Report from the Commission to the Council and the European Parliament - Annual Report by the European Commission on the Hong Kong Special Administrative Region
Date: 2003-09-15
Institutions: European Commission
Subjects: Hong Kong, democratisation, economic situation, legislation, political situation, report, the EU's international role, trade policy

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 15.9.2003
COM(2003) 544 final

REPORT FROM THE COMMISSION TO THE COUNCIL
AND THE EUROPEAN PARLIAMENT

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

   
CONTENTS

1.

2.

3.

4.

5.

6.

7.

8.

Introduction.................................................................................................................. 3

Reaffirmation and implementation of the "one country, two systèmes"...................... 3

Institutional developments ........................................................................................... 5

Legislative Developments............................................................................................ 7

Rights of assembly and demonstration. ..................................................................... 10

The Economy ............................................................................................................. 11

European union - Hong Kong relations. .................................................................... 12

Conclusion ................................................................................................................. 14

2

HONG KONG: Annual Report 2002

1.

INTRODUCTION

As in the Commission’s previous annual reports, this 2002 report aims to assess the state of
development of the Hong Kong SAR and its relations with the European Union.

In  accordance  with  the  Commission’s  mandate,  the  report  analyses  progress  in  the
implementation of the “One Country, Two Systems” principle, and reviews developments in
the  legislative,  institutional  and  individual  rights  fields.  The  document  also  provides  an
assessment  of  economic  developments,  and  reports  on  the  main  aspects  of  EU-Hong  Kong
relations.

2.

– 

REAFFIRMATION  AND  IMPLEMENTATION  OF  THE  “ONE  COUNTRY,
TWO SYSTEMS” PRINCIPLE

Reaffirmation of the principle

The  Central  Government  of  Beijing  again  reiterated  its  adherence  to  the  “one  country,  two
systems”  principle  in  its  official  statements.  In  a  speech  to  the  National  People’s  Congress
(NPC) on 5 March 2002, Prime Minister Zhu Rongji stated:

“We  should  fully  implement  the  principle  of  “one  country,  two  systems”  and  the
Basic Law of Hong Kong and Macao Special Administrative Regions. It is our firm
and  unswerving  objective  to  maintain  the  long-term  stability,  prosperity  and
development there.  The Central  Government  will continue to render  full support to
the  efforts  of  the  governments  and  Chief  Executives  of  Hong  Kong  and  Macao  to
govern  the  regions  in  accordance  with  the  law,  and  it  will  further  strengthen
economic,  trade,  scientific,  technological,  cultural  and  education  exchanges  and
cooperation  between  the  Mainland  and  Hong  Kong  and  Macao.  We  have  full
confidence in the futures of Hong Kong and Macao.”

In a speech during the 1 July celebrations on the fifth anniversary of Hong Kong’s return to
China  and  the  inauguration  of  the  second  term  of  the  HKSAR  government,  President  Jiang
Zemin said: “In a nutshell, what we have learnt in the past five years is that the policy of “one
country, two systems” and the Basic Law of the Hong Kong SAR must be implemented in a
comprehensive and accurate manner under all circumstances.”

– 

Implementation of the principle

(cid:1)  The practice of Falun Gong

The Falun Gong, a legally registered group in Hong Kong, continues to enjoy the freedom to
practice and does so in venues which include those run by government departments (Leisure
and Cultural Services Department).

3

Nevertheless its practice and sit-in protest  outside the Central People’s Government  Liaison
Office on 16 March was considered as causing obstruction. The police moved 16 Falun Gong
demonstrators,  including  four  from  Switzerland,  from  outside  the  Central  Government
Liaison Office.  Both police and demonstrators claimed to have sustained injuries during the
removal.

The 16 were subsequently arrested and charged with obstruction or assault. The trial started
on  16  June  with  about  30  Falun  Gong  practitioners  and  a  representative  from  the  Swiss
Consulate  in  Hong  Kong  in  attendance.  The  verdict,  delivered  in  mid-August,  found  all  16
guilty of causing public obstruction. Three were also convicted of assaulting police officers.
They were fined between HK$ 1,300 and HK$ 3,800, well below the maximum penalties.

In his verdict, the magistrate recalled that the right to protest and hold demonstrations is not
absolute and its exercise requires a very delicate balance. The magistrate ruled that the arrests
were  lawful,  noting  that  the  16  had  ignored  repeated  warnings  and  that  police  officers  had
been sensible and reasonable in asking the practitioners to move on.

(cid:1)  Right of abode

The Court of Final Appeal ruled on 29 January 1999  with  a broad definition  of the  right of
abode of mainland Chinese in Hong Kong. The Court’s interpretation was then overturned in
June 1999 by the interpretation of the Standing Committee of the National People’s Congress,
made at the request of the HKSAR Government.

5,073 applicants in the appeals who considered themselves to be in the same situation as the
parties to the case of 29 January 1999 claimed that they should have their claims for right of
abode re-examined in accordance with the Appeal Court’s judgement.

