U.S. and Hong Kong (1997)

U.S. Department of State

Hong Kong Country Commercial Guide for FY 95-96

Office of the Coordinator for Business Affairs

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CHAPTER VII. INVESTMENT CLIMATE

A. Openness to Foreign Investment

Hong Kong pursues a free market philosophy with minimum interference with corporate initiative. The territory welcomes foreign investment. It offers no special incentives nor does it impose 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. The Independent Commission Against Corruption, created in 1974, is responsible for investigating corruption.

There are no direct subsidies to domestic industries and, as a duty free port, no tariff barriers. There is no discrimination against foreign investors either at the time of initial investment or afterwards. 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 domestically owned firms are taxed at the same rate, 16.5% of profits. There are no preferential or discriminatory export and import policies which affect foreign investors.

There are no disincentives to foreign investment such as limitations on the use or transfer of foreign currency, or any system of quotas, performance requirements, bonds, deposits, or other similar regulations. No laws per se regulate acquisition and takeover activities, and there is no antitrust law. However, the Hong Kong Code on Takeovers and Mergers (1981) sets out general principles for acceptable standards of commercial behavior.

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. There are certain exceptions as indicated below:

Foreign ownership of local broadcasting stations or cable operators may not exceed 49%.

U.S. trained doctors, nurses and psychiatrists face burdensome licensure requirements in order to practice medicine.

Foreign lawyers are not allowed to practice Hong Kong law; foreign law firms may now hire local lawyers, which allows them to become "full service" firms. However, there are still impediments and disadvantages a foreign law firm faces in trying to compete in the Hong Kong market.

In September 1994, a one-branch restriction on overseas banks licensed after 1978 was relaxed. Overseas banks are now permitted to set up one regional office and one back office, in separate buildings, to conduct such activities as strategic planning, general liaison with correspondent banks and corporate entities, and processing and settlement of transactions already entered into by the branch office. Moreover, foreign banks may acquire a controlling interest in a local bank that has unlimited branching rights.

Foreign firms and individuals are freely allowed to incorporate their operations in Hong Kong, to register branches of foreign operations, and to set up representative offices without 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 England and Wales, 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, including intellectual property. Hong Kong is a member of the World Trade Organization in its own right as a separate customs territory -- a status it will retain after reversion to Chinese sovereignty in 1997.

Formalities are minimal for company incorporation and business registration. Foreign and domestic companies register under the same rules and are subject to the same set of business regulations. Regulations governing the relative degree of local participation in ownership apply in broadcasting.

The Hong Kong Government's Industry Department encourages inward investment as a means to introduce 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.

B. Conversion and Transfer Policies

There are no restrictions on conversion and inward or outward transfer of funds for any purpose. The HK dollar is a freely convertible currency that, since late 1983, has been linked to the U.S. dollar at an exchange rate of HK$7.8 = US$1. Authorities are committed to exchange rate stability through maintenance of the linked rate. There is no allocation of foreign exchange; reserves at the end of 1994 totaled US$49.7 billion.

C. Expropriation and Compensation

Post is aware of no expropriation actions in the recent past. However, expropriations 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, then expropriations should be conducted through negotiations, and then, in a nondiscriminatory manner in accordance with established principles of international law. Due process and transparency of purposes are observed. Investors in and lenders to expropriated entities receive prompt, adequate, and effective compensation.

Property may be acquired under the Crown 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 for jurisdiction.

D. Dispute Settlement

Post is aware of no investor-state disputes in recent years involving U.S. or other foreign investors or contractors and the Hong Kong Government. 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.

The Hong Kong Government accepts international arbitration of investment disputes between itself and investors. Via the United Kingdom, Hong Kong is a member of both the International Center for the Settlement of Investment Disputes (ICSID, the Washington Convention) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The local court system provides effective enforcement of contracts, dispute settlements and protection of rights, including intellectual property. Secured interests in property are recognized and enforced.

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 Supreme Court, which comprises the Court of Appeal and the High Court, the District Court, the Magistrate's Court, the Coroner's Court and the Juvenile Court. There is also a Lands Tribunal, Labor Tribunal, and other statutory tribunals. Pursuant to the Sino-British Joint Declaration, the power of final judgment in the HKSAR shall be vested in a five-member Court of Final Appeal.

