Report from the Commission to the Council and the European Parliament - Annual report Hong Kong 2008
Date: 2009-03-10
Institutions: European Commission
Subjects: EU relations, Hong Kong, activity report, bilateral relations, cooperation policy

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 10.3.2009 
COM(2009) 99 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

ANNUAL REPORT HONG KONG 2008 

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Hong Kong Special Administrative Region: Annual Report 2008 

Executive summary 

11  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.  In  2008  cooperation  with  the  EU,  fostered  by  a  mutually  pragmatic 
approach, progressed well, further reinforced by the EU Business Information Program. After 
a  decline  in  the  late  1990’s,  Hong  Kong’s  economy  was  revived  notably  through  China 
providing a boost to local tourism and giving Hong Kong privileged access to the mainland’s 
markets.  The  economy  is  now  severely  affected  by  the  global  financial  crisis  which  hit  the 
service  sector  very  hard.  The  pace  of  reforms  preparing  for  the  introduction  of  universal 
suffrage for the designation of the Chief Executive in 2017 and the legislators in 2020 remains 
a cause for concern.  

Introduction 

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

Eleven years have now passed since Hong Kong became a Special Administrative Region of 
the People's Republic of China (SAR), based on the concept of "one country, two systems", as 
established in the Sino-British Declaration and the Basic Law of Hong Kong. The Basic Law, 
which  took  effect  on  the  1st  July  1997,  guarantees  Hong  Kong's  market  economy  system, 
business environment, protection of the rule of law and fundamental rights and freedoms for 
the next 50 years. Over these eleven years, this principle has worked well. 

Hong Kong is an important partner for the European Union, sharing values and interests in the 
economic,  trade,  regulatory,  social  and  cultural  areas.  Relations  between  the  EU  and  Hong 
Kong have continued to develop across these areas since 1997. EU-Hong Kong relations have 
widened over the past year and new areas of cooperation have been opened in fields such as 
the  environment,  aviation,  competition  and  education.  The  EU  has  a  strong  interest  in  the 
continued autonomy and freedoms enjoyed by Hong Kong people and supports steps for an 
early and substantial progress towards universal suffrage, as envisaged in the Basic Law. 

Economic developments 

Hong Kong, as an open economy and an international financial centre, increasingly integrated 
with the economy of Mainland China and dependent on exports to the US and EU markets, 
could  not  avoid  the  impact  of  the  global  financial  and  economic  crisis.  Its  economy 
experienced a rapid deceleration in 2008, though it managed to attain good growth of around 
5.7%  in  the  first  half  of  the  year.  The  Hong  Kong  stock  market  experienced  massive 
fluctuations  along  with  it.  Inflationary  pressure  eased  towards  the  end  of  the  year,  with  the 
Consumer  Price  Index  at  3.1%  in  November  (from  over  6%  in  mid-2008).  Fiscal  reserves 
remained strong and have enabled the government to launch more fiscal stimulus measures to 
cope with the crisis. 

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As  underlined  by  the  Chief  Executive  Donald  Tsang  in  his  October  Policy  Address,  Hong 
Kong's challenges are to cope with the severe external financial environment and to reinforce 
Hong Kong as an international financial centre. Hong Kong reacted to the financial crisis with 
measures to enhance the regulatory framework, provide liquidity to the financial system and 
guarantee  all  bank  deposits.  However,  credit  tightening  has  exacerbated  the  difficulties  of 
many  highly-leveraged  companies,  especially  small  and  medium-sized  enterprises  (SMEs) 
and cross-border manufacturers in the Pearl River Delta, where the operating environment has 
become  difficult  due  to  rising  production  costs  and  weakened  external  demand.  Funding 
schemes to assist them have been provided by the Hong Kong SAR government.  

The  Hong  Kong  SAR  government  has  identified  four  sectors  of  the  economy  which  are 
particularly  vulnerable  to  the  global  financial  crisis  –  financial  services,  trade  and  logistics, 
tourism and consumption-related services, and real estate and construction. The Taskforce on 
Economic Challenges chaired by the Chief Executive will formulate specific options for the 
government and business community to address these challenges. However, as the effects of 
the  financial  crisis  continue  to  spread,  corporate  streamlining  and  large-scale  layoffs  are 
making unemployment one of the biggest challenges for Hong Kong.  

