Hong Kong, China WT/TPR/S/52
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IV. TRADE POLICIES BY SECTOR
(1) INTRODUCTION
1. As discussed in Chapter III, although the Government has characterized its industrial policy
as "proactive", by and large, this has not entailed industry/firm-specific intervention or other attempts
aimed at "picking winners".  Instead, the Government considers that the allocation of resources among
sectors, industries and firms is, in most instances,  best left to market forces.  Accordingly, it has
apparently not attempted to slow the marked decline in manufacturing's share in GDP
(production-based), which fell from 14.6% in 1991 to 6.9% in 1996, and the strong expansion of the
services sector, which now accounts for roughly four  fifths of GDP and employment (Tables IV.1 and
IV.2).  However, in the face of alleged market ma nipulation by speculators in the wake of the Asian
financial crisis, the Hong Kong Monetary Authority did intervene recently to stabilize the Hong Kongstock market.  The market intervention included the purchase of substantial stakes in several major
manufacturing and service companies.  According to the authorities, the stakes acquired broadly
represent the Hang Seng Index without preference to particular companies or sectors.
Table IV.1
Industrial structure of Hong Kong, 1986-96
(Per cent  share of production-based GDP)
1986 1991 1992 1993 1994 1995 1996
Agriculture and fishing 0.4 0.2 0.2 0.2 0.2 0.1 0.1
Industry 28.9 21.8 19.6 17.4 15.5 15.3 14.7
   Mining and quarrying 0.1 0.0 0.0 0.0 0.0 0.0 0.0
   Manufacturing 21.5 14.6 12.8 10.5 8.7 7.9 6.9
   Electricity, gas and water 2.7 2.0 2.0 2.0 2.2 2.2 2.3
   Construction 4.6 5.2 4.8 4.9 4.6 5.1 5.5
Services 65.8 72.5 74.0 76.4 78.7 79.6 80.0
Wholesale, retail and
import/export trades,
restaurants and hotels21.2 24.4 24.4 25.4 24.8 25.3 25.3
Transport, storage and
communications7.8 9.1 9.1 8.9 9.2 9.6 9.3
Financing, insurance, real
estate and business
services16.2 21.5 22.9 24.3 25.3 23.2 23.8
Community, social and
personal services15.2 14.1 14.2 14.8 15.0 16.5 16.7
Ownership of premises 9.7 10.3 10.4 10.2 11.5 12.6 12.4
GDP (production based)
(HK$ million)311,220 667,837 780,897 883,447 1,006,458 1,069,089 1,193,072
Source: HKSAR Government.
2. Hong Kong's approach to competition and regulatory policy is characterized by the authorities
as one of "minimum intervention on market forces".  This approach reflects the view that as Hong
Kong is a small, open and thus highly competitive economy, there is no need for a comprehensive
competition law.  In many instances, therefore, notably the provision of services, sectors are left
largely to regulate themselves.  This approach ha s been questioned by the Consumer Council, whichWT/TPR/S/52 Trade Policy Review
Page 64
has pointed out a lack of competition in certain sectors, including residential property, retailing,
wholesaling, distribution, bankin g, telecommunications and energy.1
Table IV.2
Employment in Hong Kong, 1986-97
(Per cent share of total employment)
1986 1991 1992 1993 1994 1995 1996 1997
Manufacturing 34.7 24.5 21.5 18.4 15.4 13.4 11.2 9.8
Construction 7.4 7.7 8.0 7.6 7.4 7.7 8.9 9.9
Services 38.6 66.2 69.0 72.5 75.8 77.6 78.8 79.3
   Wholesale, retail and
import/export trades,
restaurants and hotels24.0 30.5 31.8 32.8 34.8 34.6 34.7 33.5
   Transport, storage and
communications8.2 9.4 10.3 10.9 11.4 11.0 11.0 11.3
   Financing, insurance,
real estate and business
services6.0 7.9 8.1 10.0 10.9 11.5 11.7 12.9
   Community, social and
personal services17.0 18.4 18.8 18.9 18.7 20.4 21.4 21.6
Other 2.7 1.6 1.5 1.4 1.4 1.3 1.2 1.0
Total employment 2,642.7 2,760.1 2,744.0 2,806.6 2,879.3 2,911.6 3,014.1 3,150.4
Source: HKSAR Government.
3. Clearly, economic conditions and developments in surrounding Asian countries, and
particularly South China, have greatly influenced  the evolution of Hong Kong's industrial structure.2
Over the years, reflecting the continuing fast growth of Hong Kong's economy and its dynamic
interaction with neighbouring regions of the Pearl River Delta, a substantial number of Hong Kong
manufacturers have diversified their production bases not only to South China, but also to other
countries with relatively low labour costs.  The change in Hong Kong's industrial structure has gone
hand in hand with that of South China.  The strong growth in regional trade, together with the
relocation of the lower-value-added, assembly-type manufacturing operations across the border toSouth China has been accompanied by an increasi ng demand for service oriented activities in Hong
Kong.  Many of these activities are manufacturing-related, including product design and development,
source of materials, marketing of products, transport and communications, banking and finance, and
other professional services.  The authorities estimate that the shift to relatively high-valued activities
raised labour productivity in manufacturing by 8.4% per annum between 1991 and 1996.
(2) 
AGRICULTURE AND FISHERIES
(i) Features
4. The HKSAR's agriculture and fisheries sector is very small, currently representing a mere
0.1% of GDP (in 1996) and around 1% of employment (in 1997).  As local production accounted for
14% of vegetable consumption, 19% of live poultry, 13% of live pigs, 12% of freshwater fish and
61% of all live and fresh marine fish consumed in 1997, the HKSAR is heavily dependent upon
agricultural and fish imports.  By contrast, exports of agricultural and fish products are negligible.
                                                     
1The reports pointed out some restraints to competition in these sectors, including the de facto
monopoly and absence of price regulation enjoyed by Hong Kong and China Gas Co. Limited (HKCG) in thepiped town-gas market.
2Hong Kong Trade Development Council (1997).Hong Kong, China WT/TPR/S/52
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Cultivation of vegetables, flowers and ornamental plants as well as livestock farms has grown over
the past decades replacing the more traditional rice farming.
(ii) Policy objectives for the sector
5. Hong Kong, China provides little direct assistance to the sector.3  The Agriculture and
Fisheries Department (AFD) does, however, attempt to facilitate production and improve productivity
of local farming by conducting adaptive studies, introducing new technology to local farmers, and byproviding technical advice and low-interest loans fo r domestic farming and fisheries activities. In the
fiscal year 1997/98, a total of 472 loans amounting to HK38.6 million were granted to farmers.
During the same period a total of 82 loans amounting to HK$15.3 million were granted in the
Fisheries Marketing Organization Loan Fund and the Fisheries Development Loan Fund.
4
6. The AFD is also involved in the wholesale marketing of primary products through the
vegetable and fisheries marketing organizations. The wholesale vegetable market under the Vegetable
Marketing Organization (VMO) handled about 52% of domestic consumption in 1997.5  Under the
Marine Fish (Marketing) Ordinance, the Director of Marketing is empowered to control wholesale
marketing of fish and to issue permits for the landing and movement of marine fish.  The Ordinance
forms the legal framework for the operation of the Fish Marketing Organization (FMO).  Under the
Ordinance, marine fish are required to be sold wholesale through the FMO wholesale markets, and all
fish buyers of the market should be registered.  The FMO operates seven wholesale fish markets in
Hong Kong, which handled the sales of about 48,000 tonnes of fishery products in 1997/98.  Both
organizations are financed via a commission charged on the transaction values of the products
handled, at the rate of 10% for vegetables and 7% for fish.
7. Recent initiatives include the introduction of the Accredited Farm Scheme in November 1994.
To gain accreditation by the AFD, vegetable farmers must adopt approved horticultural practice anduse pesticide in accordance with properly designed pest control programmes.  Their produce is
marketed by the VMO to designated retail outlets.  The VMO routinely tests accredited produce for
pesticide residues at its wholesale market as part of its quality assurance programme and a service to
both producers and traders.  The Scheme has been extended to suitable vegetable farms in the
mainland of China supplying vegetables to Hong  Kong since March 1995.  So far, 152 Hong Kong
farms covering 50 hectares of land and 16 farms in the mainland of China covering 830 hectares have
been accredited.
8. Hong Kong, China continues to operate a Rice Control Scheme.  The objectives of the
scheme are to maintain a reserve stock for emergency situations or any short-term shortage of
supplies, thereby ensuring a regular and adequate supply of rice to consumers at reasonably stableprices.  Under the scheme, only firms registered with the Director-General of Trade may trade as rice
stockholders (importers).  Rice stockholders are obliged to import rice in accordance with a quota
system.  There are altogether 1,000 basic import units being shared among the stockholders.
6  Only
                                                     
