the economic slowdown. In June 1998 the government introduced a package of relief
measures including a few "emergency" measures aimed at stabilising inter-bank
interest rates as well as land, stock and foreign exchange markets. However, government
officials have largely refrained from interfering with the normal functioning of the
free-market system. The Hong Monetary Authority did intervene, however, in August 1998 to
stabilize the Hong Kong stock market by purchasing substantial stakes in several major
manufacturing and services companies that broadly represented the Hang Seng Index.
The openness of the Hong Kong economy
to trade is such that all imports enter the region duty free, although it should be noted
that tariff bindings, apply to less than half of all tariff lines. Non-tariff barriers are
almost absent. The report notes that those that do exist either stem from Hong Kong's
obligations under various international undertakings or are applied for health, safety,
security or environmental reasons or to protect intellectual property rights.
In its conclusions, the report states
that Hong Kong's trade deficit is expected to narrow considerably in 1998 and that this
suggests that domestic product and factor markets may be adjusting so as to reverse Hong
Kong's recent decline in export competitiveness. The recent fall in the value of the U.S.
dollar, especially relative to the Japanese yen, and cuts in U.S. interest rates, will
also help to improve Hong Kong's growth prospects. This, together with its traditional
adherence to a free and open market system, should facilitate Hong Kong's emergence from
the current economic crisis and contribute to a resumption of its strong economic
performance.
Notes to Editors
The WTO's Secretariat report,
together with a policy statement prepared by Hong Kong, China will be discussed by the WTO
Trade Policy Review Body (TPRB) on 7 and 8 December 1998. The WTO's TPRB conducts a
collective evaluation of the full range of trade policies and practices of each WTO member
at regular intervals and monitors significant trends and developments which may have an
impact on the global trading system. The Secretariat report covers the development of all
aspects of each of Hong Kong's trade policies, including domestic laws and regulations,
the institutional framework, trade policies by measure and by sector. Since the WTO came
into force, the new "areas" of services and trade-related aspects of
intellectual property rights are also covered.
To this press release is attached the
summary observations from the Secretariat report. The full Secretariat and government
reports are available for journalists from the WTO Secretariat on request (call 41 22 739
5019). They are also available for the press in the newsroom of the WTO internet site
(www.wto.org). The Secretariat report, together with the government policy statement, a
report of the TPRB's discussion and the Chairman's summing up, will be published in
hardback in due course and will be available from the WTO Secretariat, Centre William
Rappard, 154 rue de Lausanne, 1211 Geneva 21.
Since December 1989, the following
reports have been completed: Argentina (1992), Australia (1989, 1994 & 1998), Austria
(1992), Bangladesh (1992), Benin (1997), Bolivia (1993), Botswana (1998), Brazil (1992
& 1996), Burkina Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994 & 1996),
Chile (1991 & 1997), Colombia (1990 & 1996), Costa Rica (1995), Côte d'Ivoire
(1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt
(1992), El Salvador (1996), the European Communities (1991, 1993, 1995 & 1997), Fiji
(1997), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991 &
1998), Iceland (1994), India (1993 & 1998), Indonesia (1991, 1994 & 1998), Israel
(1994), Jamaica (1998), Japan (1990, 1992, 1995 & 1998), Kenya (1993), Korea, Rep. of
(1992 & 1996), Lesotho (1998), Macau (1994), Malaysia (1993 & 1997), Mali (1998),
Mauritius (1995), Mexico (1993 & 1997), Morocco (1989 & 1996), New Zealand (1990
& 1996), Namibia (1998), Nigeria (1991 & 1998), Norway (1991 & 1996), Pakistan
(1995), Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania
(1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), the Solomon
Islands (1998), South Africa (1993 & 1998), Sri Lanka (1995), Swaziland (1998), Sweden
(1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Trinidad and
Tobago (1998), Tunisia (1994), Turkey (1994 & 1998), the United States (1989, 1992,
1994 & 1996), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and
Zimbabwe (1994).
The
Secretariats report: summary Back to top
TRADE POLICY REVIEW BODY: HONG KONG,
CHINA
Report by the Secretariat Summary Observations
Main
Developments
The period under review (1994-98) was
marked by two main events. The first was Hong Kong's reversion to the People's Republic of
China, on 1 July 1997, and its designation as a Special Administrative Region (SAR) with a
high degree of autonomy with regard to economic (and most other) policies under the
"one country, two systems" framework established in accordance with the Basic
Law. This framework involves a 50-year commitment to allow the SAR to maintain its
existing free and open market system, which has long been the hallmark of Hong Kong's
economy, making it one of, if not the most liberal among WTO Members and has contributed
to a level of GDP per capita that is among the highest in the world (over US$26,000 in
1997). There is no indication that Hong Kong's traditional openness to trade and foreign
investment has been affected by reunification, and as such, the present economic regime
may be broadly characterized as "business as usual".
The second main event during the review
period was the outbreak of the economic crisis in Thailand in July 1997 and its spread to
other countries in and beyond South-East Asia. The crisis, and the associated drop in
demand throughout the region, has seriously impaired Hong Kong's economic performance
since the third quarter of 1997, causing a dramatic slow-down in economic activity. Real
GDP is expected to decline by 4% in 1998 compared to robust growth of 5.3% in 1997. At the
same time, the unemployment rate has more than doubled to 5% in August 1998, the highest
level since 1983. It is noteworthy that, despite the present extraordinary economic
difficulties, Hong Kong has maintained its traditional openness to both trade and
investment and has not taken any measures directly affecting imports or foreign direct
investment.
