Report from the Commission to the European Parliament and the Council - Hong Kong Special Administrative Region (SAR) : Annual Report 2006
Date: 2007-06-20
Institutions: European Commission
Subjects: EU relations, Hong Kong, activity report, bilateral relations

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.6.2007 
COM(2007) 341 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Hong Kong Special Administrative Region (SAR) : Annual Report 2006 

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REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Hong Kong Special Administrative Region (SAR) : Annual Report 2006 

In its Communication immediately following  the handover of  Hong Kong  to China  in 1997 
(1997  COM  171),  the  Commission  made  a  commitment  to  issue  an  annual  report  on 
developments in the Hong Kong Special Administrative Region. This is the ninth such report. 

Hong Kong is an important partner for the EU, sharing values and interests in the economic, 
regulatory,  educational,  social  and  cultural  spheres.  Relations  between  the  EU  and  Hong 
Kong have continued to develop across these areas since 1997 and remain practical and based 
on mutual interest.  

Political and constitutional developments 

Early in January 2006, Chief Executive Donald Tsang carried out the first major government 
reshuffle  since  he  had  taken  office  in  2005.  Joseph  Wong  was  appointed  as  Secretary  for 
Commerce,  Industry  and  Technology;  John  Tsang  as  Head  of  the  Chief  Executive's  Office; 
and Denise Yue as Head of the Civil Service.  

In  July,  the  SAR  Government  released  a  consultation  document  on  further  development  of 
political  work  within  the  civil  service.  It  proposed  that  two  new  political  posts,  Deputy 
Directors  of  Bureau  and  Assistants  to  Directors  of  Bureau,  should  be  created  to  assist 
Secretaries with political work.The consultation ending November 2006 and the government 
is expected to announce its decision in the first half of 2007. 

In  early  2006,  following  the  Government’s  defeat  in  the  Legislative  Council  in  December 
2005  on  its  constitutional  reform  proposals,  relations  with  the  pro-democracy  Legislative 
Counsellors and political parties remained tense.  

In March the Article 45 concern group formed the Civic Party, composed mainly of lawyers 
and  academics  including  six  members  of  the  Legislative  Council  -  led  by  Audrey  Eu.  This 
new  party  advocates  a  speedy  transition  to  universal  suffrage,  social  justice  and  the 
introduction of minimum wage and standard working hours.  

The  Democratic  Party  (the  largest  of  the  pro-democracy  parties)  was  dogged  by  reports  of 
infighting  throughout  2006.  Its  leader  Lee  Wing  Tat  stepped  down  in  December  2006  in 
favour of another Legislative Council member Albert Ho.  

Donald Tsang's second policy address covering the remainder of his term as Chief Executive 
(up  to  30  June  2007)  was  delivered  to  the  Legislative  Council  in  October.  Notably  it 
announced measures to address increased public concern on environmental issues.Tsang did 
not touch upon proposals for a goods and services tax and ruled out legislating on a minimum 
wage in the immediate future, drawing criticism for what was portrayed as an attempt to avoid 
contentious issues for the remainder of his term of office. 

Commentators have been unanimous in their opinion that Donald Tsang will be re-elected as 
Chief Executive in elections to be held in March 2007, although as of December 2006 he had 
yet to declare his candidature. 

Following  months  of  speculation,  Anson  Chan  announced  in  September  that  she  would  not 
stand for election for the post of Chief Executive. The democratic parties eventually agreed on 

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a single common candidate, Alan Leong, a barrister and Legislative Council member for the 
Civic Party.  

On 10 December in the election for the 800-member Chief Executive nomination committee, 
134  pro-democrats  obtained  seats  –  above  the  required  minimum  of  100  nominations  to 
successfully nominate a candidate for the Chief Executive elections, and making it likely that 
Leong will be nominated as a candidate.  

2006 has seen no substantive progress towards the establishment of universal suffrage, though 
there  has  been  sustained  and  prominent  debate,  and  this  has  widely  reflected  in  media 
coverage.  

The proposals put forward by the SAR Government at the end of 2005 did not have sufficient 
support for approval by the Legislative Council. This had suggested a limited expansion of the 
Legislative  Council  and  the  election  committee  for  the  election  of  the  Chief  Executive. 
Following this setback, Donald Tsang made clear that the SAR Government would not make 
further  proposals  for  constitutional  reform  before  Legislative  Council  elections  in  2008, 
resulting  in  a  suspension  of  any  formal  dialogue  throughout  2006.  The  Commission  on 
Strategic Development is expected to publish a new report early in 2007 mapping out options 
and possible modus operandi for wider suffrage. 

