JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Hong Kong Special Administrative Region: Annual Report 2017
Date: 2018-04-24
Institutions: European Commission, European External Action Service
Subjects: Hong Kong, democratisation, economic growth, environmental policy, human rights, international cooperation, political reform, poverty, rule of law, trade policy

EN 

  EN 

   EUROPEAN COMMISSION HIGH REPRESENTATIVE OF THE UNION FOR FOREIGN AFFAIRS AND SECURITY POLICY Brussels, 24.4.2018 JOIN(2018) 7 final  JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Hong Kong Special Administrative Region: Annual Report 2017  
 
 
REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL 
HONG KONG SPECIAL ADMINISTRATIVE REGION: ANNUAL REPORT 2017 

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,  an  annual  report  is  issued  on  developments  in 
Hong Kong. This is the 20th report, covering developments in 2017.  

2017  marked  the  20th  anniversary  of  the  handover.  It  was  an  eventful  and  politically 
challenging  year  for  the  Hong  Kong  SAR  and  for  the  functioning  of  the  ‘one  country,  two 
systems’ principle. The year was marked by the election of the Chief Executive; the visit of 
President  Xi  Jinping;  the  disqualification  of  a  further  four  pro-democracy  lawmakers;  the 
controversial co-location agreement, including the decision by the National People's Congress 
Standing Committee (NPCSC) to approve the latter, raising questions amongst Hong Kong’s 
legal  community  regarding  its  legal  basis;  and  dozens  of  judicial  cases  with  political 
overtones (many of them related to participation in the Occupy Central movement in 2014).  

Despite  some  challenges,  overall  the  ‘one  country,  two  systems’  principle  worked  well. 
However,  concerns  about  its  gradual  erosion  give  rise  to  legitimate  questions  about  its 
implementation and Hong Kong’s high degree of autonomy in the long term.   

The  rule  of  law  prevailed  and  the  judiciary  continued  to  demonstrate  its  independence  and 
consistent respect for due process, although it again faced several politically sensitive judicial 
reviews. 

Free  speech  and  freedom  of  information  are  generally  respected.  However,  two  negative 
trends  became  more  pronounced:  self-censorship  when  reporting  on  China’s  domestic  and 
foreign policy developments, and pressure on journalists.  

Hong  Kong  remained  a  competitive  international  business  and  financial  centre  and  the 
world’s premier hub for business with mainland China. 

The new administration, which took up its duties on 1 July, aimed  to make a fresh start by 
launching a range of initiatives to improve people’s livelihoods. Chief Executive Carrie Lam 
pledged  to  make  efforts  to  bridge  the  political  divide  and  to  strive  for  an  inclusive  society. 
The government announced ambitious plans to diversify Hong Kong’s economy and boost its 
innovation and technology capacity, to ensure long-term competitiveness.  

The rule of law, a transparent regulatory framework, very low levels of corruption and crime, 
along  with  an  efficient  public  administration  and  an  independent  judiciary,  contributed  to 

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preserving  and  fostering  the  favourable  investment  climate  that  lies  at  the  heart  of  Hong 
Kong’s success.  

As already stated in previous reports and reiterated on other occasions, the EU encourages the 
Hong Kong SAR and the Central Government authorities to resume electoral reform in line 
with the Basic Law, to reach agreement on an electoral system that is democratic, fair, open, 
and  transparent.  Universal  suffrage  would  give  the  government  greater  public  support  and 
legitimacy in its efforts to meet Hong Kong’s economic objectives and tackle socioeconomic 
challenges.  

Political developments 

On 26 March, a  closed-circuit Election  Committee of 1194 members  elected  Carrie Lam as 
Hong Kong’s fourth  Chief Executive, by a comfortable margin.  The election  campaign  was 
lively and contested, even though all three candidates were from the pro-establishment camp. 
There was extensive and free media coverage, though there were some restrictions on digital 
media. However, the elections were tainted by allegations of interference and pressure on the 
part of Beijing. Carrie Lam took up her duties on 1 July. She pledged to reach out to the pan-
democrats  and  work  for  reconciliation  in  Hong  Kong  society  by  focussing  on  economic 
development and urgent social issues. The beginning of her mandate was not easy, owing to 
the large number of  sensitive judicial procedures launched by the preceding administration. 

The oath-taking controversy, which resulted in the disqualification of two lawmakers in 2016, 
continued into 2017. In July, a further four pan-democratic lawmakers (making a total of 6 out 
of 70) were disqualified1.  Thus the pro-democracy camp has been stripped of its de facto veto 
power  in  some  legislative  proceedings;  its  one-third  minority  blocking  power  in  other 
proceedings  has  become  very  fragile.  In  December,  benefiting  from  the  weakening  of  the 
opposition, pro-establishment lawmakers succeeded in changing LegCo rules and procedures. 
Filibustering, in the past often used by the pan-democratic camp to oppose the Government’s 
bills, was made more difficult.   