Premier Wen Jiabao reiterated in October 2008 that China would assist Hong Kong in coming 
out  the  global  financial  crisis  and  laid  down  detailed  directions  of  the  support  measures  – 
working with Hong Kong financial regulators on contingency plans, implementing fast track 
infrastructure  projects,  in  particular  the  Hong  Kong-Macao-Zhuhai  Bridge,  extending  the 
individual travellers scheme, providing support to SMEs and guaranteeing stable supplies of 
food to ease inflation.  

Hong  Kong  continues  to  pursue  closer  integration  with  Mainland  China  regarding  flows  of 
people, knowledge, services and resources, notably through the Closer Economic Partnership 
Arrangement (CEPA). Hong Kong and Mainland China signed the main text of their first free 
trade  agreement  (CEPA  I)  in  2003.  After  five  rounds  of  supplements,  CEPA  has  become  a 
substantially  “WTO-plus”  trade  agreement  on  services  liberalisation.  Hong  Kong-based  EU 
service suppliers are benefitting from preferential market access to the Mainland market. As 
of  mid-2008,  a  total  of  1,232  companies  were  registered  as  Hong  Kong  services  suppliers 
under CEPA, of which 144 were Hong Kong-based EU companies.  

On monetary matters, Hong Kong repeated that it would maintain its peg with the US dollar, 
which  has  been  in  place  for  the  past  25  years.  It  is  also  noted  that  the  development  of 
Renminbi  (RMB)  business  in  Hong  Kong  will  be  further  expanded  under  Mainland  China's 
support to help Hong Kong with the financial and economic crisis. Hong Kong will continue 
to be a testing ground to run pilot projects on RMB liberalisation. 

EU-Hong Kong cooperation 

Relations between the EU and Hong Kong have continued to grow since 1997 on the basis of 
shared interests and mutual concerns. Hong Kong is a strategic trading and investment partner 
of the EU and a platform for trade and investment intermediation between the EU and China. 
There  is  substantial  and  pragmatic  bilateral  cooperation,  which  has  been  enhanced  during 
2008 in new areas of mutual interest.  

In 2007, the EU was Hong Kong's second largest trading partner, only after Mainland China. 
On the other hand, Hong Kong was the 15th largest export market for the EU in 2007. Total 
bilateral trade between the EU and Hong Kong amounted to €31.5 billion in 2007 and grew 
by  3.9%  to  €35.4  billion  in  the  first  nine  months  of  2008.  As  European  businesses 

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increasingly  deal  directly  with  China,  the  relative  importance  of  trade  via  Hong  Kong  has 
declined.  EU-China  trade  via  Hong  Kong  as  a  percentage  of  the  total  EU-China  trade  has 
fallen steadily from one-third in 2002 to around 13% in the first 8 months of 2008. 

The  EU  was  the  biggest  foreign  investor  in  Hong  Kong  in  2006  (according  to  the  latest 
available data), well ahead of the US and Japan, excluding Mainland China and British Virgin 
Islands. On the other hand, Hong Kong was the most popular direct investment destination for 
the EU in Asia. Hong Kong investment in Europe has been steadily developing, and became 
the second largest source of foreign direct investment from Asia after Japan.  

Hong  Kong  has  attracted  a  large  number  of  European  citizens  residing  and  working  in  the 
territory,  totalling  31,000  as  of  June  2008  (Hong  Kong  Immigration  official  figures).  This 
represents  the  biggest  concentration  of  EU  citizens  in  Asia  and  thus  continues  to  be  a 
motivating  factor  for  the  EU's  involvement  in  Hong  Kong.  The  EU's  business  presence  in 
Hong Kong continues to increase and covers a large variety of sectors, notably financial and 
business services, trading, retail and transportation. As of June 2008 there were 1,298 regional 
headquarters  and  2,584  regional  offices  in  Hong  Kong  representing  their  parent  companies 
located outside Hong Kong. EU companies continue to be the largest investor in the territory 
with 1,142 regional headquarters and regional offices based in Hong Kong.  

