JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Hong Kong Special Administrative Region: Annual Report 2016
Date: 2017-04-26
Institutions: European Commission, European External Action Service
Subjects: Hong Kong, bilateral relations, business activity, economic development, fundamental rights, housing, independence of the judiciary, international relations, political situation, rule of law

EN 

   EN 

   EUROPEAN COMMISSION HIGH REPRESENTATIVE OF THE UNION FOR FOREIGN AFFAIRS AND SECURITY POLICY Brussels, 26.4.2017  JOIN(2017) 16 final   JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Hong Kong Special Administrative Region: Annual Report 2016  
 
 
JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL 
Hong Kong Special Administrative Region: Annual Report 2016 

Summary 

Since  the  handover  of  Hong  Kong  to  the  People’s  Republic  of  China  (PRC)  in  1997,  the 
European  Union  (EU)  and  its  Member  States  have  closely  followed  political  and  economic 
developments  in  the  Hong  Kong  Special  Administrative  Region  (SAR)  under  the  ‘one 
country, two systems’ principle. The EU adheres to its ‘One China’ policy and supports the 
‘one  country,  two  systems’  principle  and  its  implementation.  In  line  with  the  commitment 
given  to  the  European  Parliament  in  1997,  the  European  Commission  and  the  European 
External  Action  Service  issue  an  annual  report  on  developments  in  Hong  Kong.  This  is  the 
19th report, covering developments in 2016.  

The year was a politically challenging one for the Hong Kong SAR and for the ‘one country, 
two  systems’  principle.  Hong  Kong  society  has  become  more  polarised.  People  are 
increasingly  anxious  about  Hong  Kong’s  future  after  2047,  the  date  until  which 
implementation  of  the  ‘one  country,  two  systems’  principle  is  guaranteed  in  Hong  Kong’s 
Basic Law. The year was also marked by ongoing concerns about the missing booksellers, the 
Mong  Kok  riot,  the  emergence  of  political  groups  advocating  self-determination  or  even 
independence, Legislative Council elections and the disqualification of two pro-independence 
lawmakers, the decision by the National People’s Congress Standing Committee (NPCSC) to 
issue  an  interpretation  of  the  Basic  Law  provisions  on  oath-taking,  voting  for  the  Election 
Committee, and preparations for the Chief Executive elections. 

The case of the five book publishers who went missing in 2015, which the EU regards as the 
most serious challenge to the Basic Law and the ‘one country, two systems’ principle since 
the 1997 handover, continued to unfold, and the circumstances of their disappearance have yet 
to  be  clarified.  One  of  the  publishers  remains  in  detention  without  having  been  formally 
charged. 

Despite  the  above  mentioned  issues,  overall  the  ‘one  country,  two  systems’  principle 
continued to work well in 2016. 

The  judiciary  continued  to  demonstrate  its  independence  and  adherence  to  due  process, 
despite being confronted with several politically sensitive judicial reviews and the NPCSC’s 
interpretation of the Basic Law. 

The  rule  of  law  remained  the  guiding  principle  for  the  government,  economic  stakeholders 
and  the  population  at  large.  Anti-corruption  action  remained  strong  and  good  governance 
indicators  were  positive.  Hong  Kong  was  ranked  14th  in  Transparency  International’s 
Corruption Perceptions Index. 

Freedom  of  speech  and  freedom  of  information  were  generally  upheld.  However,  negative 
trends can be observed as regards press freedom and in the publishing industry as a result of 

2 

 
 
 
caution and self-censorship on the part of those reporting on PRC domestic and foreign policy 
developments. The disappearance of the book publishers contributed to this. 

Hong  Kong  remained  a  competitive  international  business  and  financial  centre  and  the 
world’s premier hub for business with mainland China. It is also the main testing ground for 
China’s  capital  market  reform.  To  meet  new  challenges  in  the  digital  era,  it  is  trying  to 
re-focus its growth strategy by venturing into technology and innovation. The rule of law, a 
transparent regulatory framework, very low corruption levels and crime rates, along with an 
efficient public administration and an independent judiciary, all helped to preserve and foster 
the favourable investment climate that lies at the heart of Hong Kong’s success. 

The EU encourages the Hong Kong SAR and China’s central government to resume electoral 
reform  in  line  with  the  Basic  Law  and  to  reach  agreement  on  an  election  system  that  is 
democratic, fair, open and transparent. Universal suffrage would give the government greater 
public  support  and  legitimacy  in  pursuing  Hong  Kong’s  economic  objectives  and  tackling 
social challenges such as the socio-economic and generational divides in Hong Kong society. 
Record turnouts in the Legislative Council (LegCo) and Election Committee elections  show 
that people are eager to play an active role in political life and in deciding the future of the 
SAR. 

Political developments 

Hong Kong’s political climate remained highly polarised between the pro-establishment and 
pro-democracy camps. Tensions were increased by the emergence of the ‘localist’ movement 
as  a  political  force.  Relations  between  the  executive  and  the  legislature  continued  to  be 
strained,  with  opposition  legislators  staging  a  non-cooperation  campaign  and  using 
filibustering to delay government initiatives. For example, LegCo failed for the second time to 
adopt the copyright amendment bill. This seriously compromised the government’s attempts 
to establish Hong Kong as a regional hub for intellectual property rights as the current legal 
framework dates from the pre-internet era. 