In  a new  ruling  on  10  January  2002,  the  Court  of  Final  Appeal  ruled  by  a  majority  of  four
judges  to  one,  that  most  of  the  claimants  did  not  have  the  right  of  abode.  However  it
recognised  that  several  hundred  appellants  had  a  “legitimate  expectation”  based  on
reassurances from government departments and would be entitled to the same right of abode,
as those involved in the Court’s 29 January ruling. The fifth judge’s opinion was that all the
applicants should benefit from the notion of “legitimate expectation”.

The  majority  verdict  of  the  Court  was  warmly  welcomed  by  academics,  lawyers  and  the
government,  although  some  politicians  and  various  social  bodies  urged  the  government  to
grant  the  right  of  abode  to  all  applicants  on  humanitarian  grounds.  The  SAR  government
decided  to  keep  to  the  ruling  of  the  Court  of  Final  Appeal,  but  together  with  mainland
authorities, agreed to a period of grace until the end of March to allow unsuccessful claimants
to return to the mainland without being charged for illegally entering or overstaying in Hong
Kong.  Many  of  the  unsuccessful  claimants  returned  voluntarily  ahead  of  the  31  March
deadline. The government removed others who tried to remain illegally.

The 10  January  ruling  of  the  Court  of  Final  Appeal  laid  down  broad  legal  principles  in  the
handling of right of abode cases and -this could help to avoid future disputes over abode.

4

3.

– 

INSTITUTIONAL DEVELOPMENTS

Election of the Chief Executive for a second term

In  the  secondelections  for  Chief  Executive  in  Hong  Kong,  the  Chief  Executive  Mr  Tung
Chee-hwa was the only  validly-nominated  candidate. His nomination was supported by  714
of  the  800-member  Election  Committee.  Other  candidates  were  de  facto  excluded,  as
nominations needed to be supported by at least 100 members, following the adoption of the
Chief Executive Election Bill in 2001. Mr Tung was therefore elected for a second term at the
end of February, without a formal vote.

The legislator from the Legal constituency Margaret Ng, urged democratic forces to unite and
make  immediate  preparations  for  the  third  Chief  Executive  elections.  She  apologised  to  the
people of Hong Kong  on  behalf  of  the democratic parties  for  not  having  participated  in  the
second  election  process  (the  democratic  parties  had  an  extensive  debate  about  whether  to
participate in the election and failed to put up candidates in time).

– 

Introduction of the accountability system

As  announced  in  his  Policy  Addresses  of  2000  and  2001,  the  Chief  Executive  unveiled  the
accountability system for members of Government on 17 April 2002. The new scheme means
that  political  appointees  rather  than  senior  civil  servants  have  been  put  in  charge  of
government departments. These new Secretaries serve for a contract period not exceeding the
term  of  the  Chief  Executive,  and  are  answerable  to  him  for  both  policy-making  and  policy
implementation.  The  Secretaries  are  fully  accountable  and  may  be  required  to  resign  for
serious  failure  in  policy  outcome,  serious  mishaps  in  implementation  or  for  grave  personal
misconduct.

According  to  the  Chief  Executive,  the  new  accountability  system  will  have  the  following
implications :

– 

– 

– 

All  Secretaries  will  also  become  members  of  the  Executive  Council  (ExCo),
which  advises  the  Chief  Executive  and  also  includes  members  from  the
community and some legislators.

The top senior civil servants in each  government department will be renamed
Permanent  Secretaries.  Their  responsibilities  will  be  limited  to  policy
implementation, rather than policy-making as in the past.

The  government  will  seek  to  improve  its  working  relationship  with  the
legislature.  All  Secretaries  will  work  personally  with  Legislative  Council
(LegCo) members and seek their support for policy and other initiatives.

The  new  system  was  widely  debated  by  academics,  the  media  and  LegCo  members,  who
called for the new Secretaries to be also held accountable to LegCo by appearing for audition
before appointment and by agreeing to resign should a motion of no confidence be adopted.
Nonetheless, LegCo passed a government motion on 29 May endorsing the new system. On
24  June,  the  Chief  Executive  announced  the  composition  of  his  new  government,  after
approval by the Central Government. The new government took up its duties  on 1 July, the
date of commencement of the Chief Executive’s second term.

5

The  first  six  months  of  the  new  system  saw  Government  members  become  aware  of  their
images vis-à-vis public opinion and LegCo members. This led some of them to make public
statements on policy issues without apparent prior coordination within ExCo. After a public
protest  by  an  ExCo  member,  the  Chief  Executive  called  several  brainstorming  and  co-
ordination meetings to establish more cohesion in the new government.

The  introduction  of  the  accountability  system  on  1  July  resulted  in  the  traditional  October
Policy Address by the Chief Executive being postponed until January 2003.

– 

Pace of democratisation

The Basic  Law stipulates that, after  a  review  in 2007,  elections  for  Chief  Executive  and  all
members of LegCo may be held by universal suffrage, which is the “ultimate aim” set by the
Basic  Law.  An  interview  with  Chinese  Vice-Premier  Qian  Qichen  in  the  South  China
Morning  Post  at  the  end  of  June  triggered  concerns  among  some  about  the  commitment  to
these aims by both the Central and Hong Kong SAR Governments.

