Hong Kong, China WT/TPR/S/173/Rev.1 
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IV. TRADE POLICIES BY SECTOR 
(1) OVERVIEW  
1. Since its last Review in 2002, Hong Kong, Ch ina's liberal sectoral policies have undergone 
little change.  This has allowed the shift towa rds a services-based economy to continue, taking 
advantage of opportunities arising from liberali zation under the Closer Economic Partnership 
Arrangement (CEPA) with China.  By and large, the HKSAR continues to follow a policy of minimal 
intervention, allowing market forces to allocate resources among sectors.  The authorities maintain 
that Hong Kong, China does not discriminate in favour 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 support 
services, fostering applied research and development together with technology transfer, and investing 
in human capital in all sectors of the economy.  However, some measures remain aimed at certain 
sectors.   
2. On 1 January 2003, the Government significantly liberalized the rice trade by eliminating the 
import quota system and relaxing the registrati on criteria for rice stockholders leading, inter alia,  to a 
drop in retail prices of this commodity.  The HKSAR provides domestic support to agricultural 
activities in form of "Green Box" measures (not  subject to WTO reduction commitments).  Loan 
facilities for agriculture and fisheries, mainly  financed from non-governmental sources, have 
remained available at different interest rates de pending on the sources of funding and their purposes;  
outlays under the two fisheries loan funds were fi rst notified to the WTO Committee on Subsidies and 
Countervailing Measures in 2006.  
3. Steps to introduce new supply sources in the duop olistic electricity market are under way, but 
no major outcome is expected prior to 2008.   
4. The migration of the manufacturing sector to Mainland China has continued.  This is as a 
result of investment opportunities arising from the fu rther opening of the Mainland market, especially 
in the Pan-Pearl River Delta, which is the HKS AR's natural hinterland and a well-known production 
base;  the large labour-cost difference between th e HKSAR and Mainland China;  and possibly the 
fact that labour productivity in manufacturing is su bstantially less than in the rest of the economy, 
which is mainly services-oriented.  Additional restructuring of the HKSAR's manufacturing sector seems to be under way as both local and overseas investors might be expected to set up new manufacturing operations in the HKSAR to take advantage of the tariff-free preference under CEPA.    
5. Hong Kong, China, a net exporter of services, has continued to place emphasis on 
strengthening its legislative and in stitutional framework in order to maintain a competitive climate in 
the services sector.  However, this framework do es not yet include a comprehensive competition law 
(Chapters I and III).  The seeming lack of coherent  measures to address anti-competitive practices in 
all but a few sectors could constitute an obstacle to  greater competition in the provision of certain 
services, given the dominance of a few conglomerates.  Outward-oriented expansion of services is being driven by CEPA liberalization in 27 service areas;  the CEPA provides for earlier and wider market access for HKSAR's service suppliers th an those contained in China's WTO commitments, 
depending on the sector.  CEPA ar rangements reduced the requireme nts for HKSAR banks to conduct 
business on Mainland China  and encouraged Mainland financial ins titutions to invest in HKSAR, thus 
enhancing Hong Kong, China's status as an intern ational financial centre.  A Telecommunications 
(Amendment) Ordinance 2003 provided a comprehensiv e and clear legislative framework for mergers 
and acquisitions.  To maintain competitiveness in  port services, steps are being taken to reduce 
charges.  Foreign law firms that practice forei gn law in Hong Kong, China are barred from practicing 
domestic law and from employing or forming part nerships with HKSAR solicitors.  Healthcare 
services are largely provided through public service funded by the Government.  WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 72 
 
 
(2) AGRICULTURE AND FISHERIES  
6. The contribution of agriculture and fisheries to  GDP is relatively insignificant, at only 0.1% 
(Table I.2).  Production remains largely geared to leafy vegetables, high-value cut flowers, poultry, 
and pigs;  it consists of 2,260 fa rms employing about 5,010 persons.  Local farms produce 5% of the 
vegetables consumed in the HKSAR, together with 31% of the live poultry, and 23% of the live pigs.1  
Local production complements rather than competes  with other major market suppliers.  Production 
efforts are aimed mainly at high-value fresh foods. 
7. Government intervention in agricultural markets is  minimal.  In its notifications to the WTO 
Committee on Agriculture, Hong Kong, China indicated  that it did not provide any domestic support 
or export subsidies during 2001-032;  in 2006, it notified that "Green Box" support (not subject to 
reduction commitments) for 20 03/04 and 2004/05 was HK$86.67 million and HK$87.52 million, 
respectively.3  While the Government is responsible fo r 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 promoti ng the adoption of new production 
methods and helping producers to take advantage of new market opportunities.
4  The Government 
does not provide material or financial incentiv es to encourage switching production methods.  
However, interested farmers may seek advice from th e Department and visit the experimental station 
to obtain the relevant technical information and assi stance.  The Department also operates three loan 
funds to meet farmers' credit requirements;  some HK$21.9 million was lent to farmers during 
2005-06 (Table AIV.1).5  Emergency relief grants totalling HK$1.9 million were distributed to 
687 farmers during 2003-05.6  The authorities maintain that these loan funds are main ly financed from 
"non-governmental" sources.  Loans issued to farmers under the Kadoorie Agricultural Aid Loan 
Fund, the J.E. Joseph Trust Fund, and the Vegetabl e Marketing Organization Loan Fund bear interest 
rates in line with market rates except for small lo ans (up to HK$100,000) to farmers for development 
purposes, and loans to cooperative societies. 
8. Imports of plants and animals are subject to strict inspection at the border to prevent the 
introduction and dissemination of animal diseases and plan t pests, and to regulate the use of pesticides 
and chemicals in agricultural production.  The P esticides Ordinance (Chapt er 133 as amended in 2000 
and 2002) regulates the import, manufacture, packaging, labelling, and sale of pesticides in the HKSAR.
7  Regulations to tighten controls over chemi cal residues in animals for human consumption 
                                                      
1 Government of the HKSAR (2005e). 
2 WTO document series G/AG/N/HKG/12-17, 8 February 2002 to 12 February 2004. 
3 More than 62% of these amounts was for pest and disease control programmes (WTO document 
G/AG/N/HKG/18, 6 April 2006).  According to the authorities, the HKSAR has never provided any export 
subsidies.  However, it provided "Green Box" support to farmers also during the period 2001-03.  Data for this 
period were omitted from the notifications to the WT O Committee on Agriculture due to lack of clear 
understanding on certain definitions of domestic support and the nature of measures applied.  The situation was 
rectified in the HKSAR's notification in 2006 after cl arifications.  As the accoun ting system in 2001/02 and 
2002/03 could not provide a breakdown of various types of expenditure in sufficient detail, no precise figures 
could be provided.  The "Green Box" support for thos e years would be about the same as for 2003/04 and 
2004/05. 
4 The new methods include:  intensive production of vegetables in controlled-environment greenhouse;  
organic farming;  and production of specialty crops (fruit, vegetables).  AFCD online information.  Viewed at:  
http://www.afcd.gov.hk/english/agriculture/agr_hk/agr_hk_new/agr_hk_new.html [28 April 2006]. 
5 Government of the HKSAR (2005e). 
6 AFCD (2005). 
7 Chapter 133, Laws of Hong Kong, Pesticides Or dinance.  Viewed at:  http://www.justice.gov.hk/ 
home.htm [24 April 2006].  Companies handling pesticides imports into Hong Kong, China, whether for local Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 73 
 
 
were last enacted on 31 December 2001.8  Farming is regulated by a series of AFCD licences and 
permits, which are required to, inter alia,  trade animals, keep livestock and maintain a dairy.9  I n  
March 2003, bio-security requirements were enhanced to reduce the risk of a highly pathogenic avian 
influenza outbreak on local farms.10  
9. After 48 years of implementation11, on 1 January 2003 Hong Kong, China significantly 
liberalized the rice trade with the elimination of the import quota system for rice and the relaxation of 
registration criteria for rice stockholders;  in 2005, 91% of the imported rice originated in Thailand.  
The progressive removal of restrictions has reduced  operating costs in several ways and enhanced 
competition among operators in the local rice trade.12  A minimum reserve stock (some 
13,500 tonnes)13 covering consumption for 15 days is kept to meet any contingency.  Importers have 
to be registered as stockholders to import rice for lo cal consumption;  all registered stockholders keep 
an amount of reserve stock proportional to their share of total imports or sales.14  Anyone who intends 
to import rice may apply to be registered as a stockholder and sell directly to consumers15;  reportedly, 
an importer who also takes the role of a wholesaler  may save 20% to 30% of the cost.  The number of 
registered stockholders increased from 52 in January  2003 to 95 in June 2006.   From December 2002 
to April 2006, retail prices for Thai fragrant rice dro pped by around 5%;  in ad dition,  the gap between 
the c.i.f. import price and the retail price has narrowed significantly since 2003 (Chart IV.1). 
10. Fisheries still make an important contribu tion to HKSAR's economy through the steady 
supply of fish to the local market.  In 2003 and 2004,  the "capture" fisheries (i.e. catch of fish from 
sea with the use of fishing vessels) and mariculture  sectors supplied about 31% and 28%, respectively, 
of seafood consumed in Hong Kong, China;  pond fish farms met about 6% and 5% of freshwater fish 
consumption.16  About 90% of the catch is harvested from waters outside the HKSAR. 
11. A series of measures were proposed at the time of the previous Review to control fishing 
activities effectively and bring fisheries back to su stainability.  They included the introduction of a 
fishing licence system, designation of fisheries protection areas, and implementation of a 
territory-wide closed season for fishing.  Foll owing the completion of public consultation in 
mid 2005, a working group has been set up to furt her discuss the details of the proposed measures.17  
                                                                                                                                                                     
use or subsequent re-export, must possess a pesticides licence for pesticides registered in Hong Kong, China or a 
permit issued by the AFCD (Customs and Excise Department (undated)). 
8 Chapter 139N, Laws of Hong Kong, Public Health (Animals and Birds) (Chemical Residues) 
Regulation.  Viewed at:  http://hklaw.ccgo.hksarg/Home.htm [24 April 2006]. 
9 AFCD (undated d);  AFCD (und ated b);  and AFCD (undated a). 
10 Additional measures for poultry farms include:  inst allation of bird-proof facilities, requiring all new 
poultry farms to be at least 500 metres away from exis ting poultry farms, prohibiti ng the presence of transport 
cages from the wholesale/retail market on a farm, and, requiring local day-old chicks to be introduced from 
recognised hatcheries (AFCD, 2005). 
11 The Rice Control Scheme was introduced in 1955 when rice supply was a major concern. 
12 Trade and Industry Department (undated);  and Oryza online information,  "Oryza Market Report- 
Hong Kong's Rice Trade Undergoes Full Liberalization", 16 January 2003.  Viewed at:  http://oryza.com/asia/ 
hongkong/index.shtml [28 April 2006]. 
13 Between 2002 and 2005, the average annual reserve stock of rice ranged from 12,700 tonnes to 
14,200 tonnes. 
14 The TID collates statistics on rice import and reserve stock levels.  These statistics are regularly 
disseminated to rice importers to facilitate their underst anding of the market situation.  As a transparency 
measure, the statistics are uploaded to the TID online info rmation.  Viewed at:  http://www.tid.gov.hk/english/ 
import_export/nontextiles/nt_rice/nt_rice.html. 
15 In the past, a certain profit margin could be secured when the number of importers was limited to 
about 40 and strict entry barriers prohibited newcomers. 
16 AFCD (2005). 
17 AFCD (2005). WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 74 
 
 
Financial assistance and technical  support is provided to fisherme n and fish farmers.  As from 
June 2005, a voluntary "Accredited Fish Farm Scheme" has assisted local fish farmers to increase the 
competitiveness of their aquaculture products and to provide quality and safe aquaculture products to 
the public through development of br and names and a marketing network.18  In addition, the AFCD 
provides low-interest loans through five funds (Table  AIV.1), three of which were first notified to the 
WTO Committee on Subsidies and Countervailing Measu res in 2006 (Chapter III);  relief is also 
available through the Emergency Relief Fund.  The authorities note that these funds are financed from governmental and non-governmental sources.  As of  2004/05, most interest rates (depending on the 
status of the beneficiary) under the Fish Ma rketing Organization Loan Fund and the Kadoorie 
Agricultural Aid Loan Fund, which are mainly financed from non-governmental sources, were well 
below the "average best lending rates ranging gene rally between 5% and 5.25% per annum";  the 
interest rate for loans under the Fisheries Develo pment Loan Fund financed by governmental funding 
was 6%, which is comparable to the average best lending rate.
19   
0.00.51.01.52.02.53.03.54.04.55.05.56.06.57.07.58.0
Jan-02
Mar-02
May-02
Jul-02
Sep-02
Nov-02
Jan-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Jan-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05406080100120140160180200Chart IV.1
Mark-up on Thai fragrant rice, 2002-05
Source :   Information provided by the authorities of Hong Kong, China.Supermarket selling price
(left-hand scale)
C.i.f. import price
(left-hand scale) Mark-up
(right-hand scale)HK$/kg.Per cent
 
