Report from the Commission to the Council and the European Parliament - Hong Kong special administrative region (SAR) : annual report 2007
Date: 2008-03-03
Institutions: European Commission
Subjects: EU relations, Hong Kong, activity report, bilateral relations, cooperation policy, democracy

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 3.3.2008 
COM(2008) 118 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Hong Kong Special Administrative Region (SAR) : Annual Report 2007 

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Executive Summary 

10  years  after  the  handover,  implementation  of  the  ‘one  country/two  systems’ 
concept  continues  to  be  satisfactory,  upholding  Hong  Kong’s  way  of  life,  the 
rule  of  law  and  fundamental  freedoms.  Fostered  by  a  mutually  pragmatic 
approach,  cooperation  with  the  EU  progresses  well  and  has  deepened  in  2007. 
After a decline in the late 1990’s, Hong Kong’s economy was revived, notably 
through China providing a boost to the local tourism industry and giving Hong 
Kong  privileged  access  to  the  mainland’s  markets.  The  economy  is  now 
booming but the pace of progress towards the introduction of universal suffrage 
in  the  Hong  Kong  government’s  institutions  remains  a  cause  for  concern.  The 
territory  also  faces  a  series  of  challenges  in  the  longer  term,  especially  in  the 
environmental field.  

Introduction 

2007 marks the tenth anniversary of the handover of Hong Kong to China. The 
handover  established  the  territory  as  a  Special  Administrative  Region  of  the 
People’s Republic of China. The reunification of Hong Kong with the mainland 
is  based  on  the  ‘one  country  /  two  systems’  concept  enshrined  in  the  Sino-
British Joint Declaration of 1984 and the Basic Law of Hong Kong adopted in 
1990 by the National People’s Congress of the People’s Republic of China. The 
Basic  Law  took  effect  on  1st  July  1997  and  guarantees  that  Hong  Kong’s 
previous capitalist system and way of life shall remain unchanged for 50 years. 
Preservation of the business environment and of the rule of law in the territory 
was  the  objective  of  the  EU’s  support  of  China’s  ‘one  country  /  two  systems’ 
concept and this principle has generally worked well. 

I. EU-Hong Kong cooperation in 2007 

As was the case in 1997, Hong Kong is still the leading city in Asia in terms of 
the number of EU citizens residing and working there, more than 37000 in 2007, 
and  the  number  of  EU  businesses  and  companies  established  in  the  territory. 
This is a motivating factor for the EU’s  involvement in Hong Kong. 

Indeed  the  EU’s  presence  in  Hong  Kong  in  on  the  increase  and  covers  a  large 
variety  of  sectors,  notably  in  financial  and  business  services,  trading, 
transportation and construction (95%). 

According  to  an  official  survey  published  by  the  Hong  Kong  authorities 
(September  2007),  the  number  of  foreign  companies  in  Hong  Kong  has 
increased by more than 50% since the handover in 1997. As of June 2007 there 
were 1,246 regional headquarters, 2,644 regional offices and 2,550 local offices 
in Hong Kong representing their parent companies located outside Hong Kong.  

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EU  companies  have  a  total  of  405  regional  headquarters  in  Hong  Kong, 
followed by the U.S. (298), and Japan (232).  

Hong Kong plays an important role in facilitating trade between mainland China 
and  Europe.  Sino-EU  trade  through  Hong  Kong  has  been  rising  exponentially. 
According  to  Hong  Kong  trade  statistics,  trade  between  the  EU  and  China  via 
Hong Kong amounted to €37 billion in 2006, of which re-exports to the EU of 
goods of Chinese origin reached €29.6 billion, and re-exports to China of goods 
of  EU  origin  totalled  €7.5  billion.  According  to  Chinese  statistics,  shipments 
through Hong Kong represent 17% of total trade between China and the EU. 

However,  as  European  business  increasingly  deals  directly  with  China,  the 
relative importance of trade via Hong Kong has been declining. EU-China trade 
via  Hong  Kong  as  a  percentage  of  total  EU-China  trade  has  fallen  from  over 
one-third  in  2002  to  less  than  15%  in  the  first  months  of  2007,  albeit  the  total 
trade volume has increased. Naturally, total trade between the EU and mainland 
China continues to grow faster than the re-exports through Hong Kong. 

Since  1997  relations  between  the  EU  and  Hong  Kong  have  continued  to 
develop, based on a shared understanding of mutual interests. This relationship 
is  above  all  pragmatic  and  focuses  on  trade  and  investment.  However  it  also 
encompasses educational, social, cultural and regulatory domains. 

After  the  handover  Hong  Kong  was  confronted  with  a  number  of  unforeseen 
challenges  (including  the  Asian  financial  crisis,  the  avian  influenza  epidemic 
and the SARS pandemic) which adversely affected its economy. China came to 
Hong  Kong‘s  rescue  by  boosting  tourism  through  easing  the  restrictions  on 
mainlanders  wishing  to  visit  Hong  Kong  and  by  giving  Hong  Kong  privileged 
market  access  through  the  CEPA  (Closer  Economic  Partnership  Agreement) 
concluded in 2003. The CEPA was supplemented by further agreements in the 
following years. This involvement has proved very effective and Hong Kong‘s 
economy  is  booming  in  the  wake  of  the  mainland’s  economic  prowess.  This 
success  also  translates  into  closer  relations  between  the  administrations  of  the 
two sides, with a widening scope for exchanges and consultations. 