Nor, it would appear, has the
Government attempted to influence the long-run structural evolution of Hong Kong's economy
during the period under review. One of the main features of this evolution has been the
increasingly closer links with the fast-developing adjacent region of South China. The
strong growth in cross-border trade and investment, together with the relocation of the
lower - value-added, assembly-type manufacturing operations to South China, has been
accompanied by a growing demand for service-oriented activities in Hong Kong. The outcome
has been a continuing erosion of manufacturing's share of GDP, down to 7.3% in 1996 from
9.2% in 1994, while the share of services rose from 83.4% in 1994 to 84.4% in 1997. This
continuous shift from manufacturing to services has been reflected in the composition of
Hong Kong's imports and exports.
Throughout the period under review,
Hong Kong has run a substantial and growing merchandise trade deficit. This has been
offset to a large extent by a rising surplus in non-factor services. For merchandise and
services combined, a deficit equivalent to 3.5% of GDP was recorded in 1997, compared to
1.4% in 1996. Besides declining regional demand, this rise may be linked in part to the
recent sharp currency depreciations in neighbouring countries, which have weakened the
competiveness of Hong Kong's exports.
The financial crisis put considerable
pressure on the Hong Kong dollar, which since 1983 has been pegged to the U.S. dollar
under a currency board type of arrangement, whereby the Hong Kong dollar is fully backed
by foreign reserves. The pegging of the Hong Kong dollar to the U.S. dollar has limited
the authorities' scope for controlling the money supply and interest rates. The peg has
also resulted in an effective appreciation of the Hong Kong dollar, particularly in
relation to the devalued currencies of those countries in the region much more heavily
affected by the Asian financial crisis. The Government is committed to maintaining the
peg, which it views as the cornerstone of Hong Kong's financial and monetary system and
which it believes has a long-run stabilizing effect on the economy and is essential to
Hong Kong's role as a major international financial centre. Since the latter half of 1997,
however, the Hong Kong dollar has come under increased pressure, largely as a result of
spillovers from the financial turmoil elsewhere in the region. While this pressure has
hitherto been successfully resisted through the corresponding tightening of domestic
liquidity, the resulting higher interest rates have contributed to sharp falls in stock
and property prices and depressed domestic consumer and investment demand.
In response to domestic calls for the
Government to take action in order to alleviate, if not reverse, the recent slow-down in
economic growth and the consequent rise in unemployment, in June 1998 the Government
introduced a package of relief measures, which is expected to contribute to a budget
deficit of 1.5% in 1998. Apart from the implementation of a few "emergency"
measures aimed at stabilizing inter-bank interest rates as well as land, stock and foreign
exchange markets, the authorities have largely refrained from interfering with the normal
functioning of the free-market system.
Trade and
Investment Policies and Practices
There have been several notable
developments in Hong Kong's trade- and trade-related policies since the previous Trade
Policy Review in 1994, including modification of the Rice Control Scheme, accession to the
WTO Agreement on Government Procurement, stricter enforcement of intellectual property
rights, and the strengthening of some aspects of competition policy. However, there have
been no major changes in the trade policy regime since the transfer of sovereignty on
1 July 1997. The Government's basic approach is still to let markets operate
freely and openly both for trade and investment. Thus, it has not sought to promote or
rescue individual industries, even in the face of the Asian crisis.
The openness of the Hong Kong economy
to trade is such that all imports enter the region duty free, although it should be noted
that tariff bindings apply to less than half of all tariff lines. Non-tariff border
measures (NTMs) are almost absent; those that do exist either stem from Hong Kong's
obligations under various international undertakings or are applied for health, safety,
security or environmental reasons or to protect intellectual property rights.
The most noteworthy of these NTMs is
the Rice Control Scheme, under which the amount of rice an importer is licensed to bring
into Hong Kong is linked to that importer's contribution to the maintenance of a reserve
stock. The Scheme, whose rationale is security of supply, has remained in place since Hong
Kong's reunification with China. Clearly, the Scheme grants a certain market power to
importers, with the associated economic rents meant to defray the cost of participation in
the reserve scheme; however, price mark-ups can be high, 100% of the c.i.f. import price
in the case of Thai fragrant rice, for example. The Government reviewed the Scheme in 1997
and introduced an Optional Quota System in October 1997, with a view to encouraging
competition among importers; the Consumer Council had urged the Government to introduce
"competition clauses" into the import licences to safeguard against
anti-competitive behaviour. In 1998, the level of the reserve rice stock was reduced from
45,000 tonnes to 40,000 tonnes.
There are virtually no government
controls on the composition or destination of exports, except in the case of restrictions
maintained under the WTO Agreement on Textiles and Clothing and for UN sanctions (for
which the Central People's Government is now responsible). Nor has Hong Kong resorted to
unilateral action to address trade disputes and problems.
Hong Kong has few restrictions on
inward investment. Moreover, it has hardly any sector-specific measures that could
constitute incentives to foreign direct investment (FDI), although the tax exemption for
profits from certain international shipping services is an important exception. Hong
Kong's openness to FDI combined with sound macroeconomic policies, its transparent
rules-based legal environment, the availability of financial facilities and
infrastructure, a skilled and reliable labour force, together with its proximity to other
major markets, notably China, as well as a simple and predictable tax system, with low tax
rates across the board, have greatly contributed to Hong Kong's attractiveness to
business.
