Report from the Commission to the Council and the European Parliament - Second Annual Report by the European Commission on the Special Administrative Region of Hong Kong
Date: 2000-05-18
Institutions: European Commission
Subjects: EU relations, Hong Kong, cooperation policy, economic situation, political situation

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 18.05.2000
COM(2000) 294 final

REPORT FROM THE COMMISSION TO THE COUNCIL
AND THE EUROPEAN PARLIAMENT

Second Annual Report by the European Commission on the Special Administrative
Region of Hong Kong

REPORT FROM THE COMMISSION TO THE COUNCIL
AND THE EUROPEAN PARLIAMENT

Second Annual Report by the European Commission on the Special Administrative
Region of Hong Kong

1.

2.

3.

4.

5.

Introduction

Developments in Hong Kong

EU presence and EU interest in Hong Kong

Hong Kong SAR as an international partner

Cooperation between the Hong Kong SAR and the European Union

Further cooperation

Meeting demands

Visa free access to the EU for Hong Kong SAR passport holders

The EU-HK and HK-EU Business Cooperation Committees

6.

Conclusions

2

1.

INTRODUCTION

The European Union's basic policy on Hong Kong is set out in the Communication from the
European Commission of 23.4.97 entitled “The European Union and Hong Kong: Beyond
1997"1. The Communication was followed by Council conclusions adopted on 3 June 1997.

The EU considers that effective implementation of the “one country, two systems” principle
enshrined in the Joint Declaration and in Hong Kong’s Basic Law, is a prerequisite for Hong
Kong’s lasting stability and prosperity. Hong Kong has long been a model and an example for
other countries in the region, and a crucial point for exchanging not only goods and services,
but also ideas and ways of living and thinking.

Hong Kong is important for the EU. The EU has for years maintained a dynamic trade and
investment relationship with Hong Kong, and Hong Kong has played a role as a centre for
economic and cultural exchange between Europe and Asia. Hong Kong is part of China;
maintaining a free, open and autonomous Hong Kong is beneficial for China, and Hong Kong
can offer valuable expertise as China sets about economic reform and building the rule of law.

The Commission undertook in its 1997 Communication to produce an annual report on the
relations between the Hong Kong Special Administrative Region and the EU. The annual
report intends to assess the state of the relations between Hong Kong and the EU, and to
consider developments in the implementation of the Joint Declaration and Basic Law in Hong
Kong. The report also discusses the interests of EU businesses in Hong Kong, examines
possible areas for developing further cooperation and covers issues which, in the view of one
or other of the parties, require certain action.

2.

DEVELOPMENTS IN HONG KONG

to the rule of law and to the independence of the judiciary
Hong Kong's commitment
continues to be strong. The European Commission shares this commitment and supports the
policy of maximum vigilance over monitoring the robustness of the rule of law and the
operation of the "one country, two systems" principle. However, 1999 was not without some
controversies, most notably in legal and constitutional matters, as illustrated by some of the
following examples.

The Legal System

Legal developments in 1999 were dominated by the difference between the two legal systems
referred to in Hong Kong's constitution. In line with the "one country, two systems" principle,
the autonomy of the Hong Kong Special Administrative Region (HKSAR) is exercised under
the umbrella of the Constitution of the People's Republic of China and also Hong Kong's
common law - with the written constitution of the "Basic Law".

1

Com (97) 171 final.

3

Court of Final Appeal Ruling on the Right of Abode Issue

Following two judgements of the HKSAR Court of Final Appeal (CFA) concerning right of
abode immigration issues, in which the CFA gave an interpretation of, i.a., article 24(2)(3) of
the Basic Law, the HKSAR Government (HKSARG), pursuant to article 158(1) of the Basic
Law, decided to refer to the National People's Congress Standing Committee (NPCSC) in
Beijing the question of interpretation of these provisions of the Basic Law.

the interpretation given by the CFA violated the “original
In the HKSARG’s opinion,
legislative intent” of the relevant provisions. It constituted a serious cause of concern in view
of the large number of potential immigrants that, on the basis of the CFA’s interpretation,
might obtain the right of abode in Hong Kong. It was therefore felt appropriate to request
from the NPCSC a clear statement of the true legislative intent so as to provide certainty and
clarity on the correct interpretation of these provisions and free the courts from future
controversies.

