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FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 3996
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RUCPCIM/CIM NTDB WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 11 HONG KONG 000179 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/IFD/OIA 
TREASURY FOR OASIA 
USDOC FOR 3132/USFCS/OIO/EAP 
STATE PASS USTR FOR LEE AND RAGLAND 
 
E.O. 12958:  N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC MO
SUBJECT: HONG KONG'S 2008 INVESTMENT CLIMATE STATEMENT 
 
REF: 07 STATE 158802 
 
¶1. The following is the 2008 Investment Climate Statement for the 
Hong Kong Special Administrative Region. 
 
----------------------------------- 
A.1 Openness to Foreign Investment 
----------------------------------- 
 
¶2. Hong Kong pursues a free market philosophy with minimal 
government interference in the economy.  The Hong Kong Government 
welcomes foreign investment.  It neither offers special incentives 
nor imposes disincentives for foreign investors.  Hong Kong's 
well-established rule of law is applied consistently and without 
discrimination.  There is no distinction in law or practice between 
investments by foreign-controlled companies and those controlled by 
local interests.  Hong Kong is a member of the World Trade 
Organization in its own right and is a separate customs territory. 
Hong Kong is a duty free port, except for a small number of tariffs 
on products such as cigarettes and alcohol.  There are no quotas or 
dumping laws. 
 
¶3. Foreign firms and individuals are allowed freely to incorporate 
their operations in Hong Kong, register branches of foreign 
operations, and set up representative offices without encountering 
discrimination or undue regulation.  There is no restriction on the 
ownership of such operations.  Company directors are not required to 
be citizens of, or resident in, Hong Kong.  Reporting requirements 
are straightforward and not onerous.  Hong Kong's extensive body of 
commercial and company law generally follows that of the United 
Kingdom, including the common law and rules of equity.  Most 
statutory law is made locally.  The local court system provides for 
effective enforcement of contracts, dispute settlement, and 
protection of rights.  Formalities are minimal in company 
incorporation and business registration.  Foreign and domestic 
companies register under the same rules and are subject to the same 
set of business regulations. 
 
¶4. The Hong Kong Government's InvestHK encourages inward investment 
as a means of introducing new or improved products, processes, 
designs and management techniques. U.S. and other foreign firms can 
participate in government financed and subsidized research and 
development programs on a national treatment basis. 
 
¶5. There is no capital gains tax, nor are there withholding taxes on 
dividends and royalties.  Profits can be freely converted and 
remitted.  Foreign-owned and Hong Kong-owned firms are taxed at the 
same rate, 16.5 percent of profits in 2008-09.  There are no 
preferential or discriminatory export and import policies that 
affect foreign investors.  There are no direct subsidies to domestic 
industries.   There are no disincentives to foreign investment such 
as quotas, bonds, deposits, or other similar regulations.  The Hong 
Kong Code on Takeovers and Mergers (1981) sets out general 
principles for acceptable standards of commercial behavior. 
 
¶6. According to Hong Kong Government statistics, there were 3,890 
regional operations of overseas companies in Hong Kong in 2007.  The 
Government defines regional operations as: regional headquarters 
that control the operation of other branches in the region without 
frequent referrals to the parent company outside Hong Kong; and 
regional offices as offices that coordinate operations elsewhere in 
the region with frequent referrals to the parent company outside 
Hong Kong or a regional headquarters.  The U.S. has the largest 
number of regional headquarters and offices in Hong Kong (891 
companies), followed by Japan (748 companies) and the UK (347 
companies).  The major lines of business of the regional 
headquarters include wholesale/retail, import/export, finance and 
banking, manufacturing, and transport and related services. 
 
¶7. The Hong Kong Government owns all land, granting long-term leases 
without transferring title.  Local and foreign leaseholders are 
treated equally.  The Government plays a significant role in the 
housing market: about 50 percent of homes in Hong Kong are rented 
from the Government or purchased with government assistance at below 
market rates. 
With few exceptions, the Hong Kong Government does not attempt to 
limit the activities of foreign investors either in specified 
projects or sectors.  Foreign investment in Hong Kong flows freely 
into the industrial sector as well as into services, franchises, 
restaurants, the entertainment industry, and the ownership of 
property, both residential and commercial.  The telecommunications 
services market has been fully liberalized since January 1, 2003. 
 
¶8. The exceptions to the Hong Kong Government's open foreign 
investment policy are: 
 
HONG KONG 00000179  002 OF 011 
 
 
--Broadcasting - Voting control of free-to-air television stations 
by non-residents is limited to 49 percent.  There are also residency 
requirements for the directors of broadcasting companies. 
--Legal Services - Foreign lawyers are able to practice foreign and 
international law in Hong Kong.  Foreign lawyers can apply to take 
the Hong Kong Bar Examination and, if successful, practice Hong Kong 
law.  Foreign law firms may not hire local lawyers to advise on Hong 
Kong law, but may themselves become "local" firms after satisfying 
certain residency and other requirements.  They may thereafter hire 
local attorneys, but must do so on a 1:1 basis with the foreign 
lawyers.  They also can form associations with local law firms. 
 
¶9. Hong Kong has a free trade agreement with Mainland China, 
referred to as CEPA, or the Closer Economic Partnership Arrangement. 
 CEPA provides tariff-free export to Mainland China of Hong 
Kong-origin goods and preferential access for specific services 
sectors.  The agreement was originally implemented at the beginning 
of 2004 and has been expanded three times.  When the third phase was 
implemented at the beginning of 2006, all Hong Kong-origin products 
became eligible for tariff-free access to Mainland China.  The 
fourth phase, announced in July 2007 expanded access for service 
providers.  Service providers in 38 sectors (e.g., logistics, 
distribution) now enjoy preferential treatment on the mainland. 
U.S. and other foreign firms with a significant presence in Hong 
Kong are eligible to take advantage of CEPA concessions to enter the 
mainland market. 
 
