WT/TPR/S/109 Trade Policy Review
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IV. TRADE POLICIES BY SECTOR
(1) INTRODUCTION
1. Hong Kong, China is primarily a services based economy;  services accounted for 92.4% of
GDP in 2000 and 89% of employment.  By contrast, the contribution of agriculture, fisheries and
mining to GDP (and employment) is negligible, while that of manufacturing has declined since 1998
to reach 6.5% (Table IV.1).  This downward trend in manufacturing, which started two decades ago,is expected to continue as the production of manufactured goods continues to move to lower cost
bases on the Mainland.
1  Economic reform on the Mainland has provided a production hinterland and
market outlet for Hong Kong's manufacturers.  It has also created opportunities for a wide range of
services activities in Hong Kong, China, thus increasing the economy's orientation towards services.2
Services will continue to replace production and exports of manufactured goods owing partly to the
opening up of the Mainland's service sectors (as a result of the China's accession to the WTO), which
will provide further opportunities for Hong Kong, China.3  This structural change has also been
reflected in the sectoral distribution of employment.  Employment in the manufacturing sector has
declined since 19974, with some, but not all, of the displa ced labour being absorbed by the services
sector, which now accounts for roughly eight out of ten jobs in the Territory.  As a resultunemployment has been on the rise (Chapter I).
2. Sectoral policies have undergone little change since Hong Kong, China's Review in 1998.  By
and large, Hong Kong, China continues to follow a policy of minimal intervention, allowing market
forces to allocate resources.  The authorities maintain that no "winners" are picked nor "losers"
salvaged, and that Hong Kong, China does not discriminate for or against particular sectors.  The
Government's role is that of "proactive market en abler" or "facilitator" maintaining an institutional
framework conducive to market development, providing the required infrastructure and supportservices, fostering applied research and development together with technology transfer, and investing
in human capital in all sectors of the economy.  Nevertheless, the 2002-03 Budget Speech states that
Hong Kong, China needs to focus on "high-value-added" economic activities and lists four areas as of
particular importance:  financial services, logistics, tourism, and producer and professional services.
5
In addition, the Government takes "appropriate measur es" to secure projects deemed beneficial to the
economy when the private sector is not ready to invest in them.  Some measures are aimed at certain
sectors.  For example, a 100% immediate write-off for tax purposes is accorded for expenditure on
machinery and plant related to manufacturing processes as well as computer hardware and software,
and there is a reciprocal tax exemption for income earned from shipping services.  Furthermore, over
the next few years the Hong Kong Government will waive the Mass Transit Company's (MTRC)dividend payments to help it fund a rail-link to the Disneyland amusement park.
6
                                                     
1 Hong Kong, Port and Maritime Board (undated).
2 Since the 1980s support services for Hong Kong and the Mainland replaced manufacturing industries
as the fastest-growing sector (Government of the HKSAR, 2002a).
3 Hong Kong, Port and Maritime Board (undated) and Government of the HKSAR (2002b).
4 The share of manufacturing sector in total employment has been on a downward trend since the 1980s
dropping from some 38% to 28% in 1990, and further to 6.1% in 2001 (The Government of theHKSAR (2001b), and Secretariat Calculations based on data from the Census and Statistics Department.)
5 The Government of the HKSAR (2002a).
6 Financial Times,  10 July 2002.Hong Kong, China WT/TPR/S/109
Page 51
Table IV.1
Economic structure and employment, 1997-02
(Per cent)
1997 1998 1999 2000 2001 2002
Share of main sectors in GDP 100.0 100.0 100.1 100.0 100.0 100.0
(based on current prices, expenditure based) (%)
Agriculture and fishing 0.1 0.1 0.1 0.1 .. ..
Mining 0.0 0.0 0.0 0.0 .. ..
Manufacturing 6.0 5.6 5.4 5.5 .. ..
Electricity, gas, and water 2.2 2.7 2.8 2.8 .. ..
Services 91.6 91.5 92.3 92.4 .. ..
Construction 5.4 5.6 5.4 5.0 .. ..
Trade, restaurants, and hotels 23.7 22.9 23.0 24.3 .. ..
Transportation, communication, business & personal
services8.5 8.6 8.9 9.6 .. ..
Financing, insurance, real estate and business services 24.4 22.4 21.8 21.6 .. ..
Community, social and personal services 16.7 18.5 20.0 19.8 .. ..
Ownership of premises 12.9 13.6 13.2 12.1 .. ..
Othera0.1 0.1 -0.5 -0.8 .. ..
Share in employment (%)b, c, d100.0 100.0 100.0 100.0 100.0 100.0
Manufacturing 14.0 12.2 11.4 10.4 6.5 6.1
Services 85.1 86.9 87.7 88.7 93.5 93.9
Construction 9.6 9.8 9.2 9.4 9.2 9.2
Wholesale & retail trade, restaurants & hotels 30.4 30.5 30.0 30.6 32.3 32.1
Transport, storage, and communication 10.9 11.2 10.9 11.1 11.1 11.0
Finance, insurance, real estate & business services 12.8 13.1 14.1 14.1 15.0 15.1
Community, social and personal services 21.4 22.3 23.5 23.5 25.1 25.6
Other 0.9 0.9 0.9 0.8 0.8 0.9
.. Not available.
a Other includes adjustment for financial intermediation services indirectly measured, taxes on production and imports and
statistical discrepancies.
b Figures refer to the composite employment estimates.c There may be a slight discrepancy between the sum of individual items and the total owing to rounding.
d Figures for 2002 refer to the first quarter of the year.
Source: Census and Statistics Department, Hong Kong Annual/Monthly Digest of Statistics (various issues);  and data
provided by the Hong Kong, China authorities.
(2) AGRICULTURE
3. The contribution of agriculture and fisheries to GDP has remained stable since 1998, at 0.1%
(Table IV.1).  Government intervention in agricultural markets other than rice is minimal.Hong Kong, China did not provide any domestic support or export subsidies during 1998-01.
7  While
the Government is responsible for the provision of basic infrastructure and technical support
necessary for the development of modern, efficient, and environmentally safe farming methods,
producers are largely left to adjust to market forces.  The Agriculture, Fisheries and Conservation
Department (AFCD) is responsible for promo ting the adoption of new production methods and
helping producers to take advantage of new market opportunities.8   The Government does not provide
material or financial incentives to encourage switching of production methods.  However, interested
                                                     
7 WTO document series G/AG/N/HKG/4-13, 24 July 1998 to 8 February 2002.
8 The new methods include:  the intensive production of vegetables in controlled-environment
greenhouse;  organic farming;  and switching to the production of premium vegetables.  AFCD onlineinformation.  Available at:  http://www.afcd.gov.hk/web/text/web/english/agriculture/agric/e.htm [4 July 2002].WT/TPR/S/109 Trade Policy Review
Page 52
farmers may seek advice from the Department and visit the experimental station to obtain the relevant
technical information and assistance.  The Department also operates three funds to meet the credit
requirements of farmers;  some HK$17.5 million wa s lent to farmers during 2000/01 (Table AIV.1).
Emergency relief grants were also made available.  The authorities maintain that these funds are
financed with non-governmental resources.
4. Imports of plants and animals are inspected at the border in order to implement strict controls
to prevent the introduction and dissemination of animal diseases and plant pests, and to regulate the
use of pesticides and chemicals in agricultural production.  The Pesticides Ordinance (Chapter 133 as
amended in 2000 and 2002) was introduced in 1997 to regulate the importation, manufacture,
packaging, labelling, and sale of pesticides in Hong Kong, China.9  New regulations to tighten
controls over chemical residues in animals for human consumption were enacted on31 December 2001.
10  Farming is regulated by a series of licences and permits11, which are required,
inter alia,  to trade animals to keep livestock and to maintain a dairy. 12
5. The Rice Control Scheme remains in operation, until January 2003;  its objective is to ensure
a regular and adequate supply of rice and to provide a reserve stock for emergency situations.  Rice
stockholders (importers) must be registered w ith the Director-General of Trade and Industry.13  Rice
imports are subject to a quota system, which is regulated by import licences.  Only rice stockholders
(importers) may receive licences to import rice for local consumption.14  Up to September 1997
quotas were distributed to individual stockholders on the basis of their past imports.  Since then an
Optional Quota System has been put in place.15  Under this system, import quotas are distributed to
the stockholders (importers) according to the number of basic quota units held.16  The stockholder
(importer) is required to import a minimum fixed quota.  At present the fixed quota is 30% of the
basic quota.  In addition to the fixed quota, the stockholder may opt to import more (i.e. the optionalquota).
6. Since the previous Review of Hong Kong, Ch ina, in 1998, the Trade and Industry Department
has, in consultation with the Rice Advisory Committee, implemented several measures to gradually
liberalize the Rice Control Scheme.  The Scheme will be dismantled in January 2003, when the
import quota will be removed and imports will be fully liberalized.  Only a minimal reserve stockcovering consumption for 15 days  (some 13,500 tonnes) will be kept to meet any contingency.
Importers will have to be registered to import rice for the reserve stock.  However, the registration
criteria for importers will be fully relaxed by lifting all capital and financial requirements.  Any
interested party registered with the Business Registration Office could register as an importer.
17
                                                     