Vice-Premier  Qian  encouraged  Hong  Kong  to  “design  its  own  path  for  development
according  to  its  actual  conditions  and  proceed  gradually”  and  not  to  “blindly  copy  the
experience  of  other  places.”  He  appeared  to  rule  out  universal  suffrage  by  saying  that  the
current  system  of  election  should  be  kept,  as  the  current  model,  based  on  functional
constituency elections, was an “effective way to ensure that people from all walks of life have
a  balanced  participation  in  public  life.”  Controversy  grew  when  Chief  Secretary  Donald
Tsang appeared to agree with Vice Premier Qian, by saying that the election system should be
something  “home-grown”,  “representative  but  not  necessarily  simply  cloned  from
Westminster or US Congress”.

While  the  then  chairman  of  the  Democratic  Party,  Martin  Lee,  said  Vice-Premier  Qian’s
statement  “disregarded  or  violated  the  Basic  Law”,  some  leaders  of  other  parties  such  as
Ambrose Lau of the Hong Kong Progressive Alliance and Eric Li of the Breakfast Group also
said  that  Mr  Qian’s  remarks  were  only  “personal  views”  and  should  not  affect  Hong  Kong
people’s right to define their constitutional system.

The then Secretary designate for  Constitutional  Affairs,  Stephen  Lam,  said  the  Government
would  explore  constitutional  development  “on  the  basis  of  the  Basic  Law  and  the  “one
country,  two  systems”  principle.”  However,  when  representatives  of  democratic  groups
submitted  a  petition  to  the  Chief  Executive  at  the  end  of  July,  calling  for  a  constitutional
review and elections by universal suffrage, Mr Lam replied that the Government did not have
a  firm  agenda  for  the  public  consultation  exercise  but  that  it  would  ensure  that  there  was
adequate time for it to be completed before 2007.

– 

Proposals to subsidise legislative elections

As there would be legislative elections in 2004, Secretary for Constitutional Affairs Stephen
Lam  suggested  in  December  that  the  government  should  partly  subsidise  the  campaign
expenses  of  those  candidates  who  are  elected  or  who  receive  at  least  5%  of  the  vote.  Each
valid vote received by such candidates would be subsidised to an amount of ten Hong Kong
dollars,  subject  to  a  ceiling  of  half  of  the  total  expenses,  the  aim  being  to  encourage  the
participation of parties and independent candidates in the election process.

This suggestion was well received by Hong Kong political parties. However, the government
stated that it is inappropriate to draft a bill on political parties.

6

The  European  Commission  welcomes  the  idea  of  subsidising  election  expenses,  as  it  will
encourage more Hong Kong citizens to participate in the democratisation process.

4.

– 

LEGISLATIVE DEVELOPMENTS

Article 23 of the Basic Law

On 24 September 2002, the Security Bureau of the Hong Kong Special Administrative Region
Government  published  a  Consultation  Document  on  the  legislative  proposals  to  implement
Article  23  of  the  Basic  Law.  Article  23  requires  the  HKSAR  to  “enact  laws  on  its  own  to
prohibit  any  act  of  treason,  secession,  sedition,  subversion  against  the  Central  People’s
Government”.  It  also  deals  with  the  issues  of  State  secrets  and  the  activities  of  foreign
political organisations in Hong Kong.

Many  of  the  issues  raised  by  Article  23  are  considered  politically  sensitive.  Ever  since  the
Basic  Law  was  published  in  1990  and  brought  into  effect  in  July  1997,  there  have  been
anxieties  over  the  implementation  of  Article  23.  During  the  first  five  years  following  the
handover, the HKSAR Government made no move to legislate on Article 23. At the time, its
priority  was  the  smooth  transition  and  implementation  of  the  “one  country,  two  systems”
principle.  After  the  Secretary  for  Justice,  Miss  Elsie  Leung,  went  on  a  consultation  visit  to
Beijing at the end of February, it was reported that Mr Qiao Xiaoyang, Deputy Chairman of
the  Legal  Work  Committee  of  the  National  People’s  Congress,  had  reiterated  that  in
compliance with the Basic Law, the  HKSAR  is  obliged to enact Article  23.  In  an interview
with Hong Kong media at the end of June, Vice-Premier Qian Qichen stated again that “one
of the tasks before the SAR Government is to enact Article 23 of the Basic Law”.

Soon after Chief  Executive  Tung’s  reappointment in July  2002  for  another  5-year  term,  the
Government decided that the time was right to put forward legislation.

The Consultation Document set out, in broad terms, what the SAR  Government  intended to
do. Hong Kong already had domestic legislation on treason, sedition, State secrets, activities
of and ties with foreign political organisations inherited from the British period, and the SAR
Government proposed to amend the existing legislation in order to reflect the current realities.
The offences of subversion and secession have been added for the first time. The Consultation
Document  proposed  to  create  a  new  power  to  proscribe  organisations  affiliated  with  any
Mainland  organisation  that  had  been  proscribed  there  on  the  grounds  that  it  endangered
national  security.  The  document  also  recommended  granting  special  investigative  powers
(emergency search) to the police for these offences.

