Report from the Commission to the Council and the European Parliament - Hong Kong Special Administrative Region (SAR) - Annual Report 2005 {SEC(2006) 1098}
Date: 2006-09-07
Institutions: European Commission
Subjects: EU relations, Hong Kong, activity report, bilateral relations, constitution, economic situation, political situation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 07.09.2006 
COM(2006) 482 final 

REPORT FROM THE COMMISSION  
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

Hong Kong Special Administrative Region (SAR) : Annual Report 2005 

{SEC(2006) 1098} 

EN 

   EN 

 
 
 
  
 
 
 
REPORT FROM THE COMMISSION  
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

Hong Kong Special Administrative Region (SAR) : Annual Report 2005 

2005 was an important year for Hong Kong: 

•  Hong Kong continued to enjoy a high degree of autonomy as set out under the Basic Law 
and  the  principle  of  “one  country  two  systems”.  However,  the  two  most  significant 
political and constitutional developments of 2005 raised some concerns; 

•  Hong  Kong’s  economy  showed  strong  economic  growth,  restoring  fiscal  balance  for  the 

first time since 1997; 

•  2005  also  signalled  a  strengthening  and  deepening  of  Hong  Kong’s  bilateral  relationship 

with the EU. President Barroso visited Hong Kong in July. 

Political and constitutional developments 

On 10 March 2005, CH Tung tendered his resignation from the position of Chief Executive of 
the  SAR  Government  and  was  replaced  by  the  former  Chief  Secretary,  Donald  Tsang.  Mr 
Tung  played  an  important  role  as  Hong  Kong’s  first  Chief  Executive.  The  European 
Commission  enjoyed  a  good  working  relationship  with  him  and  his  administration  and 
expresses  its  thanks.  Mr  Tsang  was  elected  as  Hong  Kong’s  second  Chief  Executive  on  21 
June.  The  Commission  congratulates  Mr  Tsang  and  looks  forward  to  working  with  him  to 
continue and strengthen the cooperation between the EU and Hong Kong. 

There  was  significant  debate  in  Hong  Kong  as  to  whether  the  new  Chief  Executive  should 
serve  a  full  five-year  mandate  or  the  remainder  of  the  previous  Chief  Executive’s  term.  Mr 
Tsang  announced  –  contradicting  the  SAR  Government’s  previous  position  –  that  the  new 
Chief  Executive  would  serve  a  term  of  only  2  years,  the  remainder  of  Mr  Tung’s  term.  Mr 
Tsang  subsequently  requested  an  interpretation  by  the  Standing  Committee  of  the  National 
People’s Congress (NPC), which confirmed this position. There were significant objections to 
Mr  Tsang’s  initial  decision,  and  the  recourse  to  an  NPC  interpretation,  which  a  number  of 
pan-democrats and legal associations regarded as an erosion of the “one country two systems” 
principle and Hong Kong’s high degree of autonomy.  

The  Commission  recognises  the  power  of  the  NPC’s  Standing  Committee  to  interpret  the 
Basic  Law.  But  the  Commission  believes  this  power  should  be  exercised  carefully  and  in  a 
balanced  manner  consistent  with  Hong  Kong’s  high  degree  of  autonomy  and  judicial 
independence. 

The  second  important  constitutional  development  of  2005  was  the  Legislative  Council’s 
rejection  of  proposals  (based  on  the  final  report  of  the  Constitutional  Development  Task 
Force) for new procedures for the selection of the Chief Executive in 2007 and the Legislative 
Council  in  2008.  The  proposals  were  widely  and  publicly  debated  in  the  latter  months  of 
2005. Pan-democrat legislators and others criticised the absence of a timetable for universal 
suffrage; the increase in the number of appointed District Councillors; and the participation of 
appointed Councillors in the election of the Chief Executive. As a result, the proposals did not 
secure the 40 positive votes necessary for adoption by the Legislative Council.  