The Hong Kong Government owns all land in the territory. When land is sold, it is done by way of granting a long-term lease, not by transfer of freehold title. Local and foreign leaseholders are given equal treatment. Under the Joint Declaration, rights under existing leases will be protected. Up until June 30, 1997, the Hong Kong Government may continue to create new leases which can run until 2047.

E. Political Violence

Hong Kong is economically stable and secure. The territory enjoys an enviable reputation for tranquility. The Consulate General is not aware of any incidents over the past few years involving politically motivated damage to projects or installations. There has been no major unrest in the territory since the 1967 Cultural Revolution spilled across the border.

F. Performance Requirements/Incentives

Consistent with its generally laissez faire 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. Such matters are left to the market.

G. Right to Private Ownership and Establishment

Hong Kong law and regulations provide for the right of foreign and domestic private entities to establish, own and to dispose of interests of business enterprises. Foreign investors are generally allowed to engage in all lawful forms of remunerative activity. Restrictions on the latter involve regulated entry of practice in the mass transit, electric power generation, medical services, legal, telecommunications and broadcasting sectors. The Hong Kong Government does not generally engage directly in business activity via public enterprises, preferring to leave this to the private sector. In general, business privileges, franchises and land development rights are granted on the basis of competitive equality.

H. Protection of Property Rights

The territory's commercial and company laws provide for effective enforcement of contracts and protection of corporate rights. 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.

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 has developed comprehensive laws covering trademarks, trade descriptions, copyrights, industrial designs and patents. Hong Kong's patent and copyright laws are currently dependent on the United Kingdom. The Registration of Patent Ordinance provides for the registration of U.K. patents with the Hong Kong Registrar of Patents. Patent protection extends as long as the original patent in the U.K. Hong Kong provides full patent protection for chemical compounds and foodstuffs. There are no restrictions on the licensing of patents, nor is licensing compulsory.

After conducting a comprehensive review of copyright law at the request of the Hong Kong Government, the Law Reform Commission in January 1994 released to the Hong Kong Government its recommendations for updating Hong Kong's copyright and design law in line with international developments and for localizing appropriate provisions to reflect Hong Kong's transfer of sovereignty in 1997. The Hong Kong Government plans that English statute law which applies to Hong Kong will be replaced by Hong Kong enactments.

Copyrights are protected under the U.K. Copyright Act and the Hong Kong Copyright Ordinance. Foreign works are protected provided ownership is vested in a country which is a signatory to one of the international conventions. There is no need to register a copyright; protection under the Copyright Ordinance is automatic. Three- dimensional representations of two-dimensional works are protected as are registered designs. In March 1994, legislation was enacted to provide specific statutory protection for the layout-designs (topographies) of integrated circuits. Most of the provisions of the bill are based on similar legislation in the U.K. and Australia. The bill also meets standards set out in the Treaty on Intellectual Property in Respect of Integrated Circuits (The Washington Treaty 1989) and the agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).

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. Trademarks are registered under the Trademarks Ordinance, with provisions similar to trademarks legislation in the United Kingdom. The Trademarks (Amendment) Ordinance, which came into effect in 1992, extends the trademarks law to allow for registration of trademarks relating to services.

The Patent Registry registers patents that have been granted in the United Kingdom and European Patents registered in the United Kingdom.

Hong Kong has no specific ordinance to cover trade secrets. Under the Trade Description Ordinance, however, the government has the duty to protect the information being disclosed to other parties. The Trade Description Ordinance prohibits false trade descriptions, forged trade marks and misstatements in respect of goods supplied in the course of trade.

The Customs and Excise Department is responsible for the enforcement of protection for intellectual property rights. The Department has a special IPR unit with over 100 investigators. In addition to conducting raids on local establishments and street vendors, this unit works closely with the Hong Kong Government anti-smuggling task force to combat suspected smuggling operations. For 1994, there were 1302 court cases involving copyright violations and a total of HK$29.47 million (US$3.7 million) worth of goods seized. 1,041 cases involving trademark violations and trade description counterfeiting were heard in court in the same year and a total of HK$214 million (US$27.6 million) were seized.