------------------------------------- 
A.2 Conversion and Transfer Policies 
------------------------------------- 
 
¶10. There are no restrictions on conversion and inward or outward 
transfer of funds for any purpose.  The Hong Kong dollar is a freely 
convertible currency that, since late 1983, has been linked via a 
currency board to the U.S. Dollar at an exchange rate of 
approximately HKD7.75 = US$1.  There is no allocation of foreign 
exchange. 
 
----------------------------------- 
A.3 Expropriation and Compensation 
----------------------------------- 
 
¶11. The U.S. Consulate General is not aware of any expropriation 
actions in the recent past.  Expropriation of private property may 
occur if it is clearly in the public interest, but only for 
well-defined purposes such as implementation of public works 
projects.  If this is the case, expropriations are to be conducted 
through negotiations, in a non-discriminatory manner in accordance 
with established principles of international law.  Due process and 
transparency are to be observed. Investors in and lenders to 
expropriated entities are to receive prompt, adequate, and effective 
compensation.  Property may be acquired under the State Land 
Resumption Ordinance, the Land Acquisition Ordinance, the Mass 
Transit Railway (Land Resumption and Related Provisions) Ordinance 
or the Roads Ordinance.  These ordinances provide for payment of 
compensation.  If agreement cannot be reached on the amount payable, 
either party can refer the claim to the Land Tribunal. 
 
----------------------- 
A.4 Dispute Settlement 
----------------------- 
 
¶12. The U.S. Consulate General is not aware of any investor-state 
disputes in recent years involving U.S. or other foreign investors 
or contractors and the Hong Kong Government.  The Hong Kong 
Department of Justice is also not aware of any such disputes. 
Private investment disputes are normally handled in the courts or 
via private negotiation.  Alternatively, disputes may be referred to 
the Hong Kong International Arbitration Center. 
 
¶13. The Hong Kong Government accepts international arbitration of 
investment disputes between itself and investors.  Following 
reversion to Chinese sovereignty on July 1, 1997, Hong Kong applies 
provisions of the International Center for the Settlement of 
Investment Disputes (ICSID), known as the Washington Convention, and 
the New York Convention of 1958 on the Recognition and Enforcement 
of Foreign Arbitral Awards.  Hong Kong has also adopted the United 
Nations Commission on International Trade Law (UNCITRAL) model law 
for international commercial arbitration. 
 
¶14. Hong Kong and the People's Republic of China signed a Memorandum 
of Understanding in June 1999 on an arrangement parallel to the New 
York Convention for the reciprocal enforcement of arbitral awards, 
since the New York Convention, being an international agreement, is 
no longer applicable to the enforcement of arbitral awards between 
 
HONG KONG 00000179  003 OF 011 
 
 
Hong Kong and Mainland China. 
 
¶15. Hong Kong's legal system is firmly based on the rule of law and 
the independence of the judiciary.  Courts of justice in Hong Kong 
include the Court of Final Appeal, the High Court (composed of the 
Court of Appeal and the Court of First Instance), the District 
Court, the Magistrate's Courts, the Coroner's Court, and the 
Juvenile Court.  There are also a Lands Tribunal, Labor Tribunal, 
and other statutory tribunals. 
 
-------------------------------------------- 
A.5 Performance Requirements and Incentives 
-------------------------------------------- 
 
¶16. Consistent with its non-interventionist economic philosophy, 
Hong Kong imposes no export performance or local content 
requirements as a condition for establishing, maintaining or 
expanding a foreign investment.  Hong Kong offers no special 
privileges to attract foreign investment.  There are no requirements 
that Hong Kong residents own shares, that foreign equity be reduced 
over time, or that technology be transferred on certain terms. 
 
¶17. All of Hong Kong is a duty-free zone.  Subject to 
non-discriminatory application of excise taxes and restricted entry 
in some sectors, as noted above, local and foreign firms are free to 
take advantage of investment opportunities as they arise. 
 
--------------------------------------------- ---- 
A.6 Right to Private Ownership and Establishment 
--------------------------------------------- ---- 
 
¶18. Hong Kong law and regulations provide for the right of foreign 
and domestic private entities to establish, own and dispose of 
interests of business enterprises.  Foreign investors are allowed, 
except for the sectors noted above, to engage in all lawful forms of 
remunerative activity.  The Hong Kong Government does not generally 
engage directly in business activity via public enterprises. 
Business privileges, franchises and land development rights are 
granted on the basis of competitive equality. 
 
---------------------------------- 
A.7 Protection of Property Rights 
---------------------------------- 
 
¶19. Hong Kong's commercial and company laws provide for effective 
enforcement of contracts and protection of corporate rights.  Hong 
Kong has filed its notice of compliance with the trade-related 
intellectual property requirements of the World Trade Organization. 
The Intellectual Property Department, which includes the Trademarks 
and Patents Registries, is the focal point for the development of 
Hong Kong's intellectual property regime.  The Customs and Excise 
Department is the principal enforcement agency for intellectual 
property rights (IPR).  Hong Kong has acceded to the Paris 
Convention for the Protection of Industrial Property, the Bern 
Convention for the Protection of Literary and Artistic Works, and 
the Geneva and Paris Universal Copyright Conventions.  Hong Kong 
also continues to participate in the World Intellectual Property 
Organization, as part of Mainland China's delegation. 
 