The  case  of  the  five  book  publishers  who  disappeared  in  late  2015  continued  to  unfold  in 
2016. Four of the publishers returned to  Hong Kong in  the course  of the year, although the 
circumstances  of  their  disappearance  have  never  been  clarified.  Gui  Minhai,  a  Swedish 
citizen, is still detained in China without having been formally charged. Three of the returned 
publishers said they went to mainland China voluntarily, to assist in investigations, while Lam 
Wing Kee alleged publicly that he had been kidnapped and interrogated by mainland security 
forces over a period of 8 months. Several booksellers took part in televised ‘confessions’. The 
EU has repeatedly raised concerns about such practices. 

The  EU  raised  the  case  with  both  the  Hong  Kong  and  the  Beijing  authorities  on  numerous 
occasions. On 7 January, the spokesperson for High Representative/Vice-President Mogherini 
issued  a  statement  on  the  case1,  describing  it  as  ‘extremely  worrying’.  On  4  February,  the 

1   https://eeas.europa.eu/delegations/hong-kong/4962/statement-spokesperson-disappearance-individuals-

associated-mighty-current-publishing-house_en  

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European  Parliament  adopted  a  Resolution  expressing  grave  concern  about 
disappearances2, and on 23 November it passed a Resolution on the case of Gui Minhai3. 

the 

The EU takes these matters very seriously and hopes that such incidents will not be repeated. 
All necessary steps should be taken to restore faith in Hong Kong’s rule of law and the ‘one 
country, two systems’ principle. 

One  of  the  most  remarkable  political  developments  in  2016  was  the  emergence  of  new 
political  groups  following  the  failed  electoral  reform  and  Hong  Kong’s  ‘umbrella 
movement’. Several radical groups, loosely described as localists, campaign for the defence 
of  Hong  Kong’s  interests  as  opposed  to  China’s,  with  some  calling  for  self-determination 
(Demosisto)  or  outright  independence  (the  Hong  Kong  Indigenous  party,  the  Hong  Kong 
National  Party).  The  Hong  Kong  National  Party  said  it  would  seek  independence  ‘by 
whatever means’, not ruling out violence as a last resort. According to media reports, at least 
21 localist groups have been set up. Both the Hong Kong and Chinese central authorities have 
spoken  out  strongly  against  calls  for  independence  or  self-determination,  on  the  basis  that 
these would breach the Basic Law. 

On 8 February (the first day of the Chinese New Year), violent clashes on a scale seldom seen 
in Hong Kong broke out between protesters and the police. Some 500 protesters threw bricks 
and  started  fires,  with  overwhelmed  police  forces  firing  two  warning  shots.  The  10-hour 
Mong Kok riot left 128 people injured, among them 90 police officers. Of the 64 protesters 
who  were  arrested,  38  were  charged  with  rioting  (charges  against  10  people  were  later 
dropped). Many of the protesters belonged to localist groups. The police described the riots as 
organised and pre-planned. The unprecedented violence may have been fuelled by social and 
political discontent, especially among young people. 

Calls  for  self-determination  or  independence  were  made  in  the  run-up  to  the  LegCo 
by-elections in February and during the campaign for the LegCo elections in September. Not 
many  people  in  Hong  Kong  genuinely  support  such  radical  ideas,  but  social  and  economic 
grievances, combined with dissatisfaction with the traditional political powers, seem to feed 
into  support  for  localists.  In  this  context,  the  EU  recalls  its  adherence  to  its  ‘One  China’ 
policy  and  its  support  for  the  continued  implementation  of  the  ‘one  country,  two  systems’ 
principle in Hong Kong. 

In the by-elections on 28 February, a radical, anti-mainland Hong Kong indigenous candidate 
made  a  surprise  breakthrough,  winning  15 %  of  the  votes.  Although  he  failed  to  win  a  seat 
(this  was  won  by  the  pan-democrat  candidate),  the  result  was  highly  significant  as  it  lent 
political legitimacy to a hitherto marginal political movement. 

On  5  August,  thousands  took  part  in  the  first-ever  pro-independence  rally.  The  organisers 
claimed that 10 000 people attended the rally, but the police put the number at 2 500. 

2   http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P8-TA-2016-0045&language=EN  
3   http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P8-TA-2016-

0444&language=EN&ring=B8-2016-1256  

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On 4 September, Hong Kong held elections to select the 70 members of LegCo. Despite the 
absence of universal suffrage, the elections were generally seen as free from interference and 
the  process  was  by  and  large  orderly.  A  record  2.17  million  voters  turned  out  (58 %  of  the 
electorate). 

The pro-establishment camp maintained its majority, but the pro-democracy camp is now able 
to  block  legislation  requiring  a  two-thirds  majority.  The  elections  confirmed  increased 
political  polarisation  in  Hong  Kong  and  were  marked  by  the  election  of  several  localist 
candidates,  who  secured  nearly  19 %  of  the  votes.  The  new  LegCo  also  saw  a  major 
generational change. Nearly a third of lawmakers are new and many are much younger than 
previous members.  

However, the elections were tainted by the exclusion of six pro-independence candidates on 
questionable grounds that have subsequently been subject to legal challenge. 

The new LegCo term started with a chaotic swearing-in ceremony. Several lawmakers made 
changes to the wording of the oath or were otherwise deemed to have behaved disrespectfully. 
Some were asked to retake the oath on the spot, while others had an opportunity to do so in a 
separate LegCo session.  

A  particular  problem  arose  in  the  case  of  two  newly  elected  pro-independence  legislators, 
Youngspiration representatives Sixtus Leung and Yau Wai-ching, who took the most radical 
action by directing offensive language at mainland China. The government launched a judicial 
review  to  prevent  them  from  retaking  their  oaths  and  therefore  oblige  them  to  vacate  their 
seats.  