12. The marketing of fresh marine fish remains strictly regulated.  Under the Marine Fish 
(Marketing) Ordinance (Chapter 291), all fresh marine  fish (except live fish) must be landed and sold 
at the seven wholesale fish markets operated by th e Fish Marketing Organization (a statutory body), 
for sanitary and environmental reasons.20  In addition, a permit is required from the Director of 
Marketing to transport any quantity of fresh marine fish in excess of 60 kg. by land or water.  The 
Ordinance was amended by means of the Impor t and Export (Facilitation) Bill 2003 to relax the 
                                                      
18 Online information on this scheme viewed at:  http://www.hkaffs.org/en/background.html 
[15 May 2006]. 
19 WTO document G/SCM/N/123/HKG, 9 February 2006. 
20 AFCD (undated c). Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 75 
 
 
transportation control (transhipment) on marine fish.21  Contraventions of these regulations may lead 
to a maximum fine of HK$10,000 and imprisonment for up to six months.  
(3) ELECTRICITY  
13. The contribution of the electricity, gas a nd water sector to GDP and employment has 
remained stable since 2002 at 3.2% (2004) and 0. 4%, respectively (Table I.2).  The HKSAR's energy 
policy aims to ensure that the public can enjoy reliable, safe, and efficient energy supplies at 
reasonable prices, and to minimize the environmental impact of the production and use of energy.22  
Electricity is crucial to the HKSAR's economic and social development;  55% of electricity supply is 
generated by burning coal, which is a major source of regional and local air pollution.23  T h e  
HKSAR's supply reliability exceeds 99.99%, amongst the highest in the world.24 
14. The safety aspects of the electricity sector are regulated under the Electricity Ordinance 
(Chapter 406) last amended in December 2000;   the Government's Electrical and Mechanical Services 
Department is the enforcement agency.  The regulation covers, inter alia , registration of generating 
facilities, transmission, distribution, and use of electricity. 
15. HKSAR's electricity market is open to investors who meet the reliability, safety, and 
environmental requirements.  Nonetheless, the industr y is characterized by what might be viewed as a 
"natural" (i.e. de facto ) duopoly situation, although there are two monopolies, each supplying a 
segmented market.  Electricity is supplied by two private companies, both wholly owned by a listed 
company:  CLP Power Hong Kong Limited (CLP Power)25 and The Hongkong Electric Company 
Limited (HEC).26  CLP Power and HEC have operated under scheme of control agreements (SCAs) 
signed with the Government since 1964 and 1979, respectively;  the SCAs do not grant any exclusive franchise.  Each company owns its exclusive tran smission grid and allows no regular access by the 
other.  Under the SCAs, the electricity supply indus try's fuel costs are borne by consumers, and the 
basic tariff rates include a standard fuel cost;  di fferences between the standard fuel cost and actual 
                                                     
 
21 Details of the amendments viewed at:  http ://www.legco.gov.hk/yr02-0 3/english/bills/brief/ 
b60_brf.pdf. 
22 Government of the HKSAR (2005c). 
23 Chan (2003). 
24 Government of the HKSAR (2005c). 
25 Formerly known as China Light & Power Company,  Limited, CLP Power is the largest electricity 
firm in the HKSAR;  it supplies electricity to more  than 2 million customers in Kowloon and the New 
Territories, including Lantau, Cheung Chau and most of the outlying islands.  Its electricity is generated by three power stations (total installed capacity 6,596 MW as at the end of 2005), which are owned by Castle Peak 
Power Company Ltd. (CAPCO), 60% of which is owned by Exxon Energy Limited and 40% by CLP Power.  
Furthermore, since 1994, CLP Power has contracted to purchase about 70% of the power generated at the two 984 MW pressurised water reactors at the Gu angdong Daya Bay Nuclear  Power Station, some 
50 kilometres from Hong Kong, China, to help meet  the long-term demand in its supply area.  CLP Power 
wholly owns its entire transmission system;  by the end of 2005, it had 210 primary and 12,434 secondary 
substations in its transmission and distribution network.  Since 1979, the company's power system has been 
interconnected with that of the Guangdong Power Holding Company of China (now known as Guangdong Power Grid Corporation), and electricity is exported to Gu angdong Province:  80% of the profit is given back to 
CLP Power's local customers. 
26 The HEC generates and supplies electricity to Ho ng Kong Island, Ap Lei Chau, and Lamma Island.  
At the end of 2005, total installed capacity was 3,421 MW;  the first gas-fired combined-cycle generation unit, 
with installed capacity of 335 MW, came into operation in October 2006.   The transmission and distribution 
system is mostly underground (there are a few overhead lin es).  By the end of 2005 , HEC had 49 switching/zone 
substations and 3,597 consumer substations. WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 76 
 
 
fuel prices are captured in a Fuel Clause Account, through which the difference is returned to, or 
recovered from, consumers by means of a rebate or a surcharge each year.27  
16. The SCAs expire in 2008.  The Government launched a two-stage consultation exercise in 
January and December 2005:  SCAs appear to ha ve been effective in ensuring reliable and safe 
electricity supply, while providing flexibility for both the Government and the business operators to 
respond to market demands.  Criticisms include:  pe rmitted rates of return (13.5% on fixed assets, and 
additional 1.5% on assets financed by shareholders' funds) are high28;  returns based on fixed assets 
encourage over-investment;  fixing the permitted rate of  return over a 15-year period is inflexible;  
and annual tariff and auditing reviews lack transparency.29   
17. During the consultations, public views were divided30 on the post-2008 arrangements about 
introducing competition into the electricity market.  Although the majority considered it critical to 
maintain reliability of electricity supply, there we re concerns over tariff levels and environmental 
issues.  There have been suggestions on considerin g supply of electricity from the Mainland, to take 
advantage of the apparently lower tariffs across the border, and introducing more new supply sources 
into the market.  China Power International Hold ing Ltd. announced a new joint-venture company, 
China Hong Kong Power Development Company Li mited (CHKP), which c ould enter Hong Kong's 
electricity market as early as 2007, when, according to the company, there is expected to be a surplus 
power supply in Southern China.31  While the Government does not believe it prudent to predicate the 
future development of the electricity market in HKSAR on supply from Mainland China at this stage, 
the authorities suggest preparing the ground for pos sible new supply sources from the Mainland in the 
long term.32   
18. To address public expectation and concern over the future electricity market, the HKSAR 
Government proposed a series of measures in the Stage II Consultation Document, including: 
continued economic regulation of the power co mpanies by means of a bilateral agreement 
arrangement with more flexibility, such as a shorte ned ten-year agreement term with an option to 
extend for five years;  reduction of the permitted rate of return from 13.5%-15% to an average of 
9%-10% (a simulated calculation shows that this c ould lower the tariff level by about 10-20% if the 
tariff for 2006 were to be determined by this ne w approach);  new environment-related measures to 
further improve air quality and introduction of rene wable energy, etc.;  and making preparations for 
future market development in anticipation of furt her opening up and introducing more competition to 
the electricity market.  The Government will consid er the views received during the Consultation and 
hold discussions with the power companies before  finalizing the regulatory arrangements for the 
electricity market after 2008. 
                                                      
 27 The Fuel Clause Account mechanism has helped to stabilize tariffs, e.g.  by deferring the recovery of 
fuel cost deficits.  
28 Reportedly, between 1993 and 2003, CLP Power and HEC earned an average real  return on equity of 
19.4% and 21.8%, respectively.  Among  private-sector power firms operati ng in regulated markets, CLP Power 
and HEC top the profitability league, as the world averag e profitability is closer to  10%, according to Lehman 
Brothers investment bank.  South China Morning Post,  "Why Hong Kong's power bills demand scrutiny", by 
Denis Tsang and Simon Pritchard.  Viewed at:  http://cd1.emb.hkedcity.net/cd/scolar/html/newsaward03/ 
eb2rup_03.pdf [13 June 2006];  and Chan (2003). 
29 Government of the HKSAR (2005c).  Further information was viewed in Legislative Council Panel 
on Economic Services (2006). 
30 It appears that both electricity firms have indicated that any effort to reduce their permitted rate of 
return will be opposed. 
31 Asian Economic News,  9 January 2006, "China power companies plan to break H.K. electricity 
monopolies".  Viewed at:  http://w ww.findarticles.com/p/articles/mi _m0WDP/ is_2006_ Jan_9/ai_n15991171 
[13 June 2006]. 
32 Government of the HKSAR (2005c). Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 77 
 
 
19. To better protect the environment, in the Fi rst Sustainable Development Strategy for Hong 
Kong promulgated by the Governme nt in May 2005, a target was set of meeting 1%-2% of local 
power needs by renewable energy (RE) by 2012.  The 2005 Policy Address announced the intention 
to ask the power companies to u se RE in electricity generation in the future regulatory regime.  
Higher costs of RE might lead to higher electricity tariffs. 
20. Reportedly, in absolute terms, the HKSAR's el ectricity tariffs rank behind only Japan's and 
Italy's33;  although the authorities consider that the tariffs are comparable to those of major 
metropolitan cities.  At present, tariffs include th e costs of making available the supply (operating 
costs and fuel charges), plus the agreed return  to the companies for providing the service.  The 
two power companies have different tariff structures for different categories of customers.  The HEC 
has a domestic tariff, a commercial, industrial a nd miscellaneous tariff, a nd maximum-demand tariff, 
etc.34  CLP Power has various tariffs for residentia l and commercial customers, such as a domestic 
tariff, general service tariff, bulk tariff, large power tariff.35  Under the existing SCAs, government 
approval is not required for tariff increases where the projected basic tariff rate is no more than 7% 
higher than the agreed basic tariff rate for that  year as included in the most recently approved 
Financial Plan.  Under the SCAs, a Development Fund (DF) assists in financing the acquisition of 
new fixed assets and, where necessary, in mitigatin g any tariff increase;  the role of the DF in 
financing asset acquisition has diminished in rece nt years, though the role as a tariff stabiliser 
remains.  According to the authorities, the annual ta riff reviews ensure that, while relevant costs are 
taken into account, the tariffs remain reasonable and affordable to the consumers, and reflect 
prevailing economic conditions. 
(4) MANUFACTURING  
21. Hong Kong, China maintains a large trans- boundary manufacturing base, which combines 
high-value-added and technology-in tensive manufacturing processes in the territory with land- and 
labour-intensive processes in the southern pa rt of Mainland China and other countries.36  Through 
increasing relocation to the Chinese mainland, the contribution of the HKSAR's manufacturing sector 
to GDP decreased steadily from 4.2% in 2002 to 3. 5% in 2004 (Table I.2);  the sector accounted for 
5.3% of employment in 2005.  Thus, labour produc tivity in manufacturing is less than two-thirds of 
the rest of the economy.  In terms of employme nt and gross output value, textiles and clothing 
remains the largest manufacturing industry37, followed by printing, publishing and allied industries, 
and food-processing.  Although manuf acturing remains export-oriented38, the share of (domestic) 
                                                      
33 Spending on electricity  accounts for only 1.7% of average di sposable household income, making it 
good value, according to a recent report.  South China Morning Post,  "Why Hong Kong's power bills demand 
scrutiny". 
34 HEC online tariff tables.  Viewed at:  http://www.heh.com/hehWeb/DomesticServices/ 
BillingPaymentAndElectricityTariff/ TariffTable/Index_en.htm;  http ://www.heh.com/hehWeb/CommercialAnd 
IndustrialServices/BillingPaymentAndElectricityTari ff/TariffTable/Index_en.htm;  http://www.heh.com/ 
hehWeb/CommercialAndIndustrialServices/BillingPayme ntAndElectricityTariff/TariffTable/MaximumTable_e
n.htm;  and http://www.heh.com/hehWeb/DomesticServices/ConcessionaryTariffAndOtherSpecialServices/ 
ConcessionaryTariffSch emes/Index_en.htm. 
35 CLP Power tariff tables.  Viewed at:  http://www.clpgroup.com.hk/NR/exeres/D8FEECDC-7196-
42A3-BC59-577D2136026C%2C41BE6DB9-FEBB-431E-ADA4-C1B9F7391531%2Cframeless.htm?ch=%5F 
HK%5FCLPP%5FResCust%5FBill%5FTarf%5F&lang=en;  and http://www.clpgroup .com.hk/NR/exeres/ 
8DF2EE53-61F9-4B49-86CC-255C87786DB0%2C730FFE29-820C-4529-ACC7-FF60B441B67C%2Cframe 
less.htm?ch=%5FHK%5FCLPP%5FBusC ust%5FBill%5FTarf%5F&lang=en. 
36 Government of the HKSAR (2005e). 
37 Hong Kong, China is not only a leading production centre but also a hub for clothing sourcing 
globally (Hong Kong Trade Development Council (undated)). 
38 About 80% of Hong Kong, China's manufactured products are for export (Government of the 
HKSAR, 2005e). WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 78 
 