Shortly before the transfer of
sovereignty, the authorities acceded to the WTO Agreement on Government Procurement (GPA),
which entered into force on 19 June 1997.
The Government, during the period under
review, also confirmed its commitment to a policy of "minimum intervention and
maximum support". Furthermore, it indicated that, within the framework of a
free-market, it would pursue an industrial support policy aimed at sustaining and
promoting the productivity and international competitiveness of manufacturing and service
industries. This policy does not appear to be aimed at "picking winners" through
the use of industry/firm-specific measures or incentives. Instead, the authorities have
sought to ensure a business environment conducive to structural adjustment, investment and
growth by emphasising broad initiatives to enhance the skills and technology base of
economy, encourage new products and processes, remove infrastructural and land
constraints, and liberalize regulated industries, particularly those providing basic
business inputs (e.g. telecommunications services). In the face of the exceptional
difficulties arising from the Asian financial crisis, the Hong Kong Monetary Authority
(HKMA) did intervene in August 1998 to stabilize the Hong Kong stock market, by purchasing
substantial stakes in several major manufacturing and service companies; according to the
authorities, the acquisitions broadly represented the Hang Seng Index (HSI) without
preference for particular companies or sectors. As a result of this market intervention,
the HKMA's shareholding in three major conglomerates now exceeds 10%. It is worth noting
that, however carefully done, intervention can work to the advantage of some market
participants; thus, for example, by maintaining the price of their shares above levels
that might otherwise have prevailed, HSI-listed companies may be provided with an
advantage vis-à-vis non-listed companies in the cost of acquiring capital through new
share issues. Also, in the case of the roughly 9% stake purchased by the HKMA in Hong Kong
and Shanghai Banking Corporation (HSBC), Hong Kong's largest bank, there is the
possibility of a conflict of interest because the regulator is a major shareholder in one
of the banks it regulates.
In the course of the discussions
leading to this Review, the authorities emphasized that it is not their intention to
interfere with the management and operation the companies in which the Government now
holds shares. To address concerns over potential conflicts of interest, the authorities
announced, in September 1998, the establishment of a new company, the Exchange Fund
Investment (EFI) Limited, to manage these shares, at "arm's length" from the
Government and regulators; the EFI will have its own board of directors, one third of whom
have been drawn from the Government.
During the review period, the
authorities implemented comprehensive legislation aimed at ensuring Hong Kong's compliance
with the TRIPS Agreement. More recently, the authorities have taken steps to strengthen
the enforcement of laws intended to protect intellectual property rights.
In the authorities' view, competition
is best nurtured and sustained by allowing the free play of market forces and keeping
intervention to a minimum. Hence, the Government has eschewed an all-embracing competition
law; the authorities are persuaded that Hong Kong's high degree of openness to trade and
foreign direct investment and its strong reliance on market forces in combination with
sector-specific regulatory, administrative and, in the case of telecommunications,
legislative measures are sufficient to ensure highly competitive markets both for goods
and services. This approach has been questioned by the Consumer Council, which has pointed
to a lack of competition in certain sectors, including residential property, retailing,
wholesaling and distribution, banking, telecommunications and energy. However, the
Government has taken steps to strengthen some aspects of it competition policy. These
steps include the establishment of guidelines and of a body to handle complaints about
anti-competitive private practices. In addition, certain sectors, particularly
telecommunications and legal services, have been subjected to increased competition. The
authorities are also studying the possibility of increasing competition in the energy
sector.
Prospects
The recent marked decline in real GDP
and the associated sharp increase in unemployment can be traced in large part to the
adverse effect of regional demand on Hong Kong's external trade and the fall in domestic
demand. The deterioration in Hong Kong's external trade balance is probably also linked to
a certain loss of net-export competiveness in the face of large devaluations by some of
its neighbours. The fall in domestic demand owes much to the higher interest rates that
have been needed under the currency board arrangement for the Hong Kong dollar. Higher
interest rates have increased the cost of borrowing to consumers and businesses alike, and
contributed to the recent decline in property and stock prices. The consequent negative
wealth effects of the decline in such asset prices may have exacerbated the fall in
domestic demand.
Wages and other prices will need to be
sufficiently flexible downwards, and productivity improved, to help regain growth
momentum, given the relative currency appreciation and decline in demand. Although nominal
and real wages reportedly rose 4.5% and 0.1%, respectively, on an annual basis in the
second quarter of 1998 despite the economic recession, more recent newspaper reports
indicate that some firms may be starting to cut wages substantially. Property prices and
rents have already undergone sharp declines during the past year. While labour
productivity in the economy as a whole has grown only 1%, in manufacturing it increased by
9% in the 12 months ending June 1998 (up from 8% in 1997). The fact that the trade
deficit is expected to narrow considerably in 1998 suggests that domestic product and
factor markets may be adjusting so as to reverse Hong Kong's recent decline in export
competitiveness. The recent fall in the value of the U.S. dollar, especially relative to
the Japanese yen, together with cuts in U.S. interest rates will also help to improve Hong
Kong's growth prospects. This, together with its traditional adherence to a free and open
market system, should facilitate Hong Kong's emergence from the current economic crisis
and a resumption of its strong economic performance.