The case was still pending in Hong Kong’s court when the NPCSC decided to intervene by 
issuing  an  interpretation  of  the  Basic  Law  provisions  on  oath-taking  (Article  104).  The 
interpretation, unanimously passed by the NPCSC on 7 November, sent a clear message that 
Sixtus  Leung  and  Yau  Wai-ching  should  be  barred  from  retaking  their  oaths  and  taking  up 
office. The subsequent court ruling took the same line, although the judge emphasised that he 
would  have  come  to  the  same  conclusion  ‘with  or  without  referring  to  the  terms  of  the 
[NPCSC] interpretation’. The two lawmakers lost their appeals. In the meantime, they were 
ordered to vacate their seats. 

While the NPCSC has the power to interpret the Basic Law, the timing of its interpretation – 
in  the  already  politically  charged  climate  –  raised  concerns  about  the  rule  of  law  and  the 
independence  of  the  judiciary  in  Hong  Kong,  and  was  seen  as  effectively  pre-empting  the 
court ruling. 

Several  other  judicial  reviews  of  the  swearing-in  of  lawmakers  were  launched  by  private 
individuals,  and  the  government  sought  the  disqualification  of  four  other  pro-democracy 
legislators. These cases are still pending. 

The final months of 2016 were marked by preparations for the Chief Executive elections. The 
current Chief Executive surprised many by announcing that he would not run.  Elections for 
the 1 194-strong Election Committee, which will elect Hong Kong’s Chief Executive, were 

5 

 
held on 11 December. The record turnout was almost double that in 2011 (46 % compared to 
27.6 %). Although the pan-democrats did much better than in previous elections and will have 
some leverage, the pro-establishment camp still retains a very comfortable majority. 

Rule of law and the judiciary 

Despite  the  concerns  arising  from  the  case  of  the  five  missing  publishers  and  high-profile 
judicial reviews, the rule of law was otherwise upheld and the judiciary maintained its high 
standards in 2016. The Global Competitiveness Report 2016-20174 ranked Hong Kong eighth 
for judicial independence. Many lawyers expressed concern about the NPCSC’s interpretation 
of Article 104 and marched in protest, claiming it was the most serious case of interference in 
Hong Kong’s legal system since the handover. 

Maintaining judicial independence and full respect for the rule of law are vital to upholding 
Hong Kong’s democratic credentials, its standing as an international business centre, and its 
ambition to consolidate its role as an international centre for arbitration and mediation. 

Equal opportunities, rights and freedoms 

Hong Kong enjoys a great degree of freedom.  Freedom of  expression, freedom of  the press 
and  freedom  of  information  are  an  integral  part  of  its  core  values,  in  keeping  with  the  ‘one 
country,  two  systems’  principle.  They  are  also  an  essential  component  of  its  strength  as  a 
global business centre. The EU calls on all stakeholders to preserve these values. 

The media, including digital media, continued to be largely free and to give voice to a variety 
of  views.  Nevertheless,  there  was  a  growing  impression,  documented  in  the  Hong  Kong 
Journalists  Association  (HKJA)  annual  report,  that  both  the  print  and  electronic  media 
exercised self-censorship, especially when reporting on mainland China. The HKJA said that 
2016 had been an ‘extremely difficult’ year for freedom of the press and that the ‘one country, 
two systems’ principle was under serious threat. It criticised the tendency to appoint people 
with  close  links  to  Beijing  to  key  positions  in  local  media  management.  The  acquisition  of 
several  Hong  Kong  media  outlets  by  mainland  operators  also  caused  concern.  Hong  Kong 
moved up one place to 69th in the 2016 World Press Freedom Index, although the index did 
highlight a negative trend. In November, PEN International opened a centre in Hong Kong to 
defend freedom of speech. 

Following  the  disappearance  of  the  five  publishers,  some  bookstores  were  reported  to  have 
taken  publications  critical  of  China’s  leaders  off  their  shelves,  some  closed,  and  publishers 
reported disruption to printing, storage and distribution. 

In  2015,  appointments  to  university  councils  sparked  major  controversy  over  academic 
freedom  and  the  independent  governance  of  higher  education  institutions.  Calls  continued 
throughout  2016  for  the  removal  of  the  Chief  Executive  as  ex  officio  chancellor  of  all 

4   http://www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitivenessReport2016-

2017_FINAL.pdf  

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universities  in  Hong  Kong.  Many  academics  see  this  practice  as  a  threat  to  independent 
university governance that could in the long run harm academic freedom in Hong Kong. 

Hong  Kong  still  does  not  have  a  comprehensive  anti-discrimination  law.  In  January,  the 
Equal Opportunities Commission (EOC) released a study on discrimination on the grounds of 
sexual  orientation,  which  found  widespread  discrimination  against  LGBTI  people. 
Nevertheless, 55.7 % of the population supported legislation against discrimination. The EOC 
called on the government to launch a public consultation on the content of future legislation. 

Following  a  lengthy  period  of  public  consultation  and  deliberation  on  the  Discrimination 
Law  Review,  the  EOC  submitted  recommendations  to  the  government  in  March. 
High-priority  areas  include  the  rights  of  people  with  disabilities,  equality  for  women, 
discrimination on the grounds of race, nationality, citizenship and residency status, and equal 
protection for cohabiting couples. 

Foreign domestic workers, who number around 300 000, continued to suffer from a lack of 
labour and social protection. Two provisions are of particular concern: the live-in requirement 
and the ‘two-week’ rule, under which such workers must find work within two weeks of their 
contract expiring or face deportation. Also of concern are debt bondage and malpractices on 
the  part  of  employment  agencies.  The  government  took  steps  to  address  these  issues,  in 
particular by issuing a non-binding code of conduct, but more resolute action is needed. 