But  public  debate  has  continued.  Politicians  such  as  former  Chief  Secretary  Anson  Chan, 
former  Secretary  for  Security  Regina  Ip  as  well  as  Hong  Kong’s  Catholic  Cardinal  Joseph 
Zen have joined the public debate on political developments calling for universal suffrage – 
many  mentioning  the  2012  Chief  Executive  elections  as  a  deadline.  The  pro-democracy 
political  parties  including  the  pro-democracy  camp  in  LegCo  now  call  for  full  universal 
suffrage  for  the  direct  election  of  the  Chief  Executive  in  2012.  During  2006,  independent 
opinion  polls  continued  to  show  around  60%  of  Hong  Kong  people  supporting  and  seeking 
further progress towards democracy and universal suffrage. 

On  31  March  2006,  the  United  Nations  Human  Rights  Committee  issued  its  concluding 
observations  on  the  second  report  of  the  Hong  Kong  SAR  in  the  light  of  the  International 
Covenant  on  Civil  and  Political  Rights  (ICCPR).  It  said  all  necessary  measures  should  be 
taken  whereby  the  Legislative  Council  is  elected  by  universal  and  equal  suffrage  and  asked 
the  Hong  Kong  SAR  to  submit  within  one  year  information  on  the  follow-up  given  to  the 
Committee's recommendations. 

The European Union supports democracy throughout the world as the best means of creating 
legitimate,  stable,  accountable  and  transparent  government,  protecting  rights  and  freedoms, 
and  upholding  the  rule  of  law.  The  EU  supports  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. The Commission has commented at length on Hong 
Kong's  constitutional  development  and  interpretations  by  the  National  People's  Congress  of 
the SAR's Basic Law in previous annual reports – especially those for 2004 and 2005. 

There  have  been  indications  of  the  interests  of  the  Chinese  Government  in  Beijing  in  this 
debate,  and  as  a  corollary,  pressure  on  the  SAR  Government.  The  Chinese  leadership  have 
called for constructive debate to reach a consensus on the SAR’s democratic development in 
accordance with the Basic Law.  

However the Commission recognises that in general the ‘one country, two systems’ principle 
has been respected and is working well for the people of Hong Kong. The EU supports this 
principle, and in particular the respect for human rights and individual freedoms enshrined in 
the  Basic  Law,  which  should  be  enjoyed  by  the  citizens  of  the  Hong  Kong  SAR.  It  is 
important  that  the  SAR  government  continues  to  enjoy  a  high  degree  of  autonomy  in 

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economic, trade, fiscal, financial and regulatory matters, and the people of Hong Kong benefit 
from their own legal systems, an independent rule of law, individual property rights, freedom 
of speech, and market economic systems.  

Economic developments, Trade and Sectoral Issues 

The Hong Kong economy continued to grow briskly for the first three quarters of 2006: the 
Mainland economy provided sustained growth momentum for the goods and services sectors; 
overall  investment  spending  remained  solid;  the  property  market  remained  stable;  and  the 
labour  market  improved,  with  unemployment  falling  to  the  lowest  level  in  five  years.  In 
tandem with strong domestic demand, there was evidence of consumer price inflation. 

Hong Kong economic indicators: 

GDP growth  

Inflation rate 

Unemployment 
rate 

Services  as  %  share  of 
GDP 

2005 

2006 (Q1-Q3) 

7.3% 

6.8% 

1%

2.3%

5.6%

4.7%

90.6%

N/A

Among the various economic sectors, financial services, import and export trade and transport 
services were the most dynamic elements of the economy in 2006. Hong Kong maintained its 
position  as  a  regional  hub  for  finance,  trading,  logistics  and  transport  services.  Hong  Kong 
also scored very highly in a number of international surveys conducted by the world's rating 
institutions as having a business-friendly environment. 

The strong performance of the financial sector, particularly the stock market, was driven by 
huge  levels  of  liquidity  in  the  region.  Capital  market  activities  related  to  Mainland  Chinese 
enterprises flourished. Hong Kong successfully listed a number of large Chinese enterprises in 
2006, including the world's largest ever Initial Public Offering of shares for the Industrial and 
Commercial Bank of China. The total funds raised during the year reached a record high, and 
put  Hong  Kong  in  volume  terms  at  a  competitive  level  with  London  and  New  York. 
Reflecting  the  robust  market  outlook,  the  Hang  Seng  Index  and  the  trading  volume  of  the 
Hong Kong's stock market both reached historic highs during 2006. 