Groups calling for self-determination in some cases or outright independence in others have 
been weakened. Calls for independence have faded, though some pro-independence banners 
can be seen on university campuses. 

Despite a number of challenges, judicial independence and full respect for the rule of law 
were  maintained  in  2017.  These  are  vital  if  Hong  Kong  is  to  maintain  its  democratic 
credentials, its standing as an international business centre, and its ambitions to consolidate its 
role as an international centre for arbitration and mediation.  

1 By-elections for four lawmakers (two disqualified in 2016 and a further two disqualified in 2017, who have not 
appealed against the disqualification) took place on 11 March 2018. 

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In 2017, no fewer than 10 Hong Kong legislators from the opposition were undergoing some 
kind  of  judicial  procedure.  Some  were  involved  in  legal  proceedings  on  different  counts, 
ranging from oath-taking controversy and disruptive behaviour to flag desecration. 

From  March  on,  dozens  of  people  were  charged  with  unlawful  assembly,  inciting  public 
disorder  and  similar  counts,  mostly  related  to  the  Occupy  Central  protests  in  2014  or 
demonstrations outside Beijing’s Liaison Office in November 2016.  

On 17 August, Hong Kong’s Court of Appeal sentenced three Occupy leaders (Joshua Wong, 
Nathan  Law  and  Alex  Chow)  to  prison  for  unlawful  assembly  outside  government 
headquarters in 2014. Each had already served community service by the time of the appeal. 
The  Justice  Secretary  appealed  against  the  first  sentence  handed  down  by  the  lower  court 
judge,  which  was  considered  too  lenient.  Thirteen  other  pro-democracy  activists  were  also 
jailed.  Pan-democrats  accused  the  government  of  eroding  the  rule  of  law  and  using  the 
judicial system as a weapon to suppress opposition. The Bar Association and the Law Society 
issued  a  joint  statement  saying  that  there  were  no  indications  that  the  decisions  had  been 
influenced by political considerations.  

On 20 August, over 22 000 people marched peacefully to protest against the sentence.  

The jail sentences of more than three months for the three Occupy leaders mean that they will 
not  be  able  to  stand  for  election  to  the  LegCo  for  the  next  five  years.  The  three  were  later 
released on bail pending judgment by the Court of Final Appeal2. 

Members  of  the opposition are not the only  people against whom judicial proceedings have 
been  taken.  On  17  February,  seven  policemen  were  sentenced  to  two  years  in  prison  for 
assaulting  a  pro-democracy  activist  during  the  2014  Occupy  protest,  prompting  public 
expressions of discontent from supporters of the establishment. 

The  railway  co-location  agreement  with  mainland  China  was  another  issue  that  posed 
challenges  in  2017.  The  project  has  been  under  preparation  for  nearly  a  decade,  but 
procedures were expedited in July,  when the new government took up its duties. Under the 
agreement,  an  area  of  the  new  Hong  Kong-mainland  railway  station  will  be  leased  to 
mainland  China  for  one-stop  clearance  procedures.  The  proposed  agreement  will  grant 
mainland  China  almost  full  jurisdiction  over  the  platform,  the  train  compartments  and  the 
passengers' waiting hall. Jurisdiction is not restricted to immigration, customs and quarantine 
but also covers criminal and other matters.  

In  practical  terms,  this  is  a  convenient  arrangement:  plugging  Hong  Kong  into  China's 
national  high-speed  rail  network  makes  economic  and  logistical  sense.  However,  questions 
have  been  raised  about  the  compatability  of  this  co-location  arrangement  with  the  ‘one 
country, two systems’ principle. On 27 December, the NPCSC controversially approved the 
agreement. The legal community has voiced concerns about the lack of a legal basis for the 

2  On  6  February  2018,  the  Court  of  Final  Appeal  unanimously  quashed  the  sentences  of  imprisonment  and 
reinstated the sentences by the lower court magistrate.  

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NPCSC decision, which they say undermines the Basic Law. LegCo is expected to adopt an 
implementing bill in the first half of 2018. 

On 11 October, EU citizen Benedict Rogers was refused entry to Hong Kong. There is no 
doubt that Hong Kong immigration authorities have the power to decide who can enter Hong 
Kong’s territory. However, it appears, from comments made by both Hong Kong authorities 
and the spokesperson of the Chinese Ministry of Foreign Affairs, that this decision was taken 
by Beijing on the basis of its competence in ‘foreign affairs’. This raised questions about the 
implementation  of  the  ‘one  country,  two  systems’  principle,  inasmuch  as,  under  the  Basic 
Law, immigration falls under the remit of Hong Kong. 

