JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Hong Kong Special Administrative Region: Annual Report 2011
Date: 2012-05-03
Institutions: European Commission, High Representative of the Union
Subjects: Hong Kong, economic cooperation, economic situation, political situation

EUROPEAN COMMISSION 

HIGH REPRESENTATIVE OF THE
EUROPEAN UNION FOR 
FOREIGN AFFAIRS AND 
SECURITY POLICY

Brussels, 3.5.2012  
JOIN(2012) 11 final 

JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL 

Hong Kong Special Administrative Region: Annual Report 2011 

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JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL 

Hong Kong Special Administrative Region: Annual Report 2011 

INTRODUCTION 

Since the handover of Hong Kong to the People's Republic of China almost fifteen years ago, 
the  European  Union  and  its  Member  States  have  closely  followed  political  and  economic 
developments in the Hong Kong Special Administrative Region (SAR). In order to fulfil the 
1997 commitment to the European Parliament an annual report is issued on developments in 
Hong Kong. This is the fourteenth such report covering developments in 2011. 

During  2011,  the  principle  of  ‘one  country,  two  systems’,  enshrined  in  the  Sino-British 
Declaration  and  the  Basic  Law  of  Hong  Kong,  continued  to  work  well,  as  the  rights  and 
fundamental freedoms of the people of Hong Kong continue to be respected, the rule of law 
protected and the market economic system and business environment maintained.  

Bilateral  relations  between  the  EU  and  Hong  Kong  have  continued  to  expand  culminating 
with  the  visit  of  the  Hong  Kong  SAR  Chief  Executive  to  the  EU  institutions  in  September 
where he met with President Van Rompuy. 

The European Union attaches great importance to Hong Kong’s stability, economic prosperity 
and  democratic  development.  The  EU  continues  to  strongly  support  early  and  substantial 
progress  towards  the  goal  of  universal  suffrage,  in  accordance  with  the  Basic  Law  of  the 
Hong Kong SAR and the wishes of the people of Hong Kong.  

POLITICAL DEVELOPMENTS 

2011  saw  further  consolidation  of  Hong  Kong's  constitutional  development.  Subsidiary 
legislation on the electoral reform package agreed in June 2010 was approved, a robust public 
debate and extensive media scrutiny took place and political momentum was building up in 
advance  of  the  district  council  elections  and  the  constitution  of  the  expanded  Election 
Committee that will choose the next chief executive in March 2012. 

On  22  July  2011,  the  Secretary  for  Constitutional  and  Mainland  Affairs  published  a 
consultation  paper  on  arrangements  for  filling  vacancies  in  the  Legislative  Council.  By  the 
end of the consultation period on 24 September 2011, the majority of respondents considered 
that the by-election system should be retained, rejecting the original government proposal that 
the  vacancy  would  be  filled  by  the  next  candidate  on  the  list.  The  adoption  process  will  be 
completed within the 2011/2012 legislative year. 

In  his  last  policy  address  on  12  Oct  2011  entitled  'From  Strength  to  Strength',  the  Chief 
Executive  Donald  Tsang,  shifted  focus  onto  Hong  Kong's  social  challenges.  He  targeted 
unaffordable housing, Hong Kong's rapidly ageing population, and the increasing wealth gap 
and promised to take steps to improve the general quality of life. 

District Council elections were held on the 6 November 2011. Voter turnout reached 41.4% 
with  1.2  million  people  casting  their  vote.  The  Democratic  Alliance  for  the  Betterment  and 
Progress of Hong Kong (DAB) and the Federation of Trade Unions won 165 of the 412 seats; 
the pan-democratic camp won only 47 seats. The district council elections set the scene for a 
series  of  elections  to  be  held  in  2012  including  the  next  legislative  council  elections  in 

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September 2012 with five new functional constituency seats drawn from these elected district 
councils. Allegations of irregular voter registration were subject to investigations. 

On 10 December 2011, the newly expanded Election Committee, compromising 1,200 seats 
that  will  elect  the  next  chief  executive  in  March  2012,  was  constituted  with  appointments 
from business, the professional sectors, civil society and politicians at district and Legislative 
Council level. In late 2011, two candidates declared their intention to run for the next Chief 
Executive  post:  Henry  Tang,  former  Chief  Secretary  declaring  on  26  November  and  Chun-
Ying Leung, former Executive Council Convener on 27 November.  

