JOINT REPORT TO THE COUNCIL AND THE EUROPEAN PARLIAMENT ANNUAL REPORT HONG KONG 2010
Date: 2011-04-14
Institutions: European Commission, High Representative of the Union
Subjects: EU relations, Hong Kong, activity report, bilateral relations, cooperation policy

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EUROPEAN COMMISSION 

HIGH REPRESENTATIVE
OF THE UNION FOR FOREIGN 
AFFAIRS AND
SECURITY POLICY

Brussels, 14.4.2011 
COM(2011) 204 final 

JOINT REPORT TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

ANNUAL REPORT HONG KONG 2010 

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Hong Kong Special Administrative Region: Annual Report 2010 

INTRODUCTION 

Since  the  handover  of  Hong  Kong  to  Mainland  China  more  than  thirteen  years  ago,  the 
European  Union  has  closely  monitored  economic  and  political  developments  in  the  Hong 
Kong  Special  Administrative  Region  (SAR),  in  order  to  fulfil  its  1997  commitment  to  the 
European  Parliament  to  issue  an  annual  report  on  developments  in  Hong  Kong.  This  is  the 
thirteenth such report covering developments in 2010. 

During  2010,  the  principle  of  ‘one  country,  two  systems’,  as  established  in  the  Sino-British 
Declaration and the Basic Law of Hong Kong, has continued to work well, as the rights and 
fundamental  freedoms  of  the  people  of  Hong  Kong  have  been  respected,  the  rule  of  law 
protected and the market economic system and business environment maintained.  

Bilateral relations and cooperation between the EU and Hong Kong have continued to move 
forward  on  a  very  positive  track,  in  terms  of  trade,  investment  and  dialogue  on  issues  of 
common interest. The EU continued to be Hong Kong’s second largest trading partner. It is 
Hong Kong’s biggest source of foreign direct investment (FDI) after Mainland China and the 
British Virgin Islands. With one of the biggest European business communities in Asia and as 
a financial and economic hub for the region, Hong Kong maintains its strategic importance as 
a trading and investment partner for the EU. 

The  EU  continues  to  strongly  support  early  and  substantial  progress  towards  the  goal  of 
genuine universal suffrage, in accordance with the Basic Law of the Hong Kong SAR and the 
wishes of the people of Hong Kong.  

POLITICAL DEVELOPMENTS 

2010  was  a  crucial  year  for  Hong  Kong's  constitutional  development,  dominated  by  intense 
political debate on electoral reform. 

In  June,  Hong  Kong  took  an  important  step  forward  with  the  approval  by  the  Legislative 
Council of the Proposals for the Methods of Selecting the Chief Executive and for Forming 
the  Legislative  Council  in  2012.  Under  this  legislation,  in  2012  the  committee  which  elects 
the chief executive will be expanded from 800 to 1200 members and the number of seats in 
the Legislative Council from 60 to 70 members. The 50:50 ratio of legislative seats directly 
elected by the public and those elected via members of functional constituencies (as set out by 
the National People's Congress Standing Committee decision of 2007) remains. 

Of  the  ten  new  seats  added  to  the  Legislative  Council,  five  have  been  allocated  to  directly-
elected  geographical  constituencies  and  the  other  five  to  functional  constituencies.  The  five 
new  functional  constituency  seats  will  be  filled  by  directly-elected  members  of  District 
Councils,  which  are  local  government  bodies.  This  means  that  the  3.2  million  registered 
voters who currently do not have the right to elect any functional constituency lawmakers will 
be eligible to vote for the five new functional constituency seats. 

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On 25 June, Chief Executive Donald Tsang said that it was "a triumph of the one country, two 
systems arrangements". Later in his October policy address, he stressed that Hong Kong had 
taken  a  decisive  step  towards  universal  suffrage  when  the  2012  constitutional  package  was 
passed  by  the  Legislative  Council,  and  that  the  community's  aspiration  to  roll  forward  with 
constitutional development has been realised.  