The public consultation period ended on 24 December 2002. The SAR Government intended
to draft legislation to be tabled in the Legislative Council by February 2003. The Government
wanted  to  see  the  legislation  enacted  in  July  2003,  but  stated  this  was  not  an  absolute
deadline.

The three-month consultation produced a record 97,000 submissions and 340,000 signatures.
Although  initial  reactions  to  the  document  were  quite  mild,  as  time  passed  and  political
parties,  human  rights  organisations,  business  and  international  communities  started  raising
concerns, Article 23 became a major political issue in Hong Kong.

Most  local  and  foreign  associations,  bodies  and  parties  recognise  that  the  HKSAR
Government  has  a  constitutional  obligation  to  legislate  on  this  matter.  Others,  who  initially
claimed  that  there  was  no  need  for  anti-sedition  laws  in  Hong  Kong,  have  increasingly

7

stressed  the  defence  of  civil  liberties  and  press  freedom.  The  Democratic  Party  and  the
Frontier,  as  well  as  major  local  and  international  NGOs  and  associations  (Amnesty
International,  Human  Rights  Watch,  Hong  Kong  Human  Rights  Monitor,  Hong  Kong
Journalists  Association,  etc.)  are  strongly  opposed  to  the  Article  23  proposals.  They  have
expressed  serious  concerns  that  freedoms  in  Hong  Kong  will  be  eroded  and  that  the
perception of the outside world of Hong Kong as a place to do business may be affected.

Part  of  the  business  community  also  expressed  fears  that  Article  23  runs  contrary  to  the
principle  of  transparency  and  openness  of  information.  Similar  concerns  were  expressed  by
the banking sector.

Almost all parties that contributed to the debate over Article 23 seemed to agree on the fact
that in the absence of draft legislation, it was impossible to make an accurate assessment of
the possible effects in respect of human rights and fundamental freedoms. Several local and
international  associations,  with  the  Hong  Kong  Bar  Association  at  the  helm,  called  on  the
Government to provide a text in the form of a white bill and to undertake a second round of
public consultation before drawing up the blue bill for first reading in the Legislative Council.
The  Hong  Kong  General  Chamber  of  Commerce,  who,  however,  underlined  the  need  for
timely legislation to implement Article 23, also echoed this position. Furthermore, Mrs Anson
Chan, former Chief Secretary for Administration of HKSAR, argued that the “devil is in the
detail”. She stressed that it was more important to get the legislation right than to rush to meet
a deadline, and that a white bill would be “reassuring for all”.

On the international front, the EU, the United Kingdom, USA, Canada and Australia, as well
as the Chambers of Commerce of the UK and USA in Hong  Kong issued statements on the
Consultation Document. The EU, in its statement of 23 December 2002, noted the concerns
that  had  been  raised  in  Hong  Kong  and  in  particular  the  extra-territorial  effect  of  some
proposed offences as well as the broad definition of those offences, and called on the HKSAR
Government  to  ensure  that  this  legislation  and  its  implementation  would  not  undermine  the
principles of the rule of law and that the rights and freedoms outlined in the Joint Declaration
and the Basic Law would be protected.

On 19 December 2002, the European Parliament adopted an unanimous resolution calling on
the  HKSAR  Government  to  ensure  that  Article  23  proposals  would  not  be  used  to  silence
opposition, restrict freedom of speech, the freedom of the press and of publication, freedom of
association, freedom to demonstrate, the right and freedom to form trade unions, to strike and
undertake  other  cultural  activities  in  accordance  with  Articles  27  and  34  of  the  Basic  Law.
Additionally,  it  called  on  the  Government  to  publish  a  draft  bill  setting  out  clearly  detailed
provisions to be followed by further consultations.

The  HKSAR  Government  defended  its  proposals  and  had  as  at  the  end  of  2002  refused  to
provide draft legislation in the form of a white bill. Nevertheless, senior government officials
tried to reassure the public by arguing that the proposals under Article 23 would be consistent
with human  rights  guarantees in the  Basic  Law  and  in  the  International  Covenants  on  Civil
and  Political  Rights  and  on  Economic,  Social  and  Cultural  Rights.  The  Government  would
review the proposals in the light of the submissions received, in particular with regard to the
offence  of  possessing  seditious  publications,  the  investigative  powers  of  police  and  the
avenues  of  appeal  if  a  local  organisation  were  to  be  banned.  The  Government  also  stressed
that the best safeguard to Article 23 was already in place, namely Article 39 of the Basic Law,
which stipulates that no law can be validly enacted if it contravenes international standards of
human rights.