¶20. The Hong Kong Government devotes significant attention and 
resources to IPR enforcement.  Implementation of laws passed in 
recent years, including aggressive raids at the retail level, has 
significantly reduced illegal production and retail sales of 
copyright and trademark protected products.  The Hong Kong courts 
have imposed longer jail terms for violations of Hong Kong's 
copyright ordinance.  The Hong Kong Government has conducted public 
education efforts to encourage respect for intellectual property 
rights.  Nevertheless, pirated and counterfeit products remain 
available at the retail level throughout Hong Kong.  In addition, 
end-use piracy of software and textbooks, the rapid growth of 
peer-to-peer downloading via the Internet, and the illicit 
importation and transshipment of pirated and counterfeit goods, 
including optical discs and name brand handbags and apparel from 
Mainland China and elsewhere in the region, are continuing problems. 
 Hong Kong authorities have taken steps to address these problems 
by: continued monitoring of suspect shipments at points of entry; 
establishing a task force to monitor and crack down on peer-to-peer 
(P2P) piracy over the Internet in December 2004; prosecuting 
software end-use piracy, and proposing a new Copyright Amendment. 
The P2P task force made its first arrest for distributing 
unauthorized movies via this technology in January 2005.  The court 
sentenced the offender to three months' imprisonment in November 
¶2005.  In December 2006, the Court of Appeal upheld this conviction 
and sentence.  Another vulnerability is that health authorities 
continue to permit the registration of generic drugs for marketing 
 
HONG KONG 00000179  004 OF 011 
 
 
without regard to whether these products infringe on valid patents. 
Despite extensive consultations with industry, no progress has been 
made on closing this loophole. 
 
¶21. The Copyright Ordinance protects any original copyright work 
created or published by any person anywhere in the world.  The 
government made amendments to the Copyright Ordinance and enacted 
the changes in July 2007.  In particular, two new provisions create 
a criminal offence against the copying and distribution of 
infringing copies of printed works in business and a separate civil 
liability against the act of circumventing technological protection 
measures.  These provisions will be enacted by the government in the 
form of two pieces of subsidiary legislation which define the scope 
within which the relevant acts do not attract the new liabilities. 
While the government is still consulting the stakeholders, it 
targets to submit the subsidiary legislation to the Legislative 
Council in the second quarter of 2008.  The Copyright Ordinance 
provides for rental rights for sound recordings, computer programs, 
films and comic books.  It provides for enhanced penalty provisions 
against copyright piracy and additional legal tools to facilitate 
enforcement.  It decriminalizes parallel imports of copyrighted 
products 15 months after their release anywhere in the world, but 
maintains civil penalties.  It retains the existing scope of the law 
defining an offence as possession of an infringing copy of computer 
programs, movies, TV dramas, musical recordings (including visual 
and sound recordings) for use in business.  This criminal liability 
applies equally to individuals and business organizations.  The 
possession of an infringing copy of other categories of works for 
use in one's business will not attract criminal liability but may 
incur civil liability.  In addition, the government introduced a 
public consultation in December 2006 on making unauthorized 
downloading of copyrighted materials a criminal offence.  The Hong 
Kong government has received about 600 submissions by the end of the 
consultation period and plans to release the preliminary proposals 
in early 2008 to facilitate further public consideration.  The 
Patent Ordinance allows for granting of an independent patent in 
Hong Kong based on the patents granted by the UK and the Chinese 
Patent Offices.  The patent granted in Hong Kong is independent and 
capable of being tested for validity, rectified, amended, revoked 
and enforced in Hong Kong courts. 
 
¶22. The Registered Design Ordinance is modeled on the EU design 
registration system, with certain modifications.  To be registered, 
a design must be new.  The system requires no substantive 
examination.  Protection is for an initial period of five years, and 
may be extended for four periods of five years each, up to a maximum 
of 25 years. 
 
¶23. Hong Kong's trademark law is TRIPS-compatible and allows for 
registration of trademarks relating to services.  All trademark 
registrations originally filed in Hong Kong are valid for seven 
years and renewable for 14-year periods.  Proprietors of trademarks 
registered elsewhere must apply anew and satisfy all requirements of 
Hong Kong law.  When evidence of use is required, such use must have 
been in Hong Kong. 
 
¶24. Hong Kong has no specific ordinance to cover trade secrets. 
Under the Trade Description Ordinance, however, the Government has 
the duty to protect information being disclosed to other parties. 
The Trade Description Ordinance prohibits false trade descriptions, 
forged trademarks and misstatements in respect of goods supplied in 
the course of trade. 
 
------------------------------------------ 
A.8 Transparency of the Regulatory System 
------------------------------------------ 
 
¶25. Hong Kong's body of law and regulation recognizes the value of 
competition in economic endeavor.  Tax, labor, health and safety and 
other laws and policies avoid distortions or impediments to the 
efficient mobilization and allocation of investment.  Bureaucratic 
procedures and "red tape" are held to a minimum and are equally 
transparent to local and foreign investors.  Hong Kong does not have 
an anti-trust law. Hong Kong has, however, set up a Competition 
Policy Review Committee that issued recommendations in June 2006. 
These recommendations included a call for legislation to regulate 
price-fixing, bid-rigging, market allocation, sales and production 
quotas, joint boycotts, unfair or discriminatory standards and the 
abuse of dominant market position.  The government began a public 
consultation period, which ended on February 5, 2007.  The 
government will publish a consultation paper outlining the main 
scope of the legislation to consult the public again in the first 
quarter of 2008.  Currently, only the telecommunications and, to a 
lesser degree, the broadcasting sectors have competition regulations 
in place. Certain sectors of the economy are dominated by monopolies 
 
HONG KONG 00000179  005 OF 011 
 
 
or cartels, not all of which are regulated by the Hong Kong 
Government.  These entities do not discriminate against U.S. goods 
or services, but they can use their market position to block 
effective competition. 
 