On  25  June  2010,  the  spokesperson  of  the  EU  High  Representative  for  Foreign  Affairs  and 
Security  Policy,  Catherine  Ashton,  issued  a  statement  which  took  note  of  the  Legislative 
Council's  approval  of  the  2012  electoral  reforms  and  stressed  that  the  EU  continued  to 
strongly support early and substantial progress towards the goal of genuine universal suffrage 
in accordance with the Basic Law of Hong Kong and international standards. It concluded that 
this was the best guarantee of stability and prosperity for the Hong Kong people.  

The legislative process was difficult. The Government's proposals were initially opposed by 
all  pan-democratic  parties.  By-elections  were  held  in  May  triggered  by  the  resignation  in 
January  of  five  pan-democratic  legislators  who  argued  that  by-elections  would  constitute  a 
"de  facto-referendum"  on  the  pace  of  democratic  development.  All  five  legislators  regained 
their seats in a by-election with a very low (17%) turnout and the non-participation of the pro-
government parties. In an effort to find a compromise that would avoid a second rejection by 
the  legislature  of  the  electoral  reform  package,  mainland  officials  and  Hong  Kong  pan-
democratic  leaders  met  for  the  first  time  since  the  Tiananmen  events  in  1989.  The  Central 
government accepted the Democratic Party proposal to allow all registered voters (rather than 
just elected district councilors) in Hong Kong to vote for the five new functional constituency 
seats and eventually the new proposal was approved by the legislature with the necessary two-
thirds  majority.  The  EU  warmly  welcomes  the  dialogue,  which  made  the  passage  of  this 
proposal possible. 

Chief Executive Donald Tsang made clear in his October policy address that his government 
will not legislate on the issue of national security in accordance with Article 23 of the Basic 
Law during his term. Tsang said that although it was a constitutional duty, he will focus his 
energy on more pressing issues such as implementing legislation that will put into place the 
changes for electoral reform in time for 2012 and resolving livelihood issues.  

Hong  Kong's  new  Chief  Justice,  Geoffrey  Ma,  took  office  in  September  2010  vowing  to 
defend  the  rule  of  law  in  the  Special  Administrative  Region  and  promising  to  vigorously 
protect the integrity of the city's courts.  

Hong Kong lawmakers from across the political spectrum voiced support for jailed Chinese 
activist  Zhao  Lianhai,  who  organised  a  parents'  group  to  seek  compensation  for  children 
affected by melamine-tainted milk in the Mainland. Some of them had also signed a petition 
to  the  Supreme  People's  Court  calling  for  the activist's release. A joint petition by 28 Hong 
Kong  deputies  to  the  National  People's  Congress  was  also  presented  to  the  Court,  urging  a 
more  lenient  judgement  on  the  case.  Zhao  Lianhai  was  released  on  medical  parole  in 
December 2010. 

23  August  2010  witnessed  the  tragic  events  that  unfolded  in  the  Philippines  where  a  Hong 
Kong  tourist  bus  was  taken  hostage  in  Manila  resulting  in  the  death  of  eight  people  from 
Hong  Kong  and  others  injured.  The  EU  expressed  its  condolences  and  support  to  the  Hong 
Kong people.  

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Ties  between  Hong  Kong  and  Taiwan  continued  to  expand  in  2010  with  the  visit  of  Hong 
Kong  Financial  Secretary,  John  Tsang,  to  Taiwan  in  August.  The  Taiwan  –  Hong  Kong 
Economic  and  Cultural  Cooperation  Council  was  established  in  May  in  Hong  Kong.  Both 
sides agreed to strengthen exchanges and cooperation on trade, finance, investment promotion 
and tourism. 

In general terms, the EU believes that during 2010 the implementation of the "one country, 
two systems" principle in Hong Kong SAR remained satisfactory and the rights and freedoms 
of  Hong  Kong's  people,  guaranteed  in  the  Sino-British  Declaration  and  the  Basic  Law, 
continued to be respected. 