3Neither export subsidies within the meaning of Article 9.1 of the Agreement on Agriculture nor
domestic support within the meaning of Article 6 of the same Agreement existed in Hong Kong, China as at31 December 1996. (WTO documents G/AG/N/HKG/2 and G/AG/N/HKG/3, 14 November 1997).
4One additional loan amounting to HK$0.15 million was granted by the cooperative for American
Relief Everywhere Loan Fund in the sector in 1997/98.
5The VMO does not have exclusive marketing rights, and vegetables can be traded through other
wholesale markets.
6Before the introduction of the Optional Quota System in 1997 (see below), the overall import quota,
which depends on the estimated consumption level, would be apportioned to the stockholders in accordance
with their respective share of units.WT/TPR/S/52 Trade Policy Review
Page 66
rice stockholders may receive licences for the import of rice for local consumption.  The licences
permit stockholders to import rice in accordance with  the quotas allocated to them.  The maintenance
of a reserve stock at all times is a quid pro quo  for the awarding of an import licence and the
associated degree of market power enjoyed by the small number of stockholders.  A licence is also
required for the re-export of rice.7  Stockholders are free to import rice from any country. Quota
shares are distributed to individual stockholders on the basis of their past imports.  Quota transfers
from one stockholder to another are not allowed.  The annual quota utilization level of imports has
been 100% each year since the previous Trade Policy Review.8
9. Applications for registration as a rice stockholder are invited as and when necessary. The
criteria for registration as stockholder include that the applicant is ordinarily resident in Hong Kong.
In the case of a stockholder that is a partnership or a company, not less than 51% of the capital for theformer or issued voting capital for the latter is required to be in the beneficial ownership of persons or
entities ordinarily resident in Hong Kong. Five new rice stockholders were registered in 1996, and
five other stockholders ceased business in the first half of 1998, bringing the current number of
registered stockholders to 45.  (Table IV.3)
Table IV. 3
Stockholders under the Rice Control Scheme by number of basic import units held, July 1998.
Basic import units held by
stockholdersStockholders Total of basic import units Accumulated basic import
units
56   2 112 112
40   4 160 272
32   5 160 432
24   6 144 576
16 10 160 736
12 10 120 856
10   1   10 866
  9   2   18 884
  8   5   40 924
Total 45 924
Source: HKSAR Government.
10. According to the authorities, the Rice Control Scheme is aimed at ensuring that the price of
rice is maintained at a reasonable level relative to  world markets.  In the past, retail prices exceeded
import prices by a large margin.  In the case of Thai fragrant rice, for example, that margin or mark-
up averaged approximately 100% of the (c.i.f.) im port price during the period June 1995 to June 1998
(Chart IV.1).  With a mark-up of this magnitude, questions may arise as to whether the scheme is stilljustified on grounds of security of supply, given Hong Kong's reversion to China, and, if it is justified,
whether such high mark-ups are commensurate with the true cost to stockholders of maintaining the
reserve.
                                                     
7Under the Reserved Commodities Ordinance and its subsidiary regulations, the import of rice must be
covered by an import licence and the export of rice must be covered by both import and export licences.
Licence applications for imports for subsequent re-expor t are fully approved and re-exports are not subject to
any quota control.  There is no local production of rice in Hong Kong, China.
8If local consumption level is compared with the annual quota level, the degree of utilization was 97%
in 1997 (Table III.3) because the imported level was above local demand in 1997.Hong Kong, China WT/TPR/S/52
Page 67
3,0004,0005,0006,0007,0008,0009,00010,00011,000
Jun-95 Sep-95 Dec-95 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-9860708090100110120HK$/tonne
Source :    HKSAR Government.Per cent
c.i.f. import priceRetail price Left hand scale: Right hand scale: Mark u pChart IV.1
Mark up between c.i.f. import price and retail price of Thai fragrant 
rice in Hong Kong, June 1995-June 1998
11. The Government conducted a review of the Rice Control Scheme in 1997.  Rather than insert
"competition clauses" into the licences in order to safeguard against anti-competitive behaviour
among importers and wholesalers, as urged by the Consumer Council9, an Optional Quota System
was implemented in October 1997 to encourage greater competition among the registered rice
stockholders.  The system allows stockholders to vary their imports from 90% to 140% of theirallocated quota subject to an overall ceiling of 20% above the aggregate quota of the trade for the
particular period.  90% of the overall import quota is allocated as a fixed quota to individual
stockholders in accordance with their respective share of units.  Each stockholder, in addition to
his/her fixed quota, may apply to import more up to a maximum of 50% of his/her individual quota.
However, the aggregate of the optional quota allocated to all stockholders must not exceed the ceiling
which is set at 30% of the overall import quota.  If the aggregate optional quota exceeds this ceiling,
the actual optional quota for individual stockholders would be apportioned in accordance with therespective amount opted for amongst the relevant stockholders.  As of 1998, the level of reserve rice
stock in the Hong Kong has been reduced to 40,000 tonnes, compared to 45,000 tonnes previously
(Table III.3).
12. Imports of frozen meat and poultry are subject to licensing control under the Reserved
Commodities Ordinance and its subsidiary regulations.
10  The licensing scheme on frozen meat and
poultry enables the Trade Department to monitor the imports and stock levels of frozen meat and
poultry in Hong Kong and helps to maintain a reserve meat stock for emergency purposes.  Import
                                                     
9Consumer Council (1996), p.27.
10Frozen meat and poultry refers to frozen or chilled meat (including beef, mutton, pork, lamb and all
offals) and frozen poultry (including fowl, duck, goose, turkey and parts thereof).WT/TPR/S/52 Trade Policy Review
Page 68
licences covering consignments for local consumption are issued only to persons or firms registered
as stockholders with the Department.  Stockholders are free to import from any source and imports are
not subject to quota control.  Applications for imports for subsequent re-export are freely approved.
(3) MANUFACTURING
(i) Features
13. While the manufacturing sector's share in GDP has declined, the intra-industry structure of
manufacturing has remained essentially the same since the previous Trade Policy Review.  Major
manufacturing sectors include textiles and clothing, electronics, printing and publishing, and
machinery and equipment. Imports of manufactured products are largely concentrated in machinery
and transport equipment. Against a background of relocation of assembly-type operations to South
China, and the associated restructuring of Hong Kong's economy, the value added of Hong Kong'smanufacturing industries declined between 1991 and 1996, from HK$97.2 billion to HK$82.8 billion.
Labour productivity has increased in the last few years, reflecting a reduction in the labour force in
the sector and the expansion of factory auto mation and upgrading of equipment and production
technology.  In terms of export value, major manufacturing industries include clothing machinery and
transport equipment, and textiles.
(ii) Policy objectives for the sector
14. The sector is characterized by the absence of import protection; applied MFN tariff rates are
zero and non-tariff measures are largely limited to fulfil Hong Kong's international obligations or for
health and environment-related concerns. Furthermore, sector-specific incentives are largely absent
from Hong Kong's industrial policy, which the authorities characterize as minimum government
interference in the functioning of markets, but maximum support for the development of human
capital, infrastructure, applied research and development, and facilitation of technology acquisitionand upgrading (Chapter III).
15. However, in an effort to stabilize share prices on the Hong Kong Stock Exchange, in
August 1998 the Hong Kong Monetary Authority (HKMA) purchased substantial stakes (12.3% and
10.3%) in, inter alia , two major listed conglomerates, namely  Swire Pacific and Cheung Kong, whose
operations include manufacturing.
11  Such intervention, by maintaining the price of these companies'
shares above the levels that would otherwise have prevailed, has reduced their costs of new equity
capital, thereby possibly providing them with an advantage over their competitors (not listed on the
HKSE) insofar as investment is financed by new shar e issues.  In view of its substantial shareholdings
in these enterprises, the question arises as to what influence, if any, the HKMA might exert on their
future operations.  In the course of the discussions leading to this Review, the authorities haveemphasized that the Government's intention is not to interfere with the management and operation of
such companies.  Accordingly, a new company, the Exchange Fund Investment Limited, was
established in October 1998 to manage the portfolio of acquired stocks.
                                                     
11The magnitudes of these stakes were not immediately revealed, even though shareholdings in excess
of 10% must normally be disclosed under Hong Kong's Securities (Disclosure of Interest) Ordinance.  The
Government felt that it was under no obligation to comply with its own rules, which is understandable given thatit did not wish to give more fuel to speculators.  Nevertheless, it appears to weaken the authorities' earlier claims
to have been completely transparent with regard to their stock market intervention.  However, the Board of the
Exchange Fund Investment Limited has expressed the view that the Government should disclose any futureincremental changes in shareholdings of 1% or more of the issued shares in respect of those shareholdingsexceeding the 10% threshold, thereby placing the Government in exactly the same position as any other privateinvestor as regards disclosure standards.Hong Kong, China WT/TPR/S/52
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(iii) Key subsectors
(a) Textiles and clothing
16. Clothing has remained Hong Kong's most important domestic merchandise export earner,
representing around 34% of domestic exports, while textiles accounted for around 6% of total
domestic exports.  About 45% of th e HKSAR's clothing exports went to the United States in 1997,
and 29% to the European Union.  In terms of dom estic exports to major import markets, Hong Kong
has continued to lose ground to China and other lower-cost suppliers, and/or to competitors enjoying
more favourable access conditions, such as the European Union's Mediterranean trading partners or
Mexico in the United States (Chart IV.2).
17. Within the sector, cut-and-sewn garments acco unted for about 58% of the industry's total
gross output in 1996, followed by knitted garments (30%) and fur and leather garments.  With limitedlocational options, the industry has relied on mechanized and automated production process, and has
shifted to higher-value-added products, product desi gn, technical assistance, sourcing, and shipping.
The clothing and textiles sectors contributed some 25% to HKSAR's manufacturing value added in
1996 compared to 40% in 1986. Between 1987 and 1997, the number of employees in the clothing
industry has dropped from 297,517 to 76,785, represen ting some 25% of HKSAR's manufacturing
workforce in 1997.  HKSAR’s textile indust ry employed about 22,700 workers in 1997.
18. On 1 January 1995, the Agreement on Textiles and Clothing (ATC) superseded Hong Kong's
textiles restraint agreements with Canada, the European Union, Norway and the United States.
Accordingly, those restraints, formerly maintained  under the MFA, were carried over into the ATC
and will be eliminated as the products involved ar e integrated into GATT through the ATC's transition
process (Chapter III).  With the implementation of stages 1 and 2 of the integration programmes
specified in Article 2 of the ATC, in 1995 and 1998 respectively, quantitative restrictions on certaintextile products have been removed.  The restriction with Norway will be removed completely by the
end of 1998 pursuant to unilateral liberalization by Norway.  Currently, about 60% of Hong Kong’s
domestic clothing and textiles exports by value are subject to quotas under ATC.
19. In September 1996, January and September 1997, and September 1998 under the joint factory
observation visit programme, joint factory observation visits were made by the customs officers of theUnited States and the HKSAR Government to selected  textile and garment factories.  It would appear
that the programme is intended to improve U.S. Customs' understanding of HKSAR's textile export
control system and its enforcement, inter alia , against illegal transshipment from China circumventing
the country of origin requirement under the ATC.  Under the programme, joint teams of U.S. and
Hong Kong customs officers visited factories that had consented to a visit.  Any necessaryenforcement operations, including the inspection of factory books and records, were undertaken solely
by Hong Kong customs officers in accordance with HKSAR laws.
(b) Electronic products
20. In terms of total exports (including re-exports), Hong Kong's electronics industry has the
largest share, accounting for 27.9% of the total exports in 1996.
12  The share of electronic products in
HKSAR's domestic exports has remained stable at around 27% in recent years.  The electronics
industry employed about 33,700 persons, 10.9% of total manufacturing workforce in 1997.
                                                     