Hong Kong-Taiwan relations took an important step forward this year with the formalisation 
of their relations and presence of official offices in Taipei and in Hong Kong. In July 2011, 
Taiwan  opened  an  official  representative  office  in  Hong  Kong,  the  Taipei  Economic  and 
Cultural  Office.  Hong  Kong’s  office  in  Taipei  is  called  Hong  Kong  Economic,  Trade  and 
Cultural  Office.  Hong  Kong  and  Taiwan  also  embarked  on  an  increasingly  substantive 
bilateral agenda including trade and investment, aviation, custom and cultural cooperation. 

The maintenance of the rule of law and the independence of the judiciary continued to play a 
key role in securing Hong Kong's long term prosperity. In his first opening of the Legal Year, 
on  10  January  2011,  Chief  Justice  of  the  Court  of  Final  Appeal  Geoffrey  Ma  Tao-li 
underlined three fundamental features of the rule of law in Hong Kong, namely the existence 
of  laws  that  respect  the  rights  and  the  dignity  of  persons;  an  independent  judiciary  which 
protects  these  laws  and  a  proper  administration  of  justice.  The  Hong  Kong's  judicial  arm 
continues to protect the rights and liberties that exist in Hong Kong and ensures that everyone 
is treated equally and in accordance with the law. 

A number of important judgements were delivered this year. On 8 September 2011, the Court 
of  Final  Appeal,  in  line  with  the  interpretation  made  by  the  Standing  Committee  of  the 
National  People's  Congress  pursuant  to  article  158  of  the  Basic  Law,  judged  that  the  "one 
country,  two  systems"  principle  did  not  extend  to  the  doctrine  of  state  immunity  in  the  FG 
Hemisphere/Congo  case,  and  confirmed  that  a  foreign  state's  commercial  activities  are 
immune  from  litigation  in  Hong  Kong.  The  Hong  Kong  Bar  Association  said  there  was  no 
question of the judicial autonomy of the courts being compromised by the decision. The case 
involved decades-old debt of US$100 million owed by the Democratic Republic of Congo to 
FG Hemisphere, a US fund. The Court of First Instance also ruled on 30 September 2011 that 
a foreign domestic helper should be allowed to apply for permanent residency in the city. The 
Government appealed against the ruling, with the case sparking widespread debate on equal 
treatment for foreign maids. The Court of Appeal overturned the ruling of the Court of First 
Instance on the construction of the Hong Kong-Zhuhai-Macao Bridge giving the green light 
for  the  infrastructure  project  to  be  built.  The  Court  of  First  Instance  had  judged  that  the 
Environmental  Protection  Department  failed  to  conduct  an  analysis  of  the  projected 
environmental conditions putting the construction work on hold.  

During  2011,  Hong  Kong  residents  continued  to  exercise  their  rights  of  freedom  of  speech 
and association, culminating in the largest numbers for the annual July 1 march since 2004.  

ECONOMIC AND TRADE DEVELOPMENTS 

The Hong Kong economy was in good shape in 2011. It expanded at a solid pace in the first 
half  of  the  year,  thanks  to  robust  exports  of  services  and  goods  as  well  as  strong  domestic 
demand.  However,  the  growth  momentum  moderated  in  the  second  half  of  2011  given  a 
weakening  of  the  external  environment.  GDP  growth  for  2011  as  a  whole  slowed  to  5%  in 

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real  terms,  following  a  7%  increase  in  2010.  The  labour  market  was  in  a  state  of  full 
employment, with an annual unemployment rate of 3.4%. Inflation rose markedly to 5.3% 1. 

Fighting  inflation  and  containing  the  property  market  bubble  risk  were  perceived  as  the 
biggest  challenges  to  the  Hong  Kong  economy  at  the  start  of  2011.  The  Hong  Kong  SAR 
Government thus introduced a number of measures to counter the impact of inflation and cool 
down the property market in the 2011-12 fiscal budget. Among them, the Financial Secretary 
proposed  a  one-off  HK$6,000  handout  to  all  permanent  residents  aged  18  and  above  and 
withdrew  his  original  proposal  to  inject  the  same  amount  into  each  of  the  mandatory 
provident fund accounts. The direct cash handouts were unprecedented in Hong Kong's fiscal 
policy history. Hong Kong SAR Government enjoyed a sound fiscal position and significant 
reserves that reached HK$595 billion as of end-March 2011, equivalent to 34% of GDP2.  