Government report Back to top
TRADE POLICY REVIEW BODY: HONG KONG,
CHINA
Report by the Government
TRADE AND ECONOMIC
ENVIRONMENT
Economic Environment
Structure and Development of
the Economy
Hong Kong is strategically located at the doorway to
the mainland of China. It is also situated on the international time zone that bridges the
time gap between North America and Europe. Both attributes reinforce the HKSAR's position
as a global centre for finance, business and communications. Hong Kong is ranked the
eighth largest trading entity in the world. It operates the busiest container port in the
world in terms of throughput, and the busiest airport in terms of the volume of
international cargo handled. It is the world's sixth largest banking centre in terms of
external banking transactions, and the seventh largest foreign exchange market by
turnover. Its stock market has Asia's second largest market capitalization.
The HKSAR owes its strength to sound economic
fundamentals, substantial fiscal reserves and foreign exchange reserves, zero fiscal debt,
business-friendly government policies, a competent workforce complemented by a pool of
shrewd entrepreneurs, an extensive and efficient network of transport and communications
infrastructure, a high degree of internationalization, and open financial markets. Added
to these are a simple taxation system with low tax rates, free and fair market
competition, a fully convertible and stable currency, tight fiscal discipline, a
well-supervised banking sector, sound monetary system and a comprehensive legal framework.
On these virtues, the World Economic Forum ranks Hong Kong as the world's second most
competitive economy, while the U.S. Heritage Foundation and Fraser Institute of Canada
rank it as the freest economy in the world.
Over the past two decades, the Hong Kong economy has
more than tripled in scale. Hong Kong's GDP has been growing at an average annual rate of
about 7% in real terms, twice as fast as the world economy and considerably outperforming
the OECD economies. Per capita GDP in the HKSAR reached US$26,600 in 1997.
The open-door policy and economic reforms in the
mainland of China implemented since the late 1970s have not only opened up a huge
production hinterland for Hong Kong's manufacturers, but also created abundant business
opportunities for a wide range of service activities in Hong Kong. The past two decades
therefore saw a significant transformation of Hong Kong into a predominantly service-based
economy. The growth and development in financial and business services was particularly
rapid. The significance of the service sectors as a whole in terms of their contribution
to GDP thus rose steadily, from 70% in 1985 to 74% in 1990 and further to 84% in 1996. The
contribution of the manufacturing sector to GDP concurrently declined, from 22% in 1985 to
18% in 1990 and further to 7% in 1996. The fall in GDP contribution by the manufacturing
sector should nevertheless be viewed in conjunction with the concurrent substantial growth
in import/export firms engaged in sub-contracting arrangements in the mainland of China.
Many of these firms are formerly manufacturing firms which have shifted almost all of the
labour-intensive manufacturing processes to the mainland of China, leaving such high
value-added functions as marketing, orders processing, materials sourcing, design and
product development, and quality control with the local firms. So a fair part of the
HKSAR's services are generated from traditional "manufacturing" industries whose
production base has been expanded into the mainland of China.
Recent Performance
As an integral part of the world economy, Hong Kong
cannot be immune from the profound shocks emanating from elsewhere in the region and
beyond. The economy has been in a state of consolidation and adjustment, amidst the slump
in the asset markets, higher interest cost, subdued local sentiment and uncertain business
outlook brought about by the impact of the financial turmoil. GDP fell by 2.8% in real
terms in the first quarter of 1998 and by 5% in the second quarter, both figures over the
relevant quarters in 1997.
Export performance slowed considerably, hit by a dip
in import demand in Japan and East Asian economies feeling the pinch of the currency
crisis, although consumer demand in the U.S. and E.U. provided a partial offset. Exports
of services continued to be curtailed by the weakness in inbound tourism. Local consumer
spending suffered a distinct setback. Labour market conditions slackened considerably. The
unemployment rate rose sharply to 5% in the period ending August 1998. The HKSAR's GDP for
1998 as a whole is now forecast to contract by around 4% in real terms.
Yet the HKSAR economy has been adjusting
expeditiously so as to recoup competitiveness. Property prices and rentals have fallen
substantially from their peaks in 1997. Wages and salaries are softening. As inflation is
now down to its record low, the cost of living and cost of doing business in the HKSAR
have both moderated. The local workforce is adapting promptly to the more difficult
employment conditions, and the corporate sector is slimming for greater operational
efficiency. These are the necessary moves to be taken by the private sector for an
efficient adjustment process to carry through. Thus, once the regional environment and the
local sentiment improve, these will provide the HKSAR with a strong basis for prompt
return to positive growth.
Linked Exchange Rate Back to
top
Operation of the Linked Exchange Rate System
The linked exchange rate system (the link) was
introduced in October 1983. It is a form of currency board system, which theoretically
requires the monetary base to be backed by a foreign currency at a fixed exchange rate.
The monetary base is normally defined as the amount of bank notes issued and the balance
of the banking system (the reserve balance or the clearing balance) held with the currency
board for the purpose of effecting the clearing and settlement of transactions between the
banks themselves and also between the currency board and the banks. The expansion or
contraction in the monetary base would lead to interest rates for the domestic currency to
fall or rise respectively, creating the monetary conditions that automatically counteract
the original capital outflow or inflow, ensuring stability of the exchange rate throughout
the process. It is through such built-in autopilot mechanism that exchange rate stability
is maintained under the currency board system.