The last of the ‘missing’ booksellers, whose cases have not yet been satisfactorily clarified, 
reappeared  in  October  2017.  Gui  Minhai,  a  mainland-born  naturalised  Swedish  citizen,  was 
released by mainland authorities following his disappearance in 2015. He was detained again 
in January 2018. 

In  the  aftermath  of  the  booksellers’  case,  the  alleged  abduction  of  a  Chinese  businessman, 
Xiao  Jianhua,  from  his  hotel  in  Hong  Kong  on  27  January  renewed  concern  that  mainland 
security forces may be operating on Hong Kong soil.  

Equal opportunities, rights and freedoms 

Hong  Kong  enjoys  a  high  level  of  freedom.  Freedom  of  expression,  media  freedom  and 
freedom of information are core values under the ‘one country, two systems’ principle and are 
an essential component of Hong Kong’s strength as a global business centre. The EU calls on 
all stakeholders to preserve these values. 

Even  though  Hong  Kong's  media  still  enjoy  a  high  level  of  freedom,  challenges  have  been 
accumulating  for  several  years.  In  2017,  the  Press  Freedom  Index  (Reporters  Without 
Borders) downgraded Hong Kong by four places to 73rd, a historical low. 

In its latest annual report on press freedom, the Hong Kong Journalists Association concluded 
that  self-censorship  was  getting  worse;  7  out  of  10  journalists  said  press  freedom  had 
deteriorated.  Many  mainstream  media  organisations  are  at  least  partly  owned  by  mainland 
companies, which affect their coverage and editorial policy. Several instances of intimidation 
and threats to journalists were investigated by the police. 

There  was  one  notable  positive  development  in  2017:  after  years  of  complaints,  the 
government finally lifted its restrictions on coverage of government events by internet-based 
media.  

Freedom  of  expression  is  well  respected  in  Hong  Kong,  even  if  questions  are  increasingly 
being asked about its limits in relation to the sensitive issue of calls for self-determination or 
independence.  Early  in  the  year,  pro-independence  parties  criticised  the  government  for 
violating  freedom  of  expression  after  they  were  barred  from  setting  up  booths  at  the  Lunar 
New  Year  fair.  Authorities  said  that  promoting  Hong  Kong's  independence  could  endanger 
public  safety.  Banners  and  posters  calling  for  Hong  Kong's  independence  displayed  on  the 
campuses  of  several  Hong  Kong  universities  were  eventually  banned  from  most  campuses. 

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On 16 September, the heads of 10 universities issued a joint statement rejecting Hong Kong’s 
independence and condemning the ‘abuse’ of freedom of expression. The student unions of 12 
higher  education  institutions  issued  a  joint  reply  defending  their  freedom  to  discuss 
independence on campuses. The government rejected speculation that it had put pressure on 
the universities to issue the statement and added that advocacy of independence would not be 
tolerated. 

Hong  Kong  still  faces  a  whole  range  of  socioeconomic  issues  and  inequality:  the  Gini 
coefficient reached a record 0.5393, making Hong Kong one of the most unequal cities in the 
world. The gap is widening, with the richest 10% of households earning 44 times more than 
the poorest 10%. Poverty alleviation and support for the disadvantaged are at the top of the 
government’s agenda. 

Hong  Kong  still  lacks  a  comprehensive  anti-discrimination  law.  In  March,  the  Equal 
Opportunities  Commission  issued  a  joint  statement  with  75  major  companies,  the  Chinese 
University  and  the  Hong  Kong  Bar  Association  urging  the  government  to  pass  legislation 
against  discrimination  on  the  grounds  of  sexual  orientation,  gender  identity  and  intersex 
status. The government has not responded to the statement.  

The  Government  appealed  against  two  landmark  cases  concerning  same-sex  partners.  If  the 
Court of Final Appeal confirms the earlier judgments, this may give impetus for the adoption 
of a comprehensive anti-discrimination law that would cover discrimination based on sexual 
orientation. 

Foreign domestic workers (FDW), who number around 320 000, continued to suffer from a 
lack  of  adequate  labour  and  social  protection.  Two  existing  laws  regarding  FDW  are  of 
particular  concern,  namely  the  live-in  requirement  and  the  ‘two-week’  rule,  under  which 
foreign domestic workers must find work within two weeks following expiry of their contract 
or  face  deportation.  The  government  has  taken  steps  to  crack  down  on  debt  bondage  and 
malpractices by employment agencies, but more resolute action is needed. 

On 3 October, the High Court began hearing a legal challenge against the live-in requirement 
for  FDW.  Abolishing  this  requirement  would  be  a  welcome  step  in  improving  the  rights  of 
FDW: human rights groups have frequently denounced their unsuitable living conditions and 
urged the authorities to de-criminalise live-out arrangements. 