This unprecedented decision was strongly criticised in some quarters as potentially
undermining the authority of the CFA and setting a precedent, which undermined the
independence of Hong Kong's judiciary. Several options had been available to HKSARG,
among them (a) to amend the Basic Law; (b) to seek new rulings by the CFA to limit the
extent of the right of abode granted by its previous decisions or (c) to request the NPCSC to
give its own interpretation of the Basic Law’s right of abode provisions. The HKSARG chose
option (c). For many people, including some of the leading members of the legal profession,
this option was the most damaging in terms of legal and constitutional orthodoxy.

The Standing Committee's interpretation endorsed the HKSARG's view and ruled that the
Hong Kong courts should follow the Committee’s interpretation when adjudicating future
cases on right of abode.

Although some experts continue to debate the legality of the request for interpretation, others
thought the approach followed by the HKSARG not to be contrary to the provisions of the
Basic Law. Politically, however, concern remains that the HKSARG might have set an
unwelcome precedent. For their part, the HKSARG argued that this was an exceptional case,
which had required exceptional action, although they did not rule out the possibility of taking
similar action in the future.

The European Commission considers it is important for Hong Kong's reputation that this
episode should remain wholly exceptional. Besides, it shares the concern expressed by the
Human Rights Committee that “a request by the executive branch of government for an
interpretation under article 158(1) of the Basic Law could be used in circumstances that
undermine the right of a fair trial under article 14” of the International Covenant on Civil and
Political Rights.

Democratic Process

Universal Suffrage

Hong Kong's Basic Law allows for the gradual introduction of universal suffrage, with,
ultimately, the free selection of all members of the Legislative Council (LegCo). In 2004, the
number of elected members of LegCo should increase from one third to fifty percent. The
Basic Law allows for all LegCo members and the Chief Executive to be elected after 2007.
But there is no requirement for this to happen. The HKSARG has been reluctant to give any

4

commitment to, or timetable for, the introduction of a fully elected legislature, despite calls
for a public debate on the issue by opposition parties and some members of the international
community.

The European Commission reiterates the calls it has made on a number of previous occasions
(including Mr Santer’s visit to Hong Kong in 1998, as President of the EC), for the HKSARG
to state its unequivocal commitment to a fully elected system of government and to announce
a timetable for its introduction.

Human Rights

As agreed in 1998, the Chinese Government submitted to the UN reports on the HKSAR for
1999, in accordance with the provisions of the International Covenant on Civil and Political
Rights and the International Covenant on Economic, Social and Cultural Rights, as well as a
report under the UN Convention against Torture and other Cruel, Inhuman or Degrading
Treatment
several
recommendations on a number of issues of concern, including some referred to in this report.
The European Commission welcomes the submission of the reports and encourages the
HKSARG to give full attention to the implementation of the recommendations of the Human
Rights Committee.

or Punishment. The UN's Human Rights Committee made

Labour law

re-instated the laws covering collective
The Provisional Legislative Council has not
bargaining, funding of trade unions and the prevention of anti-union discrimination that were
suspended in 1997. The absence of an adequate legal framework for trade union activity in the
HKSAR has aroused concern on the part of the international trade union movement and the
International Labour Organisation.

Freedom of Travel

A number of incidents have been reported where Chinese dissidents have been prevented
from entering Hong Kong. In other cases, some Hong Kong politicians (including LegCo
members) have been prevented from entering Mainland China without any explanation. While
the refusals to grant entry into China appear to have been decisions made by the Chinese
authorities - without any involvement of the Hong Kong Government,
the cases raise
considerable concern.