9 AFCD (undated a);  and Chapter 133, Laws of Hong Kong, Pesticides Ordinance [Online].  Available
at:  http://www.justice.gov.hk/home.htm [4 July 2002].
10 Chapter 139N, Laws of Hong Kong, Public Health (Animals and Birds) (Chemical Residues)
Regulation [Online].  Available at: http://hklaw.ccgo.hksarg/Home.htm [31 December 2001].
11 For more information see:  Agriculture, Fisherie s and Conservation Department [Online].  Available
at:  http://www.afcd.gov.hk/web/text/web/english/public_info/businese_info/permit/index.htm [4 July 2002].
12 AFCD (undated b);  (undated c);  and (undated d).
13 Up to July 2000 stockholder's had to be resident in Hong Kong, China and, in the case of a company
51% of the capital had to be of Hong Kong ownership.  Since then, the only requirement for registration is acapital requirement HK$1.5 million and a credit of HK$1.5 million with a bank.  These requirements will beeliminated in 2003.
14 A licence is also required for re-exportin rice.
15 WTO (1998).
16 Allocation of basic quota units is on a historical basis.
17 By the second half of 2002, all interested parties will be invited to register as rice importers and they
may start operating by January 2003.Hong Kong, China WT/TPR/S/109
Page 53
7. In general, since the liberalization of the Rice Control Scheme started in 1998, the retail price
of rice has in nominal terms followed the decline in  the c.i.f. price;  nevertheless, the mark-up has
remained high, and even increased, possibly reflecting high fixed costs of holding the reserve
(Chart IV.1).  This might also be attributed to the lack of competition in retail distribution in
Hong Kong, China.
8. Fisheries  make an important contribution to Hong Kong, China's economy through the steady
supply of fish to the local market.  About 90% of the catch is harvested from waters outside
Hong Kong, China.  In 2000, the industry produced around 157,000 tonnes of fish products;  about
97,000 tonnes were consumed locally and the rest landed outside Hong Kong, China or exported.  The
aquaculture industry is also important.18  In order to preserve fisheries resources, a series of measures
were proposed, including the introduction of a fishing licence system and the designation of FisheriesProtections Areas.  Financial assistance and technical support is provided to fishermen and fish
farmers.  In addition, the AFCD provides low-interest loans through five funds (Table AIV.1);  relief
is also available through the Emergency Relief Fund.
19  The authorities note that these funds are
mainly financed from non-governmental sources.  As at 31 March 2002, the interest rates applicable
to the Fish Marketing Organization Loan Fund, the World Refuge Year Loan Fund, and theCo-operative for American Relief Everywhere Loan Fund stood at 2.88% for individual fisherman,
and at 1.38% for registered cooperative societies and their members, well below the "best lending
rate" of 5.13%.
                                                     
18 AFCD (undated e).
19 AFCD (undated f).0.02.04.06.08.010.012.0
40.060.080.0100.0120.0140.0160.0180.0200.0220.0Chart IV.1
Mark-up between c.i.f import price and retail price of Thai fragrant rice in Hong Kong, 
China, 1998-01
HK$/k g.
Source :   Information provided b y the authorities of Hon g Kon g, China.Supermarket selling price
(left-hand scale)
C.i.f. import price
(left-hand scale)
Mark-up
(right-hand scale)Per centWT/TPR/S/109 Trade Policy Review
Page 54
9. The marketing of fresh marine fish is strictly regulated in Hong Kong, China.  Under the
Marine Fish (Marketing) Ordinance (Chapter 291), all fresh marine fish (except live fish) are required
to be landed and sold at the wholesale fish markets operated by the Fish Marketing Organization, for
sanitary and environmental purposes.  In addition, a permit issued by the Director of Marketing is
required to transport by land or water any quantity of fresh marine fish in excess of 60 kg.
Contraventions of these regulations are liable to a maximum fine of HK$10,000 and to imprisonmentfor up to six months.
20
(3) MANUFACTURING
10. The relocation of lower-value-added manufacturing operations to Mainland China, which
started in the 1980s, has accelerated the development of more knowledge-based and higher-value-
added manufacturing operations in Hong Kong, China.  Manufacturing accounted for 5.5% of GDP in2000 and provided employment to 10.4% of the labo ur force;  these figures indicate that labour
productivity in manufacturing is lower than the territory's overall level.  The sector remains
export-oriented;  (domestic) exports of manufactured goods accounted for some 93% of total
merchandise (domestic) exports in 2001
21;  textiles and clothing, and machinery and power equipment
(including telecommunications equipment and electronics) were the major export items.22
11. In 2000, the textiles and clothing industries  accounted for some 19.9% of manufacturing
GDP, and was the largest employer in the manufacturing sector.23  It remains an important source of
foreign exchange (accounting for 47.8% of total merchandise exports in 2000).24  Exports of textiles
and clothing to Canada, the European Union, and the United States are subject to restraints, which are
to be phased out by 1 January 2005.25  The mechanism used to allocate quotas in Hong Kong, China
has not changed since 1990 (Chapter III).26  The abolition of these quotas, together with China's
accession to the WTO, is expected to have an adverse impact on Hong Kong's (domestic) exports oftextiles and clothing.
27  A series of simulations (based on a Computable General Equilibrium model)
suggested that production volume in Mainland China will continue to expand relative to that in
Hong Kong, China.  While Hong Kong's textiles and clothing industries could profit through their
investment in the Mainland, (domestic) exports of these items would decline.28
12. Manufacturing, like other sectors, continues to be dominated by small and medium-sized
enterprises (SMEs). 29  As of March 2002, 98.7% of all establishments operating in the manufacturing
sector were considered SMEs, and accounted for 63.96% of Hong Kong's total manufacturing
employment.30  Despite the importance of SMEs in the sector, there is no data on their contribution to
production or to value-added.
                                                     