12The share of electronic products in total re-exports was 28.2% in 1996.WT/TPR/S/52 Trade Policy Review
Page 70
Chart IV.2 
Hong Kong's performance in the EU and the U.S. import markets for 
clothin g, 1987-97a
0510152025
1987 88 89 90 91 92 93 94 95 96 1997  Tunisia
  India
  Turkey
  China (mainland)
 HKSA R
0510152025
1987 88 89 90 91 92 93 94 95 96 1997  Mexico
  Dominican Republic
  China (mainland)
  HKSAR
  Chinese Tai peib(a)  European Union
Import share (per cent)
(b) United States
Import share (per cent)
SITC No. 84 (including knitted garments).   
Domestic exports only.
UNSD , Comtrade database (SITC Rev.2 ).a
b
Source :bHong Kong, China WT/TPR/S/52
Page 71
21. Major items in Hong Kong’s electronics exports are electronic parts, consumer electronics,
computing equipment and telecommunication equipment.  The percentage share of parts and
components in domestic exports of electronic products increased from 32% in 1986 to about 78% in
1997.
22. There are no import and export restrictions on electrical products, except for strategic trade
restrictions (Chapter III).  The Electrical Products (Safety) Regulation, however, requires that anyhousehold electrical product supplied in Hong Kong (including those imported, manufactured locally,
or described as intended for use outside Hong Kong) should meet a set of prescribed safety standards.
As from November 1998, a product must be certified as meeting the relevant safety requirements
before it can be supplied.
(4) SERVICES
(i) Features
23. Hong Kong was ranked the world's ninth largest exporter and fifteenth largest importer of
commercial services in 1997.  In 1996, the servi ces sector accounted for 80.0% of HKSAR's GDP,
and for 78.8% of employment.  External trade in services comprised 13.3% of the HKSAR's total
trade in 1996.13  HKSAR is a net exporter of services, with net exports equivalent to 8.7% of GDP in
1997.  The size of the services sector, and the continued growth of its contribution to GDP is
indicative of the importance of productivity in services to the region's  overall growth.
(ii) Policy objectives for the sector
24. As in the case of goods, Hong Kong, China relies on market forces to assure competition in
the provision of services.  Little regulation is imposed on the size and conduct of firms, although, in
the absence of a competition law, the Government does impose sector-specific regulations, which are
deemed necessary to promote a fair and competitive environment quality of service, and the integrityof the profession.  Few exceptions to the MFN treatment and national treatment are found in the
sector.
14  Recent policy initiatives include the liberalization of fixed telecommunication network
services in 1995 and the deregulation of bank interest rates.
25. Hong Kong was an active participant in the se rvices negotiations in the Uruguay Round and
in the resultant General Agreement on Trade in Services (GATS). Hong Kong was party to thenegotiations for Financial Services and for Basic Telecommunications. Hong Kong does not maintain
any MFN exemption under Article II of the GATS.
(iii) Banking, finance and insurance
26. The financial services sector as a whole has grown rapidly in recent years, despite a downturn
in 1995.  The share of financial services, including banking, securities and insurance, in Hong Kong'sGDP was 23.8% in 1996, up from 21.5% in 1991.  Employment in the sector (including real estate
and business service) was about 407,900 persons in 1997, up 15.9% from the previous year. At the
end of August 1998, there were 348 deposit-taking institutions in Hong Kong, of which 315 were
foreign-owned.  Figures on exports and imports of financial services from 1997 onwards are not yet
available.  Nevertheless, the Government believ es that the Asian financial turmoil should have
                                                     
13External trade in services is defined as the sum of exports and imports of services.  Total trade is
defined as the sum of exports including re-exports and imports of merchandise and services.
14According to the authorities, preferential arrangements for the recognition of qualifications exist only
in legal services.WT/TPR/S/52 Trade Policy Review
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dampened somewhat the growth of trade in financial services, along with the distinct slackening of
regional economic activity.
27. As a result of the Financial Services Negotiations concluded in 1997, Hong Kong made new
commitments with respect to insurance, banking and other financial services.  Specifically, it bound
cross-border supply of reinsurance and services auxiliary to insurance (other than claims settlement
services);  removed a requirement that limited companies incorporated in Hong Kong need to bepredominantly owned by Hong Kong interests in orde r to be eligible to apply for a new full banking
licence; extended its commitments to financial leasing, guarantees and commitments, and the cross-
border supply of advisory and other auxiliary financial services;  and clarified that the limitation on
the number of branch offices does not apply to foreign banks licensed before May 1978 for fully
licensed banks, and before April 1990 for restricted-licence banks.
(a) Banking
28. Hong Kong's deposit-taking institutions fall into  three main categories: licensed banks (LBs),
restricted-licence banks (RLBs) and deposit-taking companies.
15  Though there are no legal
classifications other than the above categories, Hong Kong has developed a well-segmented banking
sector in terms of types of banks, e.g. retail, wholesale, investment and private banks, as well as in therange of products and services.  There were 175 licensed banks and 63 restricted-licence banks at the
end of September 1998, of which 31 and 37, respectively, were locally incorporated.
16  O f  f o r e i g n
AIs, Japanese AIs accounted for about 15% of the total deposit liabilities to customers, European AIs
for 12% and Chinese AIs for 22% in 1997.  The market for deposits appears to be highly
concentrated.  For example, Consumer Council (1994)  found that the Herfindahl indices for HK dollar
savings deposits in all licensed banks between 1998 and 1992 ranged from 0.16 to 0.17, as if there
were about 6.25 (= 1/0.16) licensed banks with equal market share.17
29. The Hong Kong Monetary Authority (HKMA) is responsible for overseeing the banking
sector under the Banking Ordinance, which stipulates the regulation and supervision of banking
business, and the business of taking deposits, either domestic or foreign.18  The HKMA's
responsibilities include the authorization, suspension  and revocation of authorized institutions.  The
Banking (Amendment) Ordinance 1997, enacted on 8 January 1997, provides HKMA with thenecessary powers to regulate the issue of Multi-Purpose Stored Value Cards (MPCs) and the approval
and supervision of money brokers.
30. The Monetary Authority (MA) has the power under the Banking Ordinance, after consultation
with the Financial Secretary, to revoke the authorization of a bank on grounds specified under that
Ordinance, and after giving the bank an opportunity to be heard.
19  Immediately upon the revocation
of the authorization of a bank becoming effective, the bank shall cease to carry on banking business.20
                                                     
15These are collectively called authorized ins titutions (AIs) under the Banking Ordinance
16There were 1,931 offices of licensed banks (inclusive of main offices), and 144 representative offices
of foreign banks, at the end of September 1998.
17The Herfindahl index is calculated as the sum of squares of the share of firm ( Σs2) in a particular asset
or liability item.  If there are n firms in the market, the minimum value of the index is 1/n (there are n firms of
equal market share) the maximum value is 1 (monopoly).
18Including branches and subsidiaries of foreign banks.
19According to the Exchange Fund Ordinance, the Monetary Authority is a person appointed by the
Financial Secretary to perform the function of the Exchange Fund Ordinance and other relevant ordinances.
20Where the MA is of the opinion that an authorized institution is insolvent or is likely to become
unable to meet its obligations or is about to suspend payment, he may, after consultation with the FinancialHong Kong, China WT/TPR/S/52
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31. Only licensed banks (LBs) may provide retail banking services, including the operation of
savings or current accounts.  They may also accept deposits of any size and any maturity from the
public, grant loans and advances, discount trade bills and bankers’ acceptances, deal in gold, foreign
exchange and other securities, engage in insurance business, and provide business consultative
services and private banking.21  All licensed banks must belong  to the Hong Kong Association of
Banks (HKAB) as stipulated in the HKAB Ordinan ce.  A company seeking authorization to become a
licensed bank incorporated in Hong Kong, mu st have been a deposit-taking company or a
restricted-licence bank (or any combination thereof) for not less than ten continuous years.22  T h e
minimum paid-up capital for licensed banks incorporated in Hong Kong is HK$150 million. A
licensed bank must keep assets and public deposits of HK$4 billion and HK$3 billion, respectively.
The liberalization of the Interest Rate Rules (IRR) of the HKAB since 1994 has abolished restrictionson most time deposit interest rates.
23  However, interest rates on current accounts, savings accounts
and time deposits of fixed maturities of less than seven days continue to be regulated by the IRR.24
32. Applicants for restricted bank licences mu st have a minimum paid-up capital of HK$100
million.  Restricted-licence banks may take call, notice and time deposits of any maturity from the
public, but in amounts of not less than HK$500,000, underwrite securities, deal in foreign exchangeand other securities, and provide financial advisory services in issuance of securities, mergers and
acquisitions, venture capital financing and private banking. There are no restrictions on the interest
rates they may offer.  The HKMA generally requires  that institutions applying for restricted-bank and
deposit-taking institution licences are at least 50% owned by a bank that is adequately supervised.
33. Deposit-taking companies are not called "banks" and are restricted to taking deposits of
HK$100,000 or above, with a fixed term maturity of at least three months.  There are no restrictions
on the interest rates they may offer.  They engage in a range of specialized activities, such asconsumer finance, trade finance, leasing, and securities business.
25  The minimum paid-up capital for
deposit-taking companies is HK$25 million.
34. The prudential regulations contained in the Banking Ordinance stipulate, inter alia , that
authorized institutions must:  maintain adequate liquidity (at least 25% of their assets) and capital
                                                                                                                                                                    
