RESTRICTEDWORLD TRADE
ORGANIZATIONS/WPGR/W/16/Add.3
23 July 1999
(99-3105)
Working Party on GATS Rules Original:  English
COMMUNICATION FROM HONG KONG, CHINA
Response to the Questions Relevant to the Information Exchange Required
Under the Subsidies Negotiating Mandate
Addendum
The following communication is being circulated at the request of the delegation of Hong
Kong, China to Members of the Working Party on GATS Rules.
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EXPLANATORY NOTE
I. INTRODUCTION
1. Attached to this note is the response of Hong Kong, China to the Questionnaire on Subsidies
(S/WPGR/W/16).  Below we set out the scope of the response and highlight some key issues which
have emerged in our consideration of the issue.
II. SCOPE OF RESPONSE
2. For the purpose of its response to the Questionnaire on Subsidies (S/WPGR/W/16),
Hong Kong, China relies on the definition in para. 1.1 of the Questionnaire but has not included
details on the financial contributions made by the government or public bodies in pursuit of legitimate
social welfare objectives  since it is the recognised responsibility of any government to provide a range
of social services to the public.  For transparency sake, we would like to point out that the government
does maintain certain social welfare programmes, and it does so primarily through subventions toorganisations to undertake such activities as provision of public housing, hospitals, education,
vocational training and retraining and social welfare services.  The government directly provides
some of the services in these areas, such as out-patient medical clinics and a limited number of
schools and social welfare facilities.  There is a healthy private sector in these fields, where demand
for services over and above, or different from, those provided by the government is found.
3. For the avoidance of doubt, Hong Kong, China would like to highlight that government
expenditure on services supplied in the exercise of governmental authority  (i.e. any service which is
supplied neither on a commercial basis nor in competition with one or more service suppliers) falls
outside the scope of the questionnaire because in accordance with the definition of Article I(3)(b) of
GATS, "services" includes any service in any sector except services supplied in the exercise ofgovernmental authority.S/WPGR/W/16/Add.3
Page 2
4. In assessing whether any benefit  has been conferred on the recipients, as required by
para. 1.1(b) of the Questionnaire, reference has been made to Article 14 of the Agreement on
Subsidies and Countervailing Measures.
III. ISSUES WORTHY OF CONSIDERATION
5. It is already a requirement under the GATS to schedule any subsidies which may be given, if
they fall within the measures listed in article XVI or contravene Article XVII.  Subsidies granted on a
national treatment basis (and which do not infringe Article XVI) are thus not schedulable.
6. Hong Kong, China notes that in general, subsidies which are administered on a  national
treatment  basis are likely to have less trade distortive effects.  However, it could also be argued that
subsidies provided on a national treatment basis to all firms established within the territory of a
Member but not overseas service suppliers (Mode 3)  would have trade distortive effects under Modes
1 and 2.  The question of mode specificity  of disciplines is a complex one as the effects of a subsidy
could spill over from one mode to another.
7. A related question is whether a Member is obliged to give national treatment to suppliers
outside its territorial jurisdiction .  The Scheduling Guidelines (MTN:GNS/W/164) state not.  But the
trade distortive effects of subsidies in this regard are unclear.
8. For transparency sake, Hong Kong, China has included in its return details of financial
contributions from the government which are provided on a national treatment basis.  Indeed, all the
subsidies listed in our response are granted on a national treatment basis (insofar as Mode 3 is
concerned).  It is suggested that the questions of trade distorting effects  and mode specificity  of
subsidies should be further discussed at the Working Party.
9. The response submitted is without prejudice to Hong Kong, China's future negotiating
position in the WTO.  Hong Kong, China may amend its response in the light of further discussions in
the Working Party that may clarify the scope of subs idies in services and the type of measures that
members seek to address.S/WPGR/W/16/Add.3
Page 3
RESPONSE BY HONG KONG , CHINA TO THE QUESTIONNAIRE ON SUBSIDIES
1. Please identify any subsidy programmes related to trade in services, with a brief description
of each programme.
The following are possible subsidies that are caught by the working definition adopted by
Hong Kong, China as set out in the explanatory covering note.  They may not be regarded assubsidies if further parameters are added to the definition of "subsidies" (e.g. "specificity").