The issue and redemption of bank notes, through the
note issuing banks, are required to be made against U.S. dollars at the fixed exchange
rate of HK$7.80 to US$1. Specifically, Certificates of Indebtedness, which give the
authority to the note issuing banks to issue bank notes, are issued and redeemed against
U.S. dollar at that fixed rate and for the account of the Exchange Fund. In other words,
all Hong Kong dollar banknotes are fully backed by U.S. dollar.
At present, all licensed banks are required to
maintain a clearing account with the Hong Kong Monetary Authority (HKMA) for the account
of the Exchange Fund. The aggregate balance in these accounts represents the clearing
balance of the banking system. In operating the clearing accounts, the HKMA ensures that
this crucial part of the monetary base is also subject to the discipline of the currency
board arrangements.
The HKMA also provides an undertaking to licensed
banks to convert Hong Kong dollars in their clearing accounts into U.S. dollars at the
fixed exchange rate of HK$7.75 to US$1 (the Convertibility Undertaking).
Performance of the Linked Exchange Rate System
In the last fifteen years, the link has ridden
out a number of external shocks including the 1987 World Stock Market Crash, the Gulf War
in 1990, the Exchange Rate Mechanism Crisis in 1992, the brief attack on the Asian
currencies including the Hong Kong dollar in the aftermath of the Mexican crisis in
January 1995 and the latest regional financial turmoil. The Hong Kong dollar has remained
rock solid throughout these events. The maximum deviation of the Hong Kong dollar exchange
rate from the linked rate of 7.80 is less than 1%.
The robustness of the link has been underpinned by
the strong foreign exchange reserves (US$92.1bn as at end-August 1998), a consistent track
record of fiscal discipline (average fiscal surplus around 2% of GDP since 1984), a
healthy banking system (capital adequacy ratio above 17% and bad debt ratio less than 2%
for 1997) and flexibility of the economy to adjust to external shocks.
The Asian Financial Turmoil
The successful defence of the Hong Kong dollar
linked exchange rate amidst the Asian financial turmoil and heavy selling pressure on the
Hong Kong dollar in October 1997, January and June 1998 is a clear demonstration of the
effective operation of the linked exchange rate system in exactly the same simple and
robust manner as described above. On all of these occasions, banks collectively sold more
Hong Kong dollars than the balances in their clearing accounts kept with the HKMA. When
those foreign exchange transactions were due for settlement, there was an acute shortage
of interbank liquidity which led to a rise in interbank interest rates. This effectively
stemmed capital outflow and restored the stability of the exchange rate. As a result, the
Hong Kong dollar exchange rate has remained remarkably stable throughout the turmoil and
only moved within a narrow range of HK$7.725 to 7.750. On the securities side,
notwithstanding exceptional volatilities and heavy turnover, the market has been able to
continue to operate efficiently and orderly throughout the period, demonstrating that the
market reform over the past decade has been effective.
From October 1997 to January 1998, the market
remained very volatile and sensitive. While we rode through this particularly stormy
period with our currency remaining stable, and the securities and futures markets
operating orderly and efficiently, we considered it prudent to conduct a comprehensive
review on both the monetary side and the securities side of the market. The Report of the
Financial Market Review was published in April 1998. Whereas the Report refrained from
drawing conclusions while the turmoil was still very much underway at that time, it
nonetheless noted that the defence mechanism for the currency has very effectively
preserved the stability of the exchange rate and the monetary system. The prudential
regulatory framework for both the banking and the securities sectors, which we have
carefully built up over the years, have formed effective buffers against the recent
shocks. The Report also identifies a number of areas in the current systems where
improvement at a technical and operational level are warranted. Some of these measures
have already been put in place while others are under active implementation.
However, following a number of negative factors
surfacing in July, including the political uncertainty in Japan and the poor corporate
results locally, the Hong Kong dollar came under fierce, continuing and concerted
speculative attack in end July. At the same time, the open interests in the Hang Seng
Index futures market also started to build up substantially between end July and early
August, strongly suggesting a "double-play" tactic that aimed to attack the
currency and money market and sell down the stock market on the one hand, and profit from
the futures markets on the other. The selling pressure on the Hong Kong dollar continued
into the first week of August, fuelled by repeated and escalated rumours on Reminbi
devaluation and the delinking of the Hong Kong dollar. Open interests in the futures
market rose to the unprecedented level of 100,000 contracts and above. It became clear
that the speculators strategy was to undermine the stability of the linked exchange
rate of the Hong Kong dollar, which in turn would jack up the interest rate sharply and
send the already nervous stock market further down, reaping the huge profits from the
accumulated short open interests in the stock index futures market.
It was under such circumstances that the Government
of the HKSAR launched the counter-activities in the second half of August. The purpose of
the operation in the stock and futures markets was to frustrate the "double
play" strategy of speculators. The Government was conscious of the possible downside
of the market operations, including in particular, possible misunderstanding of both local
and international investors that the Government might be interfering with market forces
with a view to artificially jacking up the stock market prices. We believe, however, doing
nothing in such circumstances would entail even greater risks and cause damages to our
economy and the society as a whole, that would be difficult and far more expensive to
repair. The situation was exceptional and commanded exceptional measures. We continue to
believe that should the government have not acted promptly as it did, the stability and
integrity of our financial markets would have been severely undermined to such extent that
public confidence would have been put under serious threat.