Secretary, issue directions to the institution or appoint an Advisor or Manager of the institution in relation to its
affairs, business and property.  He may also report the circumstances to the HKSAR Chief Executive in Council.Having considered the report of the MA, the Chief Executi ve in Council may direct the Financial Secretary to
present a petition to the High Court for the winding-up of the authorized bank by the High Court.
21Any person who carries on a business in Hong Kong dealing in securities or giving advice in
connection with securities in Hong Kong is required to be registered as a securities d ealer or investment adviser
respectively with the Securities Ordinance.  However, licensed banks have a specific eligibility to apply for
exempt-dealer status and thus are only subject to the supervision of the HKMA, instead of the dual supervisionof the HKMA and the SFC.  According to the authorities, an AI would normally establish a non-AI subsidiary toconduct insurance business.
22This rule does not apply to foreign banks seeking a banking licence in branch form.  However, it is
the general policy of the MA that an overseas bank shou ld maintain a local representative office for a minimum
of one to two years, in order to acquire sufficient ex perience, before it can be considered for authorization.
23The Rules used to govern the maximum rate of interest payable by member banks on Hong Kong
dollar deposits of up to HK$500,000 and for up to 15 months.  HKAB removed the interest rate cap on HongKong dollar time deposits fixed for more than one month on 1 October 1994.  On 3 January 1995, the interestrate cap on all time deposits fixed for more than seven days were eliminated.  In November 1995, rules on
deposits with a maturity of seven days were abolished.  According to the authorities, 99% of the time deposits
that used to be subject to the interest rate rules have been deregulated as a result of these measures
24With the exception of deposits of HK$500,000 or above, for which banks may compete freely.
25Registration with the Securities and Features Comm ission (SFC) is required to conduct securities
business.WT/TPR/S/52 Trade Policy Review
Page 74
adequacy ratios26;  submit monthly reports to the HKMA on the required financial information
including liquidity ratios;  adhere to limitations on loans to any one customer or to directors and
employees27;  and  seek approval for the appointment of directors, senior management, and for
changes in control.  The Ordinance prohibits the carrying on of "banking business" except by a bank
and the carrying on of a business of taking deposits except by an authorized institution.28  There are
no obligations on any domestic operators to employ specified banks for particular operations andtransactions.
35. Foreign banks are currently allowed to enter the domestic market by acquiring an interest in
an existing locally incorporated bank, or by setting up a branch office as a licensed bank or a
restricted-licence bank, subject to the consent of the HKMA.
29  However, foreign banks are not
allowed to establish a new locally incorporated subsidiary with a full banking licence.30  There is no
restriction between domestic and offshore banking business for foreign banks. Foreign-established
banks licensed in Hong Kong in the form of a bran ch after 1978 are subject to the condition that they
conduct their banking business in only one building, thereby effectively restricting their operation to
one branch.31  Banks incorporated overseas may also set up representative offices in the HKSAR, but
such offices are generally prohibited from taking deposits and undertaking banking business.
36. Banks incorporated overseas intending to set up an operation in Hong Kong must fulfil
standard prudential requirements and prove adequate home supervision.  Foreign banks seeking
authorization for operation in branch form in Hong Kong are required to have minimum assets of
US$16 billion32 but are not required to hold capital in Hong Kong and are thus not subject to capital
adequacy ratio requirements or to capital-based limits in large exposures.  An authorized overseas
bank can conduct the full range of banking business.
37. There exists a reciprocity requirement for issuing banking licences to banks incorporated
outside the HKSAR.  However, the requirement does not apply to banking applications from
companies incorporated in a place that is, or is part of the territory of, a WTO Member.  Hong Kong
                                                     
26The present statutory minimum capital adequacy ra tio (CAR) for locally incorporated AIs is 8%.
However, the MA may vary the CAR of an AI by increasing the ratio to not more than 12% in the case of a
licensed bank and not more than 16% in the case of a deposit-taking company or a restricted-licence bank undersection 101(1) of the Banking Ordinance.  According to th e authorities, banks in Hong Kong are not subject to a
minimum asset maintenance requirement.
27Loans to a single borrower must not exceed 25% of the capital base.
28Section 2 of the Banking Ordinance defines "banking business" as:  receiving from the general public
money on current, deposit, savings or other similar accounts repayable on demand or within less than 3 monthsor at call or notice of less than 3 months;  and paying or  collecting cheques drawn by or paid in by customers.
29The establishment of a new branch is subject to the approval of the HKMA.  The HKMA must be
notified of closure of a branch.
30This follows from the authorization criteria in the Banking Ordinance that an applicant for a local
banking licence is closely associated and identified with Hong Kong and must have been an AI for at least ten
years.
31They may maintain offices to which customers have access for the purpose of banking or
deposit-taking business and/or the arranging or entering into any other financial transactions in only onebuilding (in this context, office includes automated teller machines (ATMs));  and no more than two additionaloffices (excluding ATMs) to which customers and others have access for the purpose of any other types of
business in a separate building or buildings. Such offices may consist of not more than one regional office and
one back office.
32Total assets of the whole banking group must be at least US$16 billion.  This requirement can be
waived if the MA considers that authorizing the company to carry on banking business in Hong Kong wouldhelp to promote the interests of Hong Kong as an international financial centre.Hong Kong, China WT/TPR/S/52
Page 75
has no bilateral or regional agreements on mutual recognition of bank licences and on liberalizing
cross-border establishment of banking services.
38. There are no publicly owned banks in Hong Kong .  However,  in August 1998, in an attempt
to stabilize share prices on the Hong Kong St ock Exchange, the Hong Kong Monetary Authority
(HKMA) purchased shares in several companies, including nearly a 9% stake in the HongKong and
Shanghai Banking Corporation (HSBC) Holdings, the Hong Kong-based international banking group,
which accounts for some 30% of the benchmark Hang Seng Index.  As a consequence, the HKMA is
now the largest shareholder in HSBC and can, in theory, demand a seat on its board.  Such
intervention, by holding the price of HSBC shares above that which would have prevailed otherwise,
may have reduced the HSBC's cost of new equity capital, thereby providing it with an advantage over
its non-HSI-listed competitors.  In view of its su bstantial stake in HSBC, the question arises as to
what influence, if any, the HKMA might exert on the bank's future operations.  In the course of this
Review, the authorities have indicated that the HK MA will not exert any influence on HSBC's future
operations.
39. Hong Kong does not have any deposit insurance schemes.  It is the Government's view that
effective use of market discipline with sufficient disclosure of information is complementary toprudential supervision in promoting a sound and efficient financial system.  Accordingly, local AIs
are expected to comply with minimum standards for financial disclosure in their audited accounts as
stipulated in the "Best Practice Guide on Financial Disclosure", set out by the HKMA.  AIs
incorporated outside Hong Kong are required to lodge a copy of their audited accounts, auditors
report and directors report for each financial year with the HKMA.  The HKMA has implemented a
market risk capital regime in Hong Kong based on the framework incorporated in the Amendment to
the 1988 Capital Accord issued by the Basel Committee.  The new regime has been effective sinceend-December 1997.  Local AIs subject to the new regime must maintain both their adjusted CAR
incorporating market risk and the original CAR above the respective statutory minimum ratios set for
them.
(b) Securities and debt market
40. Hong Kong, China’s securities market is the second largest in Asia in terms of market
capitalization.  Non-domestic investors accounted for 22% of the turnover in value in the securities
market in the year ended September 1997 and 44% by volume in futures in the year ended June 1998.
The local debt market continued to expand in 1998.  The outstanding amount of Hong Kong dollar
debt securities amounted to HK$380.4 billion at the end of September 1998, up 10% from end-1997.
41. The principal legal provisions regulating the securities sector in the HKSAR include the
Securities and Futures Commission Ordinance, the Securities Ordinance, the Commodities Trading
Ordinance and the Leveraged Foreign Exchange Trading Ordinance.  The HKSAR employs a three-
tier regulatory regime comprising the front-line market regulators, the Securities and Futures
Commission (SFC), and the Financial Services Bureau of the Government, which is responsible for
policy and legislative matters.  The front-line regulators include two exchanges
33 and three clearing
houses.34  The former promulgates and enforces rules that, subject to the prior approval of the SFC,
govern, inter alia , membership of the respective exchanges and conduct of business of their members,
and set out trading practices and disciplinary powers against misconduct committed by members.  The
two exchanges also carry out self-regulatory functions – to conduct routine inspections of members'
                                                     