Flags

A further legal test case with individual freedom implications relates to the interpretation of
provisions on the desecration of national and regional flags. The Court of Appeal ruled in
March 1999 that certain parts of the National Flag and National Emblem Ordinance enacted
on 1st July 1997 were contrary to Art. 39 of the Basic Law in that they restricted rights and
freedoms enjoyed by Hong Kong residents under the provisions of the International Covenant
on Civil and Political Rights (ICCPR). The Government argued that the limits to freedom of
speech introduced by the Ordinance were justifiable and not contrary to the Basic Law or the
ICCPR. The Hong Kong SAR Government requested the Court of Final Appeal to review its
judgement.

On 15 December, the Court of Final Appeal issued its judgement. The CFA overruled the
Court of Appeal’s decision and upheld the consistency of the Ordinance with both the Basic

5

Law and the International Covenant on Civil Rights. The Court stressed in its reasoning that
the type of restrictions on the freedom of speech contained in the Ordinance were limited and
justified by the need to protect other values, which were also worthy of constitutional
protection. The CFA cited as reference decisions of Italian and German courts upholding the
constitutionality of laws which protect the national flag and punish, by imprisonment or
imposition of fines, the non-respect of their provisions.

Rendition of Offenders

Concern has also been expressed about the lack of arrangements for rendition of offenders
between the mainland and the SAR. Two cases brought special attention: one mainland
resident and several Hong Kong residents were tried, convicted and executed in the mainland.
All of them had allegedly committed crimes in Hong Kong. The fact that the Hong Kong
authorities had not called for jurisdiction in those cases troubled a number of legal and human
rights observers. The HKSARG has said repeatedly that discussions are being conducted with
the Central Government authorities on an agreement in this area.

Press Council

The Law Reform Commission introduced, in September, a proposal to set up a press council
to stop media invasion of privacy. Journalists and media professionals overwhelmingly
rejected the proposal out of fear that such a council could threaten Hong Kong's hard-earned
press freedom. Under the proposal, a set of professionals' codes of practice would be drawn
up and any violation of these codes could bring heavy fines.

The proposal came amid growing concerns in Hong Kong over the quality of the local media
and cases of unethical practice by journalists, such as intrusion into people's private lives. At
the time of compiling this report, discussions on the proposal were continuing.

Controversy was also triggered by the statement by a mainland Chinese official regarding the
reporting by the Hong Kong media of events in Taiwan following the presidential election
there.

Conclusions

As a general conclusion concerning the respect of fundamental rights and freedoms, the
European Commission wishes to reiterate its firm support for the principles of the Basic Law
of the SAR and in particular those that guarantee those fundamental freedoms. The
implementation of the concept of “one country, two systems” should not impede or limit the
respect of those fundamental principles, since they form an integral part of the concept itself.
Despite the doubts expressed about the above issues, and the concerns they have raised, Hong
Kong clearly remains a free society.

The Economy

The economic situation in Hong Kong after the handover was badly affected by the Asian
financial crisis. The economic difficulties, however, had nothing to do with political
developments and were completely unrelated to the transfer of sovereignty, even though the
two events coincided in time. The first signs of recovery are evident and in the second quarter
of 1999 Hong Kong emerged from 15 months of recession. Other economic indicators also
showed positive trends during 1999: the trade deficit narrowed, re-exports increased, stock

6

market prices recovered their July 1997 level, and unemployment stabilised. Speculation on
the stock and currency markets has abated and the peg to the US dollar is not, unlike in 1998,
the subject of discussion and controversy.

Hong Kong’s market economy continues to operate in very much in the same manner as it did
before the handover. Isolated and controversial developments, such as the Government’s
intervention in the stock, market have been the exception rather than the norm. For most
observers they are the result of economic, and not political, developments. Some liberalisation
is taking place in areas which were highly regulated and where competition was restricted,
such as the banking sector, telecommunications, airport services, etc. in part as a result of
WTO commitments and in part as a result of the HKSARG’s own initiative.