 
exports of manufactured goods dropped from 92.7% of total merchandise (domestic) exports in 2001 
to 74.8% in 200439;  textiles and clothing, and machinery and power equipment (including 
telecommunications equipment and electronics) re mained the major export items, accounting for 
54.3% and 16.7%, respectively, of tota l domestic exports in 2004 (Chapter I).40   
22. The manufacturing sector comprises mainly small and medium-sized enterprises (SMEs).41  
As of March 2006, 98.6% of all business units ope rating in the manufacturing sector were SMEs, 
which accounted for 59.5% of HKSAR's total manufacturing employment.42  In 2004, value added  
from SMEs of the manufacturing sector was HK$21.0 billion, or 1.7% of Hong Kong's GDP at factor cost.  Large factories and SMEs are linked through an e fficient and flexible subcontracting network so 
that they can respond swiftly to changes in external demand.
43 
23. The HKSAR's industrial policy objective is to help ensure that its industries remain 
competitive by providing them with necessary s upport and a business-friendly environment.  As 
Hong Kong, China's comparative advantages have  shifted from low-wage and labour-intensive 
production to high-value-a dded activities, the Government is co mmitted to promoting innovation and 
technology.  A number of schemes are in place to f acilitate structural adjustment, enhance industrial 
competitiveness and/or encourage the growth of sunrise activities (Chapter III). 
24. Views diverge on the outlook for the manufacturing sector.  With the textiles and garment 
industries relocating to the Mainland at a fast pace, following the expiry of the WTO ATC quota 
system at end 200444, the manufacturing sector is forecast to diminish further;  moreover, according to 
observers, despite zero-tariff access to the Mainland market for HKSAR manufactures under the CEPA, the large labour-cost difference between Hong  Kong, China and the Mainland suggests that a 
revival of the manufacturing sector in the former is unlikely.
45  According to the HKSAR authorities, 
CEPA arrangements could have given a boost to Hong  Kong, China's manufacturing sector in light of 
its value-added increase, by 1.7% in real terms in 2004 and 2.1% in 2005;  and a slight increase in 
employment in mid-2005.  Regarding the prospects of the textiles and clothing manufacturing in the 
HKSAR, in the light of its comparative advantages and CEPA arrangements, the authorities consider, 
inter alia,  that:  in the long run, the industry w ill focus on high-value-added brand name production 
and tap into the huge and fast-e xpanding Mainland market;  the quan titative restrictions re-imposed 
by the United States and the EC on Mainland textiles and clothing products may lead to a diversification of orders and pr oduction to other quota-free economies in the region, including the 
HKSAR. 
                                                     
 
39 Domestic exports refers to products produced in Hong Kong, China as opposed to products that are 
re-exported. 
40 UNSD, Comtrade database (SITC Rev.3). 
41 An SME in the manufacturing sector is a business unit employing less than 100 persons.  Reportedly, 
owing to the high cost of property in Hong Kong, China, the average manufacturing establishment tends to be 
small, typically housed on one or two floors of a high-rise building (such establishments are known as flatted 
factories).  The small average size of  manufacturing enterprises, couple d with the absence of legislation 
protecting jobs or wages, enhances the ability of local exporters to respond flexibly to fluctuations in the 
business cycle and changes in taste (EIU, 2005). 
42 EIU (2005). 
43 Government of the HKSAR (2005e). 
44 Between 2002 and 2003, textiles and clothing quota utilization rates for domestic exports to the U.S. 
and Canadian markets dropped to 66.9% and 28.6%, respectively;  the quota utilization for exports to the EC rose to 61.6% (Hong Kong Trade Development Council (undated)).  
45 The mid-2005 increase in textile production in the territory, following international restrictions on 
Mainland China's textile exports, is to prove only a temporary exception  (Bank of China, Hong Kong, 2005;  
and EIU, 2005). Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 79 
 
 
(5) SERVICES  
(i) Features 
25. Since the last Review, the HKSAR, a net exporter of services, has become increasingly a 
services-oriented economy;  the contribution of services to GDP rose from 88.4% in 2002 to 90.0% in 
2004 (Table I.2).46  Key services sub-sectors include the import and export trade, financing and 
insurance, and transport, storage and communicati ons.  Between 2002 and 2005 , exports (receipts) of 
non-factor services rose by 39.0% to HK$483 billion, 2.6 times greater than (domestic) merchandise 
exports (Chapter I).  This was underpinned by th e continued surge in exports of transportation 
services, trade-related services and travel services, due mainly to robust external trade and vibrant 
inbound tourism.47  In 2005, imports (payments) of non-fact or services were equivalent to 52.1% of 
exports of services.  The services sector absorbed 86% of total employment in 2005 and 86.1% in 
March 2006.  Like manufacturing, the sector is dominated by SMEs, which represent around 98% of 
the 260,233 service business units.48  
(ii) Overall commitments under the GATS 
26. The HKSAR schedule of specific commitments  under the GATS contains no horizontal 
limitations.49  Its specific commitments cover:  financial services;  business services;  communication 
services (including telecommunications);  constructi on and related engineering services;  distribution 
services;  tourism and travel-related services;  recreational, cultural and sporting services;  and maritime transport services.
50  Hong Kong, China h as accepted the Fourth and Fifth Protocols to the 
GATS, which entered into force on 5 Februa ry 1998 and 1 March 1999, respectively.  
27. The HKSAR, an active participant in the ongoing  round of negotiations , submitted its initial 
offer and revised offer on services in April 2003 and June 2005, respectively.51  Its initial offer 
included new commitments on a number of business services, environmental services, and health-related and social services;  widened scope for distribution services;  and improved 
commitments for telecommunication services, audiovisual services, construction and related engineering services, financial services, tourism and travel-related services, recreational, cultural and 
sporting services, and maritime transport services.  Fu rther improvements, as contained in its revised 
offer, covered the areas of movement of natura l persons (mode 4), urba n planning and landscape 
architectural services, maritime transport services, a nd freight transportation services.  In the areas of 
computer and related services, maritime transport services, and logistics-related services, the offer took account of the relevant sectoral initiatives a nd/or proposals submitted by other WTO Members.  
Other changes, predominantly technical in nature , were aimed at further enhancing the clarity, 
certainty, and comparability of Ho ng Kong, China's commitments.  
                                                     
 
46 Bank of China, Hong Kong (2005). 
47 Transport (31.5% of total services exports, 29% of total services imports in 2005), trade-related 
services (33.8% of total services exports, 7.2% of tota l services imports in 2005) and travel (16.5% of total 
services exports, 41.1% of total services imports in 20 05) constitute the main traded services in Hong Kong, 
China (Table I.4);  financial services accounted for 9.1% of  total services exports and 3.4% of services imports.   
48 An SME in non-manufacturing activities is a business unit employing less than 50 persons (Support 
and Consultation Centre for SMEs online information,  viewed at:  http://www.success.tid.gov.hk/english/ 
lin_sup_org/gov_dep/service_detail_6824.html [30 June 2006]);  and Government of the HKSAR (2005e),  
Trade and Industry . 
49 WTO document GATS/SC/39, 15 April 1994. 
50 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.  
51 WTO documents TN/S/O/HKG, 23 April 2003 , and TN/S/O/HKG/Rev.1, 16 June 2005. WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 80 
 
 
28. The HKSAR grants MFN treatment to all WTO Members.  It had originally made an 
exemption to the principle of MFN treatment rela ted to reciprocity on the granting of full banking 
licences to banks incorporated outside the HKSAR in 1994, but withdrew this in 1995.52   
(iii) Closer Economic Partnership Arrangement  
29. Since 2003, the HKSAR and Mainland China ha ve proceeded with continuous market 
opening under the Closer Economic Partnership Arra ngement (CEPA) (Chapter II).  CEPAs I, II, 
and III contain liberalization measures in 27 service areas for HKSAR's firms.53  In general, the 
liberalization measures will provide wider and earlier access for HKSAR service suppliers to the Mainland, ahead of China's WTO timetable of GATS commitments.  In sectors like audiovisual, 
transport and distribution, China's concessions go beyond its WTO commitments.  Reciprocally, the 
HKSAR undertook to not impose any new discriminat ory measures on Mainland China's services and 
services suppliers in the areas for which Mainland Ch ina has offered liberalization measures to the 
HKSAR.  Such commitments go beyond HKSAR's services commitments under the GATS, both in terms of sectoral coverage and the extent of liber alization.  Separately, the CEPA also strengthens 
cooperation and information sharing in the area of  finance (banking, insurance, securities, and 
futures), and enhances cooperation in tourism promotion, mutual recognition of professional 
qualifications, and exchange  of professional talents.   The "WTO-plus" liberalization measures for 
services trade give HKSAR companies a head star t over their competitors in the market of the 
Mainland of China.  At the time of its last Review, the HKSAR was negotiating an FTA initiative 
with New Zealand that was to include trade in se rvices;  these negotiations have yet to conclude 
(Chapter II). 
(iv) Financial services 
(a) Banking and finance 
30. The presence of international banks in Hong K ong, China's highly external-oriented banking 
sector is among the largest in the world (69 of th e world's 100 largest banks are established in the 
territory)
54;  it is Asia's third largest international banki ng centre in terms of external transactions, and 
its second largest loan syndication centre.  Banking continues to play an important role in HKSAR's 
economy, accounting for 8% of GDP at factor cost and 2.2% of total employment in 2004 (indicating 
that the sector's labour productivity is nearly four  times the level in the rest of the economy).   
31. As Mainland China is the major export market  for the HKSAR's banking services, the CEPA 
is expected to be of significant benefit to the sector.55  Since 2004, the CEPA has opened the door to 
the Mainland wider for smaller HK SAR banks, reduced the requireme nts for those banks to conduct 
business on the Mainland,  thus enhancing Hong Kong, China's st atus as an international financial 
centre.56  The HKSAR's capital markets  have become an important fundraising center for Mainland 
                                                      
52 WTO documents GATS/EL39, 15 April 1994, and GATS/EL/39/Suppl.1/Rev.1, 28 July 1995. 
53 Under the CEPA, the Mainland agreed to prov ide preferential treatment  to Hong Kong, China 
service suppliers in:  accoun ting, advertising, air transport, audiovi sual, banking, cultural, convention and 
exhibition, distribution, freight forwarding agency, individually owned stores, information technology, 
insurance, job referral agency, job intermediary, legal, logistics, management consulting, medical and dental, 
patent agency, professional qualification examinations, re al estate and construction, storage and warehousing, 
securities and futures, telecommunications, tourism, trade-mark agency, and transport (including road 
freight/passenger transportation and ma ritime transport).  Hong Kong Trade Development Council (2006);  and 
Trade and Industry Department (2005). 
54 Hong Kong Trade Development Council (2005b). 
55 Hong Kong Trade Development Council (2005b). 
56 Hong Kong Trade Development Council (2005b). Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 81 
 
 
companies as the latter's capital markets remain underdeveloped.57  By 2005, eight HKSAR 
incorporated banks had benefited from the loweri ng of the asset level requirement from US$20 billion 
to US$6 billion and become eligible to establish branch operations on the Mainland.58 
32. Despite the large number of banks, at the time of the previous Review, it was noted that the 
structure of the sector was quasi-oligopolistic:  in 20 05 (January-June), the three largest retail banks 
held some 55% of all assets and the ten largest  retail banks held about 84% of total assets 
(Table IV.1).  Reportedly, mergers and acquis ition activities were very important in HKSAR's 
banking sector during the period under review.59  The number of locally incorporated banks (see 
below) fell from 31 in 2000 to 24 in May 2006.  Some merger and acquisition activities were 
undertaken with a view to meeting the minimum as set requirement for entering the Mainland market 
under the CEPA, which, according to the HKSAR au thorities, has accelerated the "consolidation 
process" to some extent.    
33. Institutions authorized by the Hong Kong Moneta ry Authority (HKMA) to carry on banking 
or deposit-taking business are called "authorized in stitutions" under the Banking Ordinance.  There 
are three types of authorized institutions in the HKSAR (Table IV.1):  licensed banks, restricted-
licence banks (RLBs)60, and deposit-taking companies (DTCs).61  Only licensed banks are allowed to 
provide retail banking business.62  The main difference between 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 the local repres entative offices of overseas banks (see below), 
insurance companies, mutual funds, securities br okers and finance companies.  Licensed banks, 
RLBs, and DTCs may engage in insurance business if authorized by the Insurance Authority.  At 
end-September 2005, there were 202 authorized in stitutions operating a comprehensive network of 
1,311 local branches;  of these authorized in stitutions, 177 were owned by investors from 
30 countries.63   
34. 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 HK$4 billion for total assets.  There are no government-owned banks and no directed 
lending in the HKSAR. 
35. Subject to fulfiling the authorization criteria of the HKMA, a foreign bank may enter 
HKSAR's market:  by acquiring an existing locally incorporated bank with branching rights;  by 
setting up a branch as a licensed bank or a restricted- licence bank;  or by operating a subsidiary as a 
                                                      