33The Stock Exchange of Hong Kong Limited (SEHK) and the Hong Kong Futures Exchange Limited
(HKFE).
34The SEHK Options Clearing-house Limited, the HKFE Clearing-house Limited and the Hong Kong
Securities Clearing Company Limited.WT/TPR/S/52 Trade Policy Review
Page 76
businesses to ensure compliance with the respective rules and to take disciplinary actions if
misconduct is detected.  The Stock Exchange of Hong Kong is also responsible for approving the
initial and subsequent public offerings of listed issuers and monitoring their continuous compliance
with the listing rules.  The three clearing houses  are responsible for the settlement of market
transactions and systematic risk management f unctions, whereas the SFC, an independent statutory
body established in May 1989, supervises and monitors the exchanges and clearing houses, and alsoregulates all participants and their activities in the securities, financial investment, commodities
futures and leveraged foreign exchange industries in Hong Kong.
42. To engage in securities business
35, registration with the SFC under the Securities and Futures
Commission Ordinance, the Securities Ordinanc e, the Commodities Trading Ordinance and the
Leveraged Foreign Exchange Trading Ordinance is required, as appropriate.  To be qualified forregistration, the applicant must fulfil the requirements in these Ordinances and the "Fit and Proper
Criteria" published by the SFC.  There are also capital requirements, which vary according to the type
of business undertaken.  There is no residence requirement for dealing in securities and commodities
futures.
36  Once registered with the SFC in the relevant business, on-going compliance with all
applicable laws and regulations as well as the Codes and Guidelines published by the SFC is required.
43. Only members of the Stock Exchange of Hong Kong Limited (SEHK) are allowed to trade on
the stock exchange.  To become members of the SEHK, the applicant should be a corporation
incorporated in Hong Kong, or a person born in Hong  Kong or resident in Hong Kong for five of the
seven years preceding application.  The residence requirement can be waived for persons of good
reputation with substantial experience of dealing in securities.  In a similar manner, only members of
the Hong Kong Futures Exchange Limited (HKFE) can trade on the futures exchange.  To become a
member of the HKFE, the applicant should be a comp any incorporated in Hong Kong or an individual
who is ordinarily resident in Hong Kong.  New members must be proposed and seconded by existing
members and all members must be able to meet certain minimum capital requirements.  At the end of
March 1998, a total of 1,958 securities dealers and 502 commodity dealers were registered with SFC,
of which 257 and 84, respectively, were foreign capitalized.
44. According to the authorities, there are no cont rols over capital movements, capital gains or
dividend income remittances.  Nor are there any barriers to foreign intermediaries operating as
securities or futures dealers or advisors in Hong Kong.  For a foreign intermediary to gain access to
direct membership in the Stock Exchange or Futures Exchange, it must acquire a seat on the relevant
Exchange.  There are no barriers to non-exchange member intermediaries' access to either market
through exchange members.
45. Recent government initiatives in the sector in clude the introduction of a Securities Lending
Programme, which provides a mechanism to utilize securities held by long-term investors for
short-term use by more active market participants, thereby aiming to enhance the liquidity of
private-sector debt securities and the establishment of the Hong Kong Mortgage Corporation
(HKMC), which was incorporated in March 1997.  The HKMC is wholly owned by the Government.
The HKMC purchases residential mortgage loans from authorized institutions, packages mortgages
into mortgage-backed securities (MBS) and sells th em to capital market investors.  Against this
                                                     
35Securities business includes dealing in securities, investment advice, commodity dealing and
commodity-trading advice, and leveraged foreign exchange trading.
36Generally, corporate applicants should be eith er locally incorporated or overseas companies
registered with the Companies Registry in Hong Kong.  They should have a business address in Hong Kong andat least one director must be registered and must act ively participate in and be responsible for the dealing
business of the company, whereas all other directors and employees involved in dealing activities must also beregistered as dealers or representatives.Hong Kong, China WT/TPR/S/52
Page 77
background, MBS issues substantially increased in 1997 to HK$8.5 billion from HK$1 billion in
1996. The Government is of the view that such ac tivity by the HKMC will reduce the concentration
and liquidity risks of banks' mortgage lending and the mismatch in mortgage lending by channelling
long-term savings (e.g. pension and insurance funds) to meet long-term home financing, and stimulate
the development of the local debt market by supplying debt securities in the form of unsecured paper
or mortgage-backed securities. The HKMC launched a pilot scheme for promoting fixed ratemortgages in March 1998.
37
46. In the face of signs of cross-market manipulation on both the currency market and the
securities and futures markets, the Government launched operations in the securities and futures
market in the second half of August 1998.  The sole purpose of the market operation was to restore
the order and stability of the markets and the confidence of investors.  As part of its actions to countercross-market manipulation, the Government intr oduced a 30-point programme in early September
with a view to strengthening the discipline and tr ansparency of the securities and futures markets.
The 30-point programme focuses mainly on six specific areas, namely the short selling regime,
system enhancement, risk management, rule enforcement, inter-market surveillance, and
Government's power to respond to contingent conditions.  These measures have been developed bymaking reference to the current legislation and practice in other major international markets and none
of them limits market access to foreign market participants or imposes additional requirements on
foreign investors.
(c) Insurance
47. Hong Kong, China’s insurance industry can be classified into three main sectors: direct
insurance business, reinsurance business and services auxiliary to insurance (including broking and
agency services).  Both direct insurance business and reinsurance business are further classified intogeneral insurance business and long-term insurance business.
38  The insurance sector in Hong Kong
has grown rapidly in the past few years; averag e annual growth in gross premium income between
1991 and 1996 was about 16% before slowing to about 13% (from HK$46 billion in 1996 to about
HK$52 billion) in 1997.  By the end of 1997 assets maintained in Hong Kong to meet liabilities of
Hong Kong insurance business amounted to about HK$24 billion.  At the end of June 1998, HKSARhad 212 authorized insurers, including 112 firms incorporated in 27 countries outside of Hong Kong.
39
In 1997, property damage accounted for about 31% of total gross general insurance premiums,followed by general liability business (e.g. employees’ compensation business), and motor vehicle
business (18% and 16% of the total gross premiums, respectively).  The top ten insurers (in terms of
gross general insurance premiums written) accounted for about 39% of the total general insurancepremiums; 43% of the total gross insurance premiu ms of the top ten insurers were placed with
insurers incorporated outside Hong Kong.
48. The export of insurance services totalled HK$2.9 billion in 1996, a decline of 23% over 1995.
In 1996, the value of reinsurance exports was at HK$0.6 billion, accounting for 23% of export
earnings of the insurance sector.  Direct insurance accounted for 18% of total insurance exports in1996.  The value of direct insurance exports totalled HK$0.5 billion in 1996, a decrease of 13% over
1995.  Agent’s commissions comprised HK$1.7 billion in 1996, accounting for 59% of total insurance
exports of the HKSAR.
                                                     
37Fixed rate mortgages have also been developed by a number of property developers and banks.
38General insurance business includes property damages insurance, general liability insurance, motor
vehicle insurance, and insurance on accident, health, goods, and goods in transits.  Long-term insurance businessincludes life insurance, management of retirement schemes, permanent health and annuity.
39Insurers incorporated outside the HKSAR conducting general insurance business in Hong Kong
accounted for about 41% of total gross premiums in Hong Kong.WT/TPR/S/52 Trade Policy Review
Page 78
49. Major reforms implemented in the sector in recent years the sector include provision of
statutory backing for the self-regulatory system established for insurance intermediaries such as
insurance agents and brokers; provision of regulatory concessions to captive insurers, for example,
allowing lower minimum amount of capital and solvency margin and providing exemptions from
maintaining local assets and comp lying with valuation regulation40;  introduction of a "claims
outstanding basis" in addition to the "premium in come basis" for determining the required amount of
solvency margin of a general insurer41;  prescribing the required margin of solvency for long-term
business and codifying sound actuarial principles in the determination of long-term liabilities42;
empowering the Insurance Authority to prescribe professional standards for compliance by appointed
actuaries43;  and working with the insurance industry to introduce certain self-regulatory measures,
such as the introduction of a cooling-off period for holders of long-term insurance policies andminimum disclosure requirements for investment-linked insurance products.
50. The Insurance Companies Ordinance (ICO) sets out the regulatory framework for the
insurance industry and provides the legal backing for the self-regulatory system of insurance
intermediaries.  It stipulates the authorization and prudential supervision by the Insurance Authority
of all insurers carrying on insurance business in or from Hong Kong.  The Commissioner ofInsurance, in his capacity as the Insurance Authority, is charged with the prudential supervision of the
insurance sector in the HKSAR. The main responsibil ity of the Insurance Authority is to regulate and
supervise the insurance industry with a view to pr otecting the interests of existing and potential
policyholders and promoting the general stability of the insurance industry.  The Authority is
conferred with the powers of authorization and intervention, including powers to require submission
of financial statements and other information.  The Insurance Authority works closely with
representative bodies of the industry, e.g. the H ong Kong Federation of Insurers (HKFI), the Hong
Kong Confederation of Insurance Brokers, and Pr ofessional Insurance Brokers Association Limited to
promote self-regulation by the insurance industry.
44
                                                     