The renewed prospects for China’s membership of the WTO will present challenges to Hong
Kong, but will also offer new opportunities as well.

On the economic front, two major events in 1999 were the liberalisation of the financial
markets through the demutualisation, merger and listing of the securities and futures
exchanges, and the first steps taken to dispose of the stock portfolio that the Government
acquired in the summer of 1998.

All factors in the economic area seem to indicate that the HKSARG is conducting its finances
and its economic policy with full independence from the Central Government, in accordance
with the provisions of the Basic Law. In addition the Heritage Foundation recently confirmed
HK being one of the freest economies in the world.

3.

EU PRESENCE AND EU INTEREST IN HONG KONG

Hong Kong is one of the most important cities, if not the most important, in terms of location
for EU interests in Asia. About 46,000 EU citizens from all the Member States are resident in
Hong Kong. In 1999, at least 250 EU companies were using Hong Kong as their regional
headquarters, while 471 had regional offices in the city.

In terms of foreign investment the EU was, in 1997, the number one source of investment for
Hong Kong. The cumulative value of realised direct investment from the EU in that year
amounted to ECU 29 billion, accounting for 34% of the total. Although figures are not yet
available for 1999, indications are that EU investment continued to be strong in that period.

The EU presence in Hong Kong covers a large variety of sectors. EU industry is involved in a
number of activities ranging from financial services,
trading and manufacturing to
communications and construction. In the insurance sector, EU companies ranked first in
number of overseas insurers operating in Hong Kong. Forty-six banks licensed in Hong Kong
were incorporated in the EU. In 1998, EU companies were awarded contracts totalling ECU
145 million in the public works sector. The EU also has a very important role in shipping and
in air transport.

The EU was Hong Kong’s third supplier of goods in the first eleven months of 1999, after
China and Japan, and was Hong Kong’s third biggest market for its domestic exports, after
the United States and China.

The EU’s economic interest in Hong Kong is, of course, not limited to the Hong Kong market
but looks beyond to China and other countries in the region. Re-exports of EU origin goods

7

through Hong Kong to China increased by some 2500 times, from HK$ 18 million in 1978
(the year China announced its modernisation programme) to HK$ 44.5 billion in 1999.

Statistical data on EU-Hong Kong trade for the period 1985-1999 is contained in Annex I to
the report.

The EU is also active in Hong Kong in the cultural and educational fields and a number of
European cultural institutions are present in Hong Kong. These institutions, together with the
Consulates General of the EU Member States and the Office of the European Commission in
Hong Kong, have been cooperating in a Working Group for Culture which, for seven years,
has organised a number of events with a European focus in Hong Kong and in Macau. In
addition, European universities have developed a network of cooperation projects with Hong
Kong universities.

Under the EC’s Framework programme for research and technological development, Hong
Kong receives financial support from the EC for its participation in the EC’s dedicated S&T
programme of Research for Development. Hong Kong is involved in 2 joint research projects
on agriculture development issues with the financial support of the EC. The combined value
of these projects (which include European as well as other Asian partners) is 1.2 Million
Euros in grant support from the Research for Development programme. In addition Hong
Kong is eligible to participate on a non-financed basis in a broad range of S&T programmes,
as result of the EU/China S&T Agreement, however so far Hong Kong is not active in these
programmes.

4.

HONG KONG SAR AS AN INTERNATIONAL PARTNER

The HKSAR is fully competent, in accordance with the Basic Law, to conduct its own trade
policy as a separate Customs territory. As such it is an independent member of the WTO and
of a number of other international organisations.

Hong Kong is a particularly active Member of the WTO and maintains close and regular
contact with the European Commission. The EU and Hong Kong share a number of common
goals and objectives in the WTO and have a close working relationship, which is greatly
appreciated by the EU.