The market operations by the Government lasted for
about two weeks until end August. Since then, the Government has basically been inactive
in the market. In order to make our markets less susceptible to cross-market manipulation
and volatilities, a series of measures were introduced in both the currency market, and
the securities and futures markets. To further strengthen the currency board arrangements,
the HKMA announced on 5 September a package of seven technical measures. In sum, the
HKMA undertakes to convert the Hong Kong dollars in the banks clearing accounts with
the HKMA into U.S. dollars at the fixed exchange rate of HK$7.75 to US$1. The rate will
move to 7.80 when market conditions permit. This represents our strong commitment to the
linked exchange rate system. We also provide banks with greater access to the Discount
Window for liquidity assistance through repurchase agreement using Exchange Fund papers,
which are fully backed by foreign reserves. On the securities and futures side, the
Government put forward a 30-point programme with a view to strengthening the discipline
and transparency of the markets. The proposed measures cover six specific areas including
short selling activities, system improvement, risk management, rule enforcement,
inter-market surveillance and contingency power. The programme also proposes, as longer
term measures, full participation of investors in the central electronic clearing and
settlement systems for securities transactions, and the implementation of a completely
scripless securities market in the HKSAR.
The Government of the HKSAR is fully committed to
the maintenance of the linked exchange rate system which is a cornerstone of Hong Kong's
monetary and financial stability. No foreign exchange controls will be practised in the
HKSAR, as clearly provided in the Basic Law. The preservation of the link, which has
buttressed confidence in the our monetary and financial systems, is in the long term
interest of the HKSAR. We also remain committed to maintaining a free, open and
transparent financial market in the HKSAR that promises a level playing field for both
local and overseas investors and market operators.
External Trade Relations
Back to top
External trade plays a vital role in the
HKSARs economic development. Trade in goods and services expanded by about 13 times
and four times respectively over the past two decades. The value of our total trade in
goods and services amounted to around 265% of its GDP in 1997.
Merchandise Trade
External Trade
From 1994 to 1997, the value of the HKSARs
merchandise trade grew from HK$2,421 billion to HK$3,071 billion with an average annual
growth rate of 8.3%.
Table 3.1
The HKSARs External
Merchandise Trade Performance, 1994-1997
(HK$ billion)
Trade |
Year |
Percentage Change over Previous Year |
|
94 |
95 |
96 |
97 |
95 |
96 |
97 |
Total
Trade |
2,420.7 |
2,835.2 |
2,933.5 |
3,071.0 |
17.1 |
3.5 |
4.7 |
Imports |
1,250.7 |
1,491.1 |
1,535.6 |
1,615.1 |
19.2 |
3.0 |
5.2 |
Exports |
1,170.0 |
1,344.1 |
1,397.9 |
1,455.9 |
14.9 |
4.0 |
4.1 |
of which Domestic Exports |
222.1 |
231.7 |
212.2 |
211.4 |
4.3 |
-8.4 |
-0.4 |
Re-exports |
947.9 |
1,112.5 |
1,185.8 |
1,244.5 |
17.4 |
6.6 |
5.0 |
Source: Census and Statistics
Department.
In 1997, the HKSAR was the worlds
eighth-largest trading entity in terms of value of merchandise trade; the fifth-largest if
all Member States of the European Union are counted as a single entity. Its largest
trading partner is the mainland of China, followed by the U.S. and Japan.
The HKSARs external trade, nevertheless,
slackened considerably in the first half of 1998 upon the impact of the financial turmoil.
Exports of goods were dampened by the dip in import demand in Japan and in all the other
East Asian economies. But exports to the conventional markets such as U.S. and E.U.
performed better and provided some offset. As a whole, total trade fell by 6.7% in value
term in the first eight months of 1998 over a year earlier. Yet with imports showing an
even faster decline along with the consolidation in domestic demand, the ratio of visible
trade deficit to imports narrowed to 7.4%, from 11.4% a year earlier.
Domestic Exports
In the first half of 1998, domestic exports declined
by 5.4% in value terms over a year earlier. Clothing continued to be the largest component
of domestic exports, valued at HK$72.2 billion or 34.2 per cent of the total in 1997. This
percentage has remained stable over the past decade. At HK$33 billion, electrical
machinery, apparatus and appliances came second. Other domestic exports included
photographic apparatus, equipment and supplies and optical goods; watches and clocks; and
textiles. In 1997, the mainland of China, the U.S. and the United Kingdom were Hong Kong's
largest markets, absorbing respectively 30.2%, 26.1% and 5.1% of total domestic exports.
Re-exports
Re-exports remain the main driving force in the
HKSARs total exports. In the first half of 1998, however, re-exports fell by 1.6% in
value terms over a year earlier. The slow-down was mainly attributable to the distinct
slackening of intra-regional trade, but the further shift in the structure of the
HKSARs external trade to offshore trading also tended to dampen the growth in
re-exports.
Principal commodities re-exported included
electrical machinery, apparatus and appliances, and telecommunications and sound recording
and reproducing apparatus and equipment, valued at HK$253.6 billion in 1997. The mainland
of China, Japan and Chinese Taipei were the main origins of the re-exports; the mainland
of China, the U.S. and Japan were the major destinations.