ECONOMIC AND TRADE DEVELOPMENTS 

Hong  Kong's  economy  recovered  well  from  the  global  financial  crisis  upon  entering  2010. 
GDP  increased  by  7.1%  in  real  terms  during  the  first  three  quarters  of  2010,  after  a  2.7% 
contraction in 2009. Government measures introduced during the crisis period proved able to 
cushion external risks and maintain confidence. The post-crisis growth was supported by the 
robust  Mainland  Chinese  economy,  a  strong  rebound  in  exports  to  the  Asian  markets, 
abundant  liquidity  inflows  as  well  as  rising  consumer  and  business  confidence.  The  labour 
market was stable and the unemployment rate dropped to a two-year low at 4.1% in the three 
months  to  November  20101.  However,  inflationary  pressure  became  distinct  along  with  the 
sustained economic recovery and rising import prices. Consumer price inflation for 2010 was 
2.3%2 and the uptrend seems likely to continue into 2011. 

In 2010, Hong Kong attracted abundant inflows of international liquidity to the asset markets 
under a relaxed global monetary environment. Given the Hong Kong-US dollar peg, there was 
no possibility for the use of monetary policies to address asset price pressure. Consequently, 
mitigating  the  risk  of  an  asset  bubble  became  a  major  challenge  for  the  Hong  Kong  SAR 
Government  during  2010.  Despite  the  negative  impact  of  the  currency  link  on  asset  price 
movements  and  inflation,  Hong  Kong  authorities  publicly  reiterated  their  stance  of 
maintaining  the  Linked  Exchange  Rate  System  (HKD-USD  peg)  which  has  been  in  place 
since 1983.  

Hong  Kong  expanded  its  role  in  the  internationalisation  of  the  Mainland  currency,  the 
Renminbi  (RMB).  With  the  support  of  the  Central  Government,  along  with  the  financial 
expertise and infrastructure  Hong Kong has to  offer,  Hong  Kong  has,  for  now,  successfully 
positioned  itself  to  be  the  leading  offshore  centre  for  RMB  business  and  products.  During 
2010, China progressively relaxed its rules on RMB capital transfers, cross-border settlement, 
corporate  bond  issuances  and  access  to  its  onshore  inter-bond  market,  aiming  to  improve 
circulation of offshore RMB funds. At the same time, RMB business in Hong Kong took off 
in  a  serious  and  sustained  manner,  witnessing  growing  and  record  levels  of  RMB  deposits, 
cross-border trade settlement transactions and a burgeoning of RMB-denominated  financing 
and investment products. Hong Kong also maintained its leading position as the largest IPO 
market globally in 2010.  

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Source: Hong Kong Census and Statistics Department. 
Source:  Figure  represents  the  Composite  CPI  growth  rate  for  the  first  eleven  months  of  2010,  Hong 
Kong Census and Statistics Department. 

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Hong Kong and China continued to forge stronger economic and trade ties through the Closer 
Economic Partnership Arrangement (CEPA). The seventh supplement to CEPA was signed in 
May  2010,  under  which  China  introduced  more  liberalisation  measures  in  services  to  Hong 
Kong service suppliers, bringing the total number of liberalised service sectors under CEPA 
to  44.  The  EU  continued  its  cooperation  with  the  Hong  Kong  Government  to  disseminate 
information on CEPA to the European business community. 

On  regional  integration,  Hong  Kong  and  the  Chinese  province  of  Guangdong  took  further 
steps  to  institutionalise  their  cooperation  and  exchanges  through  a  framework  agreement 
endorsed by the State Council of the People's Republic of China and signed on 7 April 2010. 
It aims to promote joint socio-economic development in Hong Kong and Guangdong and to 
capitalise  on  the  competitiveness  of  Hong  Kong's  service  industries  and  Guangdong's 
manufacturing  industries  to  build  an  advanced  global  manufacturing  and  modern  services 
base.  

While  maintaining  its  strong  support  for  multilateralism  in  the  area  of  trade  liberalisation, 
Hong  Kong  has  recently  become  more  active  in  negotiating  and  concluding  free  trade 
agreements (FTAs). Apart from the CEPA with Mainland China, Hong Kong signed a Closer 
Economic Partnership Agreement with New Zealand on 29 March 2010, its first FTA with a 
foreign country. FTA negotiations with the European Free Trade Association (EFTA) started 
in January 2010 and are reported to be nearing completion. Exploratory talks were initiated by 
Hong Kong with Chile, Peru and Malaysia. A WTO trade policy review of Hong Kong, China 
was  conducted  in  December  2010.  As  with  previous  WTO  trade  policy  reviews,  this  one 
stated  that  Hong  Kong  remains  one  of  the  most  liberal  and  transparent  foreign  investment 
regimes, and one of the most market-oriented and open economies globally. 