Trafficking  in  human  beings  remains  a  concern,  particularly  in  the  absence  of  a  single 
legislative and policy framework. The SAR Government has set up a task force to address the 
matter and is collaborating with the EU and other members of the international community. 
Hong Kong has stepped up its cooperation with mainland China, including joint operations. 
The  EU  and  the  Hong  Kong  Security  Bureau  held  a  successful  workshop  on  trafficking  in 
human beings in July and are looking forward to continuing their cooperation.  

3 According to HKSAR Government, the Gini coefficient is slightly lower (0.473) if the effects of taxation and 
social benefits are taken into account. 

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The  anti-corruption  system  remained  vigorous  and  resilient.  Hong  Kong  boasts  very  high 
standards  of  transparency  and  anti-corruption  measures.  The  authorities  and  political  and 
business  leaders  alike  recognise  that  transparency,  including  for  mainland  firms,  is  vital  if 
Hong Kong is to maintain its pre-eminence as an international business centre. 

Relations between Hong Kong and mainland China 

Sections of Hong Kong society are worried about what they perceive as the gradual erosion of 
Hong  Kong’s  ‘high  degree  of  autonomy’  within  the  People’s  Republic  of  China  and  the 
declining  respect  for  Hong  Kong’s  values  and  way  of  life  under  the  ‘one  country,  two 
systems’ principle.  

During  his  visit  to  Hong  Kong  on  the  occasion  of  the  20th  anniversary  of  the  handover, 
President  Xi  Jinping  reiterated  the  Central  Government’s  commitment  to  the  ‘one  country, 
two  systems’  principle.  He  also  stressed  that  endangering  national  security  and  sovereignty 
and  challenging  the  power  of  the  central  government  were  red  lines  not  to  be  crossed. 
Following Xi’s visit and his report to the 19th Party Congress, speeches and comments made 
by  several  high-ranking  Beijing  officials  suggest  that  there  is  a  new  understanding  of  the 
Basic Law, with China asserting its ‘comprehensive jurisdiction’ over Hong Kong.  

In November,  the NPCSC voted to introduce the national anthem law into Annex III of Hong 
Kong’s Basic Law, which lists PRC national laws that are also applicable in Hong Kong.  The 
Hong  Kong  SAR  government  said  the  national  anthem  law  would  be  applied  in  the  SAR 
through  appropriate  local  legislation.  Some  of  the  penalties  for  which  national  law  makes 
provision cannot be applied in Hong Kong because of significant differences in criminal law. 
Retroactive application is not expected.  

Two further events in 2017 caused concern regarding the implementation of the ‘one country, 
two systems’ principle: Beijing’s decision to refuse a EU citizen entry to Hong Kong, and the 
NPCSC decision of 27 December approving the co-location agreement without due reference 
to the Basic Law.  

In  December,  Hong  Kong  and  mainland  China  signed  an  agreement  to  set  up  a  faster 
notification system for cases  where residents  of one region are detained as  criminals  by the 
other region. Both committed themselves to informing each other within seven working days 
(somewhat  longer  in  more  complex  cases)  if  a  person  is  being  held  for  minor  crimes.  The 
agreement,  which  was  triggered  by  the  disappearance  of  five  booksellers,  offers  greater 
transparency. 

Also in December, a panel of 1 989 electors, including about 300 pan-democrats, elected the 
36 Hong Kong deputies to the National People’s Congress (NPC). The election campaign was 
contested. Under new rules adopted by the NPC in March, Hong Kong candidates had to sign 
a declaration that they would uphold the national constitution and Hong Kong’s Basic Law, 
uphold  the  ‘one  country,  two  systems’  principle,  pledge  loyalty to  the  People’s  Republic  of 
China and the Hong Kong Special Administrative Region, and accept no financial assistance 
from  foreign  countries  in  connection  with  elections.  On  these  grounds,  applications  by  10 

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candidates  from  the  ‘localist’  and  pan-democratic  camps  were  invalidated.  Forty-nine 
candidates eventually ran for the 36 seats, with 11 first-time deputies elected.  

Economic Developments 

Hong Kong continues to prosper as an international financial and trade centre in Asia, and to 
lead in  various  global  economic  competitiveness  surveys.  The  government  and the business 
community, however, are concerned about long-term competitiveness vis-à-vis Hong Kong's 
regional  competitors.    In  2017,  the  government  led  a  number  of  initiatives  to  shape  Hong 
Kong's economic future, trying to encourage more development, especially in innovation and 
technology, and to exploit its role in China's Belt and Road Initiative.   

