98-4878 MOREPRESS RELEASE
PRESS/TPRB/95
4 December 1998
 HONG KONG, CHINA'S FREE MARKET SYSTEM
WILL HELP FACILITATE ECONOMIC RECOVERY
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 ec onomic 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 tothe first, the report notes that there is no indicatio n 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 re port 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 shareof 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 inEMBARGO: NOT FOR PUBLICATION
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MOREneighbouring 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 introdu ce 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 relianceon 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 bodyto 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 th e 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 interven e, 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 no tes that those that do exist either stem from Hong
Kong's obligations under various international undertakings or are applied for health, safety, securityor 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 expo rt 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, togeth er 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.PRESS/TPRB/95
Page 4
MORENotes 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 allaspects 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, areport 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), Bang ladesh (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 Republi c (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 (1 998), 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 La nka (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), Za mbia (1996) and Zimbabwe (1994).PRESS/TPRB/95
Page 5
MORETRADE POLICY REVEW 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 co mmitment 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 capitathat 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, andthe 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 co mpared 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 pres ent 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 SouthChina. The strong growth in cross-border trade a nd 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 boa rd 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 devaluedcurrencies of those countries in the region much mo re heavily affected by the Asian financial crisis.PRESS/TPRB/95
Page 6
MOREThe 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 theeconomy 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 depresseddomestic 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-marketsystem.
T
RADE 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 ofintellectual property rights, and the strengthening of some aspects of competition policy.  However,
there have been no major changes in the trade poli cy 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 thereserve scheme;  however, price mark-ups can be hi gh, 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 sh ipping services is an important exception.  HongPRESS/TPRB/95
Page 7
MOREKong's openness to FDI combined with sound macroe conomic policies, its transparent rules-based
legal environment, the availability of financial facilities and infrastructure, a skilled and reliablelabour 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 toenhance 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 severalmajor manufacturing and service companies; accord ing 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 caref ully 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;  theEFI 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 ofopenness to trade and foreign direct investment and its strong reliance on market forces in
combination with sector-specific regulatory, admi nistrative 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,PRESS/TPRB/95
Page 8
ENDparticularly 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 itsneighbours.  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 indemand.  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 rece nt 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 marketsystem, should facilitate Hong Kong's emergence from the current economic crisis and a resumption
of its strong economic performance.