57 IMF (2005c). 
58 HKMA (2005). 
59 Hong Kong Trade Development Council (2005b). 
60 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 fore ign exchange and other securities;  
and provide financial advisory services in issuance of securities, mergers and acquisitions, venture capital 
financing, and private banking. 
61 DTCs are mostly owned by, or otherwise associat ed with, banks.  They 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.  Hong Kong Monetary Authority 
online information.  Viewed at:  http://www.inf o.gov.hk/hkma/eng/bank/index.htm [28 April 2006]. 
62 Under the Banking Ordinance, ba nking business is defined as "receiving from the general public 
money on current, deposit, savings or other simila r account repayable on dema nd, or within less than 
three months;  and/or paying or collecting cheques drawn by or paid in by customers". 
63 Hong Kong Monetary Authority online information.  Viewed at:  http://www.info.gov.hk/hkma/ 
eng/bank/index.htm [28 April 2006]. WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 82 
 
 
licensed bank, a restricted-licence bank or a depos it-taking company.  As indicated above, overseas 
banks incorporated overseas may also set up represent ative offices (non-authorized institution) in the 
HKSAR, but such offices are prohibited from taki ng deposits and undertak ing banking business in 
general64;  they may act only as a liaison office between customers and the bank. 
Table IV.1 
Structure and performance ratios  of the banking sector, 2000-05 
(a) Structure  
  2000 2001 2002 2003 2004 2005 
Number of authorized institutions 263 250 224 215 208 199 
Licensed banks 154 147 133 134 133 133 
Incorporated in HK 31 29 26 23 24 24 
Incorporated outside HK 123 118 107 111 109 109 
Restricted licence banks 48 49 46 42 40 33 
Incorporated in HK 28 29 28 26 25 20 
Incorporated outside HK 20 20 18 16 15 13 
Deposit-taking companies 61 54 45 39 35 33 
Incorporated in HK 61 54 45 39 35 33 
Incorporated outside HK 0 0 0 0 0 0 
Number of local representative offices 118 111 94 87 85 86 
 
Note: As at end of financial year. 
 
(b) Performance ratios 
(Per cent)  
 All authorized institutions  Retail banksa 
  2000 2001 2002 2003 2004 2005  2000 2001 2002 2003 2004 2005 
Asset quality              
Bad debt charge to 
total assets 0.26 0.23 0.24 0.24 0.01 0.01  0.44 0.40 0.34 0.29 -0.02  -0.01  
Non-performing loansb 6.08 5.73 4.53 3.74 2.11 1.35  7.26 6.53 5.04 3.94 2.25 1.38 
Degree of concentration               
Asset share of:              
Three largest banks 30.6 31.6 32.5 32.8 32.3 33.1  56.0 55.2 54.7 55.0 54.6 54.9 
Ten largest banks 51.1 52.2 54.4 55.7 55.6 53.8  83.3 82.8 83.6 85.2 85.6 83.7 
a Retail banks include all locally incorporated banks and a number  of foreign banks whose operations are similar to those of th e 
locally incorporated banks, in that  they operate a branch network and are active in retail banking. 
b Refers to total gross classified:  "substantial", "doubtful" and "loss". 
Source: Hong Kong Monetary Authorities.  Viewed at :  http://www.info.gov.hk/hkma/eng/statistics/ 
msb/attach/T0301.xls [17 May 2006];  HKSAR, Statistical Digest of the Services Sector  (various issues);  and  
IMF (2006), Country Report No. 06/50. 
36. The conditions attached to foreign banks appl ying for a licence to operate a branch in 
HKSAR as a fully licensed bank or as a restricted  licence bank were relaxed in May 2002.  The 
minimum asset requirement of US$16 billion for ov erseas-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 requirement for an overseas bank to maintain a local representative 
office for a minimum of one to two years, in or der to acquire sufficient experience before being 
considered for authorization, was removed.  The "one-building condition", which restricted foreign 
                                                      
64 WTO document GATS/SC/39/Suppl.3, 26 February 1998. Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 83 
 
 
banks (licensed since 1978) and foreign incorporated  restricted-licence banks (licensed since 1990) to 
operate from not more than one buildin g, was removed in November 2001. 
37. Overseas banks may apply for a licence to operat e 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 depos it-taking company or a restricted-licence bank (or 
any combination thereof) for not less than three c ontinuous years.  The HKMA generally requires that 
an institution applying for a licence to operate as  a restricted-licence bank or a deposit-taking 
institution is at least 50% owned by a bank that is adequately supervised (i.e. the supervisor of the 
institution should have complied with the Core Prin ciples for Effective Banking Supervision, issued 
by the Basle Committee on Banking Supervision). 
38. As from February  2004, the People's Bank of China (PBC) provides clearing arrangements 
that permit HKSAR-licensed banks to conduct re nminbi (RMB) business.  The scope of RMB 
business initially covered  deposit-taking, currency exchange, remittances, and credit cards, and was 
expanded in 2005.  The daily limit on renminbi ex changes was raised from Rmb 6,000 to Rmb 20,000 
(US$740-US$2,469), and the limit on daily remittances increased fro m Rmb 50,000 to  Rmb 80,000.  
Designated merchants can now open renminbi de posit accounts in addition to conducting one-way 
exchange of renminbi receipts into Hong Kong doll ars, and the categories of merchants defined as 
designated merchants have been expanded to cove r transport, communications, medical services, 
education, retail sales, and catering and hospitalit y industries.  Furthermore, Hong Kong, China 
residents can issue renminbi cheques of up to Rmb 80,000 a day for consumer spending within 
Guangdong, and HKSAR banks are free to set their own spending limits for holders of renminbi-denominated credit cards, rather than ha ving to observe the previous cap of Rmb 100,000.  
The HKSAR Government is in discussions with th e Mainland China authorities on further expanding 
the scheme;  there are proposals for settlement of  cross-border trade in RMB and issuance of RMB 
bonds in Hong Kong.
65 
39. The Hong Kong Monetary Authority (HKMA) is  the government authority responsible for 
maintaining stability of the monetary and financial systems.  It promotes, inter alia,  the stability of the 
banking system through the regulation of banking bu siness and the business of taking deposits, and 
the supervision of authorized institutions.66  According to the IMF, the continuous strengthening of 
the financial infrastructure as well as of the s upervisory and regulatory systems is essential for 
HKSAR to maintain its position as a leading international financial center.67  Coordination of 
supervisory activities between the HKSAR and the Mainland is becoming increasingly important as 
integration between the two economies intensifies.68  The HKMA mainta ins close working 
relationship with regulators outside the HKS AR;  during the period under review, it, inter alia,  signed 
two bilateral memoranda of un derstanding (in August 2003 with the China Banking Regulatory 
Commission, and in January 2004, with the Bund esanstalt fur Finanzdienstleistungsaufsicht of 
Germany), which established a formal framework  for supervisory cooperation and sharing of 
supervisory information.69  The HKMA contributes extensively to the work of the Bank for 
                                                      
65 See the Chief Executive's speech at the Opening Ceremony of th e Mainland, Hong Kong and Macao 
Trade and Economic Co-operation Forum on 29 June 20 06.  Viewed at: http://www.info.gov.hk/gia/general/ 
200606/ 29/P200606290119.htm 
66 HKMA (undated b). 
67 IMF (2005b). 
68 IMF (2005b).  
69 A similar level of cooperation exists between the Securities and Futures Commission in the HKSAR 
and the China Securities Regulatory Co mmission in the Mainland for supervis ion of the securities industry.  
IMF (2005b);  and HKMA (2005). WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 84 
 
 
International Settlements (BIS), where it has, inter alia,  had a leading role in the drafting process in 
the review of the Basel Core Principles for E ffective Banking Supervision, which began in 2004.70 
40. The 1999 banking sector reform programme entere d its final stages in 2004 with the launch of 
the Commercial Credit Reference Agency in Novemb er and the enactment of the Deposit Protection 
Scheme (DPS) Ordinance in May.  The DPS was exp ected to start providing protection to depositors 
as from 25 September 2006, subject to the legislature's scrutiny of subsidiary legislation related to the 
scheme.71  The amount of protection for each eligible claim by a depositor under the scheme is to be 
capped at HK$100,000 and include a system of diffe rential contributions by banks based on their 
regulatory ratings;  this is to be managed by an independent statutory body – the Hong Kong Deposit 
Protection Board – formed on 1 July 2004.  After industry consultation, the HKMA issued a revised 
version of the Supplement to the Guideline on Prevention of Money Laundering in June 2004 and a set of Interpretative Notes;  authorized instituti ons were expected to review their policies and 
procedures on the prevention of money laundering and terrorist financing and take necessary actions 
to comply with the revised requirements before the end of 2004.
72  
41. A Banking (Amendment) Bill 2005 was enacted on 6 July 2005 to empower the HKMA to 
make Capital Rules and Disclosure Rules for a re vised capital framework based on the requirements 
of Basel II.  The Capital Rules were  expected to be published in the Gazette  in late September 2006 
and tabled in the Legislative Council in October 2006,  and the Disclosure Rules a month or so later.  
The HKSAR authorities aim to switch over to Basel II at  the start of 2007, in line with the timetable 
being adopted in other major inte rnational financial centres, and of the Basel Committee members. 
42. As of 2001, interest rates have been libe ralized and banks compete freely for deposits.73  
According to the authorities, this deregulation has helped to encourage more innovation in the 
banking sector.  After the full liberalization of interest rates74, the spread between the savings deposit 
rate and the "best" lending rate has remained in  a stable and narrow range between 4.75%-5.43% 
since 2000 (Chart IV.2).75  In addition, the mortgage rate has dropped from best lending rate minus 
1.5% in 2001 to best lending rate minus 2.8% in  2006.  Moreover the net interest margin (NIM)76 of 
retail banks contracted from 2.03% in 2001 to 1.68% in 2005 as a result of intensifying competition in 
the banking sector. 
                                                      
70 HKMA (2005). 
71 IMF (2005b);  and ADB (2005). 
72 HKMA (2005). 
73 Interest rates on savings deposits and current accoun ts were liberalized in two phases, in 2000 and 
2001.  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).  In 
1994-95, the HKMA started to libera lize the system, beginning with interest rates on time deposits of less than 
seven days.  
74 Under the linked exchange rate arrangement (Chapter I), interest rates should move in tandem with 
United States rates.  However, in 2004-05 as a result of strong capital inflows Hong Kong, China's interest rates remained below U.S. rates, giving impetus to the pr operty market and domestic credit expansion (ADB, 2005). 
75 The rate on savings deposits is based on the maximum rates under the Hong Kong Association of 
Banks' interest rate rules before the deregulation, and takes as reference the average rate quoted by the leading 
licensed banks after the deregulation.  According to the au thorities, since the interest rate liberalization, each 
bank can set its own best lending rate (BLR), so theoretically, there may be many BLRs in the market at the same time.  It so happens that many banks in the HKSA R are quoting the same level of BLR, so at the time of 
preparing this report, there are only two BLRs in the market. 
76 The NIM covers:  the interest expenses relating to all interest bearing liabilities, including, for 
example, time deposits, interbank borrowing, etc;  interest income on non-prime-based loans, such as lending to 
large corporations, which are usually priced against interb ank rates (i.e. HIBOR);  interest income or expenses 
on foreign currency assets and liabilities.  It also takes into account the impact of co mpetition on the margins of 
prime-based lending. Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 85 
 
 
1.61.71.81.92.02.12.2
2000 2001 2002 2003 2004 2005Chart IV.2
Hong Kong dollar interest rates and interest margins
012345678910
January 2000
July 2000
January 2001
July 2001
January 2002
July 2002
January 2003
July 2003
January 2004
July 2004
January 2005
July 2005
January 2006Best lending rate
Savings deposit rateInterest spread
Net interest margins (NIMs) of retail banks.  The calculation of NIMs is:  (interests income - interest expenses) / 
interest bearing assets.
HKSAR Census and Statistics Department;  and data provided by the authorities.a
Source :Per cent
Per cent(a)  Hong Kong dollar interest rates
(b)  Hong Kong dollar net interest marginsa
 WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 86 
 