20 AFCD (undated f).
21 Domestic exports refers to products produced in Hong Kong, China as opposed to products that are
re-exported.
22 UNSD, Comtrade database (SITC Rev.3).
23 Government of the HKSAR (2001b).
24 HKSAR, Census and Statistics Department.
25 In 2002 the major export markets for textiles and clothing were the United States (43.47%), China
(24.7%), and the EU (20.71%).
26 GATT (1990) and GATT (1994).
27 During 1998-00 Hong Kong, China has been the third most important exporter of clothing to the
world (UNSD, Comtrade database, SITC Rev.3).
28 Trade and Industry Department (2000).
29 An SME in the manufacturing sector is an establishment employing less than a 100 people.
30 As at March 2002, there were 294,634 SMEs established in Hong Kong, China of which 18,866 were
operating in the manufacturing sector.Hong Kong, China WT/TPR/S/109
Page 55
(4) SERVICES
13. Hong Kong, China's most important service subsectors are wholesale, retail, and
import/export trade, restaurants and hotels, which account for 26.4% of GDP, and finance, insurance,
and real estate, which accounted for 23.7%.  The direct contribution of inbound tourism to GDP is
2.2%.  However, tourism contributes to GDP through several of the other services subsectors.  The
services sector absorbed some 94% of the labour force in 2002, and is also a leading foreign exchangeearner.
14. The HKSAR schedule of specific commitments under the GATS contains no horizontal
limitations.
31  Its specific commitments cover:  financia l services;  business services;  communication
services (including telecommunications);  construction and related engineering services;  distributions
services;  tourism and travel-related services;  recreational, cultural and sporting services;  andmaritime transport services.
32  Hong Kong, China has accepted the Fourth and Fifth Protocols to the
GATS, which entered into force on 5 February 1998 and 1 March 1999, respectively.
15. The HKSAR grants most-favoured-nation (MFN) treatment to all WTO Members.  It had
originally made an exemption to the principle of MFN treatment related to reciprocity on the
provision of banking services, which was later withdrawn (i.e. the reciprocity requirement does notapply to foreign banks incorporated in a WTO Member).
33  Hong Kong, China does not participate in
any preferential agreements concerning trade in services.  However, it is negotiating FTA initiatives,
which include trade in services, with New Zealand and the Mainland of China.
(i) Financial services
(a) Banking
16. Banking plays an important role in the HKSAR's economy, accounting for some 8.5% of
GDP (at factor cost) in 2001.  Banks in Hong Kong, China were able to recover from theAsian financial crisis.  Their asset quality and the operating performance started to improve in 2000,
with the bad debt charge and the percentage of non-performing loans declining (Table IV.2).
Nevertheless, according to the Hong Kong Mone tary Authority (HKMA) the banking environment
has become more competitive and difficult.  This is attributed to the limited lending opportunities as a
consequence of the weak domestic economy and sluggish conditions in the property market.
34  The
situation in 2001 remained challenging for the banking sector, with banks having to contend with the
weak state of the domestic and global economies, and an unfamiliar low interest rate environment.
The series of interest rate cuts during the year, which led to historical lows in Hong Kong dollar
interest rates, served to make debt servicing more affordable for borrowers, thereby helping to protect
banks' asset quality.  Nevertheless, interest rate cuts failed to stimulate domestic loan demand, whichremained weak.
35  Retail banks' asset quality continued to improve in the first half of 2002.36
17. Despite the large number of banks, the structure of the sector is quasi-oligopolistic:  in 2000
(January-June) the three largest retail banks held some 55% of all assets and the ten largest retail
                                                     
31 WTO document GATS/SC/39, 15 April 1994.
32 WTO documents GATS/SC/39, 15 April 1994, GATS/SC/39/Suppl.2, 11 April 1997, and
GATS/SC/39/Suppl.3 (26 February 1998); and S/L/30, 12 September 1996.
33 WTO documents GATS/EL39, 15 April 1994 and GATS/EL/39/Suppl.1/Rev.1, 28 July 1995.
34 HKMA (2000).
35 HKMA (2001b).
36 HKMA (2002).WT/TPR/S/109 Trade Policy Review
Page 56
banks held 83% of total assets (Table IV.2).  The cartel on deposit rates, which was recently
eliminated, may have contributed to limiting competition.37
Table IV.2
(a)  Structure of the banking sector, 1998-01
1998 1999 2000 2001
Licensed banks
Incorporated in HK 31 31 31 29
Incorporated outside HK 141 125 123 118
Restricted license banks
Incorporated in HK 35 33 28 29
Incorporated outside HK 25 25 20 20
Deposit-taking companies
Incorporated in HK 99 71 61 54
Incorporated outside HK 2 0 0 0
All authorized institutions 333 285 263 250
Local representative offices 141 127 118 111
(b)  Performance ratios of the banking sector, 1998-01
(Per cent)
All authorized institutions Retail banksa
1998 1999 2000 2001 1998 1999 2000 2001
Asset quality
Bad debt charge to total assets 0.45 0.64 0.26 0.20 0.60 0.76 0.44 0.40
Non-performing loans (NPLs)
(substandard, doubtful, and loss)5.27 7.24 6.08 5.73 7.70 10.14 7.26 6.53
Concentration measures
Asset share of:
Three largest banks 25.0 27.3 30.6 31.6 57.1 56.0 56.0 55.2
Ten largest banks 50.5 51.6 51.1 52.2 82.9 83.0 83.3 82.8
a Retail banks include all local banks plus some foreign retail banks.
Source: IMF Country Report No. 01/146, August 2001 based on HKMA Annual Report, Monthly Statistical Bulletins;  and
WTO Secretariat.
18. Institutions, authorized by the HKMA to carry on banking or deposit-taking business, are
called "authorized institutions" under the Banking Ordinance.  There are three types of banking
institution (i.e. authorized institutions) in Hong Kong, China:  licensed banks, restricted-licence banks(RLBs)
38, and deposit-taking companies (DTCs).39  Only licensed banks are allowed to provide retail
                                                     
37 Interest rates on deposit have been regulated since 1964 (IMF, 2001a).  Also in April 2000, the
Consumer Council received complaints from merchants concerning an increase in transaction fees for the EasyPay System (EPS), a form of retail payment service.  Subsequently, the Council issued a report in which it
concluded that the increase in transaction fees was an instance of misuse of market power by the EPS operator,
who did not face competitive pressure in the supply of debit card network services.  The Council considered thatthere should be competition amongst debit card ne twork members and that greater transparency and
accountability in the operation of the network were needed.  In response, the HKMA conducted acomprehensive review of retail payment services in Hong Kong, China.  Completed in 2001, the reviewrecommended a self-regulatory approach to enhancing competition for retail payment services.  The outcome is
that the industry is to draw up codes of practice, which will include provisions relating to anti-competitive
practices, and monitor compliance with such codes, with the HKMA seemingly overseeing the overallimplementation (Consumer Council, 2000).
38 Restricted-licence banks may:  take call, notice, and time deposits of any maturity from the public,
but in amounts of not less than HK$500,000; underwrite securities; deal in foreign exchange and otherHong Kong, China WT/TPR/S/109
Page 57
banking business.40  The main difference between the licensed banks and the RLBs and DTCs is the
minimum amount and maturity term of the deposits they are allowed to take.  Non-authorized
institutions are representative offices of overseas banks, insurance companies, mutual funds, securities
brokers or finance companies.41   Licensed banks, RLBs, and DTCs may engage in insurance business
if authorized by the Insurance Authority.
19. A local bank is an institution incorporated in Hong Kong, China.  Local banks must be
authorized by the HKMA to carry on banking or deposit-taking business.  Local banks require a
licence to operate and are subject to a minimum asset requirement of HK$3 billion for customer
deposits and of HK$4 billion for total assets.
20. Subject to the consent of the HKMA, a foreign bank may be allowed to enter HKSAR's
market:  by acquiring an existing locally incorporated bank with branching rights;  by setting up abranch as a licensed bank or a restricted-licence bank;  or by operating a subsidiary as a licensed bank,
a restricted-licence bank or a deposit-taking company.  Banks incorporated overseas may also set up
representative offices in the HKSAR, but such offices are prohibited from taking deposits and
undertaking banking business in general
42;  these offices may act only as a liaison office between
customers and the bank.
21. The conditions attached to foreign banks applying for a licence to operate a branch in Hong
Kong, China as a fully licensed bank or a restricted licence bank were relaxed in May 2002.  The
minimum asset requirement of US$16 billion for overseas-incorporated banks was reduced to the
level applied to locally incorporated banks (HK$3 billion for customer deposits and HK$4 billion for
total assets).  In addition, the general policy requiring an overseas bank to maintain a local
representative office for a minimum of one to two years, in order to acquire sufficient experience,
before it could be considered for authorization was removed.  The authorities noted that the"one-building condition", which restricted foreign banks (licensed since 1978) and foreign
incorporated restricted-licence banks (licensed sin ce 1990) to operate from not more than one building
was first relaxed to three buildings in September 1999, and completely removed in November 2001.
43
22. Overseas banks may apply for a licence to operate  a subsidiary with branching rights in the
HKSAR, as a licensed bank, restricted-licence bank or deposit-taking company.  To obtain a licensed-bank licence, the institution must have been a deposit-taking company or a restricted-licence bank (or
any combination thereof) for not less than three continuous years.   The HKMA generally requires that
institutions applying for restricted-licence bank and deposit-taking institution licences are at least 50%
owned by a bank that is adequately supervised (i.e. the supervisor of the institution should have
                                                                                                                                                                    