40A captive insurer is an insurance company formed by its parent company to underwrite exclusively
the general insurance business of the parent or group companies or their associated companies.  The regulatory
concessions to captive insured are pr ovided in the Insurance Companies (Amendment) Ordinance enacted on
1 May 1997.  With effect from 29 December 1995, insurers carrying on general business are required to complywith the Insurance Companies (General Business) (Val uation) Regulation made under the Insurance Companies
Ordinance.
41The "claims outstanding basis" was introduced under the Insurance Companies (Amendment)
Ordinance 1996 which came into operation on 7 June 1996 for the determination of the solvency margin inrespect of general business.  An insurer is now required to maintain a solvency margin determined on thepremium income basis or the claims outstanding basis, whichever is the greater.
42These were provided in the Insurance Companies (Margin of Solvency) Regulation and the Insurance
Companies (Determination of Long-Term Liabilities) Regulation, both of which came into operation on
27 October 1995.
43As prescribed in the Insurance Companies (Amendment) Ordinance 1997, which was enacted on
1 May 1997.
44Under the self-regulatory system of insurance inte rmediaries, insurance agents are required to be
properly appointed by insurers and registered with the Insurance Agents Registration Board established by theHKFI.  Insurers are required to administer their insura nce agents in accordance with the Code of Practice for the
Administration of Insurance Agents issued by the HKFI with the approval of the Insurance Authority.  Insurance
brokers are required, inter alia , to comply with the minimum requirements specified by the Insurance Authority
with regard to qualifications and experience, capital and net assets, professional indemnity insurance, keeping of
separate client accounts and keeping of proper books and accounts.  The approved bodies of insurance brokers
are accountable to the Insurance Authority for their members' compliance with the minimum requirement.Hong Kong, China WT/TPR/S/52
Page 79
51. Authorization from the Insurance Authority is required for any company to carry out
insurance business in or from the HKSAR.45  The criteria for authorization are set out in the Insurance
Companies Ordinance and in the Authorization Guidelines issued by the Insurance Authority.46  I t
appears that the criteria are applied without discrimination to both domestic and foreign applicants.
52. A company may not generally offer life and non-life policies.47  According to the authorities,
a company may carry on some other form of business in addition to insurance business provided thatthis is not contrary to the interests of existing and potential policyholders.  A minimum paid-up capital
of HK$10 million is required for an insurer to carry out general or long-term insurance business.
48
For general insurers, the solvency margin is dete rmined on a "premium income basis" or a "claims
outstanding basis" with a minimum amount of HK$10 million or HK$20 million, depending on
whether it carries on insurance business of statutory classes or not.  For long-term insurers, the
solvency margin is the aggregate of a percentage of the mathematical reserves and a percentage of the
capital at risk, subject to a minimum of HK$2 million.  It appears that no restriction exists for insurers
in the HKSAR concerning where to invest, as long as they remain solvent overall by the statutory
amount applicable to them and maintain assets in  Hong Kong to meet 80% of their net insurance
liabilities and solvency margin relating to their Hong Kong general insurance business.  However, ageneral insurer is subject to valuation regulation stipulating the bases for determining the value of
assets and the amount of liabilities, and the admissibility limits for different categories of assets for
prudential reasons.  No statutory restrictions are imposed on business portfolio composition and
exposure to specified risk.
53. An applicant incorporated overseas can operate in the HKSAR in the form of an authorized
branch or through a locally incorporated subsidiary.
49  There appear to be no restrictions or limitations
on direct foreign ownership, nor any citizenship or residency requirements for directors.  Theapplicant is, however, required to have a commercial presence in the HKSAR and a resident chief
executive responsible for the conduct of the whole of its insurance business within the HKSAR.  Only
a company or an association of underwriters may apply for authorization to carry on insurance
business. According to the authorities, the authorizat ion criteria are the same for all insurers seeking
authorization from the Insurance Authority and al l authorized insurers are subject to the same
prudential supervision, regardless of origin.  There are no provisions to prohibit Hong Kong residents
from purchasing insurance products of their own a ccord from foreign-based insurers abroad, except
for insurance of statutory classes
50, which must be subscribed with insurers authorized in the HKSAR.
                                                     
45The applicant is also required to submit a report to demonstrate that it has undertaken a detailed
market feasibility study in respect of its proposed operations in or from the HKSAR and that its business plan is
financially viable.
46The applicant is required basically to provide sufficient capital to meet the statutory capital and
solvency margin requirements and to pre-finance its proposed business, to have fit and proper persons to holdpositions of directors and controllers, a competent management team with sufficient knowledge and relevantexperience of insurance business, and adequate reinsurance arrangements.
47With the exception of professional reinsurers whose objective of establishment is to carry on
reinsurance business only, and who would deal solely with insurance companies, granting a composite licencemay not be considered.
48The required amount is HK$20 million if the insurer engages both in general and long-term insurance
business, or insurance business of statutory classes.
49Without proper authorization by the Insurance Authority, insurance/reinsurance companies
incorporated outside the HKSAR are not allowed to solicit or market insurance in the HKSAR through branches
or via intermediaries.  However, a reinsurer incorporated outside the HKSAR is allowed to conduct reinsurancebusiness in the HKSAR provided that it has no commercial  presence in the HKSAR and is not represented in the
HKSAR by an agent.
50For example, motor vehicle (third party liability ) insurance and employees' compensation insurance.WT/TPR/S/52 Trade Policy Review
Page 80
54. To conduct insurance broking business in the HKSAR, a person must be authorized as an
insurance broker by the Insurance Authority, or be a member of an approved body of insurance
brokers.51  At the end of June 1998, there were 324 authorized insurance brokers in Hong Kong:  one
was authorized by the Insurance Authority, the rest are members of an approved body.
(d) Mandatory provident fund
55. The Mandatory Provident Fund (MPF) Scheme Ordinance was enacted in August 1995 to set
a legal framework for the forthcoming Mandatory Provident Fund System as a formal retirement
protection system.  The MPF Schemes Authority (MPFA) is responsible for prudential regulation and
supervision of the scheme. The system generally covers employees and the self-employed between
the ages of 18 and 65.52  Employees and employers both generally contribute 5 % of the employee’s
income to an elected scheme, subject to a maximum level of income for contribution purposes ofHK$20,000 per month.
53  All MPF trust schemes must be registered with the MPFA and managed by
approved trustees who meet prescribed approval criteria.54  To safeguard scheme-member interests,
the investment of scheme funds must comply with investment standards and restrictions, which are set
having regard to international standards and practices.  Accrued benefits in MPF schemes are fully
portable and have to be preserved until the scheme member attains retirement age.  The Governmentexpects the system to be ready for operation some time in the year 2000.
56. There appear to be neither cartels or monopolies operating in Hong Kong's insurance sector
nor arrangements among companies to specify the structure and level of premiums or limit
competition for new clients.
55  Domestic economic operators are free to establish contracts with their
preferred insurance company.56  There are two types of compulsory insurance in Hong Kong:
employees' compensation insurance and third party liab ility insurance in respect of motor vehicles and
pleasure vessels.
(iv) Telecommunications
57. The communications sector accounted for 3.2 % of Hong Kong, China’s GDP in 1997, up
slightly from 2.6 % in 1995.  Value added in the sector grew by some 29.6% in the year to 1996, led
                                                     
51These are the Hong Kong Confederation of Insurance Brokers, and the Professional Insurance
Brokers Association Limited.
52Expatriates working in Hong Kong who are covered by home-country programmes or whose
employment in Hong Kong does not exceed 12 months are excluded from the coverage.  All domestic
employees (including foreign domestic helpers) are also excluded.
53A self-employed person contributes 5% of his/her income.
54General criteria for local or offsho re corporate trustees include that the applicant company must be a
trust company registered under the Companies Ordinan ce and the Trustee Ordinance; and that the applicant
company should normally have a minimum paid-up capital of HK$150 million and net assets of HK$150
million (assets held in Hong Kong should be at leas t HK$15 million).  The applicant company should have a
chief executive who ordinarily resides in the HKSAR, and appropriate facilities in the HKSAR, such as officetenure and installed equipment.  Local subsidiaries of of fshore corporate trustees ar e to be treated the same as
local corporate trustees.  Only well established overseas trust companies with international experience,undoubted financial standing and good track record are considered for approval of branch operation as MPFtrustees.
55In 1997, the top ten insurers in terms of gross general insurance premiums written accounted for
about 39% of the total market.
56Under the general government policy to let individuals decide on their health and retirement
insurance, a large population of Hong Kong, China is still largely uninsured.  The authorities estimate that onlyabout 50% of the population had purchased life insurance at end 1997.Hong Kong, China WT/TPR/S/52
Page 81
by rapidly growing activities such as mobile phone services and broadband multimedia services.
Exports of telecommunications accounted for 3.2% of total services exports in 1997.
58. The principal legislation governing telecommunications in the HKSAR is the
Telecommunications Ordinance.  The last major amendment of the Telecommunication Ordinance
was made in 1993 to add new provisions to facilitate the introduction of competition in the fixed
network market.57  The Information Technology and Broadcasting Bureau is responsible for
formulating the overall policies concerning telecommunications, broadcasting and information
technologies.58  The Telecommunications Authority (TA) is the statutory body overseeing the
regulation of the sector, including the Tel ecommunication Ordinance and Telephone Ordinance,
which govern the establishment and operation of all telecommunication services. The TA is supported
by the Office of the Telecommunication Authority (OFTA), an independent government department,
to oversee the regulation of the telecommunications industry in the HKSAR.
59. All public telecommunication services in the HKSAR are provided by private entities.  A
licence from the TA is required for any company to carry out FTNS (fixed telecommunication
network services) business in the HKSAR.  Currently, there are four FTNS operators, three of which
entered the market after the deregulation of the FTNS in July 1995.59  Each of the four local fixed
network licences has a term of 15 years, until 30 June 2010.  These licences are renewable for another
term up to 15 years.  No new licences have been considered.  The TA has not approved any new
licences since 1 July 1998.60
60. Licensed FTNS operators, except the Hong Kong Telephone Company Limited (HKTC), are
free to set their own prices.61  Prior to 1 July 1998, when the Telephone Regulation on price control
was repealed, the tariffs and price structure of the HKTC had been subject to the approval of the
Telecommunication Authority before implementation.62  Before the repeal, the Government reached
an agreement with Hong Kong Telecom to surrender the exclusive licence for providing certain
external circuits and services, which had been granted to one of HKTC's associated companies, Hong
Kong Telecom International Limited.  A new price control system has been introduced since
1 July 1998.  The ceiling allowed in the system for HKTC's residential exchange line tariff will be
HK$90 per month from January 1999, HK$100 per month from 1 January 2000, and HK$110 permonth from 1 January 2001.  There has been no price control for business exchange line tariffs from 1
July 1998.  Under the agreement, all other services previously subject to the price control arrangement
of the Telephone Regulation, except for business and residential exchange lines, will remain subject
to a CPI-4% constraint in price increases until 1 January 2000, when an overall review is to be
conducted.
                                                     
