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Hong Kong is characterized by its high degree of internationalization, businessfriendly environment, rule of law, free trade and free flow of information, open and fair competition, well-established and comprehensive financial networks, superb transport and communications infrastructure, sophisticated support services, and a well-educated workforce complemented by a pool of efficient and energetic entrepreneurs. Added to these are substantial foreign exchange reserves, a fully convertible and stable currency, and a simple tax system with low tax rates.
Market structure
Hong Kong as a financial centre
Hong Kong is an international financial centre with an integrated network of financial institutions and markets. The Government's policy is to maintain and develop a sound legal, regulatory, infrastructural and administrative framework with the aims of providing a level playing field for all market participants, maintaining the stability of the financial and monetary systems and enabling Hong Kong to compete effectively with other major financial centers. A favorable geographical position, which bridges the time gap between North America and Europe, strong links with the Mainland and other economies in South-east Asia and excellent communications with the rest of the world have helped Hong Kong to develop into an important international financial centre. The absence of any restrictions
on capital flows into and out of Hong Kong is another important factor.
Financial Markets
Hong Kong's financial markets are characterized by a high degree of liquidity. They operate under effective and transparent regulations, which meet international standards. A highly-educated workforce and ease of entry for professional staff from overseas further contribute to the development of the financial markets.
world's top 100 banks, 75 have operations in the HKSAR, while 81 subsidiaries or related companies of foreign banks operate as restricted licence banks and deposit-taking companies. A further 87 foreign banks have local representative offices. The banking sector's external assets are among the highest in the world.
Exchange Market
Hong Kong has a mature and active foreign exchange market, which forms an integral part of the global market. Links with centres overseas enable foreign exchange dealing to continue 24 hours a day around the world. Hong Kong was the world's 6th largest centre for foreign exchange trading, according to the 2004 triennial global survey conducted by the Bank for International Settlements.
Stock Market
The stock market is one of the world's largest in terms of market capitalisation. At the end of May 2004, 1 057 public companies were listed on the Hong Kong Exchanges and Clearing Limited with a total market capitalisation of $5,484.4 billion (US$703.1 billion). The stock market is the 2nd largest in Asia, behind Tokyo's. The Growth Enterprise Market (GEM), a NASDAQ-style second board of the stock exchange, was launched in November 1999 to provide 'start-up' companies, in particular those involved in high-tech business, with access to equity market financing. As at May 2004, 195 companies were listed on GEM with a total market capitalisation of $74.5 billion (US$9.55 billion). In a pilot programme launched in May 2000, Hong Kong became the first city in Asia to offer 'live' trading on the Asian time-zone of seven leading US NASDAQ stocks.
About AMS/3
AMS/3 consists of five major components: Host System, Trading Terminals, MultiWorkstation System (MWS), Open Gateway (OG) and Order Routing System (ORS).
AMS/3 Trading Terminals have more functions than the existing terminals, but they cannot be connected to electronic trading channels such as mobile phone or Internet. MWS can receive electronic trading requests from investors via ORS. Broker Supplied Systems (BSS) are trading facilities developed by Exchange Participants themselves which capture investors' electronic trading requests directly or via ORS. OG connects Exchange Participants, ORS and SEHK Host System, but investors cannot use it directly. ORS is an electronic infrastructure developed by SEHK consisting of
SEHK-established Internet channel and the channel of Proprietary Network Systems (PNS) set up by service providers. It enables investors to place trading requests electronically through the Internet and mobile phone, which are then routed to MWS or BSS of designated Exchange Participants. Multiple Channels of Stock Trading After AMS/3 rollout, investors will be able to enjoy multiple channels of placing orders via systems and facilities provided by SEHK, Exchange Participants or service providers: In person Telephone Internet Mobile phone or other electronic devices (provided by service providers) Faster and More Convenient Service By increasing investors' access to the central market, AMS/3 speeds up and simplifies stock trading. Investors can enter, alter or cancel trading requests directly at any time via Internet or mobile phone. Investors can acquire the latest information about trade execution via eChannels such as Internet or mobile phone. Investors can obtain market information more conveniently. MWS carries risk management functions that allow automatic endorsement by Exchange Participants of an investor's trading request in accordance with pre-fixed credit level. These functions enable quicker routing of trading requests to the market for matching. Public Key encryption/decryption technology can be used to ensure the confidentiality of electronic trading information.