Sustained growth in 2017 

As  the  external  economic  environment  steadily  improved,  Hong  Kong  enjoyed  economic 
growth, low inflation and full employment. Real GDP growth reached 3.8% in 20174, almost 
doubling its 2% growth pace in 2016.  The expansion was underpinned by strong exports of 
goods  and services, investment expenditure and consumption. The domestic market held up 
well, supported by favourable employment conditions and more positive business sentiment. 
The annual unemployment rate was 3.1%.  Inflationary pressure was mild at 1.7% in 2017. 

Driven by ample liquidity, positive market outlook and strong corporate earnings, the Hang 
Seng Index outperformed other major Asian indexes in 2017.  It rose by more than 35% year-
on-year, closing at 29 919 on 29 December 2017. Initial public offering (IPO) activities were 
buoyant, despite a smaller average deal size compared with 2016.  However, Hong Kong lost 
its crown as the largest global IPO market, dropping to third place in terms of funds raised in 
2017, after New York and Shanghai. The drop in ranking might partly be due to the absence 
of mega listings and Chinese technology companies' increasing preference for seeking listings 
in the US.  Funds raised from IPOs dropped to HK$128.5 billion in  2017, down by 34.2%5. 
About 50% of the listed companies were mainland Chinese enterprises.   

Recognising  the  competitive  pressure  Hong  Kong  faces  in  attracting  listings  from  new 
economy companies, the Hong Kong Stock Exchange announced on 15 December 2017 that 
it would expand its listing regime to include issuers from emerging and innovative sectors that 
have weighted voting rights structures (dual class structures) 6, as well as pre-revenue biotech 
issuers.  The  change  in  position  of  the  Securities  and  Futures  Commission  ended  the  long- 
standing controversy over the regulator's rejection of the proposal of special voting rights in 
the wake of Alibaba Group Holding Ltd.'s New York listing in 2014. 

4 Source:  Unless otherwise stated, all macroeconomic data were sourced from the Hong Kong Census and 
Statistics Department. 

5 Source: Hong Kong Exchange and Clearing Ltd.. 

6 The dual-class share structure gives one group of shareholders greater voting rights than others. It is popular 
with technology companies but remains controversial with corporate governance stakeholders. 

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Hong  Kong's  financial  regulators  have  spearheaded  a  range  of  initiatives  to  promote  the 
development  of  fin-tech.  The  Hong  Kong  government  and  regulators  signed  cooperation 
agreements  with  counterparts  in  other  fin-tech  hubs,  including  the  United  Kingdom  and 
Singapore, to foster financial innovation.  

The launch of the Bond Connect scheme (July 2017) will further strengthen financial linkages 
between  Hong  Kong  and  China.    It  follows  the  model  of  the  Shanghai-Hong  Kong  Stock 
Connect  (launched  in  2014)  and  the  Shenzhen-Hong  Kong  Stock  Connect  (2016)  schemes. 
The initial phase limits trading to one-way northbound. Together with the Mutual Recognition 
of  Funds  scheme  introduced  in  2015,  Hong  Kong  has  built  up  multiple  channels  linking  its 
capital markets with China, and it has continued to play a pioneering role in China's capital 
markets liberalisation.   

In her 2017 Policy Address, Chief Executive Carrie Lam proposed that spending on research 
and development be doubled from 0.73% to 1.5% of GDP over five years and set out an array 
of measures to spur development. A HK$2bn Innovation and Technology Venture Fund was 
launched in 2017 to support tech start-ups. Earlier in the year, in January, the governments of 
Hong Kong and Shenzhen signed an agreement jointly to set up an innovation and technology 
park  in  Lok  Ma  Chau,  on  the  border  between  the  two  cities.  The  two  sides  hoped  to 
complement  each  other  in  technology  development,  so  as  to  compete  with  other  global 
technology hubs.   

China's Belt and Road Initiative was a key element in the policy-making of the Hong Kong 
SAR.    The  Hong  Kong  government  emphasised  the  need  to  capitalise  on  the  opportunities 
arising from this initiative and the Guangdong-Hong Kong-Macao Bay Area (the 'Greater Bay 
Area') development. The stated aim was for the SAR to be a business services, financing and 
asset  management  hub  for  the  Belt  and  Road,  and  to  make  the  city  a  centre  of  dispute 
resolution and arbitration for the Asian Infrastructure Investment Bank (AIIB). In June 2017, 
Hong Kong succeeded in joining the AIIB as a non-sovereign member under the auspices of 
China.  

In  December,  the  Hong  Kong  authorities  and  the  National  Development  and  Reform 
Commission signed an arrangement to facilitate Hong Kong's participation in China's Belt and 
Road Initiative.  The arrangement includes specific measures focussed on six key areas: 
(i) finance and investment, 
(ii) infrastructure and maritime services, 
(iii) economic and trade facilitation,  
(iv) people-to-people relations,  
(v) the Greater Bay Area development; and  
(vi) project interfacing and dispute resolution services.  