 
(b) Insurance 
43. In addition to the benefits from the Chinese Ma inland's WTO accession-related liberalization, 
the HKSAR's insurance sector sees opportunities arising from the CEPA (section (5)(iii) and 
Chapter II).  Under CEPA II, the Mainland branches  of Hong Kong, China-incorporated banks have 
been allowed to conduct insurance agent business si nce November 2004, with the approval of the 
relevant Mainland authorities.77  CEPA provisions allow, inter alia,  the equity ratio of HKSAR 
insurance companies in a Mainland insurance firm to  be up to 24.9% of the shares (10% under China's 
GATS Schedule of commitments).78  It is expected that this arra ngement will help improve business 
and fee-income opportunities of the Mainland bran ches of Hong Kong-incorporated banks as well as 
HKSAR insurers.   
44. While insurance products are primarily distri buted by insurance ag ents, "bancassurance" 
penetration (i.e. the distribution of insurance produc ts by banks) has been growing;  in mid 2006, 
there were 41 banks registered as insurers.   There were 174 authorized insurers in the HKSAR:  
46 long-term insurers, 109 general insurers, and 19 composite insurers.  Half of the authorized 
insurers are incorporated outside the Territory, w ith the United States and Bermuda taking the lead.  
Gross premium income in 2004 reached US$15.6 billi on, equivalent to about  9.6% of the HKSAR's 
GDP.79   
45. The Insurance Companies Ordinance provides a comprehensive regulatory regime for the 
prudential supervision of insurers and insurance in termediaries in Hong Kong, China.  The Office of 
the Commissioner of Insurance (OCI) is in charge of administering the Ordinance;  the Commissioner 
is appointed as the Insurance Authority (IA).  Any in surer wishing to carry on insurance business in or 
from the HKSAR must obtain authorization from the IA.  Authorized insurers need to satisfy 
minimum financial requirements (i.e. minimum paid -up capital and required solvency margin).  The 
authorities note that there is no differential treatment between domestic and foreign applicants in this 
regard.80  Directors and controllers of authorized insurers are required to meet the "fit and proper 
criteria", such as relevant academic or professional qualifications and work experience.  The same 
criteria are applied to domestic a nd foreign applicants.  The IA m onitors the financial condition of 
authorized insurers by examining their annual fi nancial statements and business returns.  The IA 
entered into a cooperative agreement with the China Insurance Regulatory Commission in 
November 200481, which provides a framework for cooperati on, mutual understanding, exchange of 
information, and assistance.  Mutual assistance is  provided in administration and enforcement of the 
various requirements relating to insurance business,  including the development of new regulations. 
46. Commercial presence in Hong Kong, China must be  in the form of a company, subsidiary, 
branch or representative office.  However, insura nce business (i.e. writing an insurance contract or 
soliciting insurance business) may not be ca rried out through a representative office.82  The authorized 
insurer must have a locally based Chief Executive.  The authorities state that contributions to life 
insurance and private pension plans operated by fi nancial 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. 
                                                     
 
77 HKMA (2005). 
78 Hong Kong Trade Development Council (2005b). 
79 Hong Kong Trade Development Council (2005b). 
80 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 insurers without statutory business;  HK$10 million for general insurers without statutory business;  and HK$2 million 
for captive/life insurers. 
81 IMF (2005b). 
82 WTO document GATS/SC/39/Suppl.3, 26 February 1998. Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 87 
 
 
47. Insurance intermediaries must possess the prescrib ed minimum qualifications and experience.  
Under the Insurance Intermediaries Quality  Assurance Scheme (IIQAS) introduced on 
1 January 2000, all insurance intermediaries (i.e. in surance 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 a nd requirements apply to domestic and foreign 
insurance intermediaries.  Regulation of insurance in termediaries is primarily by the Insurance Agents 
Registration Board, which oversees the discip line of insurance agents, while the Hong Kong 
Confederation of Insurance Brokers, and Professiona l Insurance Brokers Association 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, regist ration, and handling of any complaints. 
48. Statutory third-party liability insurance for motor vehicles and vessels, and employer's 
liability insurance for employees, must be purchased from an insurer authorized to operate in the 
HKSAR83;  other insurance products may be  purchased from insurers abroad.  
(v) Communications 
(a) Telecommunications 
49. The telecommunications sector is among the few sectors in which the HKSAR implements its 
sector-specific approach to safeguard compe tition (Chapter III).  Hong Kong, China has a 
sophisticated telecommunications market, which has b een an important factor in its development as a 
leading business and financial centre.  The Government 's objective is to ensure that the Territory is 
able to supply high quality telecommunications services at competitive prices.  Progressive 
liberalization of the market began in 1995, with the introduction of competition into the local fixed 
telecommunications market.  In 1999-2000, the Govern ment announced plans to further liberalize  the 
external telecommunications services and related fa cilities markets.  As a result, all sectors of the 
telecommunications market have been liberalized (Box IV.1).  The local fixed telecommunications 
market was fully liberalized as of 1 January 20 03.  There are no limitations on foreign equity 
participation or ownership or any other FDI restric tions in the telecommunications market.  However, 
in order to promote competition, the Governme nt may impose limits on cross-ownership in any 
particular sector84;  according to the authorities, this provi sion has never been applied.  At present 
there are no limitations on national treatment.85  
50. The telecommunications sector was estimated to be responsible for about 1.4% of GDP in 
2004 (Table I.2).86  At end 2004, 19,932 persons were engage d in the industry.  There were are around 
3.8 million telephone lines in the HKSAR (Table IV.2);  telephone density is around 55 lines per 
100 inhabitant, among the highest in the world.  A wide range of facsimile and data communication 
services are available;  there are about 400,000 facsimile lines.  In addition, the number of mobile service subscribers has climbed to 8.7 million (March 2006), representing one of the highest penetrations in the world at about 124.7%.
87  Hong Kong, China has 2.6 million Internet subscribers.  
Since September 2003, the number of dial-up subscribers has been outnumbered by that of broadband 
Internet subscribers;  there are around 1.67 million broadband services subscribers;  in the residential 
                                                      
83 WTO document GATS/SC/39/Suppl.3, 26 February 1998. 
84 WTO document S/NGBT/W/3/Add.16, 21 October 1994. 
85 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 staf f of the Hong Kong Telecom International (now Reach Networks 
Hong Kong Limited) were also eliminated.  
86 Government of the HKSAR (2005e),  "Telecommunications". 
87 OFTA online information.  Viewed at:  http://www.ofta.gov.hk/en/datastat/main.html. WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 88 
 
 
market, 67% of the households are now using broadband service.  Competition is keen in the 
HKSAR's telecommunications markets;  there are now 11 local fixed network licensees.  In the 
mobile arena, there are five opera tors running ten mobile networks. 
Box IV.1:  Telecommunications s ervices:  market structure a nd liberalization, June 2006 
Local fixed telecommunications network services (FTN S):  the local fixed telecommunications market was 
fully liberalized as of 1 January 2003.  There is no pre-set limit on the number of licences issued, no 
deadline for applications, and no specific requirement on network rollout or investment.  As at June 2006, 
11 companies have been licensed to provide local wireline-based FTNS on a competitive basis.  All of the 
local FTNS licensees are allowed to  provide broadband services;  ther e are 186 licensed internet service 
providers (ISPs) providing dial-up or broadband services.  Hong Kong Cable Television Limited 
(HKCTV)’s FTNS licence, previously re stricted to the provision of FTNS services over hybrid fibre coaxial 
cable network (cable modem technology), was modified in June 2005 to include the operation of wireline-
based FTNS.  To encourage investment in advanced high bandwidth telecommunications infrastructure, the 
Government announced in July 2004 that mandatory Type II interconnection at telephony exchange would 
be fully withdrawn by June 2008;  thereafter interconnection charges would be subject to commercial 
negotiation between the operators concerned.  In January 2005, the TA announced the lifting of priory 
approval requirements imposed on the tariffs of the incumbent operator PCCW-HKT.  
International telecommunications services:  the external services market has been liberalized since 1 January 
1999 and the external facilities market as from 1 January 2000.  There are 239 external telecommunications 
services (ETS) licensees.  Hong Kong, China adopts the Open Sky Policy in regulating the provision of 
satellite services;  six licensees operate satellite-bas ed external FTNS facilities and 20 licensees operate 
cable-based external FTNS facilities.  In addition, seven local FTNS licensees have also been licensed to 
provide external telecommunications facilities and services. 
Mobile services market:  mobile services have been open since their introduction in the mid-1980s and the 
introduction of mobile number portability (MNP) service on 1 March 1999 has promoted further 
competition, which continues to be vibrant.  In accordance with the regulatory framework of open network 
access and to promote competition, the third-generation m obile services (3G) licensees are required to open 
up at least 30% of their network capacity to non-af filiated mobile virtual network operators and content 
providers.  There are ten digital networks in the 800/900 and 1,700-1,900 MHz (Megahertz) bands.  As 
these mobile services licences expire in 2005-06, the OFTA has decided to grant the incumbent licensees for 
GSM and PCS services the "right of first refusal" to obtain mobile carrier licences upon expiry of their 
current licences. 
Source: Government of the HKSAR (2005), Hong Kong the Facts:  Telecommunications .  Viewed at:  
http://www.info.gov.hk/hkfac ts/telecom.pdf [15 December 2005];  and USTR (2005), National 
Trade Estimate Report on Foreign Trade Barriers – Hong Kong .  Viewed at:  
http://www.ustr.gov/assets/Document_Library/Re ports_Publications/2005/2005_NTE_Report/asset
_upload_file299_7473.pdf [2 February 2006]. 
51. The Telecommunications Authority (TA) oversees the regulation of the sector;  the 
Telecommunications Ordinance governs the establis hment and operation of all telecommunications 
services.  The TA is supported by the Office of the Telecommunications Authority (OFTA), an 
independent government agency headed by the Di rector-General of Telecommunications.  OFTA 
carries out various statutory functions in three ma in areas:  the technical and economic regulation of 
telecommunication services;  radio frequency spectru m management and satellite coordination;  and 
advisory and planning services for other government departments.  OFTA is also in charge of monitoring competition in the telecommunications market.
88  Four advisory committees consider 
                                                      
88 Complaints on anti-competitive behaviour received by  the OFTA, and the resu lts of investigations 
are posted at:  http://www.ofta.gov.hk. Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 89 
 
 
regulatory issues and provide a forum for the exch ange of ideas among the industry, consumers, and 
OFTA.89 
Table IV.2 
Telecommunication services, 2000-05  
 2000 2001 2002 2003 2004 2005 
Number of main telephone lines, as at end year ('000) 3,946 3,926 3,842 3,820 3,780 3,793 
residential 2,210 2,161 2,134 2,119 2,118 2,116 
business 1,736 1,765 1,708 1,701 1,662 1,677 
Main telephone lines per 100 inhabitants 58.8 58.1 56.6  55.8 54.8 54.4 
Public mobile radiotelephone subscriber units, as at end 
year ('000) 5,234  5,702 6,219 7,194 8,158 8,544 
excluding pre-paid SIM cards 4,173  4,256 4,207 4,408 4,575 4,753 
including pre-paid SIM cards 1,061 1,445 2,012 2,787 3,583 3,790 
Number of licensed internet service providers (ISPs) 235 258 235 201 188 186 
Number of customers of licensed ISPs ('000) 2,725.4 2,667.2 2,379.2 2,338.1 2,500.1 2,630.0 
Source:  HKSAR, Statistical Digest of the Serv ices Sector (various issues).  
52. The Telecommunications Ordinance was amen ded in June 2000.  Major amendments 
included:  provisions to promote competition in public telecommunications services;  the 
establishment of a Telecommunications (Competition Pr ovisions) Appeal Board;  clarification of 
certain provisions concerning access to land and inte rconnection for telecommunications operators;  
streamlining of licensing procedures;  and giving the statutory regulator legal power over certain 
technical matters (radio spectrum management, and standards.90  
53. The Telecommunications Ordinance prohibits all licensees from conduct that substantially 
restricts competition in any telecommunications ma rket, as well as conduct that is misleading or 
deceptive.  Anti-competitive condu ct includes the misuse of a dominant market position.  
Enforcement of the prohibitions is by OFTA, and san ctions include financial penalties, determinations 
and directions concerning network interconnection, and suspension of licences.  Civil remedies are 
available to all persons affected by anti-competiti ve practice.  Anti-competitive conduct is also 
prohibited by the conditions of the licences granted to operators.  Most consumer complaint cases have involved telecommunication services and related goods/services (Chapter III). 
54. The Telecommunications (Amendment) Ordinance 2003 entered into force in July  2004, 
providing a comprehensive legislative framework for dealing with mergers and acquisitions that have, 
or are likely to have, the effect of substan tially lessening competition in a telecommunications 
market.
91  The TA also issued guidelines on me rger and acquisitions in the HKSAR's 
telecommunications market in May 2004, to provide the industry with practical guidance on the analytical and procedural approach it intends to follow when administering the relevant provisions in the Ordinance.  Since July 2004, the TA has c onsidered several merger and acquisition proposals 
involving telecommunications licensees, and has pub lished the reasons why in each case, there were 
no adverse competition effects. 
55. A licence is required to operate any public te lecommunications services.  If an applicant 
meets the criteria, a licence is granted irrespectiv e of the nationality of the individuals who own or 
                                                     