Hong  Kong's capital  market  continues to play a key role in financing the reform of China's 
state-owned  enterprises,  expansion  of  private  enterprises,  and  its  massive  infrastructure 
development programme. Favourable provisions under CEPA have provided easier access for 
Hong  Kong  banking  and  finance  service  providers  in  Mainland  China.  At  the  end  of  2006 
from the initial Mainland authorities' policy declarations it appeared that China is prepared to 
enhance  Hong  Kong's  leadership  even  more  fully  as  an  international  financial  centre  for 
China  –  by,  for  example,  including  Hong  Kong  in  possible  measures  for  extending  and 
liberalising of the markets for Yuan Renminbi-denominated financial instruments. 

The trade interests of Hong Kong and China, in particular the Pearl River Delta, continue to 
interweave  and  converge.  Formalised  institutions  have  been  set  up  to  facilitate  cooperation 
and  exchange  of  goods,  services  and  people  between  the  two  jurisdictions,  including  the 
successive conclusions of a Closer Economic Partnership Agreement (CEPA), the Pan Pearl 
River  Delta  Regional  Cooperation  Framework  Agreement,  and  the  Quality  Migrant 
Admission Scheme. While Hong Kong needs a hinterland to support its continued growth and 
economic  development,  it  is  also  a  challenge  for  Hong  Kong  to  maintain  its  liberal 
cosmopolitan  outlook  and  free  market  business  practices  as  the  two  economies  integrate 
further.  

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On the fiscal side, the Hong Kong Government launched a consultation exercise on a broad-
based goods and services tax (GST) in July 2006, attempting to broaden the narrow tax base 
to smooth government revenues. In view of the long term financial burden of a rapidly ageing 
population  and  the  volatility  of  its  present  major  revenue  sources,  the  Hong  Kong 
Government  saw  the  need  to  introduce  tax  reforms  to  ensure  a  more  sustainable  financial 
base. But the GST proposal was not received favourably, by political parties, business, or the 
general public. In December, in the face of widespread and vocal opposition, the government 
suspended its GST proposal. Hong Kong is one of the few high income, developed economies 
which does not have a broad-based value added tax. 

Bilateral  trade  and  economic  relations  between  the  EU  and  Hong  Kong  are  mature  and 
characterised  by  a  very  limited  incidence  of  trade  irritants.  Hong  Kong  authorities  maintain 
frequent  and  regular  contacts  with  business  associations,  both  foreign  and  local,  and  are 
responsive  to  their  concerns.  The  near-absence  of  problems  at  the  micro  level  was 
underscored  by  the  general  praise  of  WTO  members  at  Hong  Kong's  trade  policy  regime 
during the Trade Policy Review that took place in Geneva on 15 December. 

EU-Hong  Kong  bilateral  trade  recorded  strong  growth  in  2006.  The  EU  became  the  second 
largest trading partner of Hong Kong in 2006, after Mainland China.  The  key growth  items 
were office machines and textiles. 

EU Trade with Hong Kong 

Year 

Imports 

EU 
from HK 

(€billion) 

Yearly  % 
change 

EU  Exports 
to HK 

(€billion) 

Yearly  %
change 

trade 

EU 
surplus 

(€billion) 

Total 
(€billion) 

trade 

2006 

14.2 

33.9 

21.5 

5.3 

7.2 

35.8  

Source: Eurostat 

Intellectual  Property  Rights.  The  European  Commission  appreciates  Hong  Kong's  sustained 
efforts  in  IPR  protection.  The  measures  of  the  Hong  Kong  Government  –  strengthening 
partnership  with  industry,  raising  awareness  of  the  importance  of  IPR  for  the  public, 
introducing  new  legislation,  and  increasing  enforcement  efforts  -  have  led  to  notable 
improvements in IPR protection. However, the Commission considers that IPR problems have 
not been completely resolved in some areas. The Commission remains concerned that Hong 
Kong continues to allow companies to register under names identical to or closely resembling 
well  known  EU  brand  names,  which  then  infringe  the  rights  of  the  EU  companies  through 
operation in mainland China. The Commission is also concerned that owners of patent rights 
to  pharmaceutical  products  are  not  adequately  protected  under  the  current  system  of 
registration. 