Trafficking in human beings remained a concern, particularly in the absence of a coherent 
legislative and policy framework. The government has set up a task force to address the issue 
and is working on it with the EU and other members of the international community. 

There  was  a  heated  debate  about  refugees  in  2016.  The  local  and  international  community 
was alarmed by the Chief Executive’s remarks to the media that Hong Kong might consider 
withdrawing  from  the  Convention  Against  Torture  (CAT)  to  curb  the  influx  of  migrants 
claiming non-refoulement protection. Hong Kong is not a party to the CAT in its own right, 
but  through  the  PRC.  Several  high-level  officials  subsequently  gave  assurances  that  Hong 
Kong had no intention of withdrawing. However, the Hong Kong government considers that 
there is a need to review the non-refoulement claims procedure, which it claims is vulnerable 
to abuse that has led to a backlog of around 10 000 cases. 

Corruption  was  deemed  to  be  under  control,  with  the  anti-corruption  system  remaining 
robust  and  resilient.  Hong  Kong  boasts  very  high  standards  of  transparency  and 
anti-corruption  measures.  The  authorities  and  political  and  business  leaders  recognise  that 
transparency  is  vital  for  Hong  Kong  to  remain  strong  as  an  international  business  centre, 
including for mainland firms. 

Relations between Hong Kong and mainland China 

Parts of Hong Kong society were  concerned about  a  gradual erosion  of Hong  Kong’s  ‘high 
degree of autonomy’ within the PRC and declining respect for its values and way of life under 
the  ‘one  country,  two  systems’  principle.  The  biggest  challenges  for  Hong  Kong's  relations 
with  the  PRC  were  the  emergence  of  radical  political  tendencies  in  Hong  Kong  and  the 

7 

 
NPCSC’s  interpretation  of  Article  104.  The  2047  timeline  only  increases  anxiety  and 
uncertainty in Hong Kong society as to the future of the ‘one country, two systems’ principle, 
despite  Beijing’s  repeated  assurances  that  this  will  continue  to  be  fully  respected  and 
faithfully implemented. 

Following  the  public  allegations  made  by  one  of  the  book  publishers  that  he  had  been 
kidnapped  by  mainland  forces,  Chief  Executive  CY  Leung  wrote  to  China’s  central 
government requesting clarification. Hong Kong authorities and China’s central government 
held several rounds of negotiations with the aim of reaching an agreement on a cross-border 
notification mechanism for Hong Kong residents who are detained on the mainland and vice 
versa.  

The  chairman  of  the  National  People’s  Congress,  Zhang  Dejiang,  made  an  official  visit  to 
Hong Kong on 17-19 May, on the occasion of the Belt and Road Summit. The visit was the 
first  by  a  high-ranking  Beijing  official  following  the  failed  political  reform  and  the 
pro-democracy  umbrella  movement  in  2014.  Zhang  sought  to  reassure  Hong  Kong  people 
about the continued implementation of the ‘one country, two systems’ principle. He reached 
out to the opposition pan-democrats, but the heightened political tensions were not conducive 
to more fruitful contacts. At the end of the year, China’s central government announced that it 
would  issue  home  return  permits  (allowing  travel  to  the  mainland)  to  some  pan-democrat 
politicians who did not have them. 

Economic developments 

In  2016,  Hong  Kong’s  GDP  recorded  1.9 %5  growth  in  real  terms,  following  the  2.4 % 
expansion in 2015. The external sector performed below expectations  in the first half of the 
year owing to a lacklustre global trading environment. The sharp decrease in tourist arrivals 
from mainland China also had a negative impact on the retail sector. The economy rebounded 
steadily towards the latter half of 2016, with a pick-up in exports of goods and services.  The 
labour  market  was  at  full  employment,  with  a  low  unemployment  rate  of  3.4 %  in  2016. 
Inflation remained in check, as consumer prices rose by 2.3 % over the year.  

In  his  annual  policy  address  on  13  January  2016,  Chief  Executive  CY  Leung  announced  a 
range  of  initiatives  to  develop  the  economy,  boost  innovation  and  technology,  and  improve 
education  and  healthcare.  He  placed  strong  emphasis  on  Hong  Kong’s  role  in  China's  ‘One 
Belt, One Road’ (OBOR) initiative and its 13th Five-Year Plan. Hong Kong would continue 
to  pursue  free-trade  agreements  (FTAs),  investment  promotion  and  protection  agreements, 
comprehensive  double-taxation  avoidance agreements (CDTAs) and air  services agreements 
with major trading partners along the Belt and Road. 

5   Unless otherwise stated, all economic indicators pertaining to the Hong Kong economy have been sourced 

from the Hong Kong Census and Statistics Department. 

8 

 
                                                            
The 2016-20176 fiscal budget contained a number of relief measures to help businesses and 
residents  weather  a  weakening  economy  and  to  stimulate  consumption.  It  proposed  various 
funding schemes and initiatives to encourage the development of innovation and technology 
(including  financial  technology  (fin-tech)),  nurture  start-ups,  help  industries  to  find  new 
markets and strengthen efforts to promote the OBOR initiative. In spite of continued increases 
in  public  expenditure  over  the  years,  the  Hong  Kong  SAR  accumulated  substantial  fiscal 
surpluses with fiscal reserves reaching HKD 935.7 billion at the end of the 2016-2017 fiscal 
year, equivalent to 37 % of GDP. 