57Minor amendments were made in 1996 to ensure the Ordinance is compatible with the International
Covenant on Civil and Political Rights.
58The Bureau was established in April 1998 to bring to gether the previously di vided respon sibilities for
telecommunications, broadcasting and information technology policies.
59The three companies are New World Telephone Limited , Hutchison Communications Limited and
New T&T Hong Kong Limited.
60According to the authorities, a policy review is being conducted regarding whether further licences
should be granted.
61HKTC is a subsidiary company providing local telephone services in Hong Kong.  Its mother
company, Hong Kong Telecom (HKT) is the only universal provider in Hong Kong, and is also the holding
company of Hong Kong Telecom International Limited (HKTI), an external service provider, and Hong Kong
Telecom CSL, a mobile service provider.
62The prices of a basket of services, including telephone lines, had been regulated since 1993 by a
price-cap system to limit the increase of these services to Consumer Price Index (CPI) minus 4%.WT/TPR/S/52 Trade Policy Review
Page 82
61. There are no foreign ownership restrictions nor MFN exemptions applicable to the
telecommunication industry.  To obtain a licence to provide public telecommunication services in the
HKSAR, the entity must be registered in the HKSAR.
62. Until the deregulation, the HKTC monopolized the market for local telephony covering voice
telephony services, public switched facsimile and data services.63  Its shares are owned by Cable &
Wireless plc and its subsidiary companies (54% of total shares), China Everbright (7.7%), China'sMinistry of Information Industry (5.3%);  the remaining 33% are public holdings.  HKTC remains the
dominant operator of the local telephony market w ith a market share of 98%.  Local communication
tariffs remained low after the introduction of competition in the FTNS in 1995.
64  As regards universal
requirements, the HKTC as a dominant carrier is charged with a universal service obligation to
provide a good, efficient and continuous basic service to all persons in Hong Kong, and charges havebeen regulated by a price-capping arrangement since 1993.  Interconnection with dominant carrier is,
in principle, left to commercial negotiations.
65  However, if the negotiation is found to be in
difficulties or if public interest consideration is necessary, the Telecommunications Authority can
intervene by determining the terms and conditions of  the interconnection agreement as provided in the
Telecommunication Ordinance.
63. Major deregulation initiatives in Hong Kong since the 1970s include the introduction of
competitive paging services in 1971, deregulation on customer premises equipment and liberalization
of value-added network services (VANS) in 1983;  the introduction of competitive public mobile
radiotelephone services (PMRS) in 1984;  the 1991 liberalization of international value-added
network services (IVANS) to countries which allow the service;  introduction of digital mobile
telephone systems in 1992;  lifting of the requirement for bilateral agreement on the offering of
IVANS on international private leased circuits, and liberalization of call-back service and internetaccess in 1993;  the liberalization of FTNS in 1995;  introduction of personal communication services
(PCS) in 1997
66;  and liberalization of international simple resale (ISR) for facsimile and data in 1998.
64. Under an exclusive licence that was to run until 30 September 2006, Hong Kong Telecom
International (HKTI) was responsible for providing certain international circuits and services.67 As a
result of negotiations between the Government and the HKTI, the exclusive licence was surrenderedon 31 March 1998, but external market liberalization will take place in two stages, i.e. external
services liberalization would commence from 1 January 1999;  and external facilities liberalization
will commence from 1 January 2000.  According to the authorities, HKTI is in the process of
rebalancing tariffs to reduce cross-subsidization between local and international calls.
68
                                                     
63The Government decided not to invite further FTNS licence applications before July 1998.
64The unit-charge per call is zero. There is a fixed monthly charge for local calls.  The Consumer
Council (1996) s uggested that such low local tariffs were subsidized by international revenue.
65To assist the FTNS operators to proceed with interconnection negotiations, the TA has issued a total
of ten statements on interconnection and related competition issues outlining the principles the TA would apply
to the various aspects of the FTNS sector.
66Currently, there are six licensed PCS providers in the HKSAR.
67These include external public telephone services, facsimile, data and television connections; domestic
and international telex and telegram services; international private leased circuits; and shore-to-ship and ground-to-air communications from Hong Kong, China.  Like HKTC, HKTI is also a subsidiary of the Hong Kong
Telecom.
68HKTC is to rebalance its local tariffs over a three-year period starting from 1 January 1999.  With the
liberalization of the external service market in Janu ary 1999, the cross-subsidiza tion mechanism will no longer
be sustainable as external service operators will only be required to pay to the local network operators a cost-based access charge for the use of the local networks for the delivery of traffic.Hong Kong, China WT/TPR/S/52
Page 83
65. Call-back services are permitted in Hong Kong.69  Companies and organizations are also
allowed to "self-provide" their own external telecommunication circuits for intra-corporate or
intra-organizational communications under the Self-Provided External Telecommunication System
(SPETS) licensing regime.  International simple resa le (ISR) for facsimile and data has been allowed
since January 1998.  In 1998, ahead of its expiry date, HKTI surrendered to the Government its
exclusive rights on the provision of certain external telecommunication circuits and services in returnfor a compensation package amounting to HK$6.7 billion.
70
66. Mobile services are open to competition.  There are at present 11 licensed mobile telephone
networks in Hong Kong operated by six operators.  While the Government does not set a limit on the
number of mobile telephone services licences, these are currently limited by the availability of
frequency spectrum.  The number of paging services licences is not limited.  There is a large numberof operators providing IVANS and Internet access services in Hong Kong.
71  These operators are
required to obtain a Public Non-exclusive Telecommunications Services (PNETS) licence at an
annual fee of HK$750 from the TA for the operation of such services.  The TA does not impose any
restriction on the number of PNETS licences.  The normal processing time for a PNETS licence
application is 14 working days.
Box IV. 1:  Testing and type approval of telecommunications equipment
As a general policy principle, the authorities seek to limit government involvement in the definition,
implementation and enforcement of technical requirements to a minimu m. Wherever such requirements are
deemed indispensable, for example for safety reasons or to ensure the functioning of technical systems, they
are as closely as possible aligned with international norms or those prevailing in important export markets
Certain complicated wireline equipment for connection to the public telecommunications networks and the
majority of radiocommunication equipment types require certification and type approval granted by the
Telecommunications Authority.  Where type approval or conformity testing is required, the
Telecommunications Authority accepts test data from recognized foreign agencies or type approval granted
by foreign authorities against a standar d equivalent to that of Hong Ko ng.  The technical standards for
telecommunications equipment are published by the Telecommunications Authority and the major concerns
are safety, prevention of interference and compa tibility/interoperability reasons.  OFTA recognizes
manufacturer's test reports only for certain types of telecommunication equipment, such as payphone,
analog multi-line equipment, multi-line ISDN BRA equi pment, and radio paging receiver. These tests must
be conducted in accordance with HKTA specifications or other international standards. There is no
regulation governing the importation and sales of non-conforming or non-certified customer premises
equipment, e.g. telephone sets or fax machines.  However, the Telecommunicati on Ordinance prohibits the
sales of radiocommunicatio n equipment not meeting the type approv al specification to local customers.
Source: HKSAR Government.
67. Access to Hong Kong's local ma rket for many basic telecommunications services including
voice and data transmission as well as mobile radio telephone and mobile data services appear to have
been liberalized.  In the WTO negotiations on Basic Telecommunications, Hong Kong was one of the
                                                     