5.

COOPERATION BETWEEN THE HONG KONG SAR AND THE EUROPEAN UNION

1999 saw an important milestone in expanding cooperation between HKSAR and the EU with
the signature and entry into force of the Customs Cooperation Agreement2 between the
European Community and Hong Kong (China). This cooperation Agreement is the first
binding Customs Cooperation Agreement concluded by the HKSAR since the handover. It
was negotiated and concluded under Article 151 of the Basic Law, which provides that the
HKSAR may, on its own, conclude and implement agreements in trade and economic matters.
It is a good example of the high degree of autonomy that the HKSAR enjoys as a separate
customs territory. The Agreement underlines the close economic ties between the HKSAR
and the EU, and will facilitate exchange of information and coordination between customs
authorities to ensure the effective application of their respective customs legislation. The
Agreement provides for mutual administrative assistance and for exchange of information and

2

OJ L 151 of 18.6.1999, p. 21-26.

8

expertise. The Agreement formalises the cooperation between Customs authorities, which was
already taking place, and puts it on a more permanent footing. The Commission welcomes
this upgrading of the cooperation and looks forward to further cooperation in other fields.

Furthering Cooperation

The Commission believes that the conditions are ready for furthering cooperation between the
European Union and Hong Kong and considers,
that education and the
environment are areas in which cooperation could be developed. As noted above, European
and Hong Kong universities have established a network of cooperation projects and many
exchanges of students and teachers are taking place. There is, however, considerable scope for
expanding this co-operation and it is an area that has been designated as a priority by the
Chief Executive of the SAR, in his most recent Policy Address.

in particular,

The environment has continued to deteriorate in recent years, paradoxically at the very time
when manufacturing industry has moved away from Hong Kong and when the technical
means can be found to prevent environmental damage. The environment was also designated
as a priority in the Chief Executive’s 1999 Policy Address. The European Union has
considerable expertise and know-how in this area and looks forward to exploring ways in
which further cooperation and interchange can be developed.

Meeting Demands

The protection of Intellectual Property Rights (IPR) in Hong Kong continues to be a matter of
concern for the European Union. This concern is shared by the industry and other third
countries, notably the United States. The HKSARG has made considerable efforts recently to
improve the situation: enforcement has been stepped up and an increased number of officers
have been assigned to combat copyright piracy and manufacturing and selling of counterfeit
products. These efforts are extremely welcome and the EU and Hong Kong will continue to
cooperate within the framework of the Customs Cooperation Agreement, signed in May.

The European Union made representations to the HKSARG in relation to this issue and,
through the work of its Trade Commissioners’ Group in Hong Kong is carefully monitoring
developments in this area.

The Commission applauds the efforts undertaken by the Hong Kong authorities and
encourages the HKSARG to continue the fight against piracy and counterfeiting, while
ensuring that production equipment will not simply be moved to neighbouring countries.

Visa Free access

On 26 January 2000 the Commission adopted a proposal for a Council Regulation where
holders of passports from Hong Kong SAR have been added to the proposed list of countries
whose nationals would be exempt from the visa requirement.

This reflects the Commission’s assessment of HKSAR against various criteria such as its
legal situation (one country, two systems), the provisions relating to immigration, border
controls and security of travel documents.

Its geographical location and its air-traffic facilities make HKSAR one of the major transit
points in Asia for travellers towards Europe. For this reason, the HK Immigration Department
dedicates to the “Control Branch” important human and technical resources to deter illegal

9

migrants from different Asian countries, and in particular those from Mainland China, from
taking advantage of those transit facilities.

According to the Basic Law, the HKSAR Government is authorised to issue travel documents
(passports, documents of Identity) to Chinese citizens who hold permanent identity cards of
the HKSAR which state their right of abode in the Region.