Following  the  blueprint  adopted  at  the  beginning  of  the  year,  the  Hong  Kong  authorities 
worked on various fronts to embrace the national ‘One Belt, One Road’ strategy. A steering 
committee,  to  be  chaired  by  the  Chief  Executive,  was  set  up  to  formulate  strategies  and 
policies  for  Hong  Kong’s  participation  in  OBOR,  along  with  a  dedicated  Belt  and  Road 
Office.  In  parallel,  in  July,  the  Hong  Kong  Monetary  Authority  set  up  the  Infrastructure 
Financing  Facility  Office  (IFFO)  to  promote  Hong  Kong  as  an  infrastructure  financing 
platform.  On  the  regulatory  front,  Hong  Kong  signed  aviation  agreements  and/or 
double-taxation avoidance agreements with several countries along the Belt and Road routes 
(Malta,  Serbia  and  Latvia),  to  prepare  for  potential  development  opportunities.  Still  in  the 
pipeline are negotiations for FTAs with Georgia and the Maldives, through which Hong Kong 
hopes  to  expand  its  FTA  network  into  Eurasia.  A  number  of  official  visits  to  the  OBOR 
countries and promotional activities took place over the course of the year. 

Hong  Kong  was  the  world’s  largest  market  for  initial  public  offerings  for  the  second  year 
running, raising a total of USD 24.8 billion7. Over 80 % of the funds raised were attributed to 
mainland  Chinese  financial  institutions.  Hong  Kong  maintained  its  competitive  edge  over 
Shanghai  and  Shenzhen  as  Chinese  companies’  preferred  fund-raising  centre.  However, 
development of the offshore renminbi (RMB) business in Hong Kong faced headwinds from 
the  continued  depreciation  of  the  Chinese  currency.  The  RMB  liquidity  pool  and  RMB 
transactions in Hong Kong contracted, mainly due to strong expectations of sustained RMB 
depreciation. Hong Kong continued to be the main testing ground for China’s capital market 
reform.  Following  the  successful  launch  of  the  Shanghai-Hong  Kong  Stock  Connect 
programme in November 2014, a second stock trading link with Shenzhen was launched on 
5 December.  The  Shenzhen-Hong  Kong  Stock  Connect  trading  scheme  allows  international 
investors to trade 881 Shenzhen-listed stocks, while eligible mainland investors have access to 
417  Hong  Kong  stocks.  The  scheme  marked  a  new  milestone  in  China’s  efforts  to  boost 
investors’ confidence in stock markets after the turmoil of summer 2015 and represented an 
important step forward in its financial market reforms. The Hong Kong Monetary Authority 
stated that both sides would explore the feasibility of a bond market connect scheme in due 
course.  

While  financial  services  flourished,  cementing  Hong  Kong’s  position  as  an  international 
financial centre, some sectors of the economy (in particular, the port and related sectors and 

6    Fiscal year of the Hong Kong SAR government runs from 1 April to 31 March of the following year. 
7   Source: Hong Kong Stock Exchanges and Clearing Ltd. (HKEx) news release, 20 December 2016. 

9 

 
                                                            
industries)  continued  to  lose  steam.  The  Port  of  Hong  Kong  faced  mounting  pressure  from 
mainland  ports  as  China  relaxed  its  shipping  policy  to  allow  foreign  vessels  to  load  and 
unload  cargo  along  its  coast.  As  a  result,  Hong  Kong  is  gradually  losing  its  role  as  a 
transhipment point for goods to and from the mainland, which accounted for about 40% of its 
transhipment  cargo.  While  Hong  Kong  was  the  largest  container  port  in  the  world  over  a 
decade  ago,  it  fell  to  the  5th  place,  trailing  Shanghai,  Singapore,  Shenzhen  and  Ningbo  in 
20158.  In 2016, the container throughput of Hong Kong Port dropped further by 2.2%. 

The  SAR’s  industrial  structure  has  remained  largely  unchanged  since  1997.  To  meet  new 
challenges in the digital era, Hong Kong is trying to re-focus its growth strategy by venturing 
into  technology  and  innovation.  In  the  2016-2017  policy  address  and  fiscal  budget,  the 
government set aside an unprecedented HKD 18 billion to promote innovation and technology 
development,  including  HKD 8.2 billion  for  the  development  of  multi-storey  industrial 
buildings for re-industrialisation. The Innovation and Technology Bureau was established in 
November  2015  to  take  the  lead  in  the  sector’s  efforts  to  catch  up.  In  2016,  a 
HKD 500 million technology voucher pilot programme was launched to provide SMEs with 
financial  assistance  to  improve  their  technological  capacity.  Other  initiatives  in  the  pipeline 
include the Innovation Technology Venture Fund (to promote public-private partnerships) and 
the  Midstream  research  programme  (for  universities  to  convert  research  into  commercial 
success). 

The Hong Kong government has identified fin-tech as a promising potential growth area. In 
September, the Hong Kong Monetary Authority announced a series of policy initiatives in this 
area, including the setting-up of a fin-tech innovation hub and a fin-tech supervisory sandbox, 
which enable faster approvals for fin-tech experiments. The hope is that Hong Kong will edge 
ahead of Singapore and Tokyo as Asia’s top financial centre. 

Land and housing 

The property market was buoyant, with home prices reaching a new peak in 2016. Residential 
housing  prices  increased  markedly  in  the  latter  half  of  the  year,  led  by  small  and 
medium-sized units. As a result, overall flat prices in December 2016 exceeded the 1997 peak 
by 77%9. To curb soaring house prices, the government raised stamp duty to a standard 15 % 
for non-first-time buyers and corporate buyers as from 5 November, replacing progressive tax 
arrangements  under  which  the  highest  rate  was  8.25 %.  Nevertheless,  property  prices  have 
remained beyond the reach of many, in particular the younger generation. 