Most pirate manufacturers have been driven out of Hong Kong in the past several years. However, many have since re-established operations across the border in south China. Despite numerous seizures of pirate goods in Hong Kong and at the PRC-Hong Kong border, customs officials are fighting an uphill battle. Software piracy continues to be a serious problem in Hong Kong, as does compact disc music piracy. The Hong Kong Government's enactment of substantially stiffer penalties in 1995 should help to deter retailers from carrying pirate products.

I. Regulatory System: Laws and Procedures

Hong Kong's body of law and regulation implicitly and explicitly promotes competition in all forms of economic endeavor. The only exceptions are those previously mentioned, where entry is restricted. 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 the minimum and are equally transparent to local and foreign investors. While Hong Kong's pro-business approach is almost universally applauded, the lack of any anti-trust enforcement powers may act to curb competition in some sectors.

J. Bilateral Investment Agreements

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, Switzerland, the Netherlands, Denmark, Sweden and New Zealand. The Hong Kong Government has initialed agreements with Canada, Italy, France, Germany, Austria, Belgium, and Vietnam. It is negotiating agreements with other investment partners in the Asia/Pacific region. All such agreements have been based on a model text approved by the PRC through the Sino- British Joint Liaison Group. The United States and Hong Kong held a first round of negotiations on a bilateral investment treaty; however, progress has been limited over questions of format and substance.

K. OPIC and Other Investment Insurance Programs

OPIC coverage is not available in Hong Kong. Hong Kong is a member of the Multilateral Investment Guarantee Agency (MIGA). Its membership will continue after the territory reverts to Chinese sovereignty in 1997.

L. Labor

For most of the last decade, Hong Kong's unemployment rate hovered around 2% as the economy continued a rapid structural transformation from manufacturing to a financial and services center. The burgeoning services sector easily absorbed displaced manufacturing workers.

With the recent slowdown in retail sales and restaurant receipts, the unemployment rate in the first four months of 1995 rose to 3%, the highest rate in nine years. As part of a package of measures introduced in June 1995 to combat rising unemployment, the Hong Kong Government will review its labor importation schemes by October. In the interim, in response to union and pro-labor legislators, it stopped new quota approvals under three labor importation programs: 1) the General Importation of Labor Scheme for skilled and semi- skilled workers (which has a quota of 25,000 workers), 2) construction workers for the Chek Lap Kok airport and related infrastructure projects (with a quota of 17,000), and 3) a separate 1,000-worker quota scheme for mainland professionals. Qualified foreign professionals, technical staff, administrators and managerial personnel are not affected, nor are foreign domestic helpers.

Labor-management relations are generally smooth. The average number of days lost due to industrial conflicts is one of the lowest in the world. In 1992, the latest year for which statistics are available, membership in Hong Kong's 522 unions totaled 542,700, for a participation rate of about 21%. Hong Kong has implemented 29 conventions of the International Labor Organization in full and 19 others with modifications. The PRC maintains that Hong Kong will continue to adhere to these conventions after 1997.

M. Foreign Trade Zones/Free Ports

All of Hong Kong is a duty-free zone, as the territory is a free port. Subject to nondiscriminatory application of excise taxes and restricted entry in some sectors, as noted above (e.g. broadcasting, electric power, telecommunications), local and foreign firms are free to take advantage of investment opportunities in the territory.

N. Capital Outflow Policy

Hong Kong has no restrictions on capital outflows nor does it maintain incentives for investment outside the territory.

O. Efficient Capital Markets and Portfolio Investment

There are no impediments to the free flow of financial resources. Laissez faire economic policies, complete freedom of capital movement and a well-understood regulatory and legal environment have greatly facilitated Hong Kong's growing role as a regional and international financial center. At year-end 1994, eighty five of the world's top 100 banks operated in Hong Kong. There were 148 foreign incorporated banks operating in the territory. Moreover, 155 subsidiaries or related companies of foreign banks operated as restricted license banks and deposit-taking companies. Forty-four U.S. financial institutions maintain operations in Hong Kong. U.S. banks licensed in Hong Kong are listed in Appendix E(f) below. Most banks in Hong Kong maintain U.S. correspondent relationships.