The European Commission's Communication, "The EU, Hong Kong and Macao: possibilities 
for cooperation 2007-2013", remains the guiding policy framework for the European Union's 
relations with Hong Kong. It sets a number of challenging objectives to move EU-Hong Kong 
relations  forward  by  deepening  and  broadening  cooperation  in  seven  key  areas:  trade  and 
customs, finance, people to people links, transport, the environment, health and food safety.  

The  implementation  of  the  agreed  policy  and  regulatory  cooperation  measures  in  the  seven 
sectors  should  now  be  further  reinforced  with  the  recently-launched  "European  Union 
Business  Information  Programme"  for  Hong  Kong  and  Macao  (EUBIP)  that  will  run  a 
programme  of  content  driven  events  until  2011.  EUBIP  will  serve  as  a  vehicle  to  promote 
better understanding and share knowledge between Hong Kong and the European Union with 
a  range  of  bilateral  cooperation  activities  in  areas  such  as  trade  and  investment,  financial 
services, transport and logistics, the environment, health, food and product safety. A call for 
proposals was launched in August 2008 and the contract was awarded to a consortium formed 
by  the  European  Chamber  of  Commerce  in  Hong  Kong,  Macao  Trade  and  Investment 
Promotion Institute, and the Institute of European Studies of Macau. EUBIP is expected to be 
fully operational in early 2009. 

The  second  EU-Hong  Kong  Structured  Dialogue  was  held  in  Brussels  on  11  December, 
moving  forward  bilateral  dialogue  and  cooperation  in  the  fields  of  trade,  standards, 
intellectual  property  protection,  investment,  customs,  competition,  food  safety,  aviation,  the 
environment,  education  and  culture.  Research  is  a  possible  area  of  cooperation  and  Hong 
Kong organisations can participate in the ICT/FP7 programme.  

The Structured Dialogue has become an effective high-level platform for officials from both 
sides  to  discuss  issues  of  common  interest.  This  year's  meeting  devoted  substantial 
discussions  to  the  global  financial  crisis  and  both  sides  appreciated  the  response  by  their 
respective  governments.  Both  sides  agreed  to  enhance  bilateral  cooperation  through  the  EU 
Business  Information  Programme,  the  Hong  Kong/Macao  Seminar  package  on  IPR  and 
standardisation issues as well as initiatives on environment, creative industries and people to 
people exchanges. 

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Several bilateral high-level visits during 2008 have contributed to enhancing EU-Hong Kong 
relations and push forward cooperation initiatives. Commissioner Kovacs visited Hong Kong 
in January with a view to deepen customs cooperation and initiated an exploratory dialogue 
with  the  Hong  Kong  SAR  government  on  the  issue  of  EU  Savings  Taxation  Directive.  In 
June, Commissioner Kuneva came to Hong Kong to address the business community on EU 
policies  on  the  global  governance  of  product  safety.  There  were  also  numerous  visits  by 
Commission  officials  to  Hong  Kong  to  explore  cooperation  in  policy  areas  such  as  the 
environment,  economic  affairs,  information  and  communications  technology  and  trade.  In 
April,  the  Chief  Secretary,  Mr  Henry  Tang,  visited  Brussels  and  met  with  Commissioner 
Mandelson. He called for closer ties between the EU and Hong Kong. 