Competition law. The European Commission welcomes the SAR Government’s consideration 
of  new  comprehensive  legislation  on  competition.  The  Competition  Policy  Review 
Committee concluded in its report in June that Hong Kong needed a cross-sector competition 
law  targeting  specific  types  of  anti-competitive  conduct  which  should  be  enforced  by  an 
independent  Competition  Commission.  The  Hong  Kong  Government  has  launched  a  public 
consultation  exercise  on  this  which  ends  in  February  2007.  The  Commission  continues  to 
monitor developments in this area with great interest.  

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Civil  Aviation. The  Commission  has  proposed  a  dialogue with  the SAR Government  on  the 
need  for  amending  existing  bilateral  air  services  agreements  between  Hong  Kong  and  EU 
Member States in order to bring these into conformity with Community law. The Commission 
has  invited  the  SAR  Government  to  restore,  in  mutual  interest,  legal  certainty  to  these 
agreements as a matter of priority. To this effect, the Commission has proposed a "horizontal 
agreement"  between  the  two  sides  that  would  provide  a  sound  legal  basis  for  all  existing 
agreements. The Commission has taken note of concerns expressed by the SAR Government 
and welcomes its agreement to begin dialogue with the Commission. 

Wine tax. The European Commission was disappointed that the Hong Kong Government did 
not revise downward the very high excise duty on wine in the 2006-07 fiscal year, which was 
maintained at 80%.  

The EU Savings Taxation Directive. In 2006, the Commission expressed its interest in starting 
exploratory  talks  with  the  SAR  Government  with  a  view  to  promoting  the  introduction  of 
measures  equivalent  to  the  EC  Directive  on  taxation  of  savings.  In  line  with  its  stated  tax 
policy  of  promoting  internationally  accepted  good  governance  principles  as  widely  as 
possible, the Commission proposes to work with Hong Kong to improve transparency and the 
exchange  of  information,  strengthening  enforcement  measures  to  prevent  the  avoidance  or 
evasion  of  taxes,  and  in  particular  promoting  application  of  measures  equivalent  to  those 
applied  within  the  EU  on  taxation  of  income  from  savings.  The  Commission  welcomes  the 
SAR Government’s agreement to working-level exploratory dialogue on this issue. 

Closer Economic Partnership Arrangement (CEPA). The first free trade agreement between 
Hong  Kong  and  Mainland  China  that  was  signed  in  2003  has  entered  into  its  fourth  phase. 
Supplement  III  (CEPA  IV)  was  signed  on  27  June  2006.Mainland  China  and  Hong  Kong 
continued  to  cooperate  to  improve  market  access  for  both  sides  and  agreed  on  further 
liberalisation measures covering both goods and services, as well as facilitation measures in 
the  area  of  intellectual  property  protection.  Effective  from  1  January  2006,  all  products  of 
Hong Kong origin (except for some prohibited articles) enjoy tariff free treatment for import 
into  Mainland  China  upon  fulfillment  of  the  CEPA  rules  of  origin.  A  total  of  27  service 
sectors have been liberalised under CEPA since its full implementation in 2004.The free trade 
arrangement provides earlier and wider market access to Hong Kong service providers while 
some  sectors  even  enjoy  WTO  plus  treatment  including  tourism,  legal  services,  audiovisual 
services,  transport  services  and  distribution  services.  The  preferential  provisions  granted  to 
the services sectors have further consolidated the position of Hong Kong as a service centre.  

Environment.  The  priority  the  EU  attaches  to  addressing  climate  change,  air  and  water  and 
other pollution are well known. The Commission believes that international cross-border co-
operation  in  this  regard  is  essential  and  to  global  benefit.  The  Commission  welcomes  the 
Hong  Kong  government's  proposals  for  new  environmental  measures  set  out  in  the  Chief 
Executive's  policy  address  delivered  in  October  2006  –  in  particular  the  reference  to  and 
proposed application of EURO standards and guidelines. The Commission stands ready to co-
operate with Hong Kong to assist and encourage the implementation of such measures, and to 
explore scope for trilateral co-operation with mainland China as appropriate. 