--------------------------------------------- ---------- 
A.9 Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ---------- 
 
¶26. There are no impediments to the free flow of financial 
resources.  Non-interventionist economic policies, complete freedom 
of capital movement and a well-understood regulatory and legal 
environment have greatly facilitated Hong Kong's role as a regional 
and international financial center.  Hong Kong's has one of the most 
active foreign exchange markets in Asia. 
 
¶27. Hong Kong has a three-tier system of deposit-taking 
institutions: licensed banks, restricted license banks, and 
deposit-taking companies.  Only licensed banks can offer 
current(checking) or savings accounts.  At the end of November 2007, 
Hong Kong had 142 licensed banks, 29 restricted licensed banks, 30 
deposit-taking institutions, and 80 representative offices.  The 
Hong Kong & Shanghai Banking Corporation (HSBC) is Hong Kong's 
largest banking group.  With its majority-owned subsidiary Hang Seng 
Bank, and 190 branches, the group controls more than 30.2 percent of 
Hong Kong dollar deposits.  The Bank of China (Hong Kong) is the 
second-largest banking group (219 branches), and controls 14.6 
percent of Hong Kong dollar deposits.  Thirty-five American 
"authorized financial institutions" operate in Hong Kong.  U.S. 
banks licensed in Hong Kong are listed in Chapter 7 - U.S. Banks and 
Local Correspondent Banks.  Most banks in Hong Kong maintain U.S. 
correspondent relationships. 
 
¶28. Hong Kong's five largest banks, in terms of total assets (2006), 
are as follows: 
                  Total 
Rank   Institution                Assets (US$ Billion) 
----   -------------              ------ 
 1     HSBC                       404.0 
 2    Bank of China (HK)         117.2 
 3     Hang Seng Bank, Ltd.        85.8 
 4     Standard Charter Bank, HK   50.1 
 5     Bank of East Asia, Ltd.     37.7 
 
Sources: Company Annual Reports 
 
¶29. Credit in Hong Kong is allocated strictly on market terms and is 
available to foreign investors on a non-discriminatory basis.  The 
private sector has access to the full spectrum of credit instruments 
as provided by Hong Kong's banking and financial system.  Legal, 
regulatory, and accounting systems are transparent and consistent 
with international norms.  The Hong Kong Monetary Authority (HKMA) 
functions as a de facto central bank.  It is responsible for 
maintaining the stability of the banking system and managing the 
Exchange Fund backing Hong Kong's currency.  The HKMA, with the 
assistance of the banking sector, has upgraded Hong Kong's financial 
market infrastructure.  Real Time Gross Settlement helps minimize 
risks in the payment system and brings Hong Kong in line with 
international standards.  The Hong Kong Mortgage Corporation (HKMC) 
promotes the development of the secondary mortgage market in Hong 
Kong.  The HKMC is 100 percent owned by the Government through the 
Exchange Fund.  The HKMC purchases residential mortgage loans for 
its own retained portfolio and also repackages mortgages into 
mortgage-backed securities for sale.  In 2006, (the latest figures 
available) the HKMC's outstanding amount of debt totaled US$3.0 
billion. 
 
¶30. On September 26, 2006, a Deposit Protection Scheme (DPS) began 
operations.  Depositors are now protected up to a maximum of 
HK$100,000 (US$12,820) per bank.  The DPS Fund (funded by 
contributions paid by member banks) amounted to US$ 47.9 million by 
the end of March 2007, and is expected to reach the target amount of 
US$166.7 million in three years.  While Hong Kong requires locally 
licensed banks to participate, overseas-incorporated banks may apply 
for an exemption if a comparable scheme in their home jurisdiction 
covers deposits taken in by its Hong Kong branches.  In 2004, the 
Hong Kong Monetary Authority (HKMA) and Dun & Bradstreet (HK) Ltd. 
(D&B) jointly launched a Commercial Credit Reference Agency (CCRA) 
to collate information about the indebtedness and credit history of 
small and medium-sized enterprises (SMEs) and make such information 
available to members of the Hong Kong Association of Banks (HKAB) 
and the Hong Kong Association of Deposit Taking Companies. 
 
¶31. Under the Insurance Companies Ordinance, insurance companies are 
authorized by the Insurance Authority to transact business in Hong 
 
HONG KONG 00000179  006 OF 011 
 
 
Kong.  Hong Kong has the highest number of authorized insurance 
companies in Asia.  As of December 2007, there were 178 authorized 
companies.  Of these, 88 were foreign companies from 23 countries. 
A number of the world's top insurance companies in terms of assets 
have branch offices or subsidiaries in Hong Kong. 
 
¶32. With a total market capitalization of US$1,710 billion and 1,173 
listed firms at year-end 2006, Hong Kong's stock exchange ranked 
second in Asia after Tokyo, and sixth in the world in terms of 
capitalization.  Hong Kong Exchanges and Clearing Limited (HKEx), a 
listed company, operates the stock and futures excanges.  The 
Securities and Futures Commission,an independent statutory body 
outside the civil service, has licensing and supervisory powers to 
ensure the integrity of markets and to protect investors. 
 