Several milestone economic legislative proposals were either introduced or passed in 2010. In 
July,  Hong  Kong  passed  its  first  minimum  wage  law.  The  Legislative  Council  adopted  the 
proposal of the government-appointed task group to set a minimum wage level of HK$28 per 
hour (approximately €2.80). The minimum wa ge law will take effect on 1 May 2011. 

Another milestone was the introduction of a draft competition bill. The draft bill (if adopted) 
would  see  the  establishment  of  a  Competition  Commission  with  responsibility  for 
investigating  and  prosecuting  anti-competitive  practices  falling  under  the  scope  of  the 
competition  bill,  while  the  current  broadcasting  and  telecommunications  authorities  would 
enjoy  concurrent  jurisdiction  for  matters  relating  to  either  of  those  distinct  areas.  The  bill 
would  also  see  the  establishment  of  a  Competition  Tribunal.  The  EU  welcomes  the 
introduction  of  competition  law  in  Hong  Kong  as  we  believe  competition  policy  is  an 
important  attribute  of  a  well-functioning  market  economy.  It  would  create  a  level  playing 
field  for  firms,  enhance  economic  efficiency  and  protect  free  trade  to  the  benefit  of 
consumers. 

On 3 March 2010 Hong Kong completed the legislative process for the enactment of the law 
and provisions on exchange of information in accordance with the 2004 version of the OECD 
Model Tax Convention. The tax law provides for exchange of information upon request only. 
In  response  to  public  demand,  Hong  Kong  has  included  safeguards  in  individual 
comprehensive  Double  Taxation  Agreements  ("CDTAs")  providing  for  additional  statutory 
procedural  safeguards  in  handling  an  Exchange  of  Information  request  by  foreign 
jurisdictions.  During  2010,  Hong  Kong  signed  14  of  these  CDTAs  tax  treaties  (7  with  EU 

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Member States). The growing network of bilateral tax treaties is expected to bring about new 
business and trade and investment opportunities for all parties. 

EUROPEAN UNION – HONG KONG RELATIONS AND COOPERATION 

In  2010,  the  European  Union  and  Hong  Kong  bilateral  relations  and  cooperation  have 
continued to expand. Hong Kong is an important player in the region and an intermediation 
platform for trade and investment flows between the EU and Mainland China. 

In 2010, the EU maintained its position as Hong Kong’s second-largest trading partner after 
Mainland  China.  Conversely,  in  the  same  year  Hong  Kong  was  the  16th  largest  trading 
partner  of  the  EU.  Bilateral  trade  between  the  EU  and  Hong  Kong  recovered  robustly  and 
increased by 29.9% during the first nine months of 2010, reaching €37.9bn. 

Next  to  Mainland  China  and  the  British  Virgin  Islands,  the  EU  was  the  biggest  foreign 
investor  in  Hong  Kong,  contributing  to  9.9 %  of  the  total  FDI  stock  in  2009.  Hong  Kong 
investment  in  Europe  has  been  developing  steadily,  as  one  of  the  major  sources  of  direct 
investment from Asia. 

Despite the global economic crisis, Hong Kong is still home to one of the biggest European 
business communities in Asia and continues to attract a large number of European citizens to 
reside  and  work  in  the  territory,  totalling  around  31,100  as  at  the  end  of  2010  according  to 
official Hong Kong Immigration figures. The EU is the largest source of foreign companies in 
Hong Kong with 423 regional headquarters, 654 regional offices and 590 local offices as of 
June 20103, outnumbering those of the US and Japan. The EU’s business presence covers a 
large variety of sectors, mainly financial and business services, trading, logistics, construction 
and  retailing.  Among  others,  EU  companies  are  now  key  players  in  the  banking,  insurance 
and securities sectors of Hong Kong. 