The  environment  is  one  of  the  key  areas  for  enhancing  EU-Hong  Kong  cooperation.  The 
Commission  welcomes  the  Hong  Kong  SAR  government's  increased  interest  in  climate 
change and policy direction for a low carbon economy and that, in spite of the global financial 
crisis, Hong Kong's commitments to environmental protection remain unchanged. Hong Kong 
sees  itself  as  having  a  regional  role  to  play,  especially  in  influencing  its  neighbouring 
province,  Guangdong,  in  setting  policy  initiatives  and  is  keen  to  cooperate  with  Mainland 
China to improve air quality within the region. In this regard, the  EU is looking forward to 
stepping up cooperation initiatives with Hong Kong to protect the environment and cooperate 
in  the  global  climate  change  agenda.  With  the  largest  financial  expertise  in  Asia,  a  well 
regulated  market  and  a  good  arbitration  system,  Hong  Kong  is  also  a  serious  candidate  to 
become  a  regional  trading  platform  for  innovative  green  financial  products,  possibly 
benefitting from EU's experience in carbon trading with the European Trading System (ETS).  

The  Commission  has  also  actively  contributed  to  Hong  Kong's  consultation  process  on  the 
competition  bill  that  will  be  submitted  to  the  Legislative  Council  in  the  2008-09  legislative 
session. The Commission welcomes the commitment of the Hong Kong government to enact 
a cross-sector competition law which will help ensure a level-playing field and enhance the 
competitiveness of Hong Kong in the long run. In addition, the Commission welcomes future 
exchanges and cooperation on its implementation. 

In  view  of  strong  EU–Hong  Kong  relations  in  the  field  of  aviation,  including  bilateral 
agreements with most EU Member States, the Commission has proposed to initiate contacts 
with Hong Kong for a horizontal air services agreement, which would give legal certainty to 
the  existing  bilateral  agreements  by  including  a  Community  Designation  Clause.  Following 
exchanges between EU and Hong Kong experts in 2008, a high-level meeting is foreseen for 
March 2009. 

EU public diplomacy in Hong Kong was a key priority in 2008, with a view to adding value 
to EU Member States' public diplomacy efforts in Hong Kong. Hong Kong is a centre of free 
press and free speech in the region, a leading media hub and a gateway for Mainland China. 
The Commission's efforts have been therefore concentrated on making the EU more visible in 
Hong Kong and on delivering prompt and substantial information on EU trade and regulatory 
policies, energy and climate change, intercultural dialogue and the EU's role in the world. 

Political developments 

In  accordance  with  its  1997  commitment  to  the  European  Parliament,  the  Commission 
continued  to  monitor  closely  Hong  Kong's  institutional  and  societal  developments  during 
2008. One of these is Hong Kong's democratic development and its process towards universal 
suffrage as set out in the Basic Law of the Hong Kong Special Administrative Region. 

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2008  started  with  a  clear  commitment  by  the  SAR  government  to  the  implementation  of 
universal suffrage and a concrete timetable to do it in time for direct elections for the Chief 
Executive in 2017 and for the Legislative Council in 2020, following the ruling issued by the 
Standing Committee of the National People's Congress on 29 December 2007. The European 
Union has consistently supported early and substantial progress towards the ultimate goal of 
universal  suffrage  in  Hong  Kong.  Therefore  on  24  January,  the  EU  expressed  its 
disappointment that the possibility of universal suffrage for 2012 had been ruled out when the 
majority of Hong Kong's people are supportive of early and greater democracy, as recognised 
by the Hong Kong SAR government in December 2007. We have always believed that early 
progress towards universal suffrage in Hong Kong in accordance with the Basic Law would 
be  in  the  best  interests  of  both  Hong  Kong  and  China.  We  therefore  hope  that  all  parties 
concerned will work towards establishing concrete proposals on wider suffrage for the 2012 
Chief Executive and Legislative Council elections, which will advance Hong Kong towards 
full universal suffrage. 

The SAR government has said that over the next four years, the focus of discussion would be 
on  how  to  amend  the  electoral  methods  for  the  2012  elections  for  the  Chief  Executive  and 
Legislative Council. In February, Chief Executive Donald Tsang appointed a 30-member task 
group  on  constitutional  development  to  study  feasible  options  for  the  2012  elections.  In  his 
annual  policy  address  delivered  on  15  October  2008,  Chief  Executive  Donald  Tsang 
acknowledged that the timetable for universal suffrage as given by the Standing Committee of 
the  National  People's  Congress  enjoys  wide  support  in  the  community.  The  government  is 
expected to consult the public in the first half of 2009 on the methods for electing the Chief 
Executive and members of the Legislative Council in 2012.  