EU-Hong Kong relations 

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The Commission adopted a Communication entitled "The European Union, Hong Kong and 
Macao:  possibilities  for  cooperation  2007-2013"  on  26  October1,  which  was  endorsed  by 
Council Conclusions on 12 December.  The Communication identified seven key sectors for 
moving  forward  cooperation:  trade  and  customs;  finance;  people-to-people  links  (including 
academia);  transport;  the  environment;  health;  and  food  safety.  It  also  proposed  that  there 
should be a regular structured dialogue between the Commission and the Hong Kong SAR on 
matters under its competence.  

On  21  December  the  Council  adopted  a  financing  instrument  for  co-operation  with 
industrialized countries and other high income countries and territories, including Hong Kong. 
The  Commission  will  discuss  and  agree  with  Hong  Kong  the  elements  of  a  co-operation 
programme which should begin by late 2007. 

President  Barroso  received  Hong  Kong  Chief  Executive  Donald  Tsang  in  Brussels  on  7 
November. The two leaders agreed that "Hong Kong and the European Union should develop, 
broaden  and  deepen  cooperation  in  areas  of  common  interest".  They  agreed  to  establish  a 
structured  dialogue  to  maintain  close  contacts  at  all  levels  and  ensure  relations  develop 
positively,  recognising  and  responding  to  any  challenges  and  opportunities  quickly  and 
effectively.  

2006  saw  a  succession  of  high  level  meetings  and  missions  between  the  European 
Commission and Hong Kong, strengthening relations.  

•  The  EC-Hong  Kong  Readmission  Committee  met  January  in  Hong  Kong  and  reviewed 

implementation of the EC-Hong Kong Readmission Agreement.  

•  Commissioner for Health and Consumer Protection Markos Kyprianou led a large mission 
to  Hong  Kong  for  discussions  on  preparedness  for  a  possible  pandemic  outbreak  and 
visiting Hong Kong's health facilities.  

•  Director  General  for  Economic  and  Financial Affairs  Klaus  Regling,  and  Member  of  the 
European  Central  Bank  Executive  Board  Jose  Manuel  Gonzalez-Paramo  led  a  major 
conference  in  Hong  Kong  on  "The  EURO:  Lessons  for  European  and  Asian  Financial 
Markets"  jointly  with  Mr.  Joseph  Yam,  Chief  Executive  of  the  Hong  Kong  Monetary 
Authority in February. 

•  Commissioner for the Internal Market Charlie McCreevy visited in May for meetings with 
the  Secretary  for  Financial  Services  and  the  Treasury  Frederick  Ma,  and  with  the  top 
officials  of  the  Hong  Kong  Securities  and  Futures  Commission,  Hong  Kong  Monetary 
Authority and Hong Stock Exchange 

•  Commissioner for Information Society and Media Viviane Reding visited in December to 
participate  in  the  International  Telecommunications  Union  Telecom  World  2006 
conference in Hong Kong.  

The  European  Commission  Office  in  Hong  Kong  was  established  in  1993,  and  sixteen 
European  Union  member  states  maintain  full-time  local  diplomatic  missions  accredited  to, 
and  managing  relations  with  Hong  Kong  (that  of  Portugal  is  located  in  nearby  Macao). 
According  to  Hong  Kong  government  statistics,  as  at  August  2006  there  were  some  37,000 
European Union citizens residing in Hong Kong. 

1 

"The  European  Union,  Hong  Kong  and  Macao:  possibilities  for  co-operation  2007-2013". 
Communication  from  the  Commission  to  the  Council  and  the  European  Parliament.  COM(2006)  648 
final of 26.10.2006. 

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The EU's public diplomacy was reinforced in Hong Kong in 2006. Throughout the year, the 
European  Commission  Office  in  Hong  Kong  has  undertaken  an  active  and  expanded 
information  and  public  diplomacy  programme  projecting  through  Hong  Kong  media  and 
society  the  EU's  values  and  policies  in  the  economic,  regulatory,  social,  educational  and 
cultural  spheres.  In  addition,  to  discuss  and  explore  these  matters  and  possibly  develop  and 
broaden future cooperation between the EU and Hong Kong in areas of mutual interest, eight 
consultative seminars were held in Hong Kong during 2006 by the Hong Kong Office of the 
European  Commission  involving  over  200  representatives  of  various  sectors  of  Hong  Kong 
society:  education  and  research,  environment,  health,  food  and  product  safety,  trade, 
economics  and  finance,  European  chambers  of  commerce,  and  the  Hong  Kong-based  EU 
business community and exporters to the EU market, as well as seminars for EU member state 
Heads of Mission and Trade Commissioners in Hong Kong. 

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