The 4th Structured Dialogue meeting between the European Commission and the Hong Kong 
SAR Government took place in Brussels on 22 November 2010. The meeting covered a range 
of  issues  ranging  from  economic  relations,  including  trade  and  investment,  to  aviation, 
environment,  research,  technology,  innovation  and  educational  cooperation.  The  two  sides 
noted  with  satisfaction  that  their  trade  and  economic  relations  had  continued  to  deepen  and 
bilateral  trade  had  steadily  returned  to  the  levels  enjoyed  prior  to  the  financial  crisis. 
Constructive  exchanges  on  the  regulatory  reform  of  the  financial  services  sector  have 
increased as well as in the field of toy safety.  

Following several years of discussions between the European Commission and Hong Kong, 
as well as the launch of bilateral negotiations between Germany and Hong Kong in 2008, the 
European  Commission  and  Hong  Kong  reached  agreement  in  2010  on  how  to  restore  legal 
certainty to the EU – Hong Kong bilateral air services agreements.  

2010  saw  a  number  of  high-level  visits  from  Brussels  to  Hong  Kong.  In  January, 
Commissioner  Kuneva  (Health  and  Consumer  Protection)  visited  Hong  Kong  to  attend  the 
APEC Toy Safety Initiative Open Dialogue. In August 2010, Commissioner Semeta (Taxation 
and  Customs  Union,  Audit  and  Anti-Fraud)  met  with  relevant  Hong  Kong  counterparts  for 

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discussions on matters relating to taxation and customs; while congratulating the Hong Kong 
Authorities  for  the  steps  forward  made  in  the  implementation  of  the  OECD  standards  for 
assistance in tax matters, he stressed the continuing interest of the EU and its Member States 
in  establishing  specific  cooperation  on  income  from  savings  with  Hong  Kong  in  order  to 
ensure  taxation  of  EU  investors  in  accordance  with  the  rules  of  their  Member  State  of 
residence,  as  provided  for  by  the  EU  Directive  on  Taxation  of  Savings  Income  and  the 
accompanying  agreements  In  September,  Director-General  Deffaa  (Taxation  and  Customs 
Union)  headed  a  delegation  of  customs  officials  for  the  8th  meeting  of  the  EU-Hong  Kong 
Joint Customs and Cooperation Committee.  

The  activities  of  the  EU  Business  Information  Programme  for  Hong  Kong  and  Macao 
(EUBIP),  co-funded  by  the  European  Commission  and  under  the  management  of  the 
European Chamber of Commerce (ECC) in Hong Kong, have increased in number and have 
become  more  diverse.  During  2010,  priority  was  given  to  financial  services  regulations, 
CEPA,  environment,  telecommunications,  customs  and  taxation.  Various  business  councils 
have been established for a number of sectors in which European business and industry enjoy 
a  leading  position,  e.g.  information  and  communications  technology  (ICT)  and  financial 
services.  They  have  provided  important  industry  input  to  our  government-to-government 
dialogue. EUBIP has proved to be a successful channel for a better understanding between the 
business communities of the EU and Hong Kong. 

Hong Kong continues to be a centre of free press and free speech, a leading regional media 
hub. EU public diplomacy efforts have focused on making the EU more active and visible in 
Hong Kong under the new Treaty of Lisbon setting. Since 1 January 2010, the Office of the 
European Union to Hong Kong represents the EU as coordinator and negotiator in the Hong 
Kong Special Administrative Region. The Treaty of Lisbon offers an opportunity for the EU 
to  further  intensify  ties  with  Hong  Kong.  Working  closely  with  the  EU  Member  States 
officially  represented  in  the  territory,  the  EU  Office  has  delivered  prompt  and  substantial 
information  on  EU  trade  and  regulatory  policies,  energy  and  climate  change,  financial 
regulation, intercultural dialogue, and the EU’s role in the world.  

Hong  Kong  has  emerged  from  the  global  crisis  without  any  major  systemic  problems.  Its 
sound  economic  and  financial  fundamentals,  its  open  economy  and  its  stable  legal 
environment  based  on  the  respect  for  the  rule  of  law  and  judiciary  independence,  are 
noteworthy elements for increasing trade and investment flows with the EU as well as serving 
as a gateway for Mainland China and the region. 

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