 
89 Telecommunications Standards Advisory Committee;  Radio Spectrum Advisory Committee;  
Telecommunications Users and Consumers Advisory Committee;  and Telecommunications Numbering 
Advisory Committee. 
90 Information provided by the authorities of Hong Kong, China;  and Government of the HKSAR 
(undated). 
91 APEC (2005);  and Competition Policy Advisory Group (2005).  The Ordinance was viewed at:  
http://www.ofta.gov.hk/en/legislation/telecom_legislation/teleOrd2003_p1e.pdf. WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 90 
 
 
manage the company.92  "Class licences" have been in pl ace since 2002;  persons become "class 
licensees" if they meet the qualification requi rements, without any application and processing 
procedure.93  New telecommunications services may be supplied as long as they are within the generic 
scope of services of the relevant licence. 
56. According to the authorities, the prices of tel ecommunications services are set by the market.  
In January 2005, the TA lifted the prior-approval re quirement for tariff change on the incumbent fixed 
operator, since competition in the fixed telephon y market had become more firmly established.94  
Consumers have derived substantia l benefits from the introduction a nd development of competition in 
the telecommunications market:  the HKSAR is one of  the least expensive markets in the world;  and 
one of the most affordable mobile phone markets. 
57. Hong Kong, China has not entered into any inter- governmental or bilateral agreements related 
to the supply of basic telecommunications networks or services. 
58. As in the case of other services sectors (sections  (5)(ii) and (5)(iv)), China's accession to the 
WTO in December 2001 and the CEPA present en ormous market opportunities for the HKSAR's 
companies in the sector.  In the WTO, China has committed to opening up the telecommunications 
and Internet services to foreign investment in phases.95  Under CEPA, as from 1 October 2003, 
Hong Kong, China companies have been able to  set up joint-venture enterprises on the Chinese 
Mainland to provide five types of value-adde d telecommunications services without geographic 
restriction.96 
(vi) Transport 
(a) Shipping 
59. Maritime transport is of vital importance to  the HKSAR as it moves more than 80% of the 
Territory's total external cargo;  the HKSAR's ship -owners manage about 9% of the world's merchant 
fleet and it was ranked fifth in the world shipping regi ster, as reported by Lloyd's Register Fairplay in 
July 2004.97  The maritime industry accounted for 2.5% of GDP in 2004, which includes some port 
related industries, such as container terminals, freig ht forwarders and other related port services.  The 
maritime sector accounted for 2.5% of total employment.  The Port of Hong Kong is one of the 
world's busiest container ports and, according to  UNCTAD ranking, the seventh busiest maritime 
centre in terms of vessel tonnage (in 2005), hand ling 230 million tonnes of freight, of which 70.2% is 
seaborne cargo (Table IV.3).98  Of all seaborne cargo, 74.6 million tonnes (46.2%) was transhipment 
cargo, mostly to and from Mainland China.  At the time of the previous Review, the transhipment 
                                                      
92 The guidelines stipulate the information required and the criteria upon which an application will be 
evaluated.  Viewed at:  http://www.ofta.gov.hk/frameset/documents_index_eng.html. 
93 For further information see OFTA online informati on.  Viewed at:  http://w ww.ofta.gov.hk/en/report-
paper-guide/paper/consultation/cp20020802.pdf 
94 See OFTA-commissioned studies on the effectiven ess of competition in HKSAR, benchmarking 
against other markets in 2003 and 2005, and details of the services cost comparison.  Viewed at:  
http://www.ofta.gov.hk/en/report-pap er-guide/report/rp20030620.pdf;  http ://www.ofta.gov.hk/en/report-paper-
guide/report/rp20051229. pdf;  and http://www.ofta.gov.hk/en/repo rt-paper-guide/repor t/rp20051229ex.pdf . 
95 Hong Kong Trade Development Council (2005b). 
96 These services include Internet data centre services, store and forw ard services, call-centre services, 
Internet access services (i.e. ISP) an d content services (i.e. ICP).  Hong  Kong, China serv ices providers' 
shareholding in the joint ve nture should not exceed 50%. 
97 Government of the HKSAR (2005g). 
98 According to the Marine Department, Hong Kong, China has 1 vessel arriving every 2.3 minutes, 
1.4 TEUs (20-foot equivalent unit) handled every 2 seconds, and 1 passenger entering or leaving by ferries every 2 seconds in 2005.   Hong Kong, China WT/TPR/S/173/Rev.1 
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time for cargo shipped from the rest of the world through Hong Kong, China to the Pearl River Delta 
had been reduced from two days to less than 24 hours.   In 2004, sea transport services accounted for 
HK$66.8 billion and contributed 15.5% to total services exports.99  
60. Sea cargo to and from HKSAR is carried both by liners and bulk vessels.  Many key routes 
are subject to liner conferences (agreements by the main shipping lines on tariffs and sailings).  
Containerized cargo dominates the liner market in H ong Kong, China (Table IV.3);  containers are 
carried by over 450 ocean vessel sailings per we ek to over 500 destinations in the world and 
2,250 river vessel sailings per week to the Pearl River Delta region.  There are some 900 shipping-related companies operating in HKSAR, providing services such as marine insurance, legal, 
arbitration, ship finance, brokerage, management, registra tion, and ship-surveying services.
100 
61. River trade has remained the fastest growing external transport mode over the period under 
review, growing at a rate of 10.3% in 2005 (Table IV.3).  The rapid growth of river trade throughput 
is attributed to export cargo from the Pearl River Delta (PRD) area of Guangdong Province.101  
Availability of efficient port facilities in PRD en ables HKSAR's traders and manufacturers to enjoy 
greater flexibility in arranging cargo freight offshor e, a practice allowing for time and cost savings.102  
The cargo throughput for seaborne trade increased  from 138.3 million tonnes in 2002 to 161.5 million 
tonnes in 2005, representing an average annual growth rate  of about 5.3%. 
Table IV.3 
Port traffic, 2000-05  
  2000 2001 2002 2003 2004 2005 
Arrival of vessels (% change)       
Ocean vessels 0.3 -0.9 -4.6 0.5 0.3 9.0 
River cargo vessels 3.3 -2.5 2.9 0.0 -1.6 0.0 
River passenger ferry -0.2 2.3 3.5 -0.9 14.6 4.5 
Total cargo movement ('000 tonnes) 174,642 178,210 192,510 207,612 220,879 230,139 
of which:       
Seaborne (%) 75.0 73.3 71.8 71.6 71.8 70.2 
River (%) 25.0 26.7 28.2 28.4 28.2 29.8 
Total  cargo movement (% change) 3.4 2.0 8.0 7.8 6.4 4.2 
Seaborne 2.1 -0.2 5.8 7.5 6.7 1.8 
River 7.6 8.8 14.0 8.8 5.5 10.3 
Total container throughput (% change) 11.6 -1.5 7.4 6.8 7.5 2.8 
Containerization of seaborne cargo (%)a 73.0 71.7 72.8 73.4 76.7 75.5 
Direct shipment 61.0 58.1 58.4 57.8 61.2 57.6 
Transhipment 96.3 95.1 95.5 95.9 96.7 96.4 
a Percentage of containerization = cont ainerized cargo divided by total cargo.  
Source:  HKSAR Marine Department, Port and Maritime Statistics;  and Hong Kong Port Development Council, Summary 
Statistics on  Port Traffic of Hong Kong . 
62. The Port of Hong Kong is renowned for its e fficiency;  and most of its port facilities, 
including all container terminals, are owned and ope rated by the private sector, with the Government 
overseeing the formulation of port policies and vessel traffic management.103  Most auxiliary services 
                                                      
99 Hong Kong Trade Development Council (2005c). 
100 Government of the HKSAR (2005g). 
101 The Pearl River links Hong K ong, China with many manufacturing centres in southern China, 
which have become the main cargo source for the territory. 
102 Commission on Strategic Development (2005). 
103 In 2004, Dubai Ports International acquired CSX' s terminal operation in Hong Kong (CT3);  in 
2005, PSA acquired a major stake in Asia Container Terminals that operates CT8 West (Hong Kong Trade 
Development Council, 2005b). WT/TPR/S/173/Rev.1 Trade Policy Review 
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are also provided by the private sector, and produc tivity enhancement through new cargo management 
techniques has raised handling efficiency.  The gran ting of rights to operate the services is "normally" 
through public tender or by private agreemen ts, and non-discriminatory procedures are adopted.104  
According to the authorities, there are well- established procedures to ensure openness and 
transparency in public tenders.   
63. Despite intense competition from neighbouring ports, the authorities indicate that most of the 
international transhipment in the region is still routed through Hong Kong port.  In terms of cost 
comparisons, it has higher terminal handling charg es (THCs) than those at other South China ports105, 
as well as higher road haulage costs relative to Main land China.  Nevertheless , traders continue to 
have confidence in the port of Hong Kong because of its superior productivity106, a higher frequency 
of callings, and the highly developed logistics services (including efficient Customs).  Moreover, 
measures have been taken by the authorities to enhance the cost competitiveness of the Port of 
Hong Kong, including:  an agreemen t with the Mainland China authorities to relax the rules relating 
to cross-boundary cargo movement;  reduction in port fees and charges;  provision of more back-up 
land for the port;  and improvement in transport in frastructure, etc.  The HKSAR authorities expect 
that strong expansion of the southe rn China cargo base will provide long- term growth of port traffic in 
HKSAR, despite some diversion of ocean-going transhipment cargo and the competition from new ports in southern China.
107  In order to attract more qualit y tonnage and enhance the HKSAR's 
competitiveness as an international maritime cen tre, the HKSAR authorities introduced an annual 
tonnage fee reduction of six months for ships registered with the Hong Kong Shipping Register for a 
continuous period of two years, provided that the sh ips have no detention record within the period.   
64. Ocean transhipment traffic increased at an a nnual rate of 10.4% in 2002-05.  However, with 
the development of container terminal facilities on the Mainland some transhipment cargo to/from the 
east coast of China is expected to be exported di rectly through Chinese ports (e.g. Shanghai), which 
have grown rapidly in recent years.  Ocean transh ipment will face further competition from lower-cost 
ports in Chinese Taipei, when connections betw een Mainland China and Chinese Taipei are fully 
liberalized.  At present Chinese Taipei–Mainland tr ade is largely routed via the HKSAR;  ocean 
transhipment related to this route accounts for around 7.7% of Hong Kong's ocean transhipment 
traffic:  some of this transhipment traffic is exp ected to switch to direct traffic when trade between 
Chinese Taipei and Mainland China is fully liberalized. 
65. According to the authorities, there have been  no changes in Hong Kong, China's maritime 
policy since 1998.  The Economic Development and Labour Bureau (EDLB) oversees shipping 
policies and ensures that adequate safety measure s are in place.  The Marine Department is the 
executive agency of the EDLB;  it manages the Po rt of Hong Kong and administers the Hong Kong 
Shipping Register.  Two advisory bodies – the Hong Kong Port Developmen t Council (PDC) and the 
Hong Kong Maritime Industry Council (MIC), both chaired by the Secretary of EDLB, were 
established in  June 2003 to replace the Hong Kong Port an d Maritime Board;  they provide a forum 
                                                      
104 WTO document S/NGMTS/W/2/Add.15, 10 February 1995. 
105 The current mechanism for determining THC is based on an international practice and is a 
commercial matter between the shippers and the shipping lines;  the HKSAR Government has been liaising with 
the parties concerned with the aim of increasing the transparency of the process, improving the consultation mechanism, and fostering a better understanding amongst the parties. 
106 In 2005, the Kwai Tsing container port handled a total throughput of 14.28 million TEUs 
(Hong Kong Port Development Council online statistics.  Viewed at:  http://www.pdc.gov.hk/eng/statistics/ 
docs/Hkport.pdf [8 May 2006]).  According to the te rminal operators, average quay crane movements are 
40 moves per crane per hour.  
107 Hong Kong Trade Development Council (2005c). Hong Kong, China WT/TPR/S/173/Rev.1 
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for key players from the private sector and the Government to  discuss and coordinate matters in 
developing and promoting the port and maritime  industry.108 
66. 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, China's GATS 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, 
the HKSAR. 
67. There are no competition or antitrust laws governi ng the operation of maritime transport.  A 
number of port services/facilities, including moori ng buoys, anchorage, and ferry terminals, are 
provided and managed by the Govern ment to safeguard port users' interests and to ensure compliance 
with safety and environmental standards in force.  On the regulatory side, to ensure compliance with 
safety regulations, the Government is responsible for licensing all local vessels.  The Government also 
regulates and monitors pilotage services. 
68. The authorities note that there are no market access restrictions for multimodal transport 
operators, general and bulk shipping lines, shippers , and intermediaries, to rent or lease trucks, 
railway carriages, or barges and related e quipment for inland forwarding of cargo.  
69. They indicated that there is no special tax treatment of income from shipping services other 
than an exemption from profit tax for income derive d from international operation of ships registered 
in the Hong Kong Shipping Register (HKSAR flag  ships).  Ownership of  a HKSAR flag ship, 
however, is not limited to an HKSAR company;  any company operating in Hong Kong, China, including foreign companies, are eligible.  Income from the international operation of a ship by a non-
resident ship-owner is also exempted if the territo ry in which that ship-owner is resident provides a 
substantially similar exemption to ship-owners reside nt in Hong Kong, China.  Moreover, the income 
derived in HKSAR from the international operation of a ship by an enterprise of a territory that has a 
double taxation relief arrangement with the HKSAR c overing shipping income is also exempted from 
the profit tax.  The extent of exempti on depends on the terms of the arrangement. 
70. Hong Kong, China is a major ship-owning and management centre.  There are 1,098 vessels 
(30.2 million gross registered tons) on the Hong Kong Shipping Register (May 2006).
109  According 
to the Hong Kong Shipowners' Association, its members owned or managed around 75 million 
deadweight tonnes as at December 2005.  A ship must  be registered in Hong Kong, China to be a 
"HKC flag-ship".  The requirements for registration are:   that a majority interest in the ship is owned 
by a Hong Kong citizen, or a Hong Kong incorporated  company, or an overseas company registered 
in HKSAR, or the ship is on charte r 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.  HKSAR  flag ships and ships of many nationalities enjoy 
preferential port dues in Mainland ports.110  HKSAR port dues are charged at the same rates for all 
ships, irrespective of nationality. 
71. Under CEPA, as from January 2004, Hong Kong,  China has benefited from preferential 
market access to the sea transport services market of the Mainland of China.  Under CEPA I and II 
(section (5)(iii) and Chapter II), HKSAR's services providers have been allowed to form wholly 
                                                      