Imports
The HKSAR is heavily dependent on imported resources
to meet the needs of its people and its diverse industries. In the first half of 1998,
imports fell by 5.7% and 2% in value and real terms respectively over a year earlier. This
decline was caused in large part by the weak domestic demand. The slow down in re-export
trade also contributed, though of much less significance.
Consumer goods constituted the largest share of the
HKSARs total imports, reaching HK$587 billion in 1997. This was followed by raw
materials and semi-manufactured goods (HK$562.4 billion) and capital goods, foodstuffs and
fuels (HK$465.7 billion). The mainland of China, Japan, and the U.S. were the main
suppliers of HKSARs imports in 1997, accounting for respectively 37.7%, 13.7% and
7.8% of the total.
Service Trade
The HKSARs export and import of trade in
services registered robust growth in the past decade, with average annual growth rates
reaching 6% and 8% in real terms respectively. The HKSAR ranked 12th in the world league
of commercial services trading entities in 1997 - the ninth largest exporter and the
15th largest importer, according to the latest estimates by the WTO Secretariat. The
major components of the HKSARs trade in services are shipping, civil aviation,
tourism, and various financial services. There has also been an increasing demand for
professional and other support services. Offshore trading, cross-border land transport
services and other business services, including exports of construction, legal,
accountancy, computer and management consultancy services to the mainland of China and
other East Asian economies, have all shown rapid increases.
In the first half of 1998, exports of services
suffered a setback along with the weakness in inbound tourism and the slow-down in visible
trade. Yet inbound tourism began to show the first signs of revival most recently. Import
of services had a modest increase, due to the continued growth in outbound trips by the
HKSAR residents. Offshore trading should have also continued to rise on the back of
sustained growth in exports by foreign-funded enterprises in the mainland of China. The
invisible trade surplus attained should still be sizeable, rendering a considerable offset
to the visible trade deficit.
TRADE PRACTICES : RECENT
DEVELOPMENT Back to top
Import and Export
Measures
The HKSAR's import and export system is
characterized by :
(a) zero tariff;
(b) minimum controls; and
(c) no subsidies or assistance to
exports.
The HKSAR applies zero tariffs on all imports and
exports of goods. Import and export controls are kept to the minimum, and either stem from
obligations under various international undertakings, or are applied for health, safety or
security reasons. A list of principal statutory provisions under the purview of the
Director-General of Trade and other government agencies which provide the legal backing to
the control of imports and/or exports to the HKSAR is at Annex 2.
Sectoral Measures
Only a few items are under absolute prohibition.
Such items include: chloroflurocarbons, 1,1,1-trichloroethane, tetrachloromethane,
hydrobromofluro-carbons and halons imported for local consumption; ozone depleting
substances imported from non-parties to the Montreal Protocol on Substances that Deplete
the Ozone Layer; smokeless tobacco products which the WHO has ruled to be carcinogenic;
food containing non-permitted colouring matter, artificial sweeteners, aflaxtoxins, erucic
acid, preservatives, anti-oxidants; and certain metals which are prohibited to protect
public health.
Certain items are subject to import and export
licensing requirements, as set out in paragraphs 4.5 - 4.18 below. Such requirements are
administered by the relevant government departments. In some cases, fees are charged to
recover the operating costs of import and export licensing systems. Exports of a wide
range of textiles and clothing are subject to quantitative restraints under the WTO
Agreement on Textiles and Clothing (ATC). Imports of rice must meet, but may not exceed,
minimum levels prescribed by the Director-General of Trade. Quantitative import
restrictions apply to certain ozone depleting substances. The HKSAR also enforces trade
sanctions against certain countries in accordance with the Resolutions of the United
Nations Security Council.
Textiles and Clothing
Domestic exports of textiles and clothing are
important to the HKSARs trade, accounting for more than 40% of the HKSARs
total domestic exports. Among these, about 60% are for export to the four restrained
markets which have imposed quantitative restraint on Hong Kong. They include the U.S., the
E.U., Canada and Norway.
Hong Kong, China takes its obligations under the WTO
ATC seriously. In order to fulfil such obligations, the Government of the HKSAR has
instituted a comprehensive control regime on the import and export of textiles and
clothing. Legal framework of the control system is provided for under the Import and
Export Ordinance and its subsidiary legislation, which stipulate that all imports and
exports of textiles and clothing, other than a few exempted items, are required to be
covered by valid licences or notifications.
In order to uphold the integrity of the control
system, the HKSAR maintains an effective checking system to detect and prevent fraudulent
import and export of textiles and clothing. The Commissioner of Customs and Excise is
responsible for enforcement work of the control system. To further enhance the control
system, a more targeted approach in conducting checks and investigations has been adopted.
Factory Audit Check, which was introduced in 1996, enables customs officers to conduct
more comprehensive and in depth checking on factories manufacturing textiles and clothing.
Furthermore, a new Production Notification (PN)
arrangement was implemented with effect from 1 July 1996 for the purpose of strengthening
the textiles export controls system and for ensuring origin compliance in respect of
cut-and-sewn garments. The PN is a notification required to be lodged with the Trade
Department before production starts. Based on the notification, customs officers will be
able to conduct real-time verification of the origin conferring production process. This
mechanism proved to be very effective in enforcing the origin rule for cut-and-sewn
garments and for combating origin frauds.