¶33. In April 2003, the Government implemented a major modernization 
of the legal framework for Hong Kong's securities market designed to 
upgrade transparency and corporate governance, boost regulators' 
enforcement powers, and improve investor protections.  To enhance 
market competitiveness, HKEx in the same month removed the rule on 
minimum brokerage commission rates for stock and futures 
transactions. 
 
¶34. There are no discriminatory legal constraints to foreign 
securities firms establishing in Hong Kong via branching, 
acquisition, or subsidiaries.  In practice, foreign firms typically 
establish in Hong Kong as subsidiaries.  Rules governing operations 
are the same, irrespective of ownership.  Portfolio investment 
decisions are left to the private sector.  There are no laws or 
regulations that specifically authorize private firms to adopt 
articles of incorporation/association that limit or prohibit foreign 
investment, participation, or control. 
 
¶35. The stock exchange plays a significant role in raising capital 
for Chinese state-owned enterprises.  Chinese state enterprises 
raise equity (through the issuance of so-called "H" shares) in Hong 
Kong provided they meet Hong Kong regulatory and accounting 
requirements.  These "H" shares are denominated in Renminbi, but 
must be purchased in Hong Kong Dollars.  In 2006, a total of 141 
Chinese enterprises had "H" share listings on the stock exchange, 
with market capitalization of US$141.0 billion. 
 
¶36. Hong Kong has made a concerted effort to develop a local debt 
market with the Exchange Fund bills and notes program.  Maturities 
now extend to ten years.  Hong Kong Dollar debt (public and private) 
has increased gradually, from US$3.46 billion at the end of 1989 to 
US$97.0 billion by the end-September of 2007.  Regional 
infrastructure financing requirements and increasing investor demand 
are projected to stimulate further development of the local debt 
market.  In May 2004, for the first time, Hong Kong issued bonds 
securitizing the revenues from Government tunnels and bridges.  In 
June 2004, the governmental Hong Kong Mortgage Corporation 
established a US$2.6 billion retail bond program.  In July 2004, the 
Hong Kong Government issued its first sovereign bonds totaling 
US$2.6 billion to raise cash for its public works program. 
 
¶37. The Hong Kong Government requires workers and employers to 
contribute to retirement funds under the Mandatory Provident Fund 
(MPF) scheme.  Contributions are expected to channel US$3-4 billion 
per year into various investment vehicles.  By the end of September 
2007, the net asset values of MPF funds amounted to US$33.0 billion. 
 
 
¶38. The Exchange Fund Investment Limited (EFIL), established by the 
Government to dispose of the stock portfolio it purchased during the 
Asian Financial Crisis, completed its operations in January 2003. 
EFIL disposed of the stocks in the form of a mutual fund, the 
Tracker Fund of Hong Kong (TraHK).  The Government decided to retain 
a portion of the stocks (worth about US$410 million) as a long-term 
investment.  The HKMA is responsible for the management of these 
stocks. TraHK is traded on the stock exchange. 
 
------------------------ 
A.10 Political Violence 
------------------------ 
 
¶39. Hong Kong is politically stable.  Demonstrations are almost 
always peaceful.  During the Sixth Ministerial Meeting of the World 
Trade Organization in December 2005, there were a number of 
incidents and arrests involving demonstrators.  Otherwise, the U.S. 
Consulate General is not aware of any incidents involving 
politically motivated damage to projects or installations. 
 
---------------- 
A.11 Corruption 
 
HONG KONG 00000179  007 OF 011 
 
 
---------------- 
 
¶40. Hong Kong has an excellent track record in combating corruption. 
 U.S. firms have not identified corruption as an obstacle to foreign 
direct investment.  The Independent Commission Against Corruption 
(ICAC) is responsible for combating corruption.  The ICAC is 
independent of the public service and the ICAC Commissioner is 
responsible directly to the Chief Executive.  A bribe to a foreign 
official is a criminal act, as is the giving or accepting of bribes, 
for both private individuals and government employees.  Penalties 
are stiff.  For example, a civil servant who solicits or accepts any 
advantage without special permission of the Government can receive 
one year's imprisonment and a HK$100,000 fine if convicted. 
Individuals in both the private and public sector can receive up to 
seven years imprisonment and a HK$500,000 fine for offering, 
soliciting or accepting a benefit for performance or non-performance 
of an official duty. 
 
------------------------------------- 
A.12 Bilateral Investment Agreements 
------------------------------------- 
 
¶41. Hong Kong is negotiating a series of bilateral investment 
agreements -- the Hong Kong Government calls them "Investment 
Promotion and Protection Agreements" -- with major foreign 
investors.  To date, Hong Kong has signed agreements with Australia, 
Austria, Belgo-Luxembourg Economic Union, Denmark, France, Germany, 
Italy, Japan, Korea, the Netherlands, New Zealand, Sweden, 
Switzerland, Thailand and the United Kingdom.  The Hong Kong 
Government has initialed agreements with Canada and Vietnam.  It is 
negotiating agreements with Singapore and Thailand.  All such 
agreements are based on a model text approved by Mainland China 
through the Sino-British Joint Liaison Group.  The United States and 
Hong Kong held talks on a bilateral investment agreement in the late 
1990s, but certain differences could not be resolved and 
negotiations were suspended.  U.S. firms, however, are not at a 
competitive or legal disadvantage since Hong Kong's market is open 
and its legal system impartial. 
 
--------------------------------------------- ----- 
A.13 OPIC and Other Investment Insurance Programs 
--------------------------------------------- ----- 
 
¶42. Overseas Private Investment Corporation (OPIC) coverage is not 
available in Hong Kong.  Hong Kong is a member of the World Bank 
Group's Multilateral Investment Guarantee Agency (MIGA). 
 