It now seems clear that the economic future of Hong Kong rests on deepening its 
economic  relationship  with  mainland  China.  As  a  service-based  economy,  its 
future  growth  will  rely,  to  a  large  extent,  on  successfully  tapping  the  huge 
Chinese  market.  Developments  in  the  financial  sector  reinforce  this  trend.  The 
China  Banking  Regulatory  Commission  announced  in  May  2007  that  the 
investment  scope  for  the  Qualified  Domestic  Institutional  Investors  scheme 
(QDII),  a  channel  which  allows  mainland  Chinese  institutional  investors  to 
invest  in  foreign  portfolio  investments,  was  expanded  to  include  Hong  Kong 
equities.  In  August,  the  announcement  of  the  so-called  “through-train  scheme” 

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allowing  individual  mainland  investors  to  buy  stocks  in  Hong  Kong,  sparked 
predictions  of  a  cash  “tsunami”  threatening  great  volatility  in  Hong  Kong’s 
stock exchange. The introduction of this scheme has now been delayed. 

Following  the  endorsement  by  the  Council  on  12th  December  2006  of  the 
Commission’s  proposals  concerning  possibilities  for  cooperation  with  Hong 
Kong  for  the  period  2007-2013,  the  Commission  has  deepened  cooperation  in 
sectors  other  than  trade,  including  customs,  finance,  people  to  people  and 
academic exchanges, sport , the environment, health and food safety. 

The  first  edition  of  the  Structured  Dialogue  between  Hong  Kong  and  the  EU 
was  held  on  the  30th  November  2007  in  Hong  Kong.  This  followed  an 
agreement reached between the Chief Executive of the Hong Kong SAR and the 
President  of  the  EU  Commission  in  2006  to  establish  this  mechanism  as  an 
annual platform to develop broader and deeper cooperation in areas of common 
interest between Hong Kong and the EU. 

This  first  meeting  reached  positive  conclusions  with  respect  to  ongoing 
cooperation  regarding  trade,  customs  and  immigration  and  acknowledged  that 
the  respective  customs,  visa  free  access  and  readmission  agreements  worked 
well. Hong Kong is meeting some of the EU’s concerns, in particular regarding 
IPR  enforcement  (counterfeit  goods,  trademark  violations  by  “  brand”  free 
riding  companies  registered  in  Hong  Kong),  and  also  plans  to  hold  a  wide 
ranging consultation on a draft competition law with a view to tabling it in the 
Legislative Council after the September 2008 elections. 

In  the  framework  of  EU  action  to  strengthen  cooperation  with  industrialized 
countries,  the  Commission  has  offered  to  provide  funding  for  establishing  in 
Hong Kong a business cooperation project for disseminating information on the 
EU, stimulating discussion, enhancing visibility as well as developing outreach 
activities. The Commission hopes to begin implementation in 2008. 

II. Political developments 

The Commission monitors institutional and societal development in Hong Kong, 
based  on  a  formal  commitment  entered  into  in  1997  with  the  European 
Parliament.  The  EU  has  consistently  voiced  its  support  for  further  democratic 
development in Hong Kong. The Basic Law, building on the institutional legacy 
of the pre-1997 colonial period, states that the ultimate aim is the election of the 
Chief Executive and the election of all members of the Legislative Council by 
universal suffrage (articles 45 and 68 of the BL).  

2007 saw much discussion regarding the government’s plans for gradual reforms 
that would have the way for universal suffrage to be introduces at a later stage 
(2012  or  2017).  Chief  Executive  Donald  Tsang,  who  started  a  new  term  of  5 

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years  on  the  1st  of  July,  launched  a  popular  consultation  on  a  Green  Paper  on 
Constitutional Development.  

A  by-election  for  a  Legislative  Council  seat,  held  on  2nd  December,  showed  a 
high  turn  out  and  resulted  in  the  victory  of  Mrs  Anson  Chan  (former  Chief 
Secretary) backed by the Democratic Party and its affiliates over Mrs Regina IP 
(former Secretary for Security) backed by the DAB(Democratic Alliance for the 
Betterment of HK) party and some business lobbies. This indicates that people 
in  Hong  Kong  have  not  lost  their  appetite  for  having  a  direct  say in  their  own 
affairs  and  for  an  accountable  government.  District  elections  earlier  in 
November had seen substantial gains by the DAB whose candidates campaigned 
emphatically on livelihood issues. 