Upon entering the second half of 2011, the Euro zone sovereign debt crisis raised concerns in 
Hong  Kong,  despite  a  limited  exposure  of  Hong  Kong  banks.  The  property  market  showed 
some  consolidation  given  the  more  cautious  sentiments  of  the  market.  The  stock  market 
underwent  a  sharp  correction  with  the  Hang  Seng  Index  closing  the  year  20%  lower  than 
20103.  Total  equity  capital  raised  at  the  Hong  Kong  Stock  Exchange  also  fell  sharply  in 
20114. However, Hong Kong still ranked first in terms of funds raised through IPOs globally 
for the third consecutive year.  

The  three  main  economic  legislative  proposals  introduced  in  2010,  i.e.  the  minimum  wage 
law,  the  competition  bill  and  the  law  and  provisions  on  the  exchange  of  tax  information, 
progressed at different paces in 2011. The Minimum Wage Law, which sets out a minimum 
wage level of HK$28 per hour, took effect from 1 May 2011. Over the last year, the labour 
market  remained  in  good  condition  and  reached  full  employment.  The  long-awaited 
Competition  Bill  continued  to  be  debated  in  the  Legislative  Council  with  strong  opposition 
from  business  sectors.  In  October  2011  the  government  introduced  amendments  to  the 
original  proposal  seeking  to  address  some  of  the  business  community  concerns.  Since 
adopting legislation on aligning exchange of tax information arrangements with international 
standards in March 2010, Hong Kong has signed 17 new tax agreements with third countries 
in less than two years (including 11 with EU Member States).  

For the first time, the role of the Hong Kong SAR was the subject of a dedicated chapter of 
China's  12th  Five-Year  Plan  (2011-2015).  In  this  national  development  strategy  plan,  China 
pledges  to  preserve  Hong  Kong's  status  as  an  international  financial,  trading  and  shipping 
centre,  and  to  support  Hong  Kong  to  be  an  offshore  RMB  centre  and  an  international  asset 
management centre. During his visit to Hong Kong in August 2011, China's Vice-Premier Li 
Keqiang  unveiled  a  package  of  measures  aimed  at  boosting  Hong  Kong's  financial  services 
industry.  These  measures  include  a  possibility  to  repatriate  RMB  through  foreign  direct 
investment  (FDI),  the  launch  of  a  RMB  qualified  foreign  institutional  investors  scheme 
(RQFIIs),  and  expansion  of  RMB-denominated  bond  issuance  (sovereign  and  corporate)  in 

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All  economic  data  pertaining  to  the  Hong  Kong  economy  are  official  statistics  released  by  the  Hong 
Kong Census & Statistics Department. 
Source: Hong Kong Financial Services and the Treasury Bureau. 
According to the Hong Kong Stock Exchange and Clearing Ltd. (HKEx), the Hang Seng Index closed 
at 18434 at end-2011. 
According  to  HKEx,  total  equity  capital  raised,  including  new  share  floatation  and  post-listing 
arrangements on the Main Board and the Growth Enterprise Market, fell by 42.6% to HK$488.3 billion 
in  2011.  Within  this  total,  the  amount  of  funds  raised  through  IPOs  dropped  by  41.8%  to  HK$258.9 
billion. 

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Hong  Kong.  The  new  measures  will  gradually  expand  the  channels  for  RMB  fund  flows 
between Hong Kong and China, and strengthen Hong Kong as the offshore centre for RMB. 
RMB business grew rapidly in Hong Kong over the last year. Hong Kong hosted the largest 
pool of RMB liquidity outside China and handled 84% 5 of China's cross-border RMB trade 
settlement. Total RMB deposits in Hong Kong amounted to ¥588.5 billion at the end of 2011, 
an  86.9%  increase  from  2010;  total  issuance  of  RMB-denominated  bonds  exceeded  ¥100 
billion6.  With  the  availability  of  financial  expertise,  well-established  financial  industry 
infrastructure, and more importantly a unique relationship with China, Hong Kong is expected 
to continue to play a key role in the internationalisation of RMB in the years to come.  