8

Article  23  legislation  is  undoubtedly  the  most  important  and  sensitive  legislation  to  be
introduced in Hong Kong since the handover in July 1997. Its potential impact on freedomin
Hong  Kong  and  the  territory’s  lifestyle  is  far-reaching.  Over  the  three-month  consultation
period, the gap between the  camps for and against Article 23 was  a divisive factor in  Hong
Kong society. There were two major public demonstrations in December 2002 about Article
23, one against (estimated 60,000 people) and one for (est. 40,000 people).

The fact that these  views  were  expressed  freely  reflects  the  openness  and  freedom  of  Hong
Kong.  Article  23  is  a  matter  that  touches  the  heart  of  “one  country,  two  systems”.  The
European  Commission  will  continue  to  monitor  this  important  issue  very  closely,  paying
particular attention to its effects on the respect of human rights and civil liberties.

– 

Anti-terrorism legislation

As Chair of the OECD’s Financial Action Task Force (anti-money laundering body) (FATF),
Hong  Kong  hosted  a  FATF  plenary  session  in  January  and  played  a  leading  role  in
formulating the Recommendations of the Financial Action Task Force on money laundering.

As part of China, Hong Kong is also required by the Central Government to take appropriate
measures  to  implement  United  Nations  Security  Council  Resolution  UNSCR1373.  On  17
April,  the  SARG  introduced  the  United  Nations  (Anti-Terrorism  Measures)  Bill  to  the
Legislative Council. The bill aims at strengthening Hong Kong’s ability to counter the flow of
funds to terrorists and terrorist organisations.

Several  aspects  of  the  Government’s  initial  draft  Bill  were  hotly  debated  in  LegCo  as  they
raised fears on civil liberties and the Government subsequently amended several  points  (the
Chief Executive’s power to gazette the names and property of terrorists, the right to apply to
the Court of Appeal for compensation, etc). All but one government motion for amendment
was  passed.  LegCo  finally  approved  the  United  Nations  (Anti-Terrorism  Measures)
Ordinance on 12 July.

– 

The first steps towards legislation on racial discrimination?

The Home Affairs Department wrote to 54 ethnic groups and NGOs seeking their views and
input  on  racial  discrimination  issues.  The  majority  of  NGOs  expressed  support  for  the
introduction  of  anti-racial  discrimination  legislation  in  Hong  Kong.  In  January,  the
chairwoman of the Equal Opportunities Committee also urged the government to enact a law
to prohibit racial discrimination.

The HKSAR government responded by  creating  a Race Relations Unit in the  Home  Affairs
Bureau  and  a  “Committee  for  the  Promotion  of  Racial  Harmony”,  comprising  government
officials and NGO representatives.

These steps were taken in response to  concerns raised by the United  Nations Committee  on
the Elimination of Racial Discrimination whose chairman, Ion Diaconu, visited Hong Kong in
early November 2002. He reiterated the Committee’s concern about the absence of a Racial
Discrimination law in Hong Kong. The SAR government reaffirmed that public consultation
procedures were underway but no final decision had yet been taken.

9

5.

RIGHTS OF ASSEMBLY AND DEMONSTRATION.

Hong Kong people continue to enjoy their basic fundamental rights and freedoms following
the handover and many demonstrations and protests took place. However the exercise of these
rights has resulted in some incidents and controversies relating to the Government’s handling
of demonstrations.

Three  Hong  Kong  political  activists  of  the  radical  April  5  Action  Group  defied  the  Public
Order  Ordinance  by  organising  a  rally  on  10  February  without  obtaining  a  “letter  of  no
objection”  from  the  police.  They  were  subsequently  arrested  on  9  May  on  the  charge  of
organising an unauthorised assembly. This was a significant development, insofar as since the
handover  the  SAR  Government  had  been  lenient  in  handling  such  demonstrations  and  no
specific group had ever been prosecuted for breaching the Public Order Ordinance.

A local court found the three political activists guilty on 25 November 2002. They were each
bound  over  to  be  of  good  behaviour  for  three  months  and  ordered  to  sign  a  HK$500  bond.
The  Chief  Magistrate  rejected  the  claims  that  the  Public  Order  Ordinance  had  breached  the
provisions  of  the  Basic  Law  and  the  Bill  of  Rights  Ordinance.  Secretary  of  Justice  Elsie
Leung  denied  suggestions  that  the  case  was  politically  motivated.  She  argued  that  the  case
had been taken to court  because the main  issue was  about whether  or not a  crime had been
committed.

After the Court of Final Appeal’s ruling of 10 January in the right of abode case, a series of
demonstrations and sit-ins were organised in Chater Garden (next to the Legislative Council
building) by  defendants  who  had  lost  their  claim.  On  24  April  300  police  officers,  together
with immigration operations personnel moved in to Chater Garden to clear abode-seekers who
refused to be sent back to Mainland China. The clearing operation came one day after more
than 100 abode-seekers had trapped Secretary for Security Mrs Regina Yip in her car outside
the Legislative Council for an hour, as they protested against their treatment. Scuffles broke
out  during  the  clearing  operation  and  the  police  handcuffed  two  media  personnel.  This
incident drew strong criticisms from media organisations and some legislators, who accused
the police of using excessive force and suppressing press freedom.