108 Government of the HKSAR (2005g). 
109 Hong Kong Trade Development Council (2005b). 
110 Government of the HKSAR (2005g). WT/TPR/S/173/Rev.1 Trade Policy Review 
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owned units in providing certain types of mar itime services like international ship management 
services, container station and depot services, non-vessel-operating common carrying services, port 
cargo loading and unloading services.111  Although HKSAR services providers can only establish 
wholly owned companies to provide supplies servic es (except fuel and water) and shipping agency 
services for vessels owned or managed by their parent  companies, this is considered important as 
HKSAR shipping companies will have greater au tonomy in conducting their own business resulting 
from CEPA II provisions.  As from 1 January 2006, the scope of services that HKSAR service providers allowed to provide has been expanded u nder CEPA III to cover:  ship maintenance and 
repair;  international ocean contai ner leasing, buying and selling, as we ll as trading of container parts; 
and ship survey for ships registered in Hong Kong, China.  For an HKSAR company providing 
bilateral maritime transport services, 50% or more of the ships owned by it, calculated in terms of tonnage, should be registered in Hong Kong, China.   But this does not apply to bilateral towing 
services, for which HKSAR service providers may set up wholly owned units to provide regular services under CEPA III.   
72. The Government of HKSAR has implemented the following legislation for the purpose of 
fulfilling obligations under international maritime agreements:  Amendments  to Merchant Shipping 
(Liability and Compensation for Oil Pollution) Ordinan ce (Cap. 414), to give effect to two resolutions 
passed by the International Maritime Organisa tion (IMO) on increased shipowner's liability and 
increased amount of compensation payable for oil po llution;  Merchant Shipping (Security of Ships 
and Port Facilities) Ordinance (Cap. 582) and Merc hant Shipping (Security of Ships and Port 
Facilities) Rules (Cap. 582A), to give effect to th e new provisions of the International Convention for 
the Safety of Life at Sea, 1974 (SOLAS) and the International Ship and Port Facility Security (ISPS) Code adopted by the IMO;  and the Merchant Shipping (Prevention and Control of Pollution) 
(Specification of Substances) (Amendment) Order (C ap. 413F), to align domestic legislation with the 
amendments to the Annex to the Protocol Rela ting to Intervention on the High Seas in Cases of 
Pollution by Substances other than Oil, 1973.
112 
(b) Air transport 
73. Hong Kong, China is a premier intern ational and regional aviation centre.   The air transport 
sector accounted for 2.8% of GDP and 1.1% of empl oyment in 2004;  exports of air transport services 
amounted to HK$47.6 billion (11.1% of all ser vices exports), up from HK$36.6 billion in 2001 
(11.4% of all services exports).  Although air cargo accounted for around 1%, by weight, of all cargo 
handled by the HKSAR in 2005, its share by value was over 34%.113  More than one third (38%) of 
                                                      
111 According to China's WTO commitments and the Regulations on the Administration of Foreign 
Investment in International Marine Shipping (effective June 2004), only a foreign joint-venture is allowed to 
provide:  maritime cargo-handling serv ices, customs clearance services for ma ritime transport, container station 
and depot services, international shipping, international shipping agency, international ship management, international marine shipping freight loading and unloading, international marine shipping container terminal, 
and yard business (Hong Kong Trade Development Council, 2005b).  
112 These texts were viewed at:  http://www.gld. gov.hk/cgi-bin/gld/egazette/gazettefiles.cgi?lang 
=e&extra=&year=2003&month=05&day=30&vol=07&no=22&gn=19&header=1&part=1&df=1&nt=s1&acurr
entpage=12&agree=1&newfile=1 &gaz_type=ls1;  h ttp://www.gld.gov.hk/cgi-bin/gl d/egazette/gazettefiles.cgi? 
lang=e&extra=&year=2004&month=06&day=25&vol=08&no=26&gn=13&header=1&part=1&df=1&nt=s1&a
currentpage=12&agree=1&newf ile=1&gaz_type=ls1;  h ttp://www.gld.gov.hk/cgi-bi n/gld/egazette/gazettefiles 
.cgi?lang=e&extra=&year=2004&month=06&day=25&vol=08&no=26&gn=128&header=1&part=1&df=1&nt
=s2&acurrentpage=12&agree=1&newfile =1&gaz_type=ls2;  an d http://www.gld .gov.hk/cgi-bin/gld/egazette/ 
gazettefiles.cgi?lang=e&extra=&year=2004&month=06&day=25&vol=08&no=26&gn=128&header=1&part=1
&df=1&nt=s2&acurrentpage=12&agree=1&newfile=1&gaz_type=ls2. 
113 Hong Kong Trade Development Council (2005b). Hong Kong, China WT/TPR/S/173/Rev.1 
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HKSAR's exports of domestically produced goods we re carried by air in 2005, up from one quarter in 
1980;  during the same period, the share of imports carried by air virtually doubled, to 37.7%. 
74. The Hong Kong International Airport (HKIA) is  one of the world's leading international 
airports, handling 3.4 million tonnes of cargo a nd 40.7 million passengers in 2005 (Table IV.4).114  To 
cater for air traffic growth, HKIA is undergoing expansion to increase its handling capacity to over 
4 million tonnes of cargo and about 55 million passenge rs per year.  Capacity may increase further to 
9 million tonnes of cargo and 87 million passengers a year at full development.115  Its air cargo 
terminal is one of the biggest in the world. 
Table IV.4 
Air transport, 2000-05  
  2000 2001 2002 2003 2004 2005 
Air cargo throughput (million tonne s) 2.2 2.1 2. 5 2.6 3.1 3.4 
Passenger throughput (million) 33.4 33.1 34.3 27.4 37.1 40.7 
 (Annual percentage change) 
Total cargo movement 13.5 -7.5 19.5 6.6 16.9 10.1 
Inward cargo movement 13.3 -6.2 12.3 3.1 12.6 7.0 
Outward cargo movement 13.7 -8.4 25.0 9.0 19.7 12.0 
Source: HKSAR Census and St atistics Department, Hong Kong Annual Digest of Statistics 2005 ;  and Civil Aviation 
Department.   
75. The cargo and passenger sides of the air tran sport industry overlap,  since over 50% of 
Hong Kong, China'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% by weight and 85% by value of air freight handled by the HKSAR. 
76. 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 remains r esponsible for air transport policy and for air 
services negotiations.  The EDB also works with th e Airport Authority (AA), a statutory body that 
operates and maintains the HKIA.  The Government is the sole shareholder in the AA but the Board 
of Directors has autonomy provided under the Airport Authority Ordinance (Cap.483).  
77. To provide air services (to and from Hong Kong, China) as a designated HKSAR airline, an 
airline must be incorporated and have its pr incipal place of business in HKSAR, and hold an Air 
Operator's Certificate issued by the Civil Aviati on Department.  In 2005, eight airlines used HKSAR 
as their base:  Cathay Pacific Airways
116, Hong Kong Dragon Airlines, Air Hong Kong, Jet Aviation 
Business Jets, Metrojet, Hong Kong Express Airways, CR Airways, and Oasis Hong Kong Airlines117, 
                                                      
114 According to Airports Council International, Hong Kong ranked first in handling international cargo 
and fifth in international passengers in 2005.  In 2005 , Hong Kong International Airport (HKIA) received the 
world's "Best Airport Award" by Skytrax Research for the fifth consecutive year (2001-05) (Hong Kong Trade Development Council, 2005b). 
115 According to a report commissioned by the Hong Kong Airport Authority, cargo volumes handled 
at Hong Kong International Airport were to grow by an average of 5.6% a year up until 2005, and by 6% a year between 2006 and 2010 (Hong Kong Trade Development Council, 2005b). 
116 The Government owns a small percentage of Cathay Pacific Airways' stocks, but has no 
management rights in the airline.  No detailed figures were available fro m the HKSAR authorities. 
117 Oasis is in the process of applying for the Air Operator's Certificate. WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 96 
 
 
as well as two helicopter operators:  HeliExpress and Heliservices.118  Designated Hong Kong, China 
airlines do not have exclusive access to routes or monopoly on ground handling services.  Nor do they receive subsidies or any other form of assistance.  
78. The provision of scheduled air services is regulated by a network of bilateral air services 
agreements (ASA) and arrangements between the HKSAR and its partners.  The main objectives of 
the HKSAR are to maintain the status of Hong Ko ng, China as a centre of international and regional 
aviation and to ensure the provision of air links to a wide range of destinations to meet the needs of 
the travelling public and shippers;  progressive liber alization of air services is pursued under the 
bilateral ASAs.  The HKSAR Government has signed 55 air-service agreements.
119 
79. Between 2002 and 2006, the HKS AR Government continued to implement the progressive 
liberalization policy and pursued liberalization of bilateral traffic arrangements with its aviation 
partners on an "equitable and mutually beneficial" ba sis.  Over this period, Hong Kong, China reached 
agreement with 14 aviation partners in Asia, Eur ope, Middle East, and the Americas to remove all 
restrictions on air services between the HKSAR and the respective partners.  Hong Kong, China also 
reached agreement with 17 partners to substantia lly expand the traffic rights arrangements.  The 
liberalization efforts have further strengthened HKS AR's position as the most important aviation hub 
in Asia.  Hong Kong, China has no plan to pursue "open skies" when the domestic markets of some 
"open skies" countries remain closed to competition by foreign airlines. 
80. Air-services-related business is covered unde r CEPA's second phase of liberalization 
measures (section (5)(iii) and Chapter II).  Unde r CEPA II, as from 1 January 2005, HKSAR's 
services providers have been allowed to establis h wholly-owned operations to provide airport 
management services for small and medium-sized ai rports and airport management training and 
consultation services in Mainland China.  They ha ve also been allowed to set up wholly-owned 
operations to provide seven types of ground services.  The period of validity of a contract for airport 
management services in Mainland China should not exceed 20 years;  this is shorter than the 
30 year limit stipulated in the 2002 Regulati ons regarding foreign-invested joint ventures.120  
HKSAR's service providers are also allowed to set up enterprises in the form of equity joint ventures 
or contractual joint ventures in the Mainland to provide air transport sales agency services under 
CEPA III, effective 1 January 2006.  As at e nd June 2006, the HKSAR Government has approved 
five applications for Hong Kong Service Supplier (HKSS) certificates in air transport services (i.e. 
                                                      