to  deepen 

integration  with  Guangdong  Province  continued 

Economic 
the 
implementation of the Framework Agreement on Hong Kong/Guangdong Cooperation signed 
in 2010. The 12th Five-Year Plan further pledges to support Guangdong in taking a pilot and 
leading  role  in  the  opening  up  of  service  industries  to  Hong  Kong,  and  urges  for  the  early 
implementation of major cooperation projects between Guangdong, Hong Kong and Macao. 
Hong Kong and Guangdong have made pledges to enhance cooperation in the development of 
a  wide  range  of  areas  such  as  cross-boundary  infrastructure  facilities,  modern  service 
industries,  innovation  and  technology  for  manufacturing  industries,  environment  and 
education.  

through 

In  December  2011  Hong  Kong  and  China  signed  the  eighth  supplement  to  the  Closer 
Economic  Partnership  Arrangement  ("CEPA").  Supplement  VIII  provides  for  a  total  of  32 
services  liberalisation  and  trade  and  investment  facilitation  measures  of  which  15  relate  to 
RMB  offshore  activities.  It  also  relaxes  origin  criteria  for  trade  in  goods,  as  well  as  the 
definition of "Hong Kong service suppliers", offering them greater business opportunities in 
China.  Including  the  measures  in  Supplement  VIII  to  CEPA,  there  are  altogether  301 
liberalisation measures under  47  service sectors. Vice-Premier Li Keqiang stated that China 
would fully liberalise service sectors to Hong Kong by the end of 2015.  

Apart from CEPA, Hong Kong has intensified its pursuit of bilateral and regional agreements. 
In  June  2011,  Hong  Kong  and  the  European  Free  Trade  Association  (EFTA)  signed  a  free 
trade agreement. It is Hong Kong's third FTA, following the agreements with China and New 
Zealand.  FTA  negotiations  with  Chile  have  also  started.  With  the  support  of  China,  Hong 
Kong  has  conveyed  to  ASEAN  its  wish  to  join  the  China-ASEAN  Free  Trade  Area.  More 
generally, Hong Kong has stated that it would continue to be an active member of the WTO 
and APEC to pursue trade and investment liberalisation.  

EUROPEAN UNION – HONG KONG RELATIONS AND COOPERATION 

During  2011,  the  European  Union  and  Hong  Kong  bilateral  relations  and  cooperation 
continued  to  expand.  Hong  Kong  remains  an  important  player  in  the  region  and  an 
intermediation platform for trade and investment flows between the EU and Mainland China. 

The EU maintained its position as Hong Kong’s second-largest trading partner after Mainland 
China  in  2011.  Hong  Kong  was  the  16th  largest  trading  partner  of  the  EU.  Bilateral  trade 
between the EU and Hong Kong grew steadily by 8.8% to €30 billion in the first nine months 
of 2011. 

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Source: Hong Kong Monetary Authority, up to first half of 2011. 
Source: Hong Kong Monetary Authority. 

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The  EU  was  the  biggest  foreign  investor  in  Hong  Kong,  next  to  Mainland  China  and  the 
British  Virgin  Islands,  contributing  to  9.9 %  of  the  total  FDI  stock  in  2010.  Hong  Kong 
investment  in  Europe  has  continued  to  develop  steadily;  it  is  one  of  the  major  sources  of 
direct investment from Asia. Despite the global economic crisis, Hong Kong continues to be 
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 31,930 
at the end of 20117. The EU is the largest source of foreign  companies  in Hong Kong with 
454  regional  headquarters,  695  regional  offices  and  670  local  offices  as  of  June  20118, 
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. EU companies are also key players in the banking, insurance and securities sectors 
of Hong Kong.  

Hong Kong also serves as a key hub for flows of foreign direct investment from the EU into 
Mainland China, and vice versa. The reasons for this include Hong Kong's proximity to and 
established  business  ties  with  Mainland  China,  the  simple  tax  system  of  Hong  Kong,  the 
availability of high-quality service providers in areas such as finance, accountancy and law, as 
well  as  the  physical  presence  in  Hong  Kong  of  an  increasing  number  of  EU  and  Mainland 
Chinese  companies.  In  addition,  Hong  Kong  provides  an  ideal  forum  for  raising  capital  for 
investment  or  expansion  of  business  operations,  be  that  through  IPOs,  secondary  listings  or 
bond issues (including RMB-denominated bonds). 