On  1  October,  an  activist  was  apprehended  burning  the  Chinese  national  flag  in  a  protest
staged  by  the  radical  April  5  movement  against  the  National  Day  celebration.  The  new
Director  of  Central  Government  Liaison  Office,  Mr  Gao  Siren  appealed  to  the  police  to
prosecute  the  activist  for  an  offence  against  the  National  Flag  Ordinance.  This  appeal  was
criticised by pro-democracy legislators and human  rights activists for interfering in HKSAR
issues. Secretary for Security Mrs Regina Yip said that the Justice Department would decide
whether to prosecute the demonstrator after considering the evidence.

Whilst  it  understands  the  necessity  of  maintaining  public  order,  the  European  Commission
hopes  that  the  practice  of  the  right  of  assembly  and  demonstration  exercised  in  lawful
conditions will not be affected.

10

6.

THE ECONOMY

Hong  Kong  has  been  undergoing  a  serious  adjustment  process  in  the  years  following  the
Asian  financial  crisis.  The  year  2002  registered  a  deepening  of  this  trend.  Asset  prices  and
wages continued to decline. While  the export  sector rebounded strongly in the latter  half of
the  year,  domestic  demand  remained  weak  and  investment  spending  continued  to  move
downwards. GDP achieved a moderate growth of 2.3% in real terms for 2002.

Two  major  economic  issues  captured  most  of  the  public  attention,  the  fiscal  deficit  and
unemployment,  which  both  peaked  in  2002.  The  Hong  Kong  SAR  Government  was  under
considerable pressure to tackle these problems swiftly.

The SAR Government recorded growing fiscal deficits in two consecutive  years, contrary to
its  tradition  of  running  a  balanced  or  small  deficit  budget  in  the  past.  The  fiscal  deficit  for
2002-2003 reached  HK$70  billion  or  about  5.5%  of  its  GDP,  following  HK$65.6  billion  in
2001-2002.  The  deficit  was  caused  by  a  combination  of  cyclical  and  structural  factors.
Among other things, land sale and property-related taxes that used to be an important source
of  revenue  have  been  declining.  On  the  expenditure  side,  an  attempt  to  cut  civil  servants’
salaries  came  up  against  legal  and  constitutional  constraints.  Tackling  the  deficit  will  be  a
major policy area for the SAR Government in the next few years.

However, Hong Kong continues to enjoy a comfortable reserve position. Its reserves stood at
HK$303 billion as at the end of the financial year of 2002-03, compared to HK$369.8 billion
at the end of 2001-02.

The unemployment rate peaked at 7.8 % in the middle of the year and then dropped to 7.2% at
the end of the year. Despite the cyclical factors during economic downturn, a rising trend of
relocating  some  support  service  operations  to  Mainland  China  was  noted.  This  affected  in
particular the middle aged, the less-skilled or less-educated part of the work force, as well as
manufacturing and construction workers.

The property sector, an important contributor to growth in past years performed poorly, and,
in  an  attempt  to  revitalise  the  market,  the  government  introduced  a  new  set  of  housing
measures in November. Under the new policy, provision of public flats for sale to low-income
groups has been suspended, and land sale  activities have been frozen  until the  end  of  2003.
These measures were devised to redress the oversupply situation and avoid competition with
the private sector.

On  the  external  front,  Hong  Kong’s  exports  of  goods  and  services  to  Mainland  China
continued to increase. More than 90% of Hong Kong’s total exports were re-exports. Of the
total  re-exports,  about  60%  were  of  Chinese  origin  and  40%  of  goods  were  destined  for
China.  Exports  of  goods  to  China  fared  well  in  2002.  In  the  tourism  and  retail  sectors,
Chinese visitors boosted the local economy. The abolition of the quota system for the Hong
Kong Group Tour Scheme for Chinese visitors as from January 2002 stimulated tremendous
growth in visitor arrivals. In 2002, the number of Mainland Chinese visitors registered a year-
on-year  growth  of  53%  (about  6.8  million),  accounting  for  about  40%  of  the  total  visitor
arrivals, China thus becoming the largest source of visitors.

11

There were notable developments in establishing closer links with Mainland China, especially
with the Pearl River Delta. The SAR Government actively pursued the proposal of building a
bridge linking Hong Kong, Macao and Zhuhai. The Western corridor linking Hong Kong and
Shenzhen  was  at  the  detailed  planning  stage  and  is  due  to  be  completed  in  2005.  24--hour
crossings  at  Lok  Ma Chau-Huanggang  checkpoints  were  agreed  upon.  Further  liberalisation
of flows of people between the two places was also noted.

The Closer Economic Partnership Arrangement (CEPA) consultations commenced in January
2002 between the HKSAR Government and the Central Government. The definition of Hong
Kong companies for the purposes of benefiting from the proposed bilateral arrangement was
one of the issues  that  generated some anxiety in the business community.  Both Hong Kong
and Mainland China reiterated that the arrangement would be in accordance with WTO rules.
The  European  Commission  will  closely  monitor  that  the  final  arrangement  will  be  WTO-
compatible  and  in  particular  will  not  discriminate  against  foreign  companies  established  in
Hong Kong.