EN 

2 

   EN 

 
The  Commission  followed  this  debate  closely.  The  Commission  expresses  its  hope  that  the 
SAR Government and the members of the pro-democracy camp will maintain and reinforce 
their dialogue, and will continue their efforts to find a solution for progress towards universal 
suffrage.  The  Commission  continues  to  support  early  and  substantial  progress  towards  the 
ultimate goal of universal suffrage in Hong Kong, as set out in the Basic Law and in line with 
the wishes of the people of Hong Kong. 

Trade and the economy 

Hong Kong’s accelerating growth throughout 2005 was higher than forecast, with real GDP 
growth  reaching  7.3  percent.  Taken  cumulatively,  Hong  Kong  has  now  enjoyed  sustained 
momentum in its economic expansion for ten consecutive quarters. As a result, fiscal balance 
was restored for the first time since the handover, with a small surplus recorded for operating 
and  consolidated  accounts.  The  EU  and  Hong  Kong  remain  important  and  growing  trade 
partners: total bilateral trade rose by 6.8 percent in 2005 to reach 31 billion euros (Eurostat 
figures).  

The  process  of  Hong  Kong’s  economic  integration  with  mainland  China  continued  to 
intensify. The third phase of the Closer Economic Partnership Agreement (CEPA III) between 
the two sides was signed in October 2005. CEPA III expanded tariff-free treatment to cover 
products  currently  classed  as  having  Hong  Kong  origin,  and  agreed  further  liberalisation  of 
trade in services. However, trade volume under CEPA remained fairly small (at around five 
percent  of  Hong  Kong’s  total  exports  to  China).  Hong  Kong’s  economic  prospects  depend 
increasingly on effective positioning and engagement in the region, with mainland China and 
in particular with South China and the Pearl River Delta.  

The  Commission  welcomes  the  SAR  Government’s  establishment  of  a  Competition  Policy 
Review Committee (which is expected to complete its work by mid-2006). The Commission 
continues to urge the SAR Government to consider a general competition law supported by an 
independent competition authority, which would help to ensure equality of access for existing 
and  new  entrants  to  Hong  Kong  markets.  The  Commission  also  welcomes  the  SAR 
Government’s commitment to the protection of intellectual property rights. Recent measures 
to  combat  local  pirated  production  have  been  effective.  But  the  Commission  remains 
concerned by transhipment of pirate and counterfeit goods through Hong Kong to the EU, the 
inadequate protection of pharmaceutical patents under the current registration system, and the 
practice of Chinese companies registering in Hong Kong under names which are identical or 
similar to those of foreign companies. 

EU / Hong Kong relations 

There  were  a  number  of  key  official  and  high-level  contacts  in  2005,  demonstrating  the 
relations. 
Commission’s  clear  support  and  commitment 
Commissioners  Mandelson  and  Kovacs  visited  Hong  Kong  for  bilateral  meetings  (in  April 
and  November  respectively),  and  Commissioners  Mandelson  and  Fischer-Boel  led  a  150-
strong  EU  delegation,  including  European  Parliament  officials,  to  participate  in  the  sixth 
WTO  Ministerial  Conference  in  December,  which  successfully  carried  forward  the  ongoing 
Doha Development Agenda negotiations.  

to  strengthening  bilateral 

President Barroso visited Hong Kong on 18 July 2005. In the joint statement which he issued 
with  Mr  Tsang,  they  agreed  that  “Hong  Kong  and  the  European  Union  should  develop, 

EN 

3 

   EN 

 
broaden  and  deepen  cooperation  in  areas  of  common  interest”.  The  Commission  intends  to 
present further practical suggestions for achieving this through a Communication in 2006. 

The  annex  to  this  report  gives  full  details  of  the  Commission’s  analysis,  covering  political 
events, constitutional developments, the economy, trade issues and EU / Hong Kong relations 
(Commission Staff Working Document SEC(2006) 1098). 

EN 

4 

   EN