Hong Kong's five largest banks and their assets are as follows:

Rank		Institution		Total Assets (US$ millions)
1		Hong Kong & Shanghai Banking Corporation (HSBC)		145,073
2		Hang Seng Bank Ltd.		35,798
3		Bank of East Asia, Ltd.		10,310
4		Dao Heng Bank		8,596
5		Nan Yang Commercial Bank		7,732

Source: KPMG Peat Marwick Banking Survey Report 1994-95

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. The Hong Kong & Shanghai Banking Corporation (HSBC) is the territory's largest banking group. With its majority-owned subsidiary Hang Seng Bank, and 340 branches, the group controls more than 40% of Hong Kong dollar deposits.

Credit is allocated strictly on market terms and is available to foreign investors on a nondiscriminatory 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 the territory's de facto central bank. The HKMA is responsible for maintaining the stability of the banking system and managing the Exchange Fund backing Hong Kong's currency -- linked to the U.S. dollar at HK$7.8 = US$1.

Stock and Futures Markets: With a total capitalization of US$269.72 billion and 529 listed firms at year-end 1994, the Stock Exchange of Hong Kong (SEHK) was ranked eighth in the world in terms of capitalization and eleventh in trading volume.

There are no discriminatory legal constraints to foreign securities firms establishing in Hong Kong via branching, acquisition, or establishing subsidiaries. In practice, foreign firms typically establish in Hong Kong as subsidiaries. Rules governing operations are the same, irrespective of ownership. There are no restrictions on cross-border capital flows.

The SEHK plays a significant role in raising capital for PRC state- owned enterprises. A memorandum of understanding on regulatory cooperation between PRC and Hong Kong stock and regulatory authorities signed in June 1993 provides a framework for Chinese state enterprises to raise equity in Hong Kong provided they meet Hong Kong regulatory and accounting requirements. "H" shares are denominated in renminbi, but must be purchased in Hong Kong dollars. At year-end 1994, a total of fifteen Chinese enterprises had raised US$2.14 billion through "H" share listings on the SEHK. Several more from a group of 22 PRC enterprises approved to list overseas will likely apply for primary listing status in Hong Kong.

The Hong Kong Futures Exchange Ltd. provides a market for Hang Seng Index futures and options. In April 1995, it launched two local stock futures contracts for HSBC Holdings, PLC and Hong Kong Telecommunications Ltd.

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. (More detailed information on Hong Kong's securities markets is contained in the Department of the Treasury's December 1994 National Treatment Study.)

Portfolio investment decisions are left to the private sector. Cross shareholding agreements have been used by at least one large Hong Kong firm. In this well publicized case, the cross shareholding agreement was implemented to stabilize control of its majority shareholders and protect against all hostile takeovers, not primarily foreign hostile takeovers. There are no laws or regulations that specifically authorize private firms to adopt articles of incorporation/association which limit or prohibit foreign investment, participation or control.

P. Major Foreign Investors ¹

United States: Motorola, Digital Equipment Corp., Sea-land, Exxon, Citibank, Caltex, AT&T, IBM, Kodak, Bank of America, Dun and Bradstreet, American International Group, Coca-Cola, Pepsi-Co.

Japan: Kumagai Gumi, Yaohan, Jusco, Daimaru, Mitsubishi, Uny, Nishimatsu, Seibu, Daido Concrete, C. Itoh.

United Kingdom: Inchcape Pacific, Cable and Wireless, Hong Kong and Shanghai Banking Corporation, Standard Chartered Bank, Jardine Matheson, Swire Pacific Group, P & O Shipping.

West Europe: Carlsberg (Denmark), Hong Kong Petrochemicals (Italian/Korean/Chinese joint venture), Siemens, Heraeus (Germany), Philips (Netherlands); Bouygues/Dragages, Bachy-Soletanches, Banque National de Paris, Banque Indosuez, Chanel, Cartier, Christian Dior, Remy (France), Erikson, Asea Brown Boveri, Tetrapak, Electrolux (Sweden).

China: China Investment and Trust Corporation (CITIC), China Resources, China Merchants, Bank of China, China Travel Services, China Overseas Construction, Guangdong Enterprises, Yue Xiu Enterprises, China Everbright.

Asia: San Miguel Brewery (Philippines), News Corp., Pioneer (Australia), Sime Darby, Shangri-la/Kerry Trading (Malaysia), Park View Properties (Taiwan), Lippo Group (Indonesia), C.P. Pokphand, Chai Thai (Thailand).

¹NOTE: This list is not in rank order nor is it comprehensive as Hong Kong does not register foreign investment.

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