(a) Stamp duty remission program for regional derivative warrants and convertible bond:
stamp duty is waived for trading of these products on the Stock Exchange of Hong
Kong Limited (SEHK).
(b) Stamp duty exemption for stock lending and borrowing: stamp duty is exempted for
lending and borrowing stocks of companies listed on the SEHK.
(c) Stamp duty exemption for hedging transactions by stock options market makers:  the
stock transactions for hedging purposes undertaken by market makers issuing stock
options in SEHK are exempted from stamp duty.
(d) The Government has provided a revolving loan facility of HK$100 million to the
Hong Kong Tourist Association (HKTA) for the setting up of an International EventsFund.  The aim of which is to provide the necessary seed money to support the
staging of some 50 major international events in a period of 5 years.  The HKTA may
draw down the loan within a period of 5 years from the date of the first draw down.
The HKTA has to pay a simple 5% annual interest on the outstanding amount of the
loan.
(e) The Services Support Fund (SSF) was established in July 1996 with an allocation of
HK$50 million from Government to provide financial support to projects which
would benefit the further development, an d increase the competitiveness, of Hong
Kong's service sector.  Such projects should be non-profit-making in nature, except
for the projects' long-terms self-sufficiency. The  Fund has so far supported a total of27 projects and the Government has recently approved an increase of commitment of
$50 million for the Fund.
2. Please state the policy objectives underlying the use of each subsidy.
(a) To encourage the development of the market of regional derivative warrants and
convertible bonds in Hong Kong.
(b) To encourage the development of the mark et of stock borrowing and lending in Hong
Kong.
(c) To encourage the development of the market of stock options in Hong Kong.
(d) To attract more international events to stage in Hong Kong and in turn enhance the
attractiveness of Hong Kong as a tourist destination.
(e) To support the growth of the service industries and to enhance their competitiveness.
3. Please indicated the availability, in the case of your country, of information necessary to
distinguish subsidies to services from subs idies to goods, e.g. when a company produces
both goods and services.
Nil.S/WPGR/W/16/Add.3
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4. Please indicate the form of each subsid ies (e.g. tax concession, loan, grant, etc.).
(a) - (c) : In the form of waiving of stamp duty.
(d) The International Event Fund aims to provide different types of financial support to
event organisers, including (i) upfront equity infusion; (ii) loan, which may be at
commercial rate, concessionary rate of interest-free; (iii) grant; and (iv) in-kindassistance such as implementing umbrella publicity and marketing programs to boost
the events' publicity and ticket sale.
(e) In the form of grants or loans.
5. Unless previously indicated, please state which sectors are eligible under the subsidy and/or
the estimated number of enterprises which are eligible under the subsidy.
(a) The stamp duty would have been payable by all investors in regional derivative
warrants and convertible bonds.  Hence, the scheme directly benefits all investors,
both local and overseas, in regional derivative warrants and convertible bonds.
(b) Stock lenders and borrowers, who are essentially brokerage houses and institutional
investors.
(c) Market makers for stock options.
(d) The Government provides a loan to the HKTA, which manages the International
Events Fund.  Event organisers could a pply for funding support under the Fund.  We
expect that the Fund will be used to support the staging of some 50 major
international events in Hong Kong.  The Fund is not targeted at any specific
sectors or enterprises .
(e) Service support bodies, trade and industry association, education and research
institutions and professional bodies can apply for financial support for undertaking
projects which meet the funding criteria.  Private companies can also apply but they
must demonstrate that the relevant proj ects would be non-profit-making and would
meet the funding criteria for the Fund.  The Fund is not targeted at any specific
sectors or enterprises .
6. Please indicate the eligibility criteria for subsidies (location, nationality, destination of
output or any other condition).
(a) All investors, local and overseas, in regional derivative warrants and convertible
bonds are entitled to the stamp duty exemption.
(b) All stock borrowers and lenders (local and overseas) who are essentially brokerage
houses and institutional investors.
(c) Market makers (local and overseas) for stock options.
(d) The HKTA, in consultation with the Steering Committee of the Fund, will take into
consideration criteria such as  the soundness of the event proposal, the potential in
generating world-wide media coverage, the appeal to overseas audience, the
compatibility with Hong Kong's tourism bus iness cycle, the appeal to commercial
sponsors, the credentials of the organisers applying for financial support, as well asthe overall financial position of IEF.  There is no restriction on the nationality of the
applicant.