As a result, housing affordability has remained a thorny issue for the SAR government. Some 
global surveys ranked  Hong Kong as  the world’s least affordable city in terms of owning a 
home10.  The  government  has  formulated  a  long-term  housing  strategy  to  supply  280 000 
public  housing  units  over  the  next  10  years.  The  2016  progress  report  signalled  that  there 

8   Source: Marine Department, Hong Kong SAR government. 
9   Source: 2016 Economic Background and 2017 Prospects, Hong Kong SAR Government 
10   According to the 12th Annual Demographia International Housing Affordability Survey (2016), of 367 cities 
Hong Kong has the least affordable housing, with average flat prices 19 times gross annual median income. 

10 

 
                                                            
would be a shortfall of suitable land for public housing over the next decade, as it would be 
increasingly difficult to secure enough land for development. The search for and acquisition 
of suitable land for housing development has caused deep divisions, particularly in rural areas 
where landlords, brownfield11 tenants (or illegal occupiers), villagers and green  groups have 
potentially  conflicting  interests.  The  planning  process  has  become  lengthier  and  more 
complicated due to opposition from the various interest groups. 

On  the  demand  side,  a  significant  development  in  the  property  market  was  the  active 
participation  of  mainland  Chinese  companies,  whose  presence  grew  in  Hong  Kong12. 
Mainland Chinese property developers took part in 62 % of government tenders for residential 
sites and won 24 % of awarded tenders in 201613. Their increased activity on the Hong Kong 
public  land  sales  market  drove  land  prices  up  for  some  sites,  pricing  out  local  developers. 
Chinese  financial  institutions  and  conglomerates  also  became  dominant  buyers  in  the  prime 
office  market. Capital outflows brought about by the broadening of  cross-border investment 
channels  and  expectations  of  further  RMB  depreciation  against  the  US  dollar  underpinned 
demand from mainland financial institutions. 

Business environment 

The  business  environment  in  Hong  Kong  faced  some  headwinds  in  2016.  SMEs,  start-ups, 
foreign companies and some individuals found it unnecessarily cumbersome and difficult to 
open bank accounts. Local and foreign chambers of commerce brought this to the attention of 
the  authorities,  arguing  that  the  practice  was  inconsistent  with  Hong  Kong’s  ambition  to  be 
the ‘super-connector’ between China and the world and a hotspot for innovation and start-ups. 
The  Hong  Kong  Monetary  Authority  finally  intervened  and  issued  a  circular  to  banks  in 
September. Nevertheless, the issue has not been fully resolved. 

Having  entered  into  force  in  December  2015,  the  Competition  Ordinance  appeared  to  be 
bringing about gradual changes in business practices and culture in Hong Kong. For example, 
19  trade  associations  removed  price  restrictions  or  fee  scales  in  2016.  The  Competition 
Commission  received nearly  1 900 complaints and inquiries, of which  130 moved on to the 
second, further assessment stage. ‘Property and property management’ and ‘professional and 
technical services’ were the top two sectors involved. A number of complaints related to bid-
rigging, which is prevalent in the building renovation sector. In the third quarter of 2016, the 
Competition  Commission  issued  its  first  proposal  for  a  block  exemption  order  for  certain 
shipping liner agreements. It still needs to address some distinctive features of the Hong Kong 
system, in particular the lack of a cross-sector merger regime, the absence of private actions, 
and the exemption of statutory bodies from coverage. 

11   Brownfield land is generally agricultural land in the rural New Territories, especially the relatively flat and 
more  accessible  areas.  The  land  has  been  used  for  various  unregulated  industrial  activities  such  as  open 
storage,  port  back-up  facilities,  industrial  workshops,  logistics  operations,  recycling  yards,  construction 
machinery and materials storage. 

12   According to the Hong Kong Census and Statistics Department, the number of mainland Chinese companies 

in Hong Kong increased from 853 in 2012 to 1 123 in 2016. 

13   Source: JLL, Hong Kong. 

11 

 
                                                            
On environment policy, Hong Kong announced a decision to phase out the local ivory trade in 
5 years. The relevant legislative amendment should be submitted to LegCo in the first half of 
2017.  In  December,  the  government  rolled  out  the  city’s  first  strategy  and  action  plan  to 
preserve biodiversity and support sustainable development, setting aside HKD 150 million for 
biodiversity initiatives in the first 3 years. 

International commitments 

Hong  Kong  made  steady  progress  in  implementing  the  Automatic  Exchange  of  Financial 
Information in Tax Matters (AEOI) in compliance with the OECD standard14. In June, LegCo 
passed  an  ordinance  amending  the  domestic  law  so  as  to  provide  the  necessary  legal 
framework for AEOI. Hong Kong will be ready to exchange tax information with Japan and 
the  United  Kingdom  automatically  from  2018  onwards.  It  has  also  invited  16  other  EU 
Member  States  to  commence  competent  authority  discussions  on  agreements  for  the 
automatic  exchange  of  financial information  and  will  continue  to  negotiate  tax  treaties  with 
more Member States. 

In June, Hong Kong informed the OECD of its commitment to implementing the base erosion 
and  profit  shifting  (BEPS)  package.  To  satisfy  OECD  requirements,  it  aims  to  submit  the 
relevant  amendment  bill(s)  to  LegCo  in  mid-2017.  To  that  end,  in  October  the  government 
launched a consultation exercise to gauge views on the implementation of OECD measures to 
counter BEPS by businesses. 