securities;  and provide financial advisory services in issuance of securities, mergers and acquisitions, venture
capital financing and private banking (WTO, 1998).
39 Deposit-taking companies are restricted to taking deposits of HK$100,000 or above, with a fixed
term maturity of at least three months and may also engage in activities, such as consumer and trade finance,
leasing, and securities business (WTO, 1998).
40 Under the Banking Ordinance, banking business is defined as:  receiving from the general public
money on current, deposit, savings or other similar account repayable on demand, or within less than threemonths; and/or paying or collecting cheques drawn by or paid in by customers.
41 IMF (2001a).
42 WTO document GATS/SC/39/Suppl.3, 26 February 1998.
43 Previously, banks were allowed offices (an "office" also includes automated teller machines or
similar terminal devices) in only one building;  and no more than two additional offices (other than an automated
teller machine or similar device) in a separate building or buildings.  Such additional offices had to consist ofnot more than one regional office and one back office (WTO document GATS/SC/39/Suppl.3,26 February 1998).WT/TPR/S/109 Trade Policy Review
Page 58
complied with the Core Principles for Effective Banking Supervision, issued by the Basle Committee
on Banking Supervision).
23. From 1981 to 1994/95, interest rates on Hong Kong dollar bank deposits below HK$500,000
were subject to the Interest Rate Rules (IRRs), operated by the Hong Kong Association of Banks
(HKAB).44  In 1994-95, the HKMA started to liberalize the system, beginning with interest rates on
time deposits of less than seven days.  Interest rates on savings deposits and current accounts wereliberalized in two phases in 2000 and 2001.  Banks may now compete for deposits freely.  The
deregulation, according to the authorities, has help ed to encourage more innovation in the banking
industry.  Despite the liberalization of interest rates, the spread between the savings deposit rate and
"best" lending rate has remained in a narrow range between 4.75%-4.97% since 1997 (Chart IV.2).
45
This may suggest that interest rates continue to be administered.  The authorities noted that the
average net interest margin (NIM) of retail banks is a better measure of competition amongst banks
than the spread.46  However, the NIM has not varied substantially since 1997, ranging from 1.85% to
2.33%.
24. The authorities believe that various factors allowed HKSAR's banks to emerge from the Asian
crisis relatively unscathed, including:  good macroeconomic policies;  the authorities' timely actionsduring the crisis, which helped contain the damage to banks' balance sheets
47;  the HKSAR's modern
regulatory system, strong bankruptcy law, and efficient enforcement procedures;  and the HKSAR's
tradition of conservative banking practices and strong market disciplines.  At the time of the crisis,
banks were well capitalized, with high liquidity ratios and good asset quality.48  There are no
government-owned banks and no directed lending in the HKSAR.
(b) Insurance
25. As of 10 June 2002, there were 203 authorized insurers in Hong Kong, China;  48 long-term
insurers, 137 general insurers, and 18 composite insurers.  More than half of the authorized insurers
are incorporated outside the Territory, with the United States (23) taking the lead.  Gross premium
income in 2001 reached HK$76 billion, equivalent to about 6.% of the HKSAR's GDP.49
                                                     
44 IMF (2000b).
45 The savings rate is based on the maximum rates under the Hong Kong Association of Banks' interest
rate rules before the deregulation and refers to the average rate quoted by the leading licensed banks after the
deregulation.  The best lending rate refers to the rate quoted by the Hong Kong and Shanghai BankingCorporation Limited (Information provided by the authorities).
46 The NIM covers: the interest expense relating to all interest bearing liabilities, including, for
example, time deposits, interbank borrowing, etc; interest income on non-prime-based loans, such as lending tolarge corporations, which are usually priced against interbank rates (i.e. HIBOR);  interest income or expense on
foreign currency assets and liabilities.  It also takes into account the impact of competition on the margins of
prime-based lending (e.g. residential mortgages are now priced at around prime minus 2.5% rather than primeplus 1.75% as in the past).
47 These actions included an intervention in the stock market to discourage speculation, and a number
of technical reforms to strengthen the currency board system and minimize its susceptibility to speculativeattacks in 1998 (IMF, 2001a).
48 In preparation for potential disruptions from the handover to Mainland China, banks in Hong Kong,
China had kept a relatively large share of liquid assets and followed conservative lending practices based onprudent collateral valuation.  The handover went smoothly, with no negative market reaction.  The excessliquidity, however, helped banks handle the unexpected shock of the Asian crisis (IMF 2001a).
49 Provisional data provided by the authorities.Hong Kong, China WT/TPR/S/109
Page 59
26. The Insurance Companies Ordinance provides a comprehensive regulatory regime for the
prudential supervision of insurers and insurance intermediaries in Hong Kong, China.  The Office of
the Commissioner of Insurance (OCI) is in charge of administering the Ordinance, with the
Commissioner of Insurance appointed as the Insurance Authority (IA).  Any insurer wishing to carry
on insurance business in or from Hong Kong, China is required to obtain authorization from the IA.
The criteria for authorization are set out in the Insurance Companies Ordinance and in the
Authorization Guidelines issued by the IA.  Authorized insurers need to meet  minimum financial
requirements (i.e. minimum paid-up capital and required solvency margin);  the authorities noted thatthere is no differential treatment between domestic and foreign applicants in this regard.
50  Directors
and controllers of authorized insurers are  required to meet the "fit and proper criteria", such as having
the minimum academic qualifications and work experience.  The same criteria are applied to domestic
and foreign applicants.  The IA monitors the financial condition of authorized insurers by examining
their annual financial statements and business returns.
27. Commercial presence in Hong Kong, China has to take the form of a subsidiary, branch or
representative office.  However, insurance business (i.e. writing an insurance contract or soliciting
insurance business) may not be carried out through a representative office.51  The chief executive
                                                     
50 The minimum solvency margin is HK$22 million for composite insurers with statutory insurance
business; HK$20 million for general insurers with statutory business;  HK$12 million for composite insurerswithout statutory business;  HK$10 million for general insurers without statutory business;  and HK$2 millionfor captive/life insurers.
51 WTO document GATS/SC/39/Suppl.3, 26 February 1998.0.02.04.06.08.010.012.0
Chart IV.2
Hong Kong dollar interest rates, 1998-2001
Per cent
Source :  Information provided by the authorities of Hong Kong, China.Savings deposit rateBest lending rateWT/TPR/S/109 Trade Policy Review
Page 60
appointed to be the authorized insurer should re side in the HKSAR.  The authorities state that
contributions to life insurance and private pension plans operated by financial institutions, together
with the benefits received therefrom, are subject to the same tax treatment regardless of whether the
financial institution is domestically or foreign owned.
28. Insurance intermediaries must possess the prescribed minimum qualifications and experience.
Under the Insurance Intermediaries Quality Assurance Scheme (IIQAS) introduced on
1 January 2000, all insurance intermediaries (i.e. insurance agents and brokers), their chief executives,
and technical representatives are required to pass the Qualifying Examination, unless otherwise
exempted.  They are also required to attend a continuing professional development programme as a
condition for re-registration.  The same rules and requirements apply to domestic and foreigninsurance intermediaries.  Regulation of insurance intermediaries is primarily carried out by the
Insurance Agents Registration Board, which oversees the discipline of insurance agents, while the
Hong Kong Confederation of Insurance Brokers, and Professional Insurance Brokers Association
Limited are responsible for the regulation of their members.  These bodies, which are approved by the
IA, are responsible for, inter alia , compliance with entry standards, registration, and handling of any
complaints.
29. Hong Kong, China residents may purchase insurance products from insurers abroad with the
exception of statutory third-party liability insurance regarding vehicles and vessels, and employer's
liability insurance for employees, which must be purchased from an insurer authorized in theHKSAR.
52
(ii) Telecommunications
30. Hong Kong, China has a sophisticated telecommunications market, which has been an
important factor in Hong Kong's development as a leading business and financial centre.  TheGovernment's objective is to ensure that the Territory is able to supply high quality
telecommunications services at competitive prices.  Since 1995, therefore, the sector has been
progressively liberalized and competition has been introduced.  There are no limitations on foreign
equity participation or ownership or any other FD I restrictions in the telecommunications market.
However, in order to promote competition the Government may impose limits on cross-ownership in
any particular sector
53;  according to the authorities, this provision has never been applied.  At present
there are no limitations on national treatment.  The Telephone Ordinance, which stipulated that
directors of the Hong Kong Telephone Company had to be bona fide residents in Hong Kong, China,
was repealed in 2000.  "Nationality" requirements for management and administrative staff of the
Hong Kong Telecom International (now Reach Networ ks Hong Kong Limited) were also eliminated.
31. In 2001, there were about 5 million telephones served by more than 3.9 million exchange
lines (Table IV.3).  The telephone density in 2001 was 73.1 telephones or 58 lines per 100 inhabitant,
among the highest in the world.  A wide range of facsimile and data communication services are
available in Hong Kong, China;  by May 2002, there were over 412,000 facsimile lines.  In addition,
by May 2002, the number of mobile service subscribers reached 5.8 million, representing apenetration rate of about 85%.
54
                                                     