Concluding the consultation on his Green Paper Chief Executive Donald Tsang 
submitted on 12th December a report to the Standing Committee of the National 
People’s  Congress.  On  29th  December  the  NPC  took  the  view  that  the  Chief 
Executive  and  the  Legislative  Council  could  be  elected  by  universal  suffrage 
from  2017  on.  In  practice  this  means  that  there  can  be  direct  elections  for  the 
Chief Executive in 2017 and for the Legislative Council in 2020.No substantive 
changes  to  the  current  system  will  be  made  before  2017.To  give  effect  to  the 
NPC’s  decisions  legislation  will  be  introduced  in  the  Legislative  Council, 
probably  after  the  2012  elections.  To  be  adopted  this  legislation  will  require 
endorsement  by  a  two  thirds  majority  of  all  the  members  of  the  Legislative 
Council, the consent of the Chief Executive and the approval of the NPC. 

The  Chief  Executive  acknowledged  that  opinion  polls  conducted  during  the 
consultation  process  showed  that  about  half  of  the  People  of  Hong  Kong 
supported  introducing  universal  suffrage  in  2012  but  he  felt  that  deferring  any 
such  change  until  2017  would  stand  a  better  chance  of  being  accepted  ”by  the 
majority in our community”.  

The  European  Parliament  continued  to  follow  developments  and  several  of  its 
members  visited  Hong  Kong  during  the  year  2007.  The  EU’s  support  for 
democracy  is  an  important  part  of its  commitment  to  develop  its  relationship 
with  Hong  Kong.  Legitimacy,  stability  and  accountability  of  government  are 
seen  as  essential  factors  for  sustaining  a  favourable  business  environment. 
Indeed they guarantee that the rule of law is upheld and protect the freedoms and 
rights of the people without which entrepreneurship and innovation would wilt.  

The NPC decisions announced on 29th December sustain China’s commitment to 
the  ultimate  goal  of  universal  suffrage,  as  set  out  in  the  Basic  Law,  for  the 
election  of  the  leaders  and  lawmakers  of  Hong  Kong.  The  Commission  has 
consistently expressed support for early progress towards this goal. It notes the 
specific gradualism of the NPC’s approach to implementing these decisions and 

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states  that  it  will  continue  to  show  support  for  not  only  gradual  but  also 
significant  progress.  Early  measures  towards  transforming  the  functional 
constituencies and transparent procedures for defining electorates and selecting 
candidates for public office would appear relevant.  

The Commission notes that the judiciary and law enforcement services in Hong 
Kong continue to have a good track record and generate case law consistent with 
the  best  common  law  practices.  The  effective  protection  of  freedoms  and 
fundamental rights through competent and independent law courts is an essential 
backbone of Hong Kong’s way of life. Some currently pending court cases that 
address issues of freedom of expression in the context of disputed broadcasting 
licences may well test the quality of the protection afforded to such fundamental 
freedoms. 

III. Perspectives for the future 

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. It is important that the SAR government continues to enjoy a high 
degree of autonomy in economic, trade, fiscal, financial and regulatory matters, 
and that the people of Hong Kong benefit from their own legal - an independent 
rule of law, individual property rights, freedom of speech - and market economy 
systems. 

At  the  same  time,  it  should  be  noted  that  Hong  Kong’s  situation  has  changed 
since 1997. Two of the most striking developments in world affairs over the past 
10  years  are  China’s  economic  achievements  and  her  ensuing  international 
assertiveness  and  the  global  acknowledgement  of  climate  change  and  its 
catastrophic  consequences.  These  issues  directly  impact  Hong  Kong  and  must 
be taken fully into account by the S.A.R.’s policy makers. They need to address 
recent 
a  number  of 
recommendation  to  Hong  Kong  by  China’s  Premier  Wen  Jiabao  to  prioritize 
innovation,  education,  talent  development  and  the  environment  encapsulates 
these challenges well.  

immediate  and  medium 

term  challenges.  The 

Hong  Kong  indeed  faces  a  whole  range  of  issues  concerning  the  quality  of  its 
environment:  most  notably  air  quality,  water  quality,  biodiversity,  energy 
efficiency, waste treatment and low emission standards for vehicles and power 
plants.  It  has  yet  to  formulate  and  implement  a  coherent  long  term  strategy  on 
this front. European expertise, relayed through networking and academic circles 
could contribute to a genuine vision for Hong Kong’s 2047 horizon and beyond.  

The concept of Hong Kong’s position in the region as a gateway to China and an 
Asian hub for financial services is still relevant. However it must also take into 
account  the  need  for  ever  closer  links  and  cooperation  with  the  mainland, 

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notably  Guangdong  province,  Shenzhen  and  Zhuhai  and  with  Macao.  Such 
cooperation is indeed necessary for dealing with trade flows as well as for law 
enforcement  and  for  tackling  environmental  challenges.  The  Commission 
believes  that  the  EU  can,  and  is  willing  to  make  a  contribution  by  offering 
experience  and  technology.  The  potential  for  relevant  input  from  sciences 
through  the  collaborative  opportunities  on  offer  in  the  EU’s  7th  Research 
Framework Programme should be also considered. These matters should be on 
the agenda for the next edition of the Structured Dialogue in 2008.  

The  main  operational  conclusion  of  this  year’s  report on  the  situation  in  Hong 
Kong is the continued need to strengthen pragmatic cooperation between the EU 
and  its  member  states  and  Hong  Kong,  and  to  promote  people  to  people 
exchanges in the areas most relevant to Hong Kong’s future well being.  

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