Private  sector  participation  in  Belt  and  Road  projects  is  growing,  with  business  interest 

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predominantly confined to  the ASEAN region. The first Belt and Road bond was  issued by 
the China Development Bank in Hong Kong in December. 

In  keeping  with  its  efforts  to  enhance  its  anti-money  laundering  and  anti-terrorist  financing 
regimes, in June the Government gazetted the Anti-Money Laundering and Counter-Terrorist 
Financing (Financial Institutions) (Amendment) Bill 2017 and the Companies (Amendment) 
Bill  2017.  The  aim  of  the  former  bill  was  to  apply  statutory  customer  due  diligence  and 
record-keeping  requirements  to  designated  non-financial  businesses  and  professions  when 
they engage in specified transactions. The latter bill sought to require companies incorporated 
in  Hong  Kong  to  maintain  beneficial  ownership  information,  by  keeping  a  Significant 
Controllers Register. This register should be open for inspection by law enforcement officers 
on demand.  

Both bills' ultimate objective was to bring Hong Kong's regulatory regime up to date, in line 
with international requirements as promulgated by the Financial Action Task Force (FATF). 
However,  as  a  result  of  submissions  made  during  the  consultation  process,  the  Government 
decided to restrict access to beneficial ownership information to competent authorities, rather 
than  making  such  information  public.  Importantly,  the  disclosure  requirements  would  only 
apply  to  Hong  Kong-incorporated  private  companies,  and  not  to  registered  non-Hong  Kong 
companies  or  Hong  Kong  listed  companies.  The  two  bills  were  adopted  by  the  Legislative 
Council on 24 January 2018. 

Trade policy 

On  the  external  front,  Hong  Kong  has  been  pursuing  free  trade  and  investment  agreements, 
focussing  on  trade  and  investment  links  within  China's  Belt  and  Road  Initiative.    In  2017, 
Hong Kong signed and concluded a number of bilateral agreements and launched negotiations 
with  new  partners,  in  addition  to  its  existing  free  trade  agreements  with  New  Zealand,  the 
European  Free  Trade  Association  and  Chile.  Negotiations  with  Georgia  and  the  Maldives 
continued. In May, Hong Kong commenced free trade agreement negotiations with Australia. 
A  free  trade  agreement  and  a  related  investment  agreement  with  ASEAN  were  signed  in 
November  in  the  margins  of  the  ASEAN  Summit.  Investment  promotion  and  protection 
agreements were concluded with Bahrain, Mexico, Myanmar and UAE, and negotiations with 
Iran and Russia were under way. Hong Kong remained an active WTO member and a staunch 
supporter of multilateralism.   

On  regional  integration,  two  new  agreements,  namely  an  Investment  Agreement  and  an 
Agreement on Economic and Technical Cooperation under Hong Kong and Mainland's Closer 
Economic Partnership Arrangement (CEPA) were signed in June 2017. The agreements grant 
Hong Kong businesses most preferential investment access to China – in both the services and 
the non-services sectors – and pave the way for Hong Kong to participate to a greater degree 
in China's Belt and Road Initiative. In addition, a Closer Economic Partnership Arrangement 
was signed with Macao in October. Hong Kong and Macao have each entered into a separate 
CEPA  with  the  mainland.  The  three  administrations  have  envisaged  building  upon  their 

9 

 
 
 
 
 
 
 
CEPAs to establish a new, common platform to advance further liberalisation and facilitation 
of trade and investment in the 'Greater Bay Area'. 

Property market and housing 

Fuelled by low interest rates, excess liquidity and strong demand from investors, the property 
market reached record highs in 2017. In particular, private residential property prices rose by 
16.7%7 compared with 2016, making Hong Kong the world's most expensive housing market. 
It  is  the  world's  least  affordable  urban  centre  for  home  buyers.  Flats  in  new  buildings  have 
been  getting  smaller  on  average  to  make  them  more  affordable  for  new  home  buyers.    As 
residential prices and rents in the private sector continued to soar, demand for public housing 
increased more than ever.  

The Hong Kong authorities have been working hard to increase supply and manage demand, 
but the efforts have not so far generated notable improvements. The demand-driven measures 
rolled out in previous years (such as tightening mortgage lending and imposing a 15% double 
stamp  duty  for  non-first  time  buyers)  remained  in  force.  Various  types  of  public  housing 
schemes  were  introduced  or  refined,  while  project  developments  were  expedited.  However, 
meeting  the  long-term  housing  supply  target  remains  a  huge  challenge  for  the  government, 
given  the  shortage  of  land.  To  garner  broad  consensus  within  the  community,  the  Chief 
Executive appointed a 30-member task force in September 2017. The land supply task force 
will  engage  the  public  in  2018  to  review  various  controversial  options  such  as  land 
reclamation, speeding up urban renewal, and exploiting conservation parks.   