69There were 38 licensees operating call-back services as at July 1998.
70The compensation package comprises the following features:  the HKTI exclusive external licence
(which was originally due to terminate in 2006) is replaced with a non-exclusive licence which extends until2010 and may be renewed for another term of 15 years;  the requirement that HKTC and HKTI be structurallyseparated is removed;  and Hong Kong Telecom will be allowed to rebalance local tariffs.
71As at July 1998, there were 66 licensees for IV ANS and 112 licensees for Internet access service.WT/TPR/S/52 Trade Policy Review
Page 84
first to sign the Agreement.  In February 1997, Hong Kong undertook, in its revised GATS Schedule
of Commitments, to liberalize FTNS and international simple resale for facsimile and data
transmission services.  Commitments have also been made on call-back and other alternative
international calling services, certain satellite services, virtual private networks, and mobile satellite
services.
(v) Transport
68. The transport and storage sector in Hong Kong accounted for 6.8% of GDP in 1996.
Transport services employed about 6% of the workforce in 1998.  Transport exports accounted for
33.3% of  Hong Kong’s total service exports;  imports accounted for 23.7% of total services imports.
(b) Air transport
69. Hong Kong’s exports of air transport services amounted to HK$33.4 billion in 1996 (11.4%
of all services exports).72  The air transport sector employed 23,400 persons, about 0.9% of the total
workforce in 1997. Though air cargo accounted for only about 1% by weight of total cargo handled
by Hong Kong in 1997, its value share was much higher, at 21.3%.
70. The regional financial turmoil did not seem to significantly affect Hong Kong's trade in air
transport services in 1997;  the contagion effect was however more noticeably felt in the first half of1998, evidenced by the decline in air cargo handled (down 1% in volume year-on-year) and in air
passenger numbers (down 14%).
71. The new airport at Chek Lap Kok opened in July 1998 replacing the former Kai-Tak airport.
The new airport is expected to handle 3 million tonnes of cargo and 35 million passengers per year;
its capacity is expected to increase to 9 million tonnes of cargo and 87 million passengers a year upon
full development.
72. The Economic Services Bureau (ESB) is responsible for policy related to air transportation
and for air services negotiations.  The ESB also oversees the work of the Civil Aviation Department
and liaises with the Airport Authority (AA), a government-owned statutory body, on developing,
operating and maintaining  the new airport.
73
73. An airline requires an Air Operator's Certificate, issued by the Civil Aviation Department
according to the Air Navigation (Hong Kong) Order 1995, before it may initiate any air services as aHong Kong airline to or from the HKSAR.  The eligibility criteria for a certificate include the
applicant's technical, organizational and management experience, and the proven experience and
competence of key personnel.  Currently, there are three Hong Kong based commercial airlines
providing scheduled international services, namely Cathay Pacific Airways Limited, Hong Kong
Dragon Airlines Limited, and AHK Air Hong Kong Limited.  None of these airlines has anyprivileges or obligations such as subsidies, government guarantees, exclusive route access or ground
handling monopoly.  The Government does not own an y airline exclusively. Hong Kong, China grants
no exclusive rights, such as obligations on the HKSAR government civil servants to fly on Hong
Kong airlines, or restrictions, or incentives for Hong Kong airlines to purchase from particular
sources.
                                                     
72No breakdown into cargo and passenger service revenues is available.
73The AA is a statutory corporation that provides, operates, develops and maintains the new airport.
The Government is the sole shareholder of the Airport Authority.Hong Kong, China WT/TPR/S/52
Page 85
74. Following the worldwide practice, scheduled international services are regulated under a
regime of bilateral agreements.74  Scheduled airline services on specific routes are managed through a
licensing system.  These licences are issued by the Air Transport Licensing Authority (ATLA), an
independent statutory body, as required by the Air Transport (Licensing of Air Services) Regulations
for the route concerned.75  After obtaining a licence, the applicant may request the Government to
consider designating it as a Hong Kong airline under  Hong Kong's bilateral air services agreement for
that particular route.76  Airlines, other than Hong Kong airlines, that wish to operate scheduled air
services between Hong Kong and a foreign country must satisfy all requirements in the country of
their registration and obtain an operating permit from Hong Kong's Director of Civil Aviation.
Scheduled air services between Hong Kong and the mainland of China are governed by air services
arrangements made by the Central People's Government in consultation with the Government of theHKSAR.
75. For non-scheduled international air services to and from Hong Kong, applications are
normally approved only if the applicant has reasonably demonstrated that scheduled services cannot
satisfy the genuine demand, by providing the service or capacity required, and that, in the case of
applications made by airlines based outside Hong Kong, the government of the country in which theairline making the application is based would afford no less favourable treatment to a Hong Kong
based airline making a similar application.
76. Airport slots are allocated by a Schedule Coordinator (SC), currently Cathay Pacific Airways,
which is appointed by the Director of Civil Aviation for the overall scheduling of flight movements in
Hong Kong based upon the IATA Scheduling Procedures Guide and any other guidelines or criteria as
may be specified by the Director of Civil Aviation from time to time.
77
                                                     
74The HKSAR Government is party to 32 air-service agreements.  Air services with Chinese Taipei
operate under an inter-airline commercial agreement.  Key parameters covered by these agreements include:granting of traffic rights;  filing and approval/disapproval of tariffs;  and principles governing operation ofagreed services, and designation/authorization of airlines.  Capacity is from time to time jointly determined bythe contracting parties to the agreement.  Airlines hold ing a licence on a particular route may start to operate on
the route after they have been designated under the relevant bilateral air services agreement and obtained the
appropriate operating authorizations from the contracting party concerned.  Hong Kong, China does not have
complete open-capacity arrangements with any aviation partner.
75The objective of the licensing scheme is to ensure the most effective service to the public while
avoiding uneconomical overlapping, and generally to the interests of the public, including those of personsrequiring or likely to require facilities for air transport, as well as those of persons providing such facilities.  The
factors affecting approval include:  the existence of other air services in the area through which the proposed
services are to be operates;  the demand for air transport in that area;  the degree of efficiency and regularity of
the air services, if any, already provided in that area, whether by the applicant or by other operators; the period
for which such services have been operated by the applicant or by other operators; the extent to which it isprobable that the applicant will be able to provide a satisfactory service in respect of safety, continuity,
regularity of operation, frequency, punctuality, reasonableness of charges, and general efficiency; the financial
resources of the applicant; the type of aircraft proposed to be used; the remuneration and general conditions of
employment of aircrew and other personnel employed by the applicant;  and any objection or representationduly made in relation to an application.
76The airline concerned must be incorporated and have its principal place of business in Hong Kong in
order to be designated as a Hong Kong airline. There are no obligations to operate non-profitable flights toremote areas.
77All scheduled airlines which plan to operate to Hong Kong are required to submit their slot requests
to the SC.  If a slot request cannot be met, the SC offers the closest available slot(s) for that specific flight.  InJune and November each year, the schedule coordinators of airports around the world and all airlines meet at the
IATA Schedule Coordination Conference to settle any outstanding slots requests.  According to IATAguidelines, all airlines are encouraged to discuss with eac h other and with the airport coordinators to resolve anyWT/TPR/S/52 Trade Policy Review
Page 86
77. In August 1998, 53 international airlines operated scheduled passenger service into and out of
Hong Kong, of which two operated their services on a code-share basis only.  Sixteen of these airlines
also operated scheduled cargo services.   There were ten international airlines providing cargo-only
service.  Airlines are required to notify their proposed tariffs to the Government.  In accordance with
the provisions of the bilateral air services agreements, the airlines are required to charge only tariffs
that have been filed with and approved by the aeronautical authorities concerned.
78. Providers of aircraft repair and maintenance services require approval under the Air
Navigation (Hong Kong) Order.  For operations within  the new airport, franchises are awarded by the
Airport Authority for aircraft base and line maintenance services.  On base maintenance, the franchise
is non-exclusive.78  On line maintenance, there will be not more than three franchisees in the first five
years and not more than four franchisees in the following five years.79  According to the authorities,
the award of these franchises follows the principle of  "level playing field" and there are no
restrictions on foreigners becoming franchisees.  There is no alliance between Hong Kong and
foreign-based carriers in respect of aircraft maintenance.
79. Ground handling services at the new airport are provided by franchisees that have entered into
an agreement with the AA.  The AA's policy is to make available a choice of competitive specialistservice providers to reduce the need for self-handling, and subject to operational considerations such
as space constraint and efficiency, airlines may apply to AA for permission to self-handle in some
areas.  According to the authorities, such applications are considered under objective and non-
discriminatory criteria.
80. The provision of computer reservation system services is not regulated in Hong Kong.
Scheduled services are not allowed to be shown in timetables, computer reservation systems or any
advertisement: (i) in a way which is in any respect inconsistent with the terms of the relevant airservices arrangements, or (ii) as being a continuation of or as providing a through service with any
other services provided by the airline to or from a point not covered by the terms of the relevant air
services arrangements. Non-scheduled services are not allowed to advertise or in any other way be
offered directly to members of the public.
(c) Maritime transport
81. Maritime transport is crucial for Hong Kong, China’s international trade, with some 90% of
its tonnage being carried by sea.
80  In 1997, a total of 169 million tonnes of cargo was handled in
domestic ports.  Hong Kong is one of the busiest container ports in the world, handling 14.6 million
TEUs (twenty-foot equivalent units) in 1997.  Vessels have been increasingly used to carry goods
between Hong Kong and South China, which has become the main cargo source for the territory.  Theshare of Hong Kong flag vessels in its seaborne cargo declined to 1% in 1998, compared with 3% in
1993.  There were 482 vessels (6.2 million gross registered tons) on the Hong Kong Shipping
Register, making it the 21st largest shipping register in the world in 1997.  Ships on the Hong Kong
Register comprised about 1 to 2% of the world fleet over the past five years.  Some Hong Kong
shipping lines, particularly those carrying containers, participate in liner conferences;  general cargo
                                                                                                                                                                    
problems relating to slot allocation.  If a mutually  acceptable solution cannot be found, the IATA Scheduling
Procedures Committee will act as the mediator.  Airlines can also appeal to the Director of Civil Aviation if theybelieve that the slots might not have been coordinated in a fair and transparent manner.
78The scope of base maintenance generally includes activities like scheduled routine heavy
maintenance, structural repairs and engine overhaul.
79Line maintenance is any maintenance that must be carried out before flight to ensure that the aircraft
is fit for the intended flight.
80WTO document S/NGMTS/W/2/Add.15.Hong Kong, China WT/TPR/S/52
Page 87
ships do not.  The Government is of the view that the Asian economic crisis has resulted in a decline
in intra-Asia cargoes through the port although Hong Kong's key catchment area of South China has
not been affected significantly.
82. The Economic Services Bureau (ESB) is responsible for overall economic and safety matters
concerning shipping as well as for marine pollution policies.  The Marine Department, under the ESB,
is responsible for the administration and implementation of safety and pollution prevention ordinancesand regulations made through the relevant legislative procedures.
81  No licence or approval