52 WTO document GATS/SC/39/Suppl.3, 26 February 1998.
53 WTO document S/NGBT/W/3/Add.16, 21 October 1994.
54 Government of the HKSAR (2002d).Hong Kong, China WT/TPR/S/109
Page 61
Table IV.3
Telecommunication services in Hong Kong, China, 1998-02
1998 1999 2000 2001 2002
Number of telephone lines
- installed during period 850,743 933,518 931,518 1,011,102 ..
- working at end of period 3,707,524 3,838,735 3,945,574 3,925,774 3,885,032
- residential 2,158,857 2,190,134 2,209,518 2,161,151 2,144,786
- business 1,548,667 1,648,601 1,736,056 1,764,623 1,740,246
Main telephone lines per 100 inhabitants 56.4 58.0 58.3 58 57.5
Number of applicationsa
- received during periodb1,052,571 1,030,192 1,018,593 .. ..
- outstanding at end of periodb3,376 8,042 7,062 .. ..
Public mobile radiotelephone subscriber units, as
at end of year
Excluding pre-paid SIM cards 2,767,941 3,650,238 4,173,318 4,256,422 4,237,943
Including pre-paid SIM cards 2,898,077 3,989,750 5,234,370 5,701,686 5,808,089
.. Not available.
a Figures refer to number of exchange lines requested for installation.
b From 2001 onwards, figures are no longer compiled by the Office of the Telecommunications Authority.
Source: Census and Statistics Department, Hong Kong Annual/Monthly Digest of Statistics (various issues), Hong Kong
Special Administrative Region;  and International Telecommunication Union (data on telephone lines per
100 inhabitants).
32. The Telecommunications Authority (TA) oversees the regulation of the sector;  the
Telecommunication Ordinance governs the establishment and operation of all telecommunications
services.  The TA is supported by the Office of the Telecommunication Authority (OFTA), an
independent government agency.  OFTA is headed  by the Director-General of Telecommunications,
who has also been appointed as the TA under the Telecommunications Ordinance to carry out variousstatutory functions in three main areas:  the technical and economic regulation of telecommunication
services;  radio frequency spectrum management and satellite coordination;  and advisory and
planning services to other government departments.
55  O F T A  i s  a l s o  i n  c h a r g e  o f  m o n i t o r i n g
competition in the telecommunication market.56  Five advisory committees have been set up to
consider regulatory issues and to provide a forum for the exchange of ideas among the industry,consumers, and OFTA.
57
33. The Telecommunications Ordinance was amended, in June 2000.  Major amendments
included:  provisions to promote competition in public telecommunications services;  the
establishment of a Telecommunications (Competitio n Provisions) Appeal Board;  clarification of
certain provisions concerning access to land and interconnection for telecommunications operators;streamlining of licensing procedures;  and giving the statutory regulator legal power over certain
technical matters (radio spectrum management, and standards.
58
                                                     
55 Government of the HKSAR (2002d).
56 Complaints on anti-competitive behaviour received by the OFTA and the investigation results are
posted on the OFTA's website.  Available at:  http://www.ofta.gov.hk.
57 Telecommunications Standards Advisory Co mmittee; Radio Spectrum Advisory Committee;
Telecommunications Users and Consumers Advisory Committee; Telecommunications Numbering Advisory
Committee;  and Complaint Committee on Junk Fax.
58 Information provided by the authorities of Hong Kong, China;  and Government of the HKSAR
(undated).WT/TPR/S/109 Trade Policy Review
Page 62
34. Under the Telecommunication (Amendment) Ordinance 2000, licensees are forbidden to
engage in any conduct aimed at preventing or substantially restricting competition in the
telecommunications market.  The licensee in a dominant position must also observe provisions against
the abuse of dominance of power, and price discrimination.  The dominant operator is also required to
seek OFTA's prior approval for tariffs for new services and for revisions of existing tariffs.  OFTA is
responsible for investigating any complaints regard ing anti-competitive activities.  Financial penalties
for anti-competitive conduct in the telecommunications market have been increased;  they may
include the suspension of licences.  Civil remedies are now available to all persons damaged by anti-
competitive practice.   Anti-competitive conduct is also prevented/controlled through the licences
granted to the operators.  Since 1998, there have been four findings of anti-competitive practice;  in
two instances, this has resulted in fines being imposed on the dominant operator.
35. Progressive liberalization of the telecommunications market began in 1995, with the
introduction of competition into the local fixed telecommunications market.  In 1999, the Government
announced the further liberalization of the market.  As a result, most sectors of the
telecommunications market have been liberalized (Box IV.1).  The local fixed telecommunications
market will be fully liberalized as of 1 January 2003.59  This means that there will be no limit on the
number of licences to be issued or on the timing of application.  The requirements on performance
bonds and on capital expenditure will also be eliminated.60
36. Licences are required for operating any public telecommunications services.  If an application
meets the criteria, a licence will be granted irrespective of the nationality of the individuals who own
or manage the company.61  New telecommunications services may not be supplied without the prior
approval of the Telecommunications Authority.
37. According to the authorities, the price of telecommunications services are set by the market.
However, to prevent the dominant supplier from abusing its market power, the TA requires the
supplier to obtain approval for new or revised tariffs under the dominant supplier's licence conditions.
The TA will turn down tariff proposals aimed at preventing or substantially restricting competition.
For instance, in January 2000, Hong Kong's telecommunications regulator launched an inquiry to
determine whether the mobile operators had breached a licensing condition that forbade them fromforming collusive price agreements (they had announced a simultaneous price increase).
62  The TA
intended to direct the six mobile service operators not to implement the increase in price, but it was
deemed unnecessary since the operators promptly revo ked it.  The TA issued a warning letter to the
operators reminding them to comply with the licence obligations, one of which is not to engage in
activities that have the purpose or effect of substantially restricting competition.
38. Hong Kong, China has not entered into any inter-governmental or bilateral agreements related
to the supply of basic telecommunications networks or services.
                                                     