Hong  Kong  continued  to  strengthen  its  anti-money  laundering  and  anti-terrorist  financing 
regimes.  In  March,  the  Hong  Kong  Association  of  Banks  issued  all  its  members  with  a 
guidance  paper  (prepared  in  consultation  with  the  Hong  Kong  Monetary  Authority)  on 
tackling ‘trade-based’ money laundering. It is claimed that Hong Kong’s current regime make 
it an attractive jurisdiction not only for trade and investment, but also for illicit activities. The 
guidance paper is intended to  help financial institutions translate the broad principles  of the 
2012  Anti-Money  Laundering  and  Counter-Terrorist  Financing  (Financial  Institutions) 
Ordinance  into  workable  internal  procedures.  In  December,  the  Security  Bureau  submitted 
proposals  to  LegCo  for  amendments  to  the  United  Nations  (Anti-Terrorism  Measures) 
Ordinance  to  take  account  of  the  latest  Financial  Action  Task  Force  recommendations  on 
countering terrorist financing and implement UN Security Council Resolution 2178. The new 
measures  will  fast-track  the  freezing  of  assets  belonging  to  terrorism  suspects  and  prohibit 
people from leaving Hong Kong or entering another state for terrorism purposes. 

Despite  its  regulatory  efforts,  Hong  Kong’s  reputation  as  an  international  financial  centre 
suffered  a  blow  in  the  wake  of  the  Panama  Papers  leak.  The  leak  raised  questions  as  to 
whether Hong Kong has effective regulation in place to prevent abuse by offshore companies. 
According  to  the  International  Consortium  of  Investigative  Journalists,  Hong  Kong  was  the 
leading market for Mossack Fonseca, the Panama-based law firm that helped clients manage 
their assets in secretive offshore structures. A large portion of the firm’s clients came from or 

14   Hong Kong signalled its support for the OECD standard in September 2014, with a view to holding initial 

exchanges with appropriate partners on a reciprocal basis by the end of 2018. 

12 

 
                                                            
through  Hong  Kong-based  affiliates.  The  Hong  Kong  authorities  argued  that  there  was  no 
domestic  law  that  prohibits  companies  or  commercial  entities  from  setting  up  companies  in 
jurisdictions outside Hong Kong. 

EU-Hong Kong bilateral relations and cooperation 2016 

Bilateral relations between the EU and Hong Kong were further strengthened in 2016. As in 
previous  years,  the  EU  was  Hong  Kong’s  second  largest  trading  partner  after  mainland 
China15, while Hong Kong was the EU’s 14th largest trading partner for trade in goods and a 
key partner for trade in services. 

Bilateral trade in goods between the EU and Hong Kong rose significantly by 7.3% in 2016 
and  amounted  to  EUR 53.2 billion,  with  the  EU  enjoying  a  trade  surplus  of  EUR 16.8 
billion16, its fifth highest external trade surplus. In 2015 (the most recent year for which data 
are available), bilateral trade in services amounted to EUR 22.77 billion, with an EU deficit of 
EUR 506 million.  

Investment relations also continued to prosper. The EU was the third largest source of foreign 
direct investment (FDI) in Hong Kong in 2015 after the British Virgin Islands and mainland 
China17. Hong Kong is one of the top 10 investors in the EU. In 2015, the stock of EU direct 
investment to Hong Kong amounted to EUR 119.4 billion; the stock of direct investment from 
Hong  Kong  to  the  EU  reached  EUR 80.4  billion18.  EU  companies  numbered  2 107,  thus 
remaining the largest group of foreign companies established in Hong Kong19. 

As the natural business and investment platform between China and Europe, Hong Kong can 
only  stand  to  gain  from  increasing  investment  flows.  In  2016,  the  EU  and  Hong  Kong 
informally  explored  the  role  that  Hong  Kong  could  play  as  an  investment  platform  in  the 
Investment Plan for Europe and under the OBOR initiative.   

The 10th EU-Hong Kong Structured Dialogue meeting in Brussels on 17 November achieved 
the following significant results.  

  The two sides reached an understanding on measures to facilitate the export of meat 

and meat products from the EU. 

  They  agreed  to  pursue  dialogue  and  cooperation  on  food  safety  and  health-related 

issues.  

  The EU and Hong Kong welcomed the promising cooperation in the framework of a 
newly  set  up  Intellectual  Property  Working  Group  and  agreed  to  have  investment 
experts on both sides meet and exchange information on recent developments in their 

15   The ranking is based on trade statistics released by the Hong Kong Census and Statistics Department. 
16   Source:  Comext,  Eurostat’s  reference  database  for  international  trade  in  goods.  Provisional  data  as  of  14 

February 2017. 

17   Source: External direct investment of Hong Kong in 2015, the Hong Kong Census and Statistics Department. 
18   Source: Eurostat and DG TRADE.  
19   Source:  2016  annual  survey  of  companies  in  Hong  Kong  representing  parent  companies  located  outside 

Hong Kong, the Hong Kong Census and Statistics Department. 

13 

 
                                                            
respective  investment  policies.  The  parties  agreed  to  further  strengthen  their  good 
cooperation in the WTO.  

  They decided to coordinate efforts to combat wildlife trafficking.  

  They  updated  each  other  on  the  implementation  of  measures  in  the  field  of 
transparency  in  tax  matters  and  against  BEPS  under  the  aegis  of  the  G-20  and  the 
OECD. 

The EU and Hong Kong continued to work well together under the action plan on cooperation 
in  the  customs  enforcement  of  intellectual  property  rights.  In  March,  they  completed  a 
six-month pilot project under which they exchanged intelligence on detention cases via secure 
means and jointly analysed border detention statistics. The pilot involved five airports in the 
EU.  In  the  light  of  this  positive  experience,  the  EU  and  Hong  Kong  decided  to  expand  the 
scope of their cooperation, in particular by including more EU airports. 