The  2008  Legislative  Council  election  was  held  on  7  September  under  the  professional 
supervision  of  the  Electoral  Affairs  Commission.  There  are  60  seats  in  the  Legislative 
Council,  with  30  lawmakers  elected  by  geographical  constituencies  through  direct  elections 
and  30  legislative  councillors  elected  by  functional  constituencies.  With  142  candidates 
running for the geographical constituency seats, this Legislative Council election became the 
most  competitive  election  in  Hong  Kong's  history.  The  Democratic  Alliance  for  the 
Betterment  and  Progress  of  Hong  Kong  (DAB)  remained  Hong  Kong's  biggest  party  in  the 
legislature, with 13 seats in the Legislative Council. Its former chairman, Jasper Tsang Yok-
sing  was  elected  President  of  the  Legislative  Council.  The  pan-democratic  camp  won  23  of 
the  60  seats  in  the  legislature  allowing  a  blocking  minority  for  constitutional  changes.  Its 
share in the directly elected geographical constituencies remained unchanged, obtaining 60% 
of  the  popular  vote.  However,  given  the  nature  of  the  electoral  system,  pro-government 
parties retain a comfortable majority in the legislature. 

The elections were held in a fair and orderly manner. The overall conduct of the elections was 
another testament to the political maturity of the people of Hong Kong and showed that there 
is a sound base for swift progress towards the Basic Law’s ultimate aim of universal suffrage. 

This will be an important legislative period for the Legislative Council, as it will debate the 
government's  proposal  for  constitutional  change,  in  particular  its  suggestion  to  further 
democratise the election process in time for 2012, which will need the support of two-thirds 
of this Legislative Council.  

2008  also  saw  the  expansion  of  the  government's  ministerial  accountability  system  with  the 
appointment by the Chief Executive of eight Under Secretaries and nine Political Assistants 
under the political appointment system to work closely with the heads of government bureaux 
and civil servants and to help implement the government's policies. 

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The  Commission  notes  that,  as  in  previous  years,  fundamental  rights  and  freedoms, 
guaranteed  in  the  Basic  Law,  have  been  protected  by  independent  law  courts  and  law 
enforcement agencies. The judiciary and the law enforcement services in Hong Kong continue 
to  have  a  good  track  record.  There  were  a  number  of  judicial  review  cases  against 
administrative decisions that touched on important constitutional issues in 2008. In December, 
the  High  Court  ruled  against  the  Immigration  Department's  procedure  on  reviewing  torture 
claims filed by asylum seekers as it did not allow claimants to have legal representation with 
them  at  any  stage  of  the  review  process  and  said  it  was  in  violation  of  Hong  Kong’s 
international obligations under the United Nations Convention against Torture. In a separate 
judicial review case, the High Court ruled against the government's disenfranchisement which 
deprived  all  prisoners  of  their  right  to  vote,  regardless  of  their  sentence.  The  court  stressed 
that the ban was in contravention of a right that is constitutionally guaranteed under the Basic 
Law and the Hong Kong Bill of Rights. In light of these judicial review cases, Secretary for 
Justice Wong Yan-lung noted that Hong Kong's judiciary had provided the government with 
important and practical guidance in areas where the relevant legal provisions may not be free 
from ambiguity.  

However,  administrative  decisions  to  deny  foreign  nationals’  entry  into  Hong  Kong  for  the 
Olympic Torch Relay in May raised concerns as well as pending court cases for an unlicensed 
radio station run by pro-democracy activists. The defendants argued that Hong Kong's radio 
licensing  regime  was  unconstitutional,  as  it  granted  unfettered  discretion  to  the  Chief 
Executive  in  deciding  applications  for  a  broadcaster's  licence,  which  could  undermine 
freedom of expression. The charges laid against them were dismissed by Magistrate Douglas 
Yau,  based  on  his  ruling  that  the  licensing  system  breached  the  Basic  Law's  provisions  on 
freedom of speech. That ruling was set aside by the Court of Appeal on 12 December, which 
ruled in favor of the Hong Kong government. The court held that a constitutional challenge to 
the  licensing  regime  could  not  be  a  defence  to  a  crime  and  has  sent  the  case  back  to  the 
magistrate for a re-trial.  