Reserved Commodities
Imports of rice, frozen meat and poultry are subject
to licensing control under the Reserved Commodities Ordinance and its subsidiary
regulations. The purpose behind is to ensure a regular and adequate supply, and to provide
a reserve stock for emergency situations.
Rice
Rice is the most important staple foodstuff in
the HKSAR. Yet, there is no commercial production of rice, and we rely entirely on imports
for local consumption. Importers are free to import rice from any source. Major sources of
imports in 1997 were Thailand (73.8% of total imports), Australia (19.5%) and the mainland
of China (3.2%). Importers are registered with the Trade Department as stockholders to
ensure that they share the responsibility of maintaining a reserve stock of rice in the
HKSAR. Imports of rice require licences. Imports for local consumption are governed by
quotas. However, applications for imports for subsequent re-export are freely approved.
The amount of import quotas is determined on a
half-yearly basis taking into account the demand and supply of rice in the coming import
period to ensure that at any given time there is reserve stock equivalent to the amount
required for 45 days consumption. Unlike most other import quota regimes which
aim at curbing imports, under the rice control scheme, importers are required to import in
excess of the amount required for consumption to a level which would ensure that at any
given time there is an adequate reserve stock of 45 days. In essence, the
establishment of import quotas is a regulatory measure to ensure that rice is imported in
each import period not only to match consumption but to maintain a steady reserve stock to
cushion any sudden disruption of supply in coming months.
With a view to introducing more competition in the
rice trade, the Trade Department has operated an Optional Quota System since October 1997.
Under this system stockholders can choose to import slightly more or slightly less rice
than the amount allocated according to their basic quota units held.
The Reserved Commodities Ordinance (Cap. 296)
and its subsidiary regulations provide the legal framework for the control of rice. The
law confers extensive powers on the Director-General of Trade to control not just import
and stock keeping of rice, but also on storage, movement, distribution, sale and pricing
of rice. In practice the Director-General of Trade exercises his powers in relation to
only import and stockholding (including storage), but has never taken any measures to
regulate the price of rice. This is because the scheme has been developed for internal
security rather than for economic purposes.
Frozen Meat and Poultry
Frozen meat and poultry refer to frozen or
chilled meat (including beef, mutton, pork, lamb and all offals) and frozen poultry
(including fowl, duck, goose or turkey and parts thereof). The control on frozen meat and
poultry enables the Trade Department to monitor the imports and stock levels of frozen
meat and poultry in the HKSAR, and helps maintain a reserve stock for emergency purposes.
The licensing of frozen meat and poultry is under review to see whether they should
continue to be controlled as reserved commodities.
Strategic Commodities
Strategic commodities are subject to both import and
export controls so as to prevent the HKSAR from being used as a conduit for proliferation,
and to secure Hong Kongs continued access to high-tech goods and technology
essential for its economic developments.
Under the strategic trade control system, the Trade
Department is the licensing authority, and the Customs and Excise Department is the
enforcement agency. The system is provided for in the Import and Export Ordinance. Items
subject to control are listed out in the Import and Export (Strategic Commodities)
Regulations to the Ordinance. The overall control list follows those adopted by the
various international non-proliferation regimes.
The Weapons of Mass Destruction (Control of
Provision of Services) Ordinance was enacted in June 1997 to prohibit the provision of
services which assist the development of such weapons.
Other Licensing Control
Other products subject to licensing control and the
purposes for imposing the control are set out at Annex 3.
Rules of Origin Back to top
Imports into Hong Kong are not required to be
accompanied by certificates of origin (COs) issued by the exporting countries concerned.
With regard to exports, the Government of the HKSAR provides an origin certification
system to facilitate exporters to meet the requirements of importing countries. COs are
required as a customs clearance document for the export of restrained textiles to the E.U.
and Norway.
The Trade Department is the government agency
responsible for administering the origin certification system and issuing COs. Apart from
the Trade Department, five other organizations have been designated by the Government as
competent to issue COs under Article 11 of the International Convention for the
Simplification of Customs Formalities 1923. These Government Approved Certification
Organizations are:
the Hong Kong General Chamber of
Commerce;
Federation of Hong Kong Industries;
the Indian Chamber of Commerce, Hong
Kong;
the Chinese Manufacturers
Association of Hong Kong; and
the Chinese General Chamber of
Commerce.
To uphold the integrity of the certification system,
only registered manufacturers verified to have the manufacturing capability to perform the
origin-conferring processes of their registered products may apply for certificates of
origin. The Trade Department also ensures that all issuing organizations adopt the same
practices and procedures in the issue of certificates of origin, and that the rules of
origin are followed.
Hong Kong rules of origin are established in
accordance with internationally accepted practice, and conform with the standards and
practices set out in the Kyoto Convention.
Information Technology
Agreement
Hong Kong, China is a party to the Ministerial
Declaration on Trade in Information Technology Products (the "Information Technology
Agreement" or "ITA") concluded at the WTO Singapore Ministerial Conference
in December 1996. To demonstrate our commitment to trade liberalization, we bound our
tariff on all products covered by the ITA at zero in one go, instead of in four stages, on
1 July 1997.
Hong Kong, China has also been participating
actively and constructively in the work of the Committee of Participants on the Expansion
of Trade in Information Technology Products, including the negotiation on expansion of
product coverage of the ITA. Hong Kong, China takes a liberal approach in the negotiation
and looks forward to its successful conclusion.
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