----------- 
A.14 Labor 
----------- 
 
¶43. In the 1980s and much of the 1990s, Hong Kong's unemployment 
rate hovered around two percent.  Reflecting structural changes in 
the local economy and weak global economic conditions, the 
unemployment rate rose to a record level of 8.3 percent in May 2003. 
 The job market has improved gradually since then, with the 
unemployment rate standing at 3.6 percent in November 2007, the 
lowest level since April 1998.  The Employees Retraining Board 
provides skills retraining for local employees to cope with ongoing 
structural change in the economy. 
 
¶44. To address a shortage of highly skilled technical and financial 
professionals, the Hong Kong Government has made efforts to attract 
qualified foreign and mainland Chinese workers.  As of July 2003, 
conditions for admitting mainland Chinese for employment were eased 
and aligned with those applicable to foreign nationals. 
 
¶45. In 2005, membership in Hong Kong's 715 registered unions totaled 
668,034, a participation rate of about 20.88 percent.  Hong Kong has 
implemented 41 conventions of the International Labor Organization 
in full and 18 others with modifications. 
 
¶46. Local law provides for the right of association and the right of 
workers to establish and join organizations of their own choosing. 
The Government does not discourage or impede the formation of 
unions. Workers who allege discrimination against unions have the 
right to have their cases heard by the Labor Relations Tribunal. 
Although legislation does not prohibit strikes, in practice most 
workers must sign employment contracts that state that walking off 
the job is a breach of contract and can lead to summary dismissal. 
Collective bargaining is legal in Hong Kong, but there is no 
obligation on employers to engage in it.  In practice, collective 
bargaining is not widely used. For more information on labor 
regulations in Hong Kong, please refer to the following website: 
http://www.justice.gov.hk/home.htm (click on Chapter 57 "Employment 
 
HONG KONG 00000179  008 OF 011 
 
 
Ordinance"). 
 
------------------------------------------ 
A.15 Foreign Trade Zones/Free Trade Zones 
------------------------------------------ 
 
¶47. Hong Kong is a free port without foreign trade zones.  Hong 
Kong's modern and efficient infrastructure supports Hong Kong's role 
as a trade entrepot and regional financial and services center. 
Rapid growth has placed severe demands on that infrastructure, 
giving rise to plans for major new investments, particularly in 
transportation and shipping facilities, over the next few years. 
Significant elements include a planned expansion of container 
terminal facilities, additional roadway and railway networks, major 
residential/commercial developments, community facilities, and 
environmental protection projects.  In May 2004, the Legislative 
Council passed a bill allowing the Hong Kong Government to issue 
US$2.6 billion bonds to fund infrastructure or other investment 
projects. 
 
¶48. Airport: In the first 11 months of 2007 Hong Kong's 
international airport at Chek Lap Kok handled daily an average of 
806 flights, 129,904 passengers, and more than 10,161 tons of cargo. 
 Seventy-nine international airlines operated some 5,500 scheduled 
flights per week between Hong Kong and 150 cities around the world. 
Hong Kong is a major gateway to Mainland China.  There are direct 
flights from Hong Kong to nearly 40 mainland cities. The demand for 
services to Mainland China is growing.  The Hong Kong airport is in 
the world's top ranks in terms of passenger and cargo throughput. 
 
¶49. With 24-hour operations, two all-weather runways, an ability to 
cater to all types of commercial aircraft, and high-speed transport 
links from the terminal to the city, the airport is well positioned 
to meet Hong Kong's aviation needs in the coming decades. 
 
¶50. The airport has a multi-modal marine cargo terminal that 
provides vessel services between various ports in the Pearl River 
Delta and the airport.  To strengthen Hong Kong's position as the 
economic gateway of Mainland China and Asia and to boost revenues, 
the Airport Authority (AA) has built "SkyCity", which includes a 
world-class exhibition center, Asia World-Expo; SkyPlaza, an office 
and retail complex; SkyPier, a cross-boundary ferry terminal; and a 
nine-hole golf course.  In December 2006, AA held an open tender to 
build its third cargo terminal.  AA anticipates that the tender 
process will be completed in 2008 with the new facility beginning 
operations around 2011.  The organization responsible for safety 
oversight, the Civil Aviation Department, plans to introduce 
satellite-based Communications, Navigation, Surveillance/ Air 
Traffic Management (CNS/ATM) Systems.  The new equipment will 
enhance flight safety and efficiency as well as maintain Hong Kong's 
status as a center of international and regional aviation.  The 
project will take 15 years. 
 
¶51. Shipping and Port Activities: Hong Kong enjoys one of the best 
natural deep-water ports on the Chinese coast. With continued high 
economic growth and industrialization in Mainland China, the 
development of deep-water ports at Yantian and Gaolan in southern 
China should complement Hong Kong's facilities over the medium term. 
 Over the longer term, the Hong Kong port will face increased 
competition from those ports and from Shanghai, which are improving 
their service efficiency. 
 
¶52. Hong Kong's container port is one of the world's busiest.  In 
the first 8 months of 2007, Hong Kong's nine privately-operated 
container terminals and mid-stream operators handled 15.6 million 
twenty-foot equivalent units (TEUs) of cargo.  Some 80 international 
shipping lines are providing over 500 container liner services per 
week connecting to over 500 destinations worldwide. 
 