59 Telecommunications Authority Hong Kong (2002).
60 The licensee does not need to make a pledge on th e amount of capital to be invested and there is no
need to provide a performance bond (i.e. a deposit with a third party who issues a bond in favour of the licensingauthority guaranteeing that the bonded sum will be released to the authority if the licensee fails to honour its
commitments).
61 The guidelines to obtain licence are available online at:  http://www.ofta.gov.hk/frameset/
documents_ index_eng.html.  The guidelines stipulate th e information required and the criteria upon which an
application will be evaluated.
62 Financial Times,  4 January 2000 and 21 January 2000.Hong Kong, China WT/TPR/S/109
Page 63
Box IV.1:  Telecommunications services:  market structure and liberalization
Local fixed telecommunications networ k services (FTNS):  the local fi xed telecommunications market was
liberalized in 1995 when three new wireless-based operators were licensed to compete with Cable &Wireless HKT.  In early 2000, five other wireless-based licences were issued, as well as a licence to allow
Hong Kong Cable TV to provide telecommunications services (using cable modem technology) were
issued.  There are ten local fixed telecommunications  operators.  Despite the entry of new companies,
PCCWHKT (formerly known as Cable & Wireless HKT Ltd.) is the dominant local carrier among theten licensees.
International Telecommunications Services:  Cable & Wireless HKT International Limited (CWHKTI) was
granted a 25-year exclusive licence to provide certain ex ternal telecommunications circuits and services in
1981 (i.e. until 2006).  Following an agreement made between the Government and Cable & Wireless HKTLimited and its group of companies (including CWHKTI), CWHKTI surrendered its exclusive licence onMarch 1998.  In January 1999, the Government liberalized the external services market.  The external
facilities market was liberalized in January 2000.  As of June 2002, the TA had issued 213 external
telecommunications services (ETS) licences, 8 licences for satellite-based external FTNS operation, and17 licences for cable-based external FTNS operation.
Mobile market:  mobile services have been open to  competition since their introduction in the mid-1980s.
There are six operators in Hong Kong, China.  The introduction of mobile number portability (MNP)
service on 1 March 1999 has promoted further competition among the mobile network operators as itallows customers to retain their telephone numbers when they switch to another mobile network operator.In October 2001, four more licences were issued for third-generation mobile services (3G).  In accordancewith the regulatory framework of open network access and to promote competition, the 3G licensees arerequired to open up at least 30% of their network capacity to non-affiliated mobile virtual network
operators and content providers.
Source:  Hong Kong, China Government.
(iii) Transport
(a) Air transport63
39. Hong Kong, China remains a premier international and regional aviation centre.  Exports of
air transport services amounted to HK$42 billion in 2001 (13% of all services exports).  The air
transport subsector employed about 0.8% of the total workforce in 2001.  Although air cargo
accounted for less than 1% by weight of all cargo handled in Hong Kong, China in 2001, its value
share was more than 27%.  About one third of Hong Kong, China's exports of domestically produced
goods were carried by air in 2001, up from one fourth in 1980.
40. The new airport at Chek Lap Kok, which opened in July 1998, has become one of the world's
leading international airports, handling 2.07 million tonnes of cargo and 32 million passengers in
2001 (Table IV.4).64  The airport has the capacity to handle 3 million tonnes of cargo and
45 million passengers per year;  its capacity is expected to increase to 9.5 million tonnes of cargo and
87.3 million passengers a year upon full development.  Its air cargo terminal is the biggest in theworld.
                                                     
63 This section draws on Hong Trade Development Council (2000-2002a).
64 According to Airport Council International, Hong Kong ranked No. 1 in handling international cargo
and No. 5 in international passengers respectively in 1999.  Hong Kong International Airport Press Releases:"2002 Cargo Airport of the Year Award for HKIA", 20 March 2002;  and  "HKIA named World's Best Airportfor second consecutive year", 8 May 2002 [Online].  Available at:  http://www.hkairport.com/eng/aboutus/pressrelease.jsp [1 July 2002].WT/TPR/S/109 Trade Policy Review
Page 64
Table IV.4
Air transport, 1997-01
1997 1998 1999 2000 2001
Air cargo throughput (million tonnes) 1.79 1.63 1.97 2.24 2.07
No. of passenger handled (million) 28.3 27.2 29.1 33.4 32.0
Annual percentage change
Total freight movement 14.3 -8.8 21.2 13.5 -7.4
Inward freight movement 14.4 -7.8 8.6 13.2 -6.1
Outward freight movement 14.1 -9.8 32.7 13.7 -8.4
Source: Hong Kong Port and Maritime Board, Summary Statistics on Port Traffic in Hong Kong.
41. The cargo and passenger sides of the air transport industry overlap, since over 50% of
Hong Kong's air freight is carried in the holds of  passenger aircraft rather than in freighters.
Scheduled and non-scheduled carriers operate in both cargo and passenger transport.  There are two
major types of cargo:  express cargo and heavy lift cargo.  The latter accounts for around 95% byweight and 85% by value of air freight handled by Hong Kong.
42. Since 1998, there have been no changes in policy, laws or regulations regarding the provision
of air services or investment in such services.  The Economic Development Branch (EDB) of the
Economic Development and Labour Bureau continues to be responsible for air transportation policy
and for air services negotiations.  The EDB also works with the Airport Authority (AA), a statutorybody that operates and maintains the Hong Kong International Airport.  The Government is the sole
shareholder in the AA but the Board of Directors has autonomy.  
43. To provide air services (to and from Hong Kong, China) as a designated Hong Kong airline,
an airline must be incorporated and have its principal place of business in Hong Kong, China, and
hold an Air Operator's Certificate issued by th e Civil Aviation Department.  Four airlines use
Hong Kong, China as their base:  Cathay Pacific Airways
65, Hong Kong Dragon Airlines, Air Hong
Kong, and Metrojet Ltd.66  The designated Hong Kong airlines do not have exclusive access to routes
or ground handling monopoly, and do not receive subsidies or other type of assistance.
44. The provision of scheduled air services is regulated by a network of bilateral air services
agreements (ASA) and arrangements between Hong Kong, China and its partners.  As of  February
2002, the HKSAR Government had signed 50 air-service agreements.  A Hong Kong airline seeking
to operate scheduled services must obtain a licence for the route from the Air Transport Licensing
Authority (ATLA), an independent statutory body.  Once licensed, it is eligible for designation by the
Government of the HKSAR under the relevant ASA, and for allocation of traffic rights.67  In general,
only one Hong Kong airline  is designated on a given route, and it is usually the airline first licensed
by the ATLA for the route.  However, under special  circumstances more than one Hong Kong airline
may be designated on any given route.68  Hong Kong, China has not signed any open skies
agreements.
                                                     
65 The Government owns Cathay Pacific Airways' stocks, but has no management rights in the airline.
66 In February 2002, Air Hong Kong became a wholly-owned subsidiary of Cathay Pacific Airways
(Hong Kong Trade Development Council, 2000-2002a).
67 Government of the HKSAR (2002e).
68 This would occur when it is judged that more competition is needed in the public interest and the
traffic is sufficient to sustain substantial operations by more than one Hong Kong airline in addition to theoperations of foreign airlines; or when one airline has been designated for a route but chooses not to or hasceased to serve that route or does not operate services on it satisfactorily; or when the services provided by theHong Kong, China WT/TPR/S/109
Page 65
45. Arrangements are made under bilateral ASAs for the exchange of traffic rights.  According to
the authorities, no discriminatory measures are maintained against foreign airlines.  However, airlines,
other than designated Hong Kong airlines,  wishing to operate scheduled air services between Hong
Kong, China and a foreign country must satisfy all requirements in the country of their registration
and obtain an operating permit from Hong Kong's Director of Civil Aviation.69  Airport slots are
allocated by a Schedule Coordinator (SC), currently Cathay Pacific Airways, which is appointed andmonitored by the Director-General of Civil Aviation.  Scheduled airlines planning to operate in
Hong Kong, China must request a slot from the SC.  If the request cannot be met, the SC offers the
closest available slot(s) for that specific flight.  Airlines can also appeal to the Director-General of
Civil Aviation if they believe that the slots might not have been allocated in a fair and transparent
manner.
46. At end 2001, 66 scheduled, and 16 non-scheduled passenger airlines operated in Hong Kong,
China
70;  17 of these airlines also operated scheduled cargo services.  In addition, 13 international
airlines provided cargo-only service.
47. Airlines are required to notify their proposed tariffs to the Government of the HKSAR.  In
accordance with the provisions of the bilateral air services agreements, the airlines are required tocharge only tariffs that have been filed with and approved by the aeronautical authorities concerned.
48. There is no restriction on foreign investment in support services, such as aviation fuel supply,
ramp handling, air cargo handling, and aircraft catering at the Hong Kong International Airport
(HKIA).  These services are provided by private companies that have obtained franchises from the
AA through a competitive open bidding process. There are over ten franchisees (all locally
incorporated companies) providing service at the HKIA.  The Airport Authority periodically assesses
the demand for services, and if necessary introduces additional operators.  Subject to operationalconsiderations, such as space and efficiency, airlines may also apply for permission to provide such
services themselves;  according to the authorities, applications are considered under objective and
non-discriminatory criteria.
(b) Maritime transport
71
49. Maritime transport is of vital importance to Hong Kong, China as it handles more than 80%
of the Territory's total external cargo.  The port of Hong Kong continues to be one of the world's
busiest container ports, handling 17.8 million TEUs (20 foot equivalent unit) in 2001, of which 73% is
seaborne cargo (Table IV.5).72  Of all seaborne cargo, 48 million tonnes (37%) were trans-shipment
cargo, mostly to and from Mainland China.  The trans-shipment time of cargo shipped from the rest of
the world through Hong Kong, China to the Pearl River Delta has been reduced from two days to lessthan 24 hours.
73  A decline in seaborne cargo in 2001 has been attributed to the global economic
downturn.
                                                                                                                                                                    
