1997 Country Reports
On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1998.

HONG KONG

Key Economic Indicators
(Billions of U.S. dollars unless otherwise indicated)

Sources: Census and Statistics Department

1/ Estimates based on available monthly data in September 1996
2/ Expenditure¡¦ased GDP estimates
3/ Money supply of Hong Kong dollars and foreign currencies
4/ Of which domestic exports (as opposed to re¡¦xports) constituted 17.2 percent (1995), 15.2 percent (1996) and 14.5 percent (1997 estimate based on data through August).
5/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1997 figures are estimates based on data available through August 1997. Hong Kong merchandise trade includes substantial re¡¦xports (mainly from China) to the United States, which are not included in these figures.
6/ As of Q2 1997
7/ As of Q2 1997; the Land Fund was included in the foreign exchange reserves effective July 1, 1997

1. General Policy Framework

The Hong Kong Government pursues economic policies of noninterference in commercial decisions, low and predictable taxation, government spending increases within the bounds of real economic growth, competition subject to transparent laws (albeit without antitrust legislation) and consistent application of the rule of law. With few exceptions, the government allows market forces to set wages and prices, and does not restrict foreign capital or investment. It does not impose export performance or local content requirements, and allows free repatriation of profits. Hong Kong is a duty¡¦ree port, with few barriers to trade in goods and services.

The Government regularly runs budget surpluses, and has amassed large fiscal reserves. The corporate profits tax is 16.5 percent, and personal income is taxed at a maximum rate of 15 percent. Property is taxed. Interest, royalties, dividends, capital gains and sales are not. Government spending has grown from approximately 14 percent of GDP in the mid 1980s to about 19 percent by the early 1990s.

Because monetary policy is tied to maintaining the nominal exchange rate linked to the U.S. dollar, Hong Kong's monetary aggregates have effectively been demand determined. The Hong Kong Monetary Authority, responding to market pressures, occasionally adjusts liquidity through interest rate changes and intervention in the foreign exchange and money markets.

On July 1, 1997, Hong Kong became a Special Administrative Region of the PRC. China assumed responsibilities for Hong Kong's foreign affairs and defense, but Hong Kong remains a separate customs territory with a high degree of economic autonomy. It continues to manage its financial and economic affairs, to use its own currency, and to participate independently in international economic organizations and agreements.

2. Exchange Rate Policies

The Hong Kong dollar is linked to the U.S. dollar at an exchange rate of HK$7.8 = US$1.00. The link was established in 1983 to encourage stability and investor confidence in the run¡¦p to Hong Kong's reversion to Chinese sovereignty in 1997. PRC officials have said they support Hong Kong's policy of maintaining the link after 1997.

There are no multiple exchange rates and no foreign exchange controls of any sort. Under the linked exchange rate, the overall exchange value of the Hong Kong dollar is influenced predominantly by the movement of the U.S. dollar against other major currencies. The price competitiveness of U.S. exports is affected in part by the value of the U.S. dollar in relation to third country currencies.

3. Structural Policies

There has been no major change in Hong Kong's free market approach to economics. The government does not have pricing policies, except for in a few still¡¦egulated sectors such as telecommunications. Its personal and corporate tax rates remain low, and it does not impose import or export taxes. Over the past three years, Hong Kong has completed its deregulation of interest rates covering almost 99 percent of deposits, removing interest rate caps for deposits of seven days or less. Consumption taxes on tobacco, alcoholic beverages, and some fuels probably restrict demand for some U.S. exports. Hong Kong generally adheres to international product standards.

Hong Kong's lack of antitrust laws has allowed monopolies or cartels ­­ some of which are government¡¦egulated ­­ to dominate certain sectors of the economy. These monopolies/cartels do not necessarily discriminate against U.S. goods or services, but they can use their market position to block effective competition.

4. Debt Management Policies

The Hong Kong government has minuscule public debt. Repeated budget surpluses have meant the government has not had to borrow. To promote the development of Hong Kong's debt market, the government in March 1990 launched an exchange fund bills program with the issuance of 91¡¦ay bills. Maturities have gradually been extended. Five¡¦ear notes were issued in October 1993, extending maturities beyond Hong Kong's reversion to Chinese sovereignty, followed by 7¡¦ear notes in late 1995 and 10¡¦ear notes in 1996. Under the Sino¡¦ritish agreed minute on financing the new airport and related railway, total borrowing for these projects cannot exceed US$2.95 billion, and such borrowing "will not need to be guaranteed or repaid by the government." Liability for repayment will rest with the two statutory bodies: the Mass Transit Railway Corporation and the future Airport Authority.

5. Significant Barriers to U.S. Exports

Hong Kong is a member of the World Trade Organization, but is not a party to the WTO's plurilateral agreement on civil aircraft. As noted above, Hong Kong is a duty¡¦ree port with no quotas or dumping laws, and few barriers to the import of U.S. goods.

Import licenses: Hong Kong requires import licenses for textiles, rice, meats, plants, and livestock. The stated rationale for most license requirements is to ensure health standards are met. The requirements do not have a major impact on U.S. exports.

Services barriers: There are some barriers to entry in the services sector:

Hong Kong has liberalized its telecommunications policy, but still maintains a government¡¦egulated monopoly on international voice services.

Foreign ownership of local broadcasting stations or cable operators cannot exceed 49 percent. Moreover, the government stipulates that broadcasters use the Hong Kong Telecom International satellite uplink rather than their own uplink.

A new bilateral civil aviation agreement gives U.S. air carriers important new rights. However, the agreement does not permit codesharing or allow U.S. carriers new fifth freedom passenger rights to carry passengers beyond Hong Kong. These factors will limit expansion of U.S. passenger carriers in the Hong Kong market.

Foreign law firms are barred from hiring local lawyers to advise clients on Hong Kong law, even though Hong Kong firms can hire foreign lawyers to advise clients on foreign law. Foreign law firms can become "local law firms" and hire Hong Kong attorneys, but they must do so on a 1:1 ratio with foreign lawyers.

Foreign banks established after 1978 are permitted to maintain only one branch (automated teller machines meet the definition of a branch). Since 1994, these banks have been allowed to open a regional and a back office at separate sites. Foreign banks can acquire local banks that have unlimited branching rights.

6. Export Subsidies Policies

The Hong Kong government neither protects nor directly subsidizes manufacturers. It does not offer exporters preferential financing, special tax or duty exemptions on imported inputs, resource discounts,