The Commission welcomes the enactment of the Race Discrimination Bill which was passed 
unanimously  by  the  Legislative  Council  on  10  July  and  which  will  render  discrimination, 
harassment and vilification on the ground of race unlawful and will extend the jurisdiction of 
the  Equal  Opportunities  Commission  to  include  discrimination  on  racial  grounds.  This  Bill 
constitutes  an  important  step  in  creating  a  more  equal  society  in  Hong  Kong.  We  also 
welcome the legislation published in 6 June 2008 to implement civil justice reforms intended 
to  improve  the  cost-effectiveness  of  the  civil  procedure  system  and  reduce  complexity  and 
delays  in  litigation  in  Hong  Kong.  These  reforms  are  expected  to  come  into  effect  in  April 
2009. 

In  the  region,  Hong  Kong  will  seek  to  maintain  its  position  as  a  regional  centre  for  trade, 
services  and  the  media.  Hong  Kong's  very  successful  hosting  of  the  Equestrian  Olympics 
Games  in  August  and  the  Paralympics  Games  in  September  confirms  its  reputation  as  a 
multicultural meeting capital in Asia, a unique place where "East meets West". 

Perspectives for the future 

Mitigating  the  impact  of  the  financial  crisis  in  the  real  economy  will  be  an  immediate 
challenge  for  the  Hong  Kong  SAR  government.  Creating  more  job  opportunities,  boosting 
domestic demand and support to small and medium-sized businesses will be high on the Hong 
Kong SAR government's agenda while at the same time maintaining Hong Kong's role as an 
international  finance  and  service  centre  for  Asia.  Chief  Executive  Donald  Tsang  said  in  his 

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policy  address  for  2009  that  Hong  Kong  should  look  at  "turning  the  financial  crisis  into  an 
opportunity"  and  advocated  to  reinforce  Hong  Kong's  position  as  an  international  financial 
centre. 

The  future  of  Hong  Kong  as  an  international  financial  centre  is  linked  to  its  expanding 
economic  ties  with  Mainland  China,  and  in  particular  the  Pearl  River  region,  and  its 
traditional  connections  with  South  East  Asia,  in  addition  to  its  key  attributes  of  having  a 
sound legal environment, rule of law, good regulatory regime  and financial expertise. Hong 
Kong will continue to play its role in financial intermediation between Mainland China and 
the rest of the world. 

The broad European interests in Hong Kong, as shown in this report, mean that Hong Kong 
will continue to be an important partner for the EU in Asia, playing a central part in the EU's 
relations with Mainland China. All in all, the Commission proposes to continue its effective 
engagement with the Hong Kong SAR government to enhance our pragmatic cooperation in 
order  to  address  together  global  challenges  such  as  the  financial  crisis,  economic 
interdependence and environmental protection. Within the framework of the general move to 
improve  transparency  at  international  level  as  an  answer  to  the  financial  crisis,  the 
Commission  and  the  EU  Member  States  look  forward  to  Hong  Kong  SAR  willingness  to 
establish  cooperation  with  the  EU  in  the  area  of  taxation  through  an  effective  exchange  of 
information.  More  emphasis  should  be  given  to  increasing  people-to-people  contacts  and 
exchanges that will allow Europe and Hong Kong to get to know each other better and respect 
the cultural diversity which is a common feature to both Hong Kong and Europe.  

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 Hong 
Kong SAR continues to enjoy a high degree of autonomy in economic, trade, fiscal, financial 
and  regulatory  matters.  The  EU  is  committed  to  Hong  Kong's  continued  stability  and 
prosperity. We believe that the best way to guarantee these is for Hong Kong to move towards 
a  system  for  universal  suffrage  as  envisaged  in  the  Basic  Law.  Hong  Kong's  democratic 
development is important to the EU.  

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