A trade policy review of Hong Kong was conducted at the WTO in 2002, the second since the
establishment  of  the  SAR  in  1997.  It  concluded  that  Hong  Kong’s  institutional  and  policy
framework  had  remained  largely  unchanged  since  its  reversion  to  China  and  was  in
accordance  with  the  principle  of  “one  Country,  two  Systems”.  Hong  Kong  had  also
maintained  its  traditional  openness  to  both  trade  and  investment.  However,  the  review  also
noted that the  lack  of  -appropriate legislation might  hamper the  effective  application  of  fair
competition in Hong Kong.

7.

– 

EUROPEAN UNION - HONG KONG RELATIONS.

Exchange of visits and high level contacts

As  in  previous  years,  high-level  visits  and  meetings  continued  to  enhance  EU-Hong  Kong
relations. Commissioner Michel Barnier paid a short visit to Hong Kong at the end of January
where  he  met  the  Chief  Executive,  Mr  Tung  Chee  Hwa  and  discussed  political  and
economical developments both in the EU and Hong Kong.

The Chief Secretary for Administration, Mr Donald Tsang, paid his second official visit to the
European  Commission  in  May,  the  first  having  taken  place  in  November  2001.  During  his
stay  in  Brussels,  Mr  Tsang  met  the  President  of  the  European  Commission,  Romano  Prodi
and  Commissioners  Pascal  Lamy  and  Antonio  Vitorino.  Discussions  focused  on
developments in Hong Kong and EU-Hong Kong relations in the five years since the SAR’s
handover to China on 1 July 1997. Other topics covered during Mr Tsang’s visit were the EC-
HK  Customs  Cooperation  Agreement  and  the  finalisation  of  the  EC-HK  Re-admission
Agreement.

Contacts took also place in the margins of international events between Commissioner Lamy
and  the  Secretary  for  Trade  and  Industry,  first  Mr  Brian  Chau  and  then  Mr  Henry  Tang.
Discussions  mainly  focused  on  the  Doha  multilateral  trade  negotiations  and  on  the
development of the trade relations between Hong Kong and Mainland China.

Mrs Rita Fan, President of the Hong Kong Legislative Council (Legco), visited the European
Parliament  in  both  Strasbourg  and  Brussels  in  September.  The  purpose  of  the  visit  was  to
study the facilities and architecture of the EP’s buildings, as the Legco was planning to build
a new complex by 2007. Mrs Fan also had important political meetings with members of the

12

European Parliament. She was received by Mr Colom i Naval, Vice-President of the EP, Mrs
Plooij-Van Gorsel, Chairperson of  the  EP’s  Delegation with  China,  Hong  Kong  and  Macao
and Mr Priestley, Secretary-General of the EP.

A delegation from the Economic and Social Committee, led by president of the study group
on the relations between EU and China, Mr Sukhdev Sharma, visited Hong Kong in July. It
had  meetings  with  local  NGOs,  human  rights  groups  and  academics.  The  visit  focused  on
economic, social, human rights and environment issues.

– 

EC-Hong Kong Re-admission Agreement

An agreement between the European Community and the Hong Kong Special Administrative
Region  (SAR)  of  the  People’s  Republic  of  China  on  the  readmission  of  persons  residing
without  authorisation  was  signed  on  27  November  2002  in  Brussels.  This  agreement  is  the
first-ever  readmission  agreement  signed  between  the  European  Community  and  a  third
country or territory. It will enable Hong Kong and the EC to ensure, on a reciprocal basis, the
rapid and effective identification and return of persons entering or remaining illegally in their
respective territories.

The  agreement  was  signed  jointly  by  Commissioners  Chris  Patten  and  Antonio  Vitorino,
responsible  for,  respectively,  External  Relations  and  Justice  and  Home  Affairs,  and  by
Antony Leung, Financial Secretary of Hong Kong SAR.  It follows the Community’s March
2001 decision to grant visa-free access to Hong Kong SAR passport holders.

Negotiations  for  this  agreement  were  finalised  at  the  end  of  2001,  and  the  agreement  was
initialled  on  22  November  2001  on  the  occasion  of  Hong  Kong  Chief  Secretary  for
Administration Donald Tsang’s visit to Brussels. The conclusion of re-admission agreements
is  part  of  the  EU’s  broader  strategy  for  combating  illegal  immigration,  adopted  by  the
European Council at its meetings in Tampere, Laeken and Seville. Commissioners Patten and
Vitorino emphasised the valuable role such agreements play in this respect.

Commissioner  Patten  and  Antony  Leung  also  exchanged  views  on  the  overall  political  and
economic  situation  and  perspectives  in  Hong  Kong,  on  the  SAR  Government’s  fiscal  and
budgetary policies, and on closer economic ties with Mainland China, in particular the Pearl
River Delta.