(e) See AnnexS/WPGR/W/16/Add.3
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7. Please indicate how the subsidy is calculated (e.g. on production, on exports, on a fixed or
fluctuating basis, etc).
(a)-(c) : 0.25% of the consideration of the transaction.
(d) There is no fixed formula.  When considering the level of funding support to be
provided to event organisers, the factors set out in paragraph 6(d) above will be takeninto consideration.
(e) Under the SSF, the amount of the funding support requested have to be clearly set out
and itemised in the applications.  The applicant organisations must also provide
detailed explanation and justification for the projects.  The applications would be
carefully assessed by an SSF Vetting Committee which would make
recommendations to the Director-General of Industry.  In considering whether
funding support would be given, the Committee would take into account whether theproposed budget is reasonable and realistic, the benefits that such a project will bring
to the service sector and the technical and management capability of the applicant
organisation.
8. Please specify any time limits attached to the subsidies described above.
(a)-(c) : no time limit.
(d) The HKTA has to repay all outstanding loan together with the outstanding interests
accrued by the end of the 5 years credit period.
(e) There is no specific time limits attached to the projects to be funded by the SSF.
However, in considering a project proposal, due consideration will be given to
whether the schedule of implementation of the proposed project is well-planned andthe duration reasonable.  Based on past experience, the duration of most SSF funded
projects ranges from 1-2 years.
9. Please indicate any subsidy disciplines already assumed in the context of regional
agreements.
Nil.
10. Where such information is available, Members may wish to indicate:
- subsidy per unit or total annual subsidy ou tlays in respect of each subsidy granted;
(a) HK$2,031,504 in 1997
(b) Data not available
1.
(c) HK$284,239,484 from 1 June 1996 to 30 November 1997.
(d) Data not available.
(e) Regarding the projects approved so far, the average funding support for each
project is HK$1.83 million.
                                                     
1 Reporting on stock borrowing and lending is by the number of transaction, not by traded value, hence no
information on the amount of stamp duty exempted.S/WPGR/W/16/Add.3
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 - statistical data indicating the impact of subsidies on trade in services in the sectors
or activities concerned.
(a) Regional derivative warrants and convertible bonds were first introduced in
Hong Kong in April 1997, the same month when stamp duty exemption was
granted on such trade.  Since its introduction, there have been 17 regionalderivative warrants listed on the SEHK with an average daily turnover of
$20.8 million, or 0.2% in terms of the total turnover of the Exchange.  There
has been no regional convertible bond listed on the SEHK yet.
(b) Since the introduction of the stamp duty exemption, the number of
transaction of local stock lending and borrowing has grown substantively.  In
1994, the number of transaction reported was 1,245 and in 1997, the figure
grew to 20,048, representing growth of about 1,500 times.
(c) The stamp duty exemption on stock option trading was effective at the same
time when the first stock option was launched in September 1995.  Since
then, the number of stock options has grown from 1 to 17 with turnover in
terms of number of contracts traded grown by 48% over the same period.
(d) Data not available.
(e) Data not available.S/WPGR/W/16/Add.3
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ANNEX
Eligibility Criteria for Services Support Fund (SSF)
1. Funding support will be provided for projects which are beneficial to the overall development of
Hong Kong as a service centre or which constitute to the further development of one or moreservice industries, such as by enhancing intern ational competitiveness or domestic capacity for
production.
2. The benefits must accrue to one or more service industries as a whole, and not just to a single
private company or consortium of private companies.
3. Projects to be funded should be non-profit-mak ing except for the purpose of long-term self-
sufficiency.
4. Funds will not be provided for the creation of civil service posts.
5. In considering a proposal, due consideration will be given to -
(a) the benefit that it will bring to the service sector;
(b) whether there is a demonstrated need for the proposed project;
(c) the technical and project management capability of the applicant
institution/organisation;
(d) whether the proposed project's schedule of implementation is well-planned and the
duration reasonable;
(e) whether the proposed budget is reasonable and realistic;
(f) whether there is or likely to be a duplication of the work currently carried out by
other organisations; and
(g) if recurrent expenditure will be incurred (e.g. manpower costs and other
administrative expenses), whether the proposed project has a potential of becoming
self-sufficient after a certain period of time.
6. There is no restriction on the nationality or place of incorporation of the applicant.
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