Fiscal management, poverty and wealth gap 

The  Hong  Kong  government  has  accumulated  deep  fiscal  reserves  since  1997.  Financial 
Secretary  Paul  Chan  presented  a  strong  fiscal  report  on  the  Hong  Kong  SAR  in  February 
2017, with a budget surplus of 3.7% of GDP for 2016-17 and estimated reserves of 37% of 
GDP for 2017-18. On top of a range of one-off concessionary measures, the fiscal surplus was 
budgeted  to  spend  more  on  care  of  the  elderly  and  developing  innovation.  Chief  Executive 
Carrie  Lam  pledged  to  increase  spending  in  a  number  of  policy  areas,  given  that  fiscal 
reserves exceed HK$1 trillion. The comfortable fiscal position also allowed the administration 
to  reduce  the  tax  burden  on  companies.  Amongst  other  measures,  the  Chief  Executive 
proposed halving the corporate tax rate to 8.25% for the first HK$2 million in profits. 

Despite robust economic growth and full public coffers, the poverty situation deteriorated and 
income disparities increased, largely because of a more rapidly ageing population. The latest 
government  study8  showed  that  1.35  million  of the  city’s  7.35  million residents  were  living 

7 Source:  Hong Kong Property Review – monthly supplement, the Rating and Valuation Department of the 
Hong Kong SAR 

8 Source: the Hong Kong Poverty Situation Report 2016, the Government of the Hong Kong SAR, November 
2017 

10 

 
 
 
 
 
 
 
 
                                                            
below the official poverty line. The poverty rate rose 0.2% percentage points to a record high 
of  19.9%  in  2016.  The  government  pledged  to  implement  appropriate  taxation  and  social 
welfare policies to let different strata of society share the fruits of economic development and 
government resources. 

Environment protection policy 

In 2017 environmental protection climbed up the policy agenda. A number of initiatives and 
legislative procedures were launched and initiated. Hong Kong vowed to move towards a low 
carbon  economy  and  to  become  the  greenest  region  of  China.  In  January,  Hong  Kong 
published the  ‘Climate Action Plan 2030+’ report in  response  to the Paris  Agreement.   The 
report sets out Hong Kong’s new absolute carbon emissions reduction target of 26% to 36% 
for 2030 as compared to 2005 and the concerted plans to achieve it.  In an effort to reduce and 
better manage urban waste, a detailed proposal was published in March for a municipal solid 
waste charging scheme, to be introduced in 2019.  

A  state-of-the-art  Waste  Electrical  and  Electronic  Equipment  Treatment  (WEEE)  facility 
became  operational  in  December.  The  facility,  built  and  operated  by  a  European  waste 
management firm (in a joint venture with a local service provider) was the first of its kind in 
Hong Kong.  Hong Kong also launched a three-step plan to phase out the ivory trade by the 
end  of  2021.  The  government  submitted  the  relevant  bill  to  the  Legislative  Council  for 
scrutiny in June 2017 (and the bill was passed in January 2018). 

EU-Hong Kong bilateral relations and cooperation in 2017 

The  European  Union  and  Hong  Kong  are  major  trade  and  investment  partners.  They 
continued to deepen bilateral relations in 2017.  

The European Union is Hong Kong's second largest trading partner after China and one of its 
key  foreign  investors.  With  more  than  2,100  EU  companies  based  in  Hong  Kong,  the  EU 
remains the largest foreign business constituency in the city. In turn, Hong Kong is the 14th 
largest trading partner in goods and one of the EU's key Asian trading partners in services. 

In 2017, EU exports of goods to Hong Kong rose by 5% year-on-year to € 36.8 billion while 
imports from Hong Kong amounted to €11.2 billion, resulting in a sizable surplus for the EU 
of €25.6 billion, the fourth highest EU external trade surplus. EU exports of goods to Hong 
Kong are boosted by robust demand for machinery and equipment, jewellery, clothing, luxury 
goods, food, wine, and automobiles. 

Bilateral trade in services between the EU and Hong Kong remained stable. In 2016 (the most 
recent year for which data are available), bilateral trade in services amounted to €22.3 billion. 
EU imports of services from Hong Kong reached €11.4 billion, while exports to Hong Kong 
reached €10.9 billion, resulting in a EU deficit of €461 million. 