airline that applies for designation are different from th ose provided by the existing designated airline on that
route (Government of the HKSAR, 2002e).
69 WTO (1998).
70 Hong Kong Trade Development Council (2000-2002a).
71 This section is from Hong Kong, Port and Maritime Board (undated).
72 According to the Marine Department, Hong Kong gets one vessel arriving or departing every
1.2 minutes, one TEU handled every two seconds and one passenger entering or leaving by ferries everytwo seconds (Hong Kong Trade Development Council (2000-2002b).
73 Government of the HKSAR (2002f).WT/TPR/S/109 Trade Policy Review
Page 66
50. Sea cargo to and from Hong Kong, China is carried both by liners and bulk vessels.  Many
key routes are under liner conferences (agreements by the main shipping lines on tariffs and sailings).
Hong Kong, China is served by some 200 shipping lines.  Containerized cargo dominates the liner
market in Hong Kong, China.
51. River trade has been the fastest growing external transport mode over the past few years
(1999-01), growing at a rate of 8.8% in 2001 (Table IV.5).  The rapid growth of river trade throughputis attributed to export cargo from the Pearl River Delta area of Guangdong Province.  As for seaborne
trade, despite a marginal decline in 2001, the cargo throughput increased from 128.2 million tonnes in
1999 to 130.7 million tonnes in 2001, representing an average annual growth of about 1%.  The Pearl
River links Hong Kong, China with many manufacturing centres in southern China, which have
become the main cargo source for the territory.
52. The port of Hong Kong is owned and managed by the Hong Kong, China Government.
However, most of the port facilities are owned and managed by the private sector, with the
Government overseeing the formulation of port  policies and vessel traffic management.  Most
auxiliary services are also provided by the private sector.  The granting of rights to operate the
services is "normally" through public tender or by private agreements, and non-discriminatoryprocedures are adopted.
74  According to the authorities, there are well established procedures to ensure
openness and transparency in public tenders.  All container terminals are privately owned and
operated.  There are eight container terminals with a total of 18 berths, operated by four private
consortia.  Their combined throughput capacity is around 11.5 million TEUs per year.  A new
container terminal is being built to further improve cargo-handling capacity and efficiency.75
Table IV.5
Port traffic in Hong Kong, China, 1997-02
(Per cent, unless otherwise indicated)
1997 1998 1999 2000 2001 2002a
Arrival of vessels (annual percentage change)
Ocean vessels 6.5 -6.3 -9.9 0.3 -0.9 2.2
River cargo vessels 9.4 1.5 -7.4 3.3 -2.5 2.5
River passenger ferry 1.4 -1.8 -7.8 -0.2 2.3 1.6
Total freight movement ('000 TEUs) 169,229 167,170 168,838 174,642 178,210 91,632
of which:
Seaborne (%) 78.8 76.3 75.9 75.0 73.3 71.7
River (%) 21.2 23.7 24.1 25.0 26.7 28.3
Total freight movement (annual percentage change) 7.6 -1.2 1.0 3.4 2.0 3.4
Seaborne 5.9 -4.4 0.6 2.1 -0.2 0.6
River 14.2 10.5 2.3 7.6 8.8 11.3
Total container throughput (annual percentage change) 8.2 1.4 11.2 11.6 -1.5 2.4
Percentage of containerization for seaborne cargo 65.1 63.4 69.0 73.0 71.7 72.5
Direct shipment 46.7 44.1 46.9 49.1 45.7 58.5
Trans-shipment 96.9 96.9 95.0 94.6 92.6 95.0
.. Not available.
aJ a n - J u n .
Source: Hong Kong Port and Maritime Board, Summary Statistics on Port Traffic in Hong Kong, China.
                                                     
74 WTO document S/NGMTS/W/2/Add.15, 10 February 1995.
75 These represent average annual growth rates of 5.3% and 3.1% respectively during the first and
second decades from 2000.Hong Kong, China WT/TPR/S/109
Page 67
53. The Port of Hong Kong faces increasing competition from neighbouring ports.  In terms of
cost comparisons, Hong Kong, China's port has higher  terminal handling charges (THCs) than those
at South China, as well as higher road haulage costs relative to Mainland China.  Nevertheless, traders
continue to have confidence in the port of Hong Kong because of its superior productivity76, a higher
frequency of callings, and the highly developed logistics services (including an efficient Customs)
available.77  Moreover, Guangdong exports, the main engine of growth for the HKSAR's port traffic,
grew at an annual rate of 8% during 1998-01 and are expected to grow at a faster rate as a result of
China's accession to the WTO.
54. Trans-shipment traffic increased at an annual rate of 12.2% in 1999-01.  However, with the
development of container terminal facilities in the Mainland, it is expected that part of the
trans-shipment cargo to/from the east coast of China will be exported directly through Chinese ports(e.g. Shanghai), which have grown rapidly in recent years.  Trans-shipment will face further
competition from lower cost ports in Chinese Taip ei, when connections between Mainland China and
Chinese Taipei are fully liberalized.
78  At present Chinese Taipei–Mainland trade is routed via
Hong Kong, China;  it accounts for 1 million TEUs or 6% of total container throughput.  It is expected
that up to 50% of the traffic that is ordinarily routed via the Port of Hong Kong will switch tocompeting ports.
55. According to the authorities, there have been  no changes in Hong Kong, China's maritime
policy since 1998.  The Economic Development a nd Labour Bureau (EDLB) oversees shipping
policies and ensures that adequate safety measures are in place.  The Marine Department is the
executive agency of the EDLB;  it manages the Port of Hong Kong and administers the Hong Kong
Shipping Register.
56. According to the authorities, there are no restrictions on foreign direct investment in port
facilities and maritime services, nor exceptions to national treatment.  Nor are there any limitations on
the total number of foreign natural persons who may be employed in maritime transport or at a
maritime transport services supplier.  Entry of all categories of personnel, except for those listed in
Hong Kong's Schedule, is subject to an economic needs test,  which ensures, inter alia , that foreign
nationals possess skills or knowledge that are not readily available in and are of value to Hong Kong,China.
57. The authorities noted that there are no market access restrictions on the ability of multimodal
transport operators, general and bulk shipping lines, shippers, and intermediaries, to rent or lease
trucks, railway carriages, or barges and related equipment for inland forwarding of cargo.
58. A ship must be registered in Hong Kong, China to be a "flag-ship".  The requirements for
registration are:  that a majority interest in the sh ip is owned by a Hong Kong citizen, or a Hong Kong
incorporated company, or an overseas company registered in Hong Kong, China, or the ship is on
charter to such a company;  a representative person , either the owner or a locally incorporated ship
management company, is appointed in relation to the ship;  and the ship's safety and pollution levels
are satisfactory.
                                                     