¶53. Hong Kong's container terminal handling capacity is 18 million 
twenty-foot equivalent units (TEUs) a year, which will be able to 
cope with the forecast growth in demand to the end of this decade. 
The container terminals handle about 68 percent of the port's total 
throughput.  The river trade terminal, mid-stream operators and 
other facilities handle the remaining 32 percent.  The Hong Kong 
Government commissioned a study on "Hong Kong Port - Master Plan 
2020" to formulate a competitive, sustainable strategy and a master 
plan for Hong Kong's port development, including the location of a 
new container terminal and related infrastructure, for the coming 
twenty years.  The study has been presented to industry and the 
Legislative Council for consultation.  Taking into account the 
comments received, the Government is working out an action plan to 
implement the recommendations of the study.  In particular, the 
Government has commissioned consultants to work out the optimal 
timing for the construction of Container Terminal 10 and to conduct 
 
HONG KONG 00000179  009 OF 011 
 
 
an ecology study on Northwest Lantau so as to decide whether it is 
environmentally suitable for development of container terminal. 
These two studies are expected to be completed in 2007. 
 
¶54. Roads and Railroads: Hong Kong's roads have one of the highest 
vehicle densities in the world.  In September 2007, there were 
550,000 licensed vehicles and about 1,994 kilometers of roads, or 
276 vehicles per kilometer of road. This high vehicle density, 
combined with difficult terrain and high density building 
development, poses a constant challenge to transport planning, road 
construction and maintenance.  To cope with worsening traffic 
congestion, largely due to the rapid growth in the number of private 
cars, the Highways Department has launched an extensive road 
construction program.  The Highways Department has budgeted US$5.4 
billion for road projects between 2005/2006 and 2010/2011.  Hong 
Kong will also build a bridge from the Western tip of Lantau Island 
to Macau and Zhuhai, paving the way for accelerated development of 
the Western Pearl River Delta region. 
 
¶55. Two railway corporations managed Hong Kong's metro and rail 
systems: the Mass Transit Railway Corporation (MTRC) and the 
Kowloon-Canton Railway Corporation (KCRC). The two railway companies 
merged on December 2, 2007. The integrated system is operated and 
managed by MTRC, including 9 lines of railway network with a total 
length of over 200 kilometers. 
 
¶56. Hong Kong is working on a massive expansion of its rail system. 
Investment in Hong Kong's domestic and cross-boundary rail networks 
in the next decade is expected to exceed in scale the US$20 billion 
spent on the transportation facilities associated with the airport. 
Most of the projects involve linking existing lines or creating 
extensions to new points of interest.  In his 2007-08 Policy 
Address, Chief Executive Donald Tsang announced that Hong Kong will 
push ahead with 10 large-scale infrastructure projects, of which 3 
are rail networks including the South Island Line (an extension of 
seven-kilometer rail to the South Island), the Sha Tin to Central 
Link (connecting Northeast New Territories and Hong Kong Island via 
East Kowloon), and the Guangzhou-Shenzhen-Hong Kong Express Rail 
Link (a high-speed national rail network of 12,000 kilometers 
linking up major cities, with maximum train speeds of 200 to 300 
kilometers per hour). 
 
------------------------------------------ 
A.16 Foreign Direct Investment Statistics 
------------------------------------------ 
 
¶57. Tables: 
 
--Table 1: Position of Inward Foreign Direct Investment by Major 
Investor Country/Territory, as at end of 2005. 
 
                    US$          %Share 
Country                  Billion       of Total 
-------                 ---------      --------- 
China             163.1    43.6 
Netherlands              41.9           11.2 
Bermuda              30.2            8.1 
United States         26.4            7.1 
British Virgin Islands     26.2            7.0 
Japan        16.9         4.5 
United Kingdom        11.3            3.0 
Singapore              10.8            2.9 
Cayman Islands       6.0         1.6 
Thailand               4.3            1.1 
Others                  36.8      9.8 
            ---------      --------- 
TOTAL                 373.9          100.0 
 
Source: Hong Kong Census and Statistics Department 
Note 1: Excluding inward direct investment from offshore financial 
centers, which was originally from Hong Kong. 
Note 2: US$1 = HK$7.8 
Note 3: Total not sum due to rounding. 
 
--Table 2: Position of Inward Foreign Direct Investment by Major 
Economic Activity, as at end of 2005. 
 
                             US$          %Share 
Sector                             Billion       of Total 
--------                          ---------      --------- 
Investment holdings, real estate    185.0   49.5 
  and various business services 
Wholesale, retail and import/        68.4          18.3 
  export trades 
Banks and deposit-taking             51.9          13.9 
 
HONG KONG 00000179  010 OF 011 
 
 
  companies 
Financial institutions other than   19.1           5.1 
  banks and deposit-taking companies 
Transport and related services   10.7           2.9 
Insurance             9.4        2.5 
Manufacturing           7.8           2.1 
Communications                 5.6           1.5 
Construction          4.3        1.2 
Restaurant and Hotels              2.4           0.7 
Other Activities                   9.2     2.5 
                      ---------     --------- 
TOTAL                    373.9         100.0 
 
Source: Hong Kong Census and Statistics Department 
Note 1: Excluding inward direct investment from offshore financial 
centers, which was originally from Hong Kong. 
Note 2: Total not sum due to rounding. 
 
--Table 3: Position of Outward Foreign Direct Investment by Major 
Investor Country/Territory, as at end of 2005. 
 
                    US$          %Share 
Country                  Billion       of Total 
-------                 ---------      --------- 
China             189.4    58.8 
British Virgin Islands     69.7           21.6 
Bermuda              11.6            3.6 
United Kingdom         7.6            2.4 
Singapore               5.1            1.6 
Japan         3.8         1.2 
United States          3.4            1.0 
Thailand               2.9            0.9 
Liberia         2.9         0.9 
Malaysia         2.8         0.9 
Others                  23.2      7.2 
            ---------      --------- 
TOTAL                 322.3          100.0 
 
Source: Hong Kong Census and Statistics Department 
Note 1: Excluding outward direct investment of offshore financial 
centers that was channeled back to Hong Kong. 
Note 2: Total not sum due to rounding. 
 