– 

Customs Cooperation

Customs cooperation between the European Community and the HKSAR continued in 2002
on the basis of the 1999 Agreement on Cooperation and Mutual Administrative Assistance in
Customs Matters. The fourth Joint Customs Cooperation Committee was concluded in Hong
Kong on 5 December, with constructive and profitable results.

– 

Intellectual Property Rights

In spite of a very complete legal and administrative array in terms of protection of intellectual
property  rights,  several  EU  companies  point  out  a  recrudescence  of  counterfeit  goods  in
transit  on  the  HK  territory,  in  particular  in  the  sectors  of  luxury  goods,  of  new  information
and  communication  technologies.  Furthermore,  the  recent  seizures  in  Hong  Kong  of
counterfeited  pharmaceutical  products  raised  concerns  amongst  the  EU  industries  of  the
sector.

13

– 

Business Cooperation Committee

The  Business  Cooperation  Committee  brings  together  business  representatives  from  the  EU
and Hong Kong to discuss economic developments and other matters of mutual interest. The
Fourth  Plenary  Session  of  the  Committee  was  held  in  Brussels  on  21  –  22  May  and  was
attended by Commissioner Lamy and Chief Secretary Donald Tsang, who both gave speeches
at the opening dinner. There was high-level participation on both sides. HK placed emphasis
on  the  economic  integration  in  the  Pearl  River  Delta,  whilst  the  EU  highlighted  the
completion of the EMU and its political significance.

– 

EU presence and interests in Hong Kong

The EU was Hong Kong’s third largest supplier in 2002 after Mainland China and Japan, and
was the third biggest market for Hong Kong’s exports, after Mainland China and the United
States. Total bilateral trade decreased further to 29.6 billion Euro (imports from Hong Kong:
9.7 billion Euro; exports to Hong Kong: 19.9 billion Euro, i.e. a 10 billion Euro surplus for
the EU).

In terms of foreign  investment,  the  EU  was the fourth largest source of external investment
for Hong Kong in 2001, after Mainland China, British Virgin Islands and Bermuda, The total
inflow of investment from the EU reaching HK$ 7 billion or 1 billion Euro in 2001. The stock
of  direct  investment  from  the  EU  amounted  to  HK$  289,2  billion  (41,2  billion  Euro),
accounting for 8,8% of the investment total.

EU  companies  are  an  important  group  of  market  players  in  the  financial  services  of  Hong
Kong. In the insurance sector, the EU continued to top the list of overseas insurers operating
in Hong Kong in 2002. Out of a total of 107 overseas banks licensed in Hong Kong, 36 were
incorporated in the EU as of the end of December 2002, the largest number of foreign banks
in Hong Kong.

In the public works sector, EU companies were awarded contracts totalling 46 million Euro in
2002.

In 2002, there were 266 EU companies using Hong Kong as their regional headquarters and
572  as  their  regional  offices.  It  is  estimated  that  40,330  EU  citizens  were  residing  in  Hong
Kong at the end of 2002.

8.

CONCLUSION

The introduction  of the  government accountability  system at the  start of the second  term  of
the  Chief  Executive  is  a  first  step  towards  the  development  of  a  more  democratic
constitutional  system.  The  European  Commission  hopes  that  this  first  step  will  soon  be
followed by the launch of public consultation on the election of both the Chief Executive and
all members of the Legislative Council by universal suffrage, as provided for under the Basic
Law.

14

The Commission welcomes the Article 23 consultation process which revealed that the people
of  Hong  Kong  attach  great  importance  to  the  rule  of  law  and  the  respect  of  fundamental
freedoms. Many feared that the enactment of Article 23 of the Basic Law might threaten these
freedoms  which  characterise  Hong  Kong’s  system.  The  Commission  finds  some
encouragement in the fact  that  the Hong Kong  Government  amended its initial  proposals to
take  account  of  public  reactions  and  suggestions,  and  calls  on  the  SAR  Government  to
continue  to  take  into  consideration  opinions  expressed  by  the  Hong  Kong  people  and  the
international community.

The Commission believes that the  rule of  law  and  the  continued respect  of the fundamental
freedoms guaranteed by both the Basic Law and the international human rights covenants are
the  foundation-stones  of  a  free  and  vibrant  Hong  Kong  society.  It  will  continue  to  monitor
closely the implementation of Article 23 before and after the adoption of the new legislation.

The Commission acknowledges the consultations between Mainland China and the HKSAR
on  a  “Closer  economic  partnership  arrangement”  (CEPA).  Such  an  arrangement  should  be
WTO-compatible  and  not  discriminate  against  other  WTO  members.  Hong  Kong’s  further
economic  integration  with  Mainland  China  is  an  asset  for  both,  provided  that  Hong  Kong
retains  its  individual  personality  within  the  framework  of  the  “one  country,  two  systems”
principle.

The signing of a readmission agreement in November was a major step forward in EU-Hong
Kong relations, and the Commission looks forward to its coming into force in 2003.

Hong Kong’s economic adjustment is understandably a long and difficult process. The people
of Hong Kong should remain confident about future economic developments and continue to
take full advantage of the assets the SAR has as an international financial centre and services-
oriented economy.

15