11 

 
 
 
 
 
 
 
 
 
 
Two-way  investment  flows  between  the  EU  and  Hong  Kong  are  significant.  Hong  Kong  is 
one  of  the  EU's  major  direct  investment  destinations.  Excluding  offshore  centres, the  EU  is 
the second largest foreign investor in Hong Kong (after mainland China), contributing 9.7% 
of the total foreign direct investment stock in 2016 (latest available).  A significant percentage 
of  EU  investment  in  China  transits  via  Hong  Kong.  The  presence  of  high-quality  service 
providers  and  the  rule  of  law  are  among  the  main  reasons  for  this.  In  turn,  Hong  Kong 
remains the EU's second most important direct investor from Asia, after Japan, partly because 
a sizeable proportion of China's outbound investment in Europe is channelled through Hong 
Kong.  In  2017  the  EU  and  Hong  Kong  held  informal  talks  (in  March  and  November)  to 
explore the possible launch of negotiations on investment agreement.  

in  particular 

The 11th  EU-Hong Kong annual Structured Dialogue  meeting  took place in Hong Kong on 
16 November9.  The  two  sides  discussed  a  wide  range  of  subjects  and  identified  areas  for 
intellectual  property  protection,  customs  matters, 
further  cooperation, 
environment  (waste  management  and  wildlife  trafficking)  and  competition  policy.  The  two 
sides  exchanged  views  on  regulatory  matters,  including  public  light  buses  and  public 
procurement, and agreed to continue working towards a better understanding of each other’s 
concerns and priorities. For the first time, an expert meeting on financial services took place 
in the margins of the Structured Dialogue.  Both sides updated each other on their respective 
developments in the sector and explored ways to step up cooperation on financial regulation, 
particularly as regards equivalence processes and Mutual Recognition of Funds (MRF). 

As  regards  cooperation  on  customs,  the  EU  and  Hong  Kong  are  currently  assessing  the 
compatibility of their respective Authorised Economic Operator (AEO) schemes with a view 
to a possible Mutual Recognition Agreement (MRA). The EU is committed to continuing the 
AEO mutual recognition process with Hong Kong in 2018. 

The  co-funding  mechanism  of  the  Hong  Kong  Research  Grants  Council  (set  up  in  2015  to 
foster  cooperation  under  the  EU’s  Horizon  2020  framework  programme)  continued  to  bear 
fruit.  The  scheme  worked  well  in  its  first  year  of  operation,  and  the  fund  for  2016-17  was 
fully allocated.  

As part of its agenda for fair taxation at global level, on 5 December the EU unveiled a list of 
'non-cooperative' tax jurisdictions ('the List'). Hong Kong did not figure on the List, thanks to 
its  recent  policy  and  legislative  proposals  and  to  its  commitment  to  address  the  concerns 
identified by the EU during the screening process, notably under the criteria of transparency 
and  fair  taxation.  Hong  Kong  was  therefore  considered  to  be  a  'cooperative'  jurisdiction, 
provided that it successfully meets its commitments by the end of 2018. The EU will monitor 
the  effective  implementation  of  these  commitments  and  will  continue  the  constructive 
dialogue established with the Hong Kong authorities. 

9 https://eeas.europa.eu/delegations/benin/35762/joint-press-statement-structured-dialogue-meeting-between-
hksarg-and-european-union-explores_en 

12 

 
 
 
 
                                                            
EU business interests in Hong Kong are represented by the European Chamber of Commerce 
(ECC). The ECC has five 'business councils' that focus on the automotive sector, intellectual 
property, energy and the environment, financial services and information, communication and 
technology.  It  works  closely  with  the  EU  Office  in  Hong  Kong  and  Macao  to  facilitate 
dialogue  with  the  government.  In  2017,  the  ECC  worked  towards  a  stronger,  more 
coordinated representation of the EU business community by making substantial submissions 
to  the  government  highlighting  the  interests,  priorities  and  recommendations  of  European 
businesses,  and  by  organising  a  number  of  sectoral  round  tables  with  government 
representatives to enhance the business-to-government interface. 

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

The  EU  diplomatic  missions  and  cultural  institutes  worked  together  with  local  partners  on 
many people-to-people activities. Examples of such activities included the EU Film Festival 
with  an  opening  concert,  the  first  EU  booth  at  the  Hong  Kong  Book  Fair,  the  EU  Day  of 
Languages,  an    EU-themed  animated  short  film  competition  with  local  schools,  a  beach 
cleaning  event  and  several  human  rights-focussed  seminars.  The  EU  hopes  to  build  on  this 
momentum to continue its work with the government, civil society and business in promoting 
exchanges on rights and freedoms. 

There were a number of high-level visits from the EU institutions in 2017. The highlight was 
the  December  visit  of  European  Commission  Vice-President  Valdis  Dombrovskis,  who  met 
the Chief Executive, the Financial Secretary, the Financial Services Secretary and the Hong 
Kong Monetary Authority. Members of the European Parliament visited Hong Kong twice in 
2017.  On  13  December,  the  European  Parliament  adopted  a  recommendation  on  Hong 
Kong10, taking stock of developments 20 years after handover. 

10 http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P8-TA-2017-
0495&language=EN&ring=A8-2017-0382  

13