--Table 4: Position of Outward Foreign Direct Investment by Major 
Economic Activity, as at end of 2005. 
 
                             US$          %Share 
Sector                             Billion       of Total 
--------                          ---------      --------- 
Investment holdings, real estate    185.8   57.6 
  and various business services 
Wholesale, retail and import/        47.0          14.6 
  export trades 
Manufacturing          20.1           6.2 
Banks and deposit-taking             12.3           3.8 
  companies 
Communications                10.8           3.3 
Transport and related services   10.3           3.2 
Financial institutions other than    9.9           3.1 
  banks and deposit-taking companies 
Restaurant and Hotels              6.7           2.1 
Insurance             3.8        1.2 
Construction          3.3        1.0 
Other Activities                  12.2     3.8 
                      ---------     --------- 
TOTAL                    322.3         100.0 
 
Source: Hong Kong Census and Statistics Department 
Note 1: Excluding outward direct investment of offshore financial 
centers that was channeled back to Hong Kong. 
Note 2: Total not sum due to rounding. 
 
--Table 5: Amount and Growth of U.S. Investment in Hong Kong in 
2002/2003/2004/2005/2006 in US$ Billions. 
 
Year    Amount    %Change 
----   --------   ------- 
2002     40.3      24.0 
2003     36.4      -9.7 
2004     27.9     -23.4 
2005     32.6      16.8 
2006     38.1      16.9 
 
Source: U.S. Department of Commerce, Bureau of Economic analysis, 
U.S. Direct Investment Position Abroad on a Historical Cost Basis 
 
HONG KONG 00000179  011 OF 011 
 
 
Note 1: The U.S. Department of Commerce estimates the total U.S. 
direct investment position in Hong Kong at historical cost (the book 
value of U.S. direct investors' equity in, and net outstanding loans 
to, their foreign affiliates). 
Note 2: U.S. Department of Commerce statistics differ from HKG 
statistics. Per Table 1 above, the latter indicates total U.S. 
investments of US$26.4 billion at year-end 2005. 
Note 3: Preliminary figures for 2006. 
 
--Table 6: Hong Kong's Pledged and Actual Direct Investment in 
Mainland China in US$ Billions and Percent Share of Total Investment 
in Mainland China. 
 
       Amount       % Share 
Year      Pledged     Invested  of Total 
----    ---------   ---------- ---------- 
2001        20.7      16.7         35.7 
2002        25.2      17.9         33.9 
2003        40.7      17.7         33.1 
2004        50.1      19.0         31.3 
2005        N.A.      18.0         29.8 
2006        N.A.      20.2         32.1 
1978-2006   N.A.     279.8         40.8 
 
Source: PRC Ministry of Commerce 
Note: PRC Ministry of Commerce stopped reporting the pledged foreign 
investment figures in December 2005. 
 
--Table 7: Major Foreign Investor Firms. 
 
United States: 
American International Group, AT&T, Bank of America, Caltex, 
Citigroup, Coca-Cola, Compaq Computer, Disney, ExxonMobil, Federal 
Express, Goldman Sachs, IBM, JP Morgan Chase, Kodak, Merrill Lynch, 
Morgan Stanley, Motorola, Pacific Waste Management, Pepsi, Dell, 
Isagenix Worldwide LCC. 
 
Japan: 
¶C. Itoh, Citizen Watches, Daido Concrete, Hitachi, Jusco, 
Mitsubishi, NEC, Nishimatsu, Nomura, Olympus, Uny, Kadokawa 
Intercontinental Publishing (Asia). 
United Kingdom: HSBC, Inchcape Pacific, Jardine Matheson, Lloyds, P 
& O Shipping, Standard Chartered Bank, Swire Pacific Group. 
 
Continental Europe: 
Carlsberg, Hong Kong Petrochemicals (Italian/Korean/Chinese joint 
venture), Siemens, Heraeus, Philips, Bouygues/Dragages, 
Bachy-Soletanches, Banque National de Paris, Banque Indosuez, 
Chanel, Cartier, Christian Dior, Remy, Ericsson, Asea Brown Boveri, 
Tetrapak, Electrolux, Refratechnik, Lotto Sport Italia. 
 
Mainland China: 
Bank of China (Hong Kong), Beijing Enterprises, China Everbright, 
China Investment and Trust Corporation (CITIC), China Merchants, 
China Mobile, China National Offshore Oil Corporation (CNOOC), China 
National Petroleum Corporation, China Ocean Shipping Co (COSCO), 
China Overseas Construction, China Resources, China Travel Services, 
China Unicom, Guangdong Enterprises, Lenovo Group, Petro China, 
Shanghai Industrial, Yue Xiu Enterprises, China Construction Bank 
Corporation, China Life Insurance. 
 
Asia: 
San Miguel Brewery, News Corp., Pioneer, Sime Darby, 
Shangri-la/Kerry Trading, Park View Properties, Lippo Group, C.P. 
Pokphand, LG, First Pacific Group, UTI Bank, Allahabad Bank. 
 
¶58. Resources: 
 
--Hong Kong Census and Statistics Department: 
http://www.info.gov.hk/censtatd/ 
--Hong Kong Monetary Authority: http://www.info.gov.hk/hkma/ 
--Independent Commission Against Corruption: 
http://www.icac.org.hk/ 
 
CUNNINGHAM