To facilitate bilateral trade further, the EU and Hong Kong established a work plan that may 
lead  to  the  Mutual  Recognition  of  the  respective  Authorised  Economic  Operator  (AEO) 
programmes. 

In  research  and  innovation,  2016  saw  positive  developments  in  the  collaboration  scheme 
between  the  European Commission  and  the  Hong  Kong  Research  Grants  Council, set  up  in 
2015 to foster cooperation in joint academic research projects under the EU’s Horizon 2020 
framework programme. In September, the Research Grants Council awarded the first sum of 
HKD 2 million  for  a  project  by  Hong  Kong  Polytechnic  University.  In  October,  a  second 
invitation was launched for applications under the Horizon 2020 call for 2016-2017. 

As part of its agenda for fair taxation at global level, the EU continued to work on drawing up 
a  common  EU  list  of  non-cooperative  tax  jurisdictions.  It  compiled  a  ‘scoreboard  of 
indicators’ on the basis of a pre-assessment of all non-EU countries. The scoreboard is not a 
preliminary EU list and does not imply any judgment of non-EU countries. Hong Kong was 
flagged for the risk indicators transparency and preferential corporate income tax regime. In 
parallel,  it  stepped  up  its  efforts,  in  particular  by  signing  bilateral  competent  authority 
agreements  (CAA)  for  the  automatic  exchange  of  financial  information  with  the  UK  and 
Japan based on the OECD model. It approached nearly all EU Member States with a view to 
signing  CAAs,  CDTAs  and  tax  information  exchange  agreements.  It  received  favourable 
responses from a number of Member States and was awaiting feedback from others. 

the 

International  Organisation  of  Securities  Commissions’ 

EU-Hong  Kong  relations  in  the  field  of  financial  services  were  strengthened  by  the  new 
annual EU-Asia-Pacific Forum, which held its inaugural meeting in Singapore in October. All 
(IOSCO) 
members  of 
the 
Asian-Pacific  Regional  Committee, 
Directorate-General  for  Financial  Stability,  Financial  Services  and  Capital  Markets  Union) 
and  the  European  Securities  and  Markets  Authority  gathered  to  exchange  information  and 
views on policy and regulatory developments. Hong Kong was represented by its Securities 
and  Futures  Commission.  The  purpose  of  the  Forum  is  to  exchange  information  on  current 
regulatory  frameworks  and  future  developments,  with  the  focus  on  opportunities  for 

the  European  Commission  (represented  by 

14 

 
strengthening  Asia-Pacific  coordination  in  the  area  of  financial  services;  equivalence 
decisions to be taken by the European Commission and similar decisions to be taken by Asia-
Pacific authorities; and emerging policy priorities for the global regulatory agenda. 

EU business interests in Hong Kong are represented by the European Chamber of Commerce, 
a ‘chamber of chambers’ whose membership comprises the 15 European chambers based in 
Hong  Kong  and  one  in  Macao.  The  ECC  has  five  ‘business  councils’  that  focus  on  the 
automotive  sector,  brand  protection,  energy  and  the  environment,  financial  services  and 
information,  communication  and  technology.  It  works  closely  with  the  EU  Office  to  Hong 
Kong  and  Macao  to  facilitate  dialogue  with  the  government.  In  2016,  it  continued  work  on 
implementing the EU Business Information Programme, which aimed to strengthen economic 
partnership  and  business  cooperation  with  Hong  Kong  and  Macao  and  ensure  a  stronger, 
coordinated representation of EU business interests. 

The EU and Member State diplomatic missions in Hong Kong continued to work together to 
raise the EU’s profile. To this end, the EU Office organised a number of ‘dialogue’ meetings 
between  EU  Heads  of  Mission  and  senior  members  of  the  Hong  Kong  government,  LegCo 
and  the  judiciary,  and  other  leading  figures,  including  business  people.  The  EU  and  Hong 
Kong  worked  together  to  increase  people-to-people  contacts,  in  particular  in  the  areas  of 
academic cooperation, student mobility, culture and creative industries. 

EU diplomatic missions and cultural institutes worked together with local partners on many 
people-to-people  activities,  including an  EU  Film  Festival,  organising  a  European  Higher 
Education Pavilion at a large education and training fair, the EU Day of Languages, a schools 
calendar  competition,  and  several  events  focusing  on  human  rights,  including  a  two-day 
workshop on trafficking in human beings and a conference on LGBTI rights and freedom of 
religion.  The  EU  hopes  to  build  on  this  momentum  and  to  continue  working  with  the 
government, civil society and business to promote exchanges on rights and freedoms. 

The EU Academic Programme Hong Kong (EUAP), a consortium comprising the Hong Kong 
Baptist University, the University of Hong Kong, the Chinese University of Hong Kong and 
Lingnan University, continued to strengthen EU-Hong Kong relations through academic work 
and network-building with local, regional and European partners. The EUAP held a series of 
events on European ‘smart city’ case studies and organised conferences and seminars. It also 
hosted the Model European Union, a unique simulation of EU decision-making and politics in 
which  students  played  the  roles  of  heads  of  state  or  government  of  Member  State  in  the 
European Council. 

There  were  a  number  of  high-level  visits  from  the  EU  institutions  in  2016.  Visits  from  the 
European  Commission  included  Vice-President  Jyrki  Katainen  in  July  (who  met  the  Chief 
Executive,  the  Chief  Secretary  and  the  Financial  Secretary)  and  by  the  Commissioner  for 
Agriculture and Rural Development, Phil Hogan, in November. The visit by Mr Hogan paved 
the way for the agreement on measures to facilitate EU meat exports to Hong Kong. 

15