76 In 2001, the Kwai Chung Container Port handled a total throughput of 11.29 million TEUs.  The
terminals operators attained 68 moves per hour for one quay crane and an average of 50.4 moves per hour for a
vessel.
77 Hong Kong, Port and Maritime Board (undated).
78 Chinese Taipei–Mainland trade is routed via Hong Kong, China because direct trade has been
prohibited since 1949.  Liberalization of Mainland China–Chinese Taipei trade is expected to start around2003-04 (Hong Kong, Port and Maritime Board, undated).WT/TPR/S/109 Trade Policy Review
Page 68
59. There are no competition or antitrust laws governing the operation of maritime transport.  A
number of port services/facilities including mooring buoys, anchorage, and ferry terminals are
provided and managed by the Government to safeguard port users' interests and to ensure the
compliance of safety and environmental standards.  On the regulatory side, to ensure compliance with
safety regulations, the Government is responsible for licensing local passenger vessels.  The
Government also regulates and monitors pilotage services.
60. The Consumer Council has received and investigated two complaints alleging
anti-competitive behaviour by a group of shipping lines providing container services to Hong Kong
shippers.79  The complaints relate to the manner in which a "Yen Appreciation Surcharge" (YAS)80
and Terminal Handling Charge (THC) were determined and imposed by competing members ofgroups of shipping lines;  these are known as "conference agreements" a common feature ofinternational shipping.  In the case of THCs, for example, the Hong Kong Shippers Council
complained that such charges had been set at a uniformly high rate, with the result that Hong Kong
shippers were now paying the highest THCs in th e world.  But while a comparison of charges for
different shipping line agreements between different ports in the region supported the contention that
THCs in Hong Kong, China are relatively high, th e Council found it impossible to ascertain the extent
to which these charges diverged from competitive market prices.  Nonetheless, the Council concluded
that in view of their price fixing characteristics, "conference agreements" may warrant further
attention by the Government, noting that other comparably advanced economies have a regulatory
mechanism to provide ongoing oversight of such agreements and handle competition complaints.  In
view of the Government's "sector-specific" approach to competition policy, the Council believes that
the Port and Maritime Board (PMB), which has juri sdiction over this subsector, should facilitate
negotiations between shippers and lines that have formed agreements, and provide a mechanism forthe independent evaluation of the effects of shipping agreements on competition.
81
(iv) Tourism82
61. Tourism contributes to Hong Kong, China's GDP through several services subsectors.  The
direct  contribution of inbound tourism to GDP in 2000 is estimated at about 2.2%.83  In 2001, some
3% of the labour force was employed directly in inbound tourism.  The number of visitors to HongKong, China has been increasing since 1998 (Table IV.6).  In 2001, Hong Kong, China welcomed
13.73 million visitors, representing a 5.1% growth over the previous year;  the largest group came
from the Mainland China (32.4% of the total).  Als o, the abolition of the quota system for the Hong
Kong Group Tour Scheme in January 2002 resulted in a substantial increase of visitors from the
Mainland (46.7%) during January-May 2002.  In addition, tourism from Europe and the United Statesstarted to recover from the slow down of 2001.  Notwithstanding the prevailing uncertainties regarding
the global economic situation, the tourism industry had a good start in 2002 as 6.33 million visitors
                                                     
79 Consumer Council (2002).
80 The YAS involved a uniform charge imposed by a container liner APL on cargo shipments from
Japan to hedge against exchange rate risks as laid down by an association of shipping companies, known as the
Intra-Asia Discussion Agreement, of which the APL was a partner. It was alleged that the surcharge was set, by
a "cartel", at a level higher than could be justified by the exchange rate movements.
81 The Consumer Council considers that its recommendations are generally in line with the principles
underlying the recommendations contained in the OECD's recent Liner Shipping Competition Policy Report.The latter found no convincing evidence that the practice of  discussing and/or fixing rates and surcharges among
competing carriers offers more benefits than costs to sh ippers and consumers; it recommended that limited anti-
trust exemptions not be extended to price-fixing and rate discussions.
82 This section is based on Government of the HKSAR (2000) and (2002f).
83 This figure includes income directly generated from visitors' spending on shopping, dinning, hotels,
local tours, other personal services, and air transport.  As of 2000, no data were available on the directcontribution of tourism to GDP.Hong Kong, China WT/TPR/S/109
Page 69
arrived in the first five months, 14.2% higher than the corresponding period in 2001.  Hotel
occupancy rates reached 79% on average in 2001;  the average for the first four  months of 2002 was
82%.  For the full year of 2002, visitor arrivals are expected to achieve a 7.9% growth over 2001.84
62. Tourism is one of Hong Kong China's largest earners of foreign exchange.  Total tourism
receipts in 2001 increased by some 4.5% over 2000 , to reach HK$64.3 billion, which is equivalent to
about 5% of GDP.  In 2001, the average per capita spending of visitors was HK$4,532, a decline of0.2% over 2000 (Table IV.6).  The Government has therefore attached great importance to the
development of this industry.  It has adopted a three-pronged strategy to promote the sector, including
improving the existing tourism infrastructure, faci lities, and products; promoting Hong Kong, China
as a tourist destination;  and enhancing the quality of services.  The Government is also committed to
developing different types of tourism, such as business, family, eco, and cultural tourism.
85
Table IV.6
Tourism, 1998-01
1998 1999 2000 2001
Incoming visitors ('000) 10,160 11,328 13,059 13,725
Number of visitors by origin
The Americas 1,029 1,155 1,296 1,259
Europe, Africa, and Middle East 1,041 1,149 1,223 1,171
Australia, New Zealand, and South Pacific 333 361 417 387
North Asia 1,125 1,465 1,755 1,762
South and Southeast Asia 1,195 1,511 1,747 1,747
Chinese Taipei 1,813 2,063 2,386 2,419
Macao, China 442 417 450 532
Mainland China 2,597 3,206 3,786 4,449
Total tourism receipts (HK$ million) 58,468 56,242 61,514 64,282
Per capita spending by visitors (HK$) 5,541 4,791 4,539 4,532
Rates of change (%)
Incoming visitors -9.9 11.5 15.3 5.1
Total tourism receipts -24.9 -3.8 9.4 4.5
Per capita spending by visitors -17.5 -13.5 -5.3 -0.2
Source: Hong Kong Tourism Board (2001),  A Statistical Review of Hong Kong Tourism 2001 .
63. Since 1998, new governmental institutions have been created and existing ones modernized to
foster tourism development.  These include the Tourism Commission set up in 1999, and the
reconstitution of the Hong Kong Tourist Association into Hong Kong Tourism Board (HKTB).
64. Apart from developing new attractions, such as the Hong Kong Disneyland, the Tung Chung
Cable Car system, and the Hong Kong Wetland Park, steps have been taken to improve the quality of
existing tourism products.  The Tourism Board launched a Quality Tourism Services (QTS) Scheme
in 1999 to underline the importance of quality services and promote upgrading of the service
standards of retailers and restaurants.  In April 2001, the HKTB launched a two-year campaign to
promote Hong Kong, China in overseas markets.  These schemes and campaigns are funded by theGovernment.  To attract more business visitors to  Hong Kong, China, a new international exhibition
centre has been planned at the Airport (a joint venture between the Government and the private
                                                     
84 Government of the HKSAR (2000).
85 Government of the HKSAR (2002f).WT/TPR/S/109 Trade Policy Review
Page 70
sector).86  Work also started on developing Hong Kong Wetland Park (financed with public funds) in
the far north-west of Hong Kong, China;  this project is aimed at exploiting Hong Kong's ecosystem.
65. The Travel Agents Ordinance (Chapter 218) was enacted in 1985 to regulate outbound travel
agents through a licensing scheme.  In April 2002, the Legislative Council passed the Travel Agents
(Amendment) Ordinance, which will enter into effect on 1 November 2002;  the Ordinance introduces
licensing requirements for persons/companies carrying on the business of an inbound travel agent.
The Travel Agents Licence, to be obtained from the Government, will enable travel agents to conductboth outbound and inbound business.  The licensing requirements for inbound travel agents are the
same as those for outbound.  Travel agents are required to abide by the codes of conduct, directives,
and instructions issued from time to time by the Travel Industry Council of Hong Kong, an
organization of travel agents.  The licensing system  is thus supplemented by the Council's regulations.
There are also plans to introduce a certification scheme, under which all tour guides will be requiredto pass an examination and obtain a certificate before taking up employment.
                                                     
86 Government of the HKSAR (2002f).Hong Kong, China WT/TPR/S/109
Page 71
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