The HKSAR Passport issuing system and the record check system for authentication utilise a
technologically advanced procedure.

The HKSAR authorities issue also Documents of Identity for visa purposes to HKSAR
residents who cannot obtain national passports from any other State/Region. The vast
majority are Chinese nationals from the Mainland who are not yet eligible to hold a HKSAR
passport (they have not completed a 7 years continuous residence).

Both documents (passport and document of Identity) contain security and anti-forgery
features.

The Commission hopes that its assessment will be shared both by the Council and by the
European Parliament during the procedure for adoption of the proposed draft Regulation.

The EU-HK and HK-EU Business Cooperation Committees

The EU-HK and HK-EU Business Cooperation Committees held their second meeting in
October 1999. The Committees play an important role in promoting contacts between Hong
Kong and EU business circles. The changes that are taking place in the HKSAR as well as the
very important changes taking place in Europe, such as the introduction of the Euro and
furthering enlargement of the EU, require a clear and regular exchange of information, which
the Committees can achieve.

6.

CONCLUSIONS

The European Commission considers that two and a half years after the handover of Hong
Kong to China, the “one country, two systems” principle remains intact and is generally
working well. Hong Kong remains one of the most free societies in Asia. There have been
some difficulties, but we should not exaggerate them. The European Commission will
continue to monitor the position closely, particularly the continuing independence of the
courts and adherence to the rule of law.

The economy is recovering well from the effects of the Asian financial crisis. EU companies
continue to invest heavily in Hong Kong, which demonstrates confidence in its future. The
European Commission welcomes the continuing close working relationships it has with Hong
Kong in international trade matters, and looks forward to pursuing together, through the
WTO, a number of shared objectives.

It will be important for Hong Kong’s image internationally that the HKSARG and the
Government of China clearly demonstrate their continuing commitment to the “one country,
two systems” principle. Hong Kong people are running Hong Kong and doing so effectively.
The European Commission notes the provisions in the Basic Law regarding the pace of
democratisation and encourages open and public debate on this matter in Hong Kong. A faster
pace of democratisation would set to rest many of the anxieties expressed about Hong Kong’s
present and future.

10

The European Commission considers co-operation with Hong Kong should be increased in a
number of ways, to the benefit of both parties, and will seek to identify suitable opportunities
to take this forward in the year ahead.

11

1.1.

Trade Trend between the EU and Hong Kong for the period Jan 1985 – Oct
1999

ANNEX 1

IMPORTS

EXPORTS

(ECU
MILLION)

(ECU
MILLION)

TOTAL
TRADE (ECU
MILLION)

BALANCE

(ECU
MILLION)

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Jan-Oct
(million Euro4)

19993

Source: EUROSTAT

4819

5300

5507

6318

6413

5909

6401

5908

6438

6493

7156

7262

8371

9706

8475

4551

4229

4777

6767

7022

6598

7395

8782

11392

13087

15796

17509

20441

17296

12701

9370

9529

10284

13085

13453

12507

13796

14690

17830

19580

22952

24771

28812

27002

21176

-268

-1071

-730

450

591

689

994

2874

4954

6594

8639

10248

12070

7591

4226

For the period Jan 1985 to Dec 1998, total bilateral trade between the EU and Hong Kong
increased almost threefold and the EU balance of trade was transformed from a deficit of
ECU 268 million in 1985 to a surplus of ECU 7591 million in 1998. EU imports from Hong
Kong doubled, while exports increased more than three times. It should be noted that the
decrease of EU exports to Hong Kong between 1997 and 1998 was mainly due to the Asian
Financial Crisis.

3

4

Latest available statistics from the Eurostat.
On 1 January 1999, the Euro became the official currency of 11 Member States of the European Union
with a fixed conversion rate against their national currencies. At the same time, the ECU disappeared as
an international and common unit for comparison of EU figures.
Figures from 1985 to 1994 include only 12 Member States

12