Hong Kong has advanced one place to rank sixth in the global foreign exchange market, and seventh in the global foreign exchange and over-the-counter derivatives market, according to the latest Bank for International Settlements triennial survey results. The Monetary Authority said the results are broadly in line with global trends, with Deputy Chief Executive William Ryback adding: "The advance in Hong Kong's global ranking in terms of foreign exchange trading is encouraging as it reinforces Hong Kong's position as a competitive and active centre for foreign exchange and derivatives activities."
Market regulations
1. General Policy Framework
Since becoming a Special Administrative Region of the Peoples Republic of China on July 1, 1997, Hong Kong has continued to manage its own financial and economic affairs, its own currency, and its independent role in international economic organizations and agreements. The Hong Kong Government generally pursues 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 flows or investment. It does not impose export performance or local content requirements, and allows free repatriation of profits. Hong Kong is a dutyfree port, with few barriers to trade in goods and services. Until 1998, the government regularly ran budget surpluses and thus has amassed large fiscal reserves. The corporate profit tax is 16 percent and personal income is taxed at a maximum of 15 percent. Property is taxed but interest, royalties, dividends, capital gains and sales are not. In the face of a possible structural deficit, the government has faced pressure to identify new sources of revenue. A recent Advisory Committee report suggested 13 options to broaden the tax base including a general consumption tax, capital gains tax and tax on interest. However, Financial Secretary Antony Leung has indicated that none of these reforms will be implemented in the near future. stimulus measures, including infrastructure expenditures, small tax cuts, employment generation, and development funds for small and medium enterprises. However, authorities generally resisted pressure for large-scale government expenditures to kick start the economy. One exception to this traditional laissez faire approach was the creation of a new Innovation and Technology Commission, which in mid-2000 was given responsibility for spearheading Hong Kongs move to create a knowledge based economy. The governments willingness to fund technology investment reflected the widespread belief
that Hong Kong cannot compete in the high tech sector without targeted government support. 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 demanddetermined. 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. The Asian financial crisis provoked a sharp economic downturn in 1998 and the first half of 1999, but Hong Kong's economic fundamentals remained strong, with a stable banking system, prudent fiscal policy, and massive dollar reserves. A strong, export-led recovery in 2000 and early 2001 stalled abruptly at midyear, following a slump in consumer demand in the United States and Europe. The September 11 terrorist attacks in the United States and subsequent further economic downturn in Hong Kong's major markets have worsened the short-term outlook. Unemployment is increasing (to around five percent) and Hong Kong will experience recession in 2001. The local community remains concerned about Hong Kong's long-term competitiveness in the face of challenges from mainland China. In response to these economic difficulties, the government unveiled a series of modest
3. Structural Policies
The government does not have pricing policies, except in a few sectors such as energy, which is a regulated duopoly. Even in these controlled areas, the government continues to pursue sector-by-sector liberalization. Hong Kongs personal and corporate tax rates remain low and it does not impose import or export taxes. The Monetary Authority implemented the final phase of interest rate deregulation covering savings and current accounts in July 2001. Interest rates on all types of deposits are determined by competitive market forces. Consumption taxes on tobacco, alcoholic beverages, and some fuels constrain 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 informal cartels, some of which are government-regulated, to dominate certain sectors of the economy. These informal cartels can use their market position to block effective competition indiscriminately but do not discriminate against U.S. goods or services in particular.