118 In February 2002, Cathay Pacific Airways is the majority shareholder of Air Hong Kong.  
Hong Kong Trade Development Council (2005b). 
119 Under the Basic Law of the HKSAR, acting under specific authorization from the Central People's 
Government, the Government of the HKSAR may negotiate and conclude new air services agreements providing routes for airlines incorporated and having their principal place of business in Hong Kong, China and 
providing rights for overflights and technical stops.  Such  agreements cover scheduled air services to, from or 
through Hong Kong, China, which do not operate to, from or through the Mainland of China.  These bilateral 
agreements have been signed with Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil, Brunei, Cambodia, 
Canada, Croatia, Czech Republic, Denmark, Estonia, Fi nland, France, Germany, Greece, Hungary, Iceland, 
India, Indonesia, Israel, Italy, Ja pan, Jordan, Kenya, Kuwait, Luxemb ourg, Malaysia, Mauritius, Mongolia, 
Myanmar, Nepal, the Netherlands, New Zealand, Norw ay, Oman, Pakistan, Papua Ne w Guinea, the Philippines, 
Qatar, Russian Federation, Saudi Arabia, Singapore, South Africa, Korea, Sri Lanka, Sweden, Switzerland, Thailand, Turkey, the United Arab  Emirates, the United Kingdom, the United States, and Viet Nam 
(Government of the HKSAR, 2005a).  
120 Under Regulations on Foreign Investment in the Civil Aviation Industry, since August 2002 China 
has allowed foreign companies to invest, through joint ventures, in the construction of runways, passenger 
terminals, and cargo terminals, as well as in other support services such as ground services, aircraft 
maintenance, air catering, hotels and restaurants, and aviation fuel supply.  Foreign investment in air traffic control remains off-limits (Hong Kong  Trade Development Council, 2005b). Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 97 
 
 
airport operation services (excluding cargo handling) ;  air transport ground services;  air transport 
sales agency services - freight;  and air trans port sales agency services - passenger) and four 
companies in Hong Kong have been eligible for the CEPA treatment in expanding their businesses 
into the relevant market of Mainland China.   
81. During the period under review, air services between HKSAR and Mainland China have 
grown from 550 to more than 900 weekly services to about 40 cities in Mainland China;  11 airlines 
operate in the market.  Air traffic to Mainland China now accounts for 22.2% of HKIA's traffic.  
Connectivity to Mainland China is well developed compared with other gateway airports in the region 
in terms of network, frequency, and number of ai rlines.  The gateway function is expected to be 
further enhanced as a result of another breakth rough in the air services arrangements review, 
concluded in June 2006 between Hong Kong, China and Mainland China, which removes capacity 
limits on most routes, substantially increases the capac ity on the others, and enables the entry of even 
more carriers. 
82. A Hong Kong, China 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 Gove rnment of the HKSAR under the relevant ASA, and 
for allocation of traffic rights.  Whilst it has b een the general practice that the Government will 
designate the airline first licensed by ATLA to  exercise Hong Kong, China’s traffic rights on each 
route, flexibility is frequently exercised to desi gnate more than one HKSAR airline on major routes.
121  
Since the air traffic regime of the HKSAR has be en significantly liberalized, most major routes are 
already operated by more than one local airline, as well as competing foreign airlines.  As a result, all 
routes out of Hong Kong, China are now highly competitive.  Airlines seeking to operate 
non-scheduled services to and from the HKSAR must apply for a permit from the Director-General of 
Civil Aviation.  Hong Kong, China has adopted a liber al approach to allow and facilitate operation of 
both passenger and freight charter services, which supplement or complement scheduled services, on 
grounds of reciprocity. 
83. Arrangements are made under bilateral ASAs for th e exchange of traffic rights.  According to 
the authorities, no discriminatory measures are maintain ed against foreign airlines.  In line with the 
world-wide practice promulgated by the Internationa l Civil Aviation Organisation, airlines, other than 
designated HKSAR airlines, wishing to operate sch eduled air services between HKSAR and a foreign 
country must satisfy all requirements in the count ry of their registration and obtain an operating 
permit from Hong Kong's Director of Civil Aviation.  Airport slot allocation follows well-established 
international norms.  Slots are allocated by a Sche dule Coordinator (SC), currently Cathay Pacific 
Airways, which is appointed and monitored by the Director-General of Civil Aviation.  Scheduled 
airlines planning to operate in Hong Kong, China mu st request a slot from the SC.  If the request 
cannot be met, the SC offers the closest available slot(s) for the 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.  No case of appeal has been reported during the review 
period. 
84. Hong Kong, China is served by a large number of airlines.  By 2005/06, over 80 scheduled 
airlines served the HKSAR with passenger and cargo traffic.122  There are over 5,500 weekly flights 
                                                      
121 This would occur when it is judged  that more competition is in the public interest and the traffic is 
sufficient to sustain substantial operations by more th an one HKSAR airline in addition to the operations of 
foreign airlines; or when one airline has been designated for a route, but chooses not to or has ceased to serve 
that route or does not operat e services on it satisfactorily;  or when th e services provided by the airline that 
applies for designation are different from those provided by the existing designated airline on that route. 
122 Hong Kong Trade Development Council (2005b). WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 98 
 
 
providing services to and from almost 140 destina tions worldwide (March 2006), including 40 cities 
in Mainland China.  
85. Airlines are required to notify their proposed tariffs to the Government of the HKSAR.  In 
accordance with the provisions of the bilateral ai r services agreements, the airlines are required to 
charge only tariffs that have been filed with a nd approved by the aeronautical authorities concerned. 
86. Since 2002, the Government has enacted Amendmen ts to the following:  the Civil Aviation 
(Aircraft Noise) Ordinance (Cap. 312), to prohibit the operations of aircraft that do not meet the noise standards specified by the International Civil Avia tion Organisation;  the Air Navigation (Dangerous 
Goods) Regulations (Cap. 448C) and the Danger ous Goods (Consignment by Air) (Safety) 
Regulations (Cap. 384A), to give effect to the 2003-04 edition of the Technical Instructions for the 
Safe Transport of Dangerous Goods by Air, published by the International Civil Aviation 
Organisation;  the Aviation Security Ordinance (Cap. 494), to give effect to a Resolution passed by the International Civil Aviation Organisation to deal  effectively with unruly or disruptive behaviour 
committed on-board civil aircraft;  the Carriage by Air Ordinance (Cap. 500), to apply to Hong Kong 
the Convention for the Unification of Certain Rul es for International Carriage by Air, signed at 
Montreal on 28 May 1999 to enhance legal protecti on to passengers and shippers;  and the Civil 
Aviation Ordinance (Cap. 448), to exempt aircraft owners not responsible for the management of 
aircraft from third-party strict liability, so as to facilitate aircraft financing in Hong Kong.
123   
87. 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 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).  The AA periodically 
assesses the demand for services, and if  necessary allows entry of additional operators.  Subject to 
operational considerations, such as space and effici ency, airlines may also apply for permission to 
provide these services themselves;  according to th e authorities, applications are considered under 
objective and non-discriminatory criteria.  
88. In August 2003, the HKSAR Government announ ced its intention to proceed with the 
eventual partial privatization of the AA;  the plan  consisted of introducing the required legislation in 
the first half of 2004 and, subject to its enactment  and the availability of suitable market conditions 
thereafter, to launch an initial public offering of th e shares of the AA.  A consultation to gauge the 
public's view ended on 31 May 2005.124  Given the inconclusive outcome  of the consultation process, 
the HKSAR Government is reviewing the possibl e timetable for taking this issue forward.  
89. Hong Kong, China has double taxation avoidan ce agreements (Chapter II) covering air 
services with some aviation partners.  Otherwise, there is no special tax treatment for air services.  Where there is an arrangement for relief from doubl e taxation covering airline profits, HKSAR taxes a 
resident airline operating international traffic on its  income derived from an arrangement territory if 
such income has been granted tax relief by that territory.  On the other hand, Hong Kong, China does 
not tax the income of airlines of the arrange ment territory derived from Hong Kong, China. 
                                                     
 
123 This legislation was viewed at:  http://www.legco .gov.hk/yr01-02/english/subleg/brief/60_brf.pdf;  
http://www.legco.gov.hk/yr03-04/english/subleg/brief/214_ brf.pdf;  http://www.legco.gov.hk/yr03-04/english/ 
subleg/sub_0217.htm;  http://www.legc o.gov.hk/yr04-05/englis h/bills/brief/b10_brf.pd f;  http://www.legco. 
gov.hk/yr04-05/english/bills/b rief/b34_brf.pdf;   and http://www.legco. gov.hk/yr04-05/englis h/bills/brief/b29_ 
brf.pdf. 
124 Government of the HKSAR (2003). Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 99 
 
 
(vii) Legal services 
90. Hong Kong, China is home to the largest cluster of international lawyers in Asia – about 40% 
of international lawyers in Asia.  They play a pivotal role in satisfying professional services needs 
associated with Mainland-related investment.  HK SAR's exports of legal services amounted to 
US$96 million in 2004;  Mainland China is the mo st important export market for HKSAR's legal 
services.  According to a survey of law firms, as at February 2005, 83% of  the respondents had dealt 
with cross-border commercial transactions.  Th e special arrangements under CEPA and simplified 
procedures for mainland enterprises to set up office s in Hong Kong, China are expected to boost the 
demand for a wide range of professional services provided by HKSAR law firms.125 
91. Lawyers are admitted to practice in Hong Kong, China either as solicitors or barristers, and 
there are different admission requirements for the tw o branches of the profession.  Such requirements 
are specified in the Legal Practitioners Ordinance.  Pursuant to the Ordinance, the two professional 
bodies (the Law Society and the Bar Association), are vested with the power to regulate solicitors and 
barristers in practice, conduct, discipline, exam ination, and continuing education, by way of 
subsidiary legislation.  The Ordinance specifies that these rules and regulations made by the Law 
Society and the Bar Association would require  the prior approval of the Chief Justice. 
92. With the amendments to the Ordinance in 1995 and 2000 (and the new provision relating to 
the new admission criteria for barristers, on 28  March 2003), according to the authorities, the 
admission criteria for solicitors and barristers are now in line with the general obligations of the 
GATS.  All foreign lawyers from common law and non- common law jurisdictions are allowed to take 
specified examinations to become HKSAR solicitors  and barristers.  According to the authorities, 
within the legal framework provided in the Ordinance,  all solicitors and barristers are able to compete 
respectively on a level playing field.  Betw een 2002 and 2004, 206 out of 400 foreign lawyers 
(i.e. 51.5%) passed the qualifying examination. 
93. Reportedly, foreign law firms that practice fo reign law in HKSAR are barred from practicing 
Hong Kong law126, and from employing or being in partnership with HKSAR solicitors.127  Foreign 
law firms that wish to provide both forei gn and domestic legal services may do so only by 
establishing associations with law firms.  Such fore ign law firms may be associated with, or even be 
branches of, overseas law firms if they meet certain cr iteria, e.g. at least one partner of the Hong Kong 
firm must also be a partner in the overseas firm.  The number of foreign lawyers in such foreign law firms should also not exceed the number of solicitors in the associated HKSAR firms  
94. The legal profession is to a large extent self-re gulating.  At present, the Ordinance does not 
contain any specific provision to safeguard against anti-competitive practices or to regulate mergers 
and acquisitions. 
                                                     
 
125 Hong Kong Trade Development Council (2005b). 
126 "Foreign lawyers" as referred to in the Legal Practitioners Ordinance are those registered with the 
Law Society under Part IIIA of the Ordinance.  They may provide only foreign law, and not Hong Kong law advice.  They should not be solicitors or barristers in Hong Kong, China.  A foreign firm means a law firm or a sole proprietor that is registered as a foreign firm under Part IIIA of the Ordinance.  All partners in such foreign firms must be foreign lawyers.  Foreign law firms may establish associations (but not partnerships) with local law firms.  By way of these associations, they could provide both foreign and domestic legal services to clients.   
127 USTR (2005). WT/TPR/S/173/Rev.1 Trade Policy Review 
Page 100 
 
 
(viii) Healthcare 
95. Hong Kong, China's public healthcare services are an integral part of the public services 
provided by the Government for residents.  Public  healthcare services are heavily subsidized;  users 
contribute on average only about 5% of the cost.  In terms of service volume, the public healthcare 
sector accounts for about 90% of all inpatient services  and 15% of outpatient services provided in the 
Territory.  However, in value terms, public spe nding on healthcare services accounted for no more 
than 60% of total health expenditure.  Rapid advances in medical science and pharmaceutical 
technology mean more expensive treatment and drugs  and lead to even higher public expenditure.  
According to the Hong Kong Population Projections, the proportion of residents aged 65 and over will 
rise from 12% in 2003 to 27% in 2033.  These factors are bound to bring greater pressure on 
government finances.  The Health, Welfare and Food Bureau is studying alternative arrangements for 
healthcare financing, and plans to launch pub lic consultation on the recommended options.  In 
finalizing an overall package, the HKSAR Governme nt is to consider whether to provide a tax 
deduction for contributions to private medical insurance schemes.    
96. The HKSAR authorities indicate that there is no ba rrier to private or foreign investment in 
healthcare services.  Only priv ate hospitals and nursing homes are subject to non-discriminatory 
licensing and planning regulation.  Other medical services, such as clinics, are not subject to similar regulations.  In the HKSAR, practitioners of 12 healthcare professions
128 must register with the 
relevant statutory boards/councils before they can pr actise.  To qualify for registration, non-locally-
trained applicants, irrespective of their nationalit y, must pass the respective licensing/registration 
examinations conducted by the boa rds/councils (except Chiropractors Council).  Non-locally-trained 
applicants must possess the relevant qualifi cations/experience recognized by the respective 
boards/councils before they are allowed to take pa rt in the licensing/registration examinations.  At 
present the Chiropractors Council does not hold any such examination, but requires applicants to be in 
possession of qualifications recognized for registration.  For doctors, upon passing the 
licensing/registration examinations, applicants ar e required to successfully complete a period of 
internship before they can practise.  For pharmacis ts, all non-local applicants must have an aggregate 
of relevant pre-registration training and post-regi stration experience of not less than one year.  For 
nurses and midwives, upon passing the licensing examina tions, they may be required to undergo such 
further training as the respective councils may specify. 
                                                      
128 The professions are as follows:  medical prac titioners, dentists, pharmacists, Chinese medicine 
practitioners, nurses, midwives, medical laboratory technol ogists, radiographers, physiotherapists, occupational 
therapists, optometrists, chiropractors. Hong Kong, China WT/TPR/S/173/Rev.1 
 Page 101 
 
 
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