The 5th Structured Dialogue meeting between the European Union and the Hong Kong SAR 
Government took place in Hong Kong on 8 December 2011. The meeting covered a range of 
issues  from  economic  relations,  including  trade  and  investment,  to  aviation,  environment, 
research, technology, innovation and educational cooperation, financial services, competition 
legislation, traditional Chinese medicines, emissions trading and climate change, and customs 
matters. The two sides noted that their trade and economic relations had continued to develop 
and deepen and bilateral trade had steadily returned to the levels enjoyed prior to the 2008-09 
financial  crisis.  Constructive  exchanges  on  the  regulatory  reform  of  the  financial  services 
sector  and  testing  and  certification  have  continued  to  take  place  at  technical  level.  The 
Structured  Dialogue  is  a  well  established  platform  that  allows  the  EU  and  Hong  Kong  to 
move  forward  their  relationship.  Moreover,  the  EU  remains  committed  to  continue 
exploratory talks on possible cooperation in the area of taxation of savings. 

Despite the agreement in 2010 between the European Commission and Hong Kong on how to 
restore legal certainty to the EU – Hong Kong bilateral air services agreements there has only 
been  limited  progress  in  bilateral  negotiations  between  Hong  Kong  and  the  relevant  EU 
Member States. With a view to ending legal uncertainty, it is highly desirable that Hong Kong 
completes the process of amending its air services with all relevant EU Member States, either 
through bilateral negotiation, or by the conclusion of a “horizontal agreement” with the EU. 
2011  saw  an  increase  in  the  number  of  high-level  visits  between  the  European  Union 
institutions and Hong Kong SAR that culminated with the high level encounter between EU 
Council President Van Rompuy and Hong Kong Chief Executive Donald Tsang in September 
as  well  as  meeting  with  Commissioner  for  Foreign  Trade,  Karel  de  Gucht.  Exchanges  at 
ministerial  level  have  also  expanded  with  the  visit  to  Hong  Kong  in  May  of  Commissioner 
Hedegaard  (Climate  Action)  to  deliver  the  keynote  address  to  the  World  Consumer's 

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Source: Hong Kong Immigration Department 
Source: Hong Kong Census and Statistics Department 

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Conference and the trip to Brussels in October of Hong Kong Secretary for Justice Wong Yan 
Lung  where  he  had  meetings  with  Vice-President  and  Commissioner  Reding  (Justice, 
Fundamental  Rights  and  Citizenship).  Regular  senior  official  visits  have  helped  maintain 
substantial exchanges in areas of common interest including financial services regulations and 
anti-corruption  activities.  Delegations  of  Members  of  the  European  Parliament  have  also 
passed by Hong Kong and contributed to enhancing our cooperation. 

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 continued to increase in number 
and have become more diverse. During 2011, priority was given to the sovereign debt crisis in 
Europe,  financial  services  regulations,  CEPA,  environment  and  climate  change,  and  trade 
relations  between  the  EU  and  Greater  China.  The  EUBIP  business  councils  established  for 
sectors  in  which  European  business  and  industry  enjoy  a  leading  position,  e.g.  information 
and  communications  technology  (ICT)  and  financial  services,  have  continued  to  provide 
important industry input to our government-to-government dialogue. EUBIP continues to be a 
successful channel  for an  increased understanding between the business communities of the 
EU and Hong Kong. 

To  further  intensify  ties  with  Hong  Kong.  the  EU  and  the  EU  Member  States  officially 
represented  in  the  territory  have  increased  public  diplomacy  efforts,  to  make  the  EU  more 
visible in Hong Kong and increase the knowledge and information on EU policies including 
trade  and  regulatory  policies,  energy  and  climate  change,  financial  services  regulation, 
customs  matters,  gender  equality  policies,  intercultural  dialogue,  and  the  EU’s  role  in  the 
world.  They  have  also  worked  closely  together  to  enhance  people  to  people  contacts  and 
promote academic exchanges with joint activities such as the EU Education Fair and the EU 
Film  festival.  In  late  2011,  the  EU  launched  a  call  for  proposals  for  an  EU  Academic 
Programme in Hong Kong which will run from 2012-2015. The main objective is to develop 
outreach activities to enhance the visibility of the EU and strengthening academic cooperation 
with  EU  higher  education  institutions,  including  encouraging  more  scholars  and  students  to 
undertake research and studies on EU related issues.  

The EU will continue to nurture its relationship with Hong Kong SAR, increase economic and 
trade  links,  enhance  cooperation  with  business  and  civil  society  and  promote  mobility  and 
exchanges with the Hong Kong people.  

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