substantial presence in the Hong Kong market. Our bilateral civil aviation agreement does not permit code sharing and restricts the ability of U.S. cargo and passenger airlines to carry fifth freedom traffic to and from Hong Kong and other points. These restrictions limit the expansion of U.S. carrier services in the Hong Kong market. In June 2000, the LEGCO passed a Legal Practitioners (Amendment) Bill that removed the privileges conferred on barristers from England, Scotland, Northern Ireland and other Commonwealth countries. A Hong Kong court may admit a foreign lawyer to practice as a barrister if he is considered a fit and proper person and has complied with the general admission requirements, including passing any required examinations. 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 three branches (automated teller machines meet the definition of a branch). The Hong Kong Monetary Authority has promised to consider further relaxation of this limit in 2001. In the meantime, foreign banks can acquire local banks that have unlimited branching rights.
Broadcast satellite signal piracy is also a growing concern for U.S. companies, and industry associations have asked the government to take action against pubs and other public venues that use satellite signals without compensation. Trademarks: Sale of counterfeit items, particularly handbags and apparel, is widespread in Hong Kongs outdoor markets. Customs officials have conducted numerous raids, but these actions have had little impact on the overall availability of counterfeit goods. New Technologies: U.S. industry associations report that Hong Kong-based web sites are being used to sell and transmit pirate software and music. Since April 2000, Hong Kong Customs has raided nine establishments believed to be engaged in Internet piracy. None of these cases has gone to court, but these raids put Hong Kong well ahead of its neighbors in tackling the problem of Internet-based piracy. Hong Kong's stepped-up IPR enforcement effort has helped to reduce estimated losses to U.S. film and music companies. The Business Software Alliance reported in May 2001 that software piracy in Hong Kong rose from 56 percent in 1999 to 57 percent in 2000. However, estimated total losses for the software industry decreased from US$88.6 million to US$86 million. U.S. film and music distributors also report increasing levels of legitimate sales in Hong Kong.
8. Workers Rights
a. The Right of Association: Local law provides for right of association and the right of workers to establish and join organizations of their own choosing. Trade unions must be registered under the Trade Unions Ordinance. The basic precondition for registration is a minimum of seven persons who serve in the same occupation. The government does not discourage or impede the formation of unions Workers who allege antiunion discrimination have the right to have their cases heard by the Labor Relations Tribunal. Violation of antiunion discrimination provisions is a criminal offense. Although there is no legislative prohibition of 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.
b. The Right to Organize and Bargain Collectively: In June 1997, the Legislative Council passed three laws that greatly expanded the collective bargaining powers of Hong Kong workers, protected them from summary dismissal for union activity, and permitted union activity on company premises and time. However, the Provisional Legislature repealed these ordinances, removing workers new statutory protection against summary dismissal for union activity. Legislation passed in October 1997 permits the cross-industry affiliation of labor union federations and confederations, and allows free association with overseas trade unions (although notification of the Labor Department within one month of affiliation is required), but removed the legal stipulation of trade unions right to engage employers in collective bargaining and banned the use of union funds for political purposes. Collective bargaining is not widely practiced.
c. Prohibition of Forced or Compulsory Labor: Compulsory labor is prohibited under the Bill of Rights Ordinance. While this legislation does not specifically prohibit forced or bonded labor by children, there are no reports of such practices in Hong Kong. d. Minimum Age for Employment of Children: The "Employment of Children" Regulations prohibit employment of children under age 15 in any industrial establishment. Children ages 13 and 14 may be employed in certain non-industrial establishments, subject to conditions aimed at ensuring a minimum of nine years of education and protecting their safety, health, and welfare. In 2000, there were three convictions for violations of the Employment of Children Regulations. e. Acceptable Conditions of Work: Aside from a small number of trades and industries in which a uniform wage structure exists, wage levels are customarily fixed by individual Agreement between employer and employee and are determined by supply and demand. Some employers provide workers with various kinds of allowances, free medical treatment and free Subsidized transport. There is no statutory minimum wage except for foreign domestic workers (US$500 per month). To comply with the Sex Discrimination Ordinance, provisions in the Women and Young Persons (Industry) Regulations that had prohibited women from joining dangerous industrial trades and limited their working hours were dropped. Work hours for people aged 15 to 17 in the manufacturing sector remain limited to 8 per day and 48 per week between 6 a.m. and 11 p.m. Overtime is prohibited for all persons under the age of 18 in industrial establishments. Employment in dangerous trades is prohibited for youths, except 16 and 17 year old males.
The Labor Inspectorate conducts workplace inspections to enforce compliance with these and health and safety regulations. Worker safety and health has improved, but serious problems remain, particularly in the construction industry. In 2000, a total of 58,092 occupational accidents (33,652 of which are classified as industrial accidents) were reported, of which 199 were fatal. Employers are required under the Employees Compensation Ordinance to report any injuries sustained by their employees in workrelated accidents. f. Rights in Sectors with U.S. Investment: U.S. direct investment in manufacturing is concentrated in the electronics and electrical products industries. Aside from hazards common to such operations, working conditions do not differ materially from those in other sectors of the economy. Relative labor market tightness and high job turnover have spurred continuing improvements in working conditions as employers compete for available workers.
0.1% 10%
revenues: $31.31 billion expenditures: $32.3 billion, including capital expenditures of $5.9 billion (2005 est.)
Public debt:
1.8% of GDP
Current account balance: $23.85 billion Exports:
$291.6 billion
Imports - partners:
China 43.5%, Japan 12.1%, Taiwan 7.3%, US 5.3%, Singapore 5.3%, South Korea 4.8%
Reserves of foreign exchange $122.3 billion and gold: Debt - external:
$416.5 billion
Currency (code):
Hong Kong dollars per US dollar - 7.79 (2005), 7.788 (2004), 7.7868 (2003), 7.7989 (2002), 7.7988 (2001)
Fiscal year:
1 April - 31 March
People's Republic of China, Hong Kong Special Administrative Region: Selected Economic and Financial Indicators
2002 2003 2004 2005 2006
Proj.
Real GDP (percent change) Real domestic demand (contribution) Foreign balance (contribution)
1.8 -0.7
3.1 0.1
8.2 4.5
7.0 1.8
5.5 2.0
2.5
3.1
3.7
5.2
3.5
External balances (in billions of US$) Merchandise trade balance (In percent of GDP) Current account balance (In percent of GDP)
-5.1 -3.1 12.4 7.6 -5.8 -3.6 16.5 10.4 -9.3 -5.6 16.4 9.6 -4.5 -2.6 17.8 10.2 -0.8 -0.4 19.2 10.3
Foreign exchange reserves Foreign exchange reserves (in billions of US$, end of period) (In percent of GDP)
68.4 74.5 74.4 70.8 66.8 111.9 118.4 123.6 123.8 124.8
Currency
1 Hong Kong dollar (HK$) = 100 cents Exchange rates: Hong Kong dollars per US dollar - 7.799 (April 2005), 7.798 (January 2002), 7.7994 (2001), 7.7918 (2000), 7.7589 (1999), 7.7462 (1998), 7.7425 (1997); note the Hong Kong dollar is linked to the US dollar at a rate of about 7.8 Hong Kong dollars per US dollar
of a knowledge-based economy. The review follows a two-year study by the Commission on Strategic Development which encompasses a vision and a strategic framework for Hong Kong to become, not only a major city in China, but also Asia's world city.
Cyberport
Cyberport Hong Kong's IT flagship is a HK$15.8 billion (US$2 billion) landmark project managed by Hong Kong Cyberport Management Company Limited and owned by the HKSAR Government. It is creating an interactive environment that will be home to a strategic cluster of more than 100 information technology (IT) companies and
more than 10 000 IT professionals. This clustering of local and overseas companies and professional talent is envisioned as a catalyst and hub for the growth of local and regional IT industries, with particular emphasis on IT applications, information services and multimedia content creation. Cyberport will also provide IT education for the broader community. Cyberport represents a commitment on the part of the Government of the HKSAR to facilitate Hong Kong's development as a leading digital city in the region. The project is being developed on a 24-hectare site at Telegraph Bay in the southern district of Hong Kong Island. Cyberport is being completed in phases extending through 2004, and when complete will feature 100 000 square metres of 'intelligent' office space.
Science Park
The Science Park aims to establish and nurture a world-class technology community dedicated to applied research and development. It is being developed along a clustering concept, with four clusters of electronics, IT and telecommunications, biotechnology and precision engineering. The first phase of the Science Park opened in June 2002. Phase II of the Science Park is to be completed by the end of 2007.
Railway Development
Further to the commissioning of West Rail in December 2003, four new railways are scheduled for completion between 2004 and 2007. Both the Tsim Sha Tsui Extension, which will provide a second rail interchange between the KCR and the MTR systems, and the Ma On Shan Rail, which will connect new towns in the eastern parts of Hong Kong with the urban areas, will be completed by 2004. The Penny's Bay Rail Link connecting Sunny Bay with Disneyland on Lantau Island is expected to be completed in 2005. A new rail passenger boundary crossing at Lok Ma Chau connecting Huanggang in Shenzhen is expected to be completed before mid-2007.
The 'Railway Development Strategy 2000' provides a blueprint for Hong Kong's rail network expansion up to 2016 or so. This involves a total investment of some $100 billion to complete five new passenger rail projects (the Kowloon Southern Link (KSL), Shatin to Central Link (SCL), Island Line Extensions (ILE), Northern Link (NOL), and Regional Express Line (REL)) and a Port Rail Line for freight. Upon their completion, Hong Kong's rail network will expand by some 40 per cent to over 250 kilometres. The railways' share of the public transport system will be boosted from 30 per cent to about 40 per cent.
The Outline Zoning Plan to guide redevelopment of the former Kai Tak Airport site was approved in June 2002. In view of a recent court ruling on reclamation in Victoria Harbour, a comprehensive review of the current development scheme will be carried out to ensure its compliance with the legal requirements. The review which covers the planning and engineering aspects, is expected to take two years. It will include extensive public involvement to gauge the community's wishes for this major waterfront site and to help build public consensus on revising the development scheme.
Road Projects
New strategic roads will alleviate urban congestion and provide vital new links into the New Territories and beyond. Among the major road projects are the Hong KongShenzhen Western Corridor, Deep Bay Link and Route 8 including the Stonecutters Bridge. The 1 596-metre Stonecutters Bridge, with a main span of 1 018m, will be the longest cable-stayed bridge in the world. It is the first long-span bridge located in an urban environment in Hong Kong and will be highly visible from Hong Kong Island and Kowloon Peninsula. The bridge design was adopted from the winning design of an international competition in 2000 which elicited participation from the best design and engineering firms in the world. This bridge is an important part of Route 8 between Tsing Yi and Sha Tin. On completion of the works in mid-2008, Hong Kong will be adding an east-west strategic route linking the eastern part of the New Territories to the airport. This new highway will provide direct access to Container Terminals No 8 and No 9 in Kwai Chung, which will further enhance Hong Kong as an important international logistics and transportation hub
Conclusion
The economy of Hong Kong has often been cited by people such as Milton Friedman and the Cato Institute as an example of the benefits of laissez-faire capitalism. Many analysts believe that this characterization of the Hong Kong economy is not entirely accurate, as the Hong Kong government, both under British and Chinese rule, have occasionally intervened in the economy.
Frequently Asked Questions about Hong Kong Forex market Q1 What channels are there for investors to place orders after the full implementation of AMS/3? A1 The channels available depend on the type of trading facility used by the Exchange Participant of an investor. If trading is conducted via a trading terminal which cannot be connected to other eChannels, investors will have to place orders with the Exchange Participant by telephone or in person. If the Exchange Participant adopts
Multi-Workstation System (MWS) or Brokers Supplied System (BSS), an investor can opt for any channel provided by the Exchange Participant to place his order (traditional method or the Internet/mobile phone). Since BSS are developed by Exchange Participants or suppliers, services vary and investors should select Exchange Participants that suit their needs. Q2 Is online trading faster than the traditional method of placing orders? A2 In normal cases, online trading serves investors faster. However, as the experience of most Internet users indicates, there is always the possibility of congestion of Internet lines resulting in delays in trading which is something SEHK cannot control. Q3 Is it possible for an investor to input trading requests via ORS after trading hours? Will BSS of Exchange Participants continue to receive trading instructions after market close? A3 Technically, ORS can support the input of trading requests after market close. However, actual ORS operating hours depend on market needs. Exchange Participants decide on their own whether their BSS will continue to entertain trading requests after market close. Q4 How do investors place orders online via SEHK's Internet channel? A4 Before trading shares, investors should first apply to Hongkong Post for an ecertificate and register with their Exchange Participants. The Exchange Participant will record the e-certificate number of an investor in ORS to provide identity authentication during online trading. An investor who owns more than one securities account needs only one e-certificate, but he/she is required to register with Exchange Participants separately for the use of ORS. An investor who has accounts in more than one Exchange Participant should select his preferred Exchange Participant in the SEHK web page for securities transactions before entering his trading request. Web pages of some Exchange Participants are connected to the SEHK web page for securities transactions to collect investors' trade requests. SEHK's Internet channel aside, web facilities provided by Proprietary Network System (PNS) vendors, such as the Internet, mobile phone, or PDA palm computer, may also be used by investors to enter order instructions. Order instructions placed via these means should first be verified and approved by an Exchange Participant before they can be routed to the market for matching. Q5 How can investors be prevented from inputting wrong trading requests
accidentally during online trading? A5 SEHK cannot prevent investors' input errors. SEHK will strengthen its investor education programme by organising a series of public seminars and producing investor educational material. As trading requests have to go through an Exchange Participant before being routed to the central trading system, Exchange Participants will continue to perform advisory and risk management functions after the launch of AMS/3. Q6 How can online securities accounts be protected from embezzlement? A6 SEHK's Internet channel adopts the latest Internet technology to offer investors a security-tight online trading environment and make use of accredited e-certificates to ensure the integrity and confidentiality of trades. Before trading securities online, investors should apply to Hongkong Post for an e-certificate. By means of Public Key Infrastructure which encrypts and verifies investors' identity and online trade information, an e-certificate protects investors' interests from being infringed by eavesdropping, tampering, forgery and other misconducts. Investors should note that as BSS and PNS are developed by Exchange Participants and PNS vendors, not all their facilities adopt these security measures. Q7 Will an investor still be required to trade shares via an Exchange Participant after the launch of AMS/3? A7 Yes. Before dealing in shares, an investor is required to open an account with an Exchange Participant. Whichever channel an investor chooses, his trading instructions should first be verified and approved by an Exchange Participant before it is routed to the market for matching. Exchange Participants will continue to play an advisory and verification role after AMS/3 has come into service. Q8 What impact will electronic trading have on brokerage commission? A8 The level of brokerage commission is a matter of commercial arrangement between Exchange Participants and their clients. SEHK's minimum brokerage rule will still apply after implementation of AMS/3. Brokerage commission will remain 0.25 per cent of the value of the transaction with a minimum of HK$50. The minimum brokerage rule is scheduled for abolition on 1 April 2002 after which commission will be fully negotiable between Exchange Participants and clients. Q9 Will the new trading system be insured? Will SEHK compensate investors or
market participants for losses caused by AMS/3 defects? A9 Due diligence will be exercised to ensure the normal functioning and operation of AMS/3. According to the Exchanges and Clearing Houses (Merger) Ordinance, SEHK is not liable for anything done or omitted to be done in good faith. SEHK has developed a set of contingency arrangements, including the switch of AMS/3 primary site to AMS/3 backup site in case of hardware failure and, in the event of emergencies in the first two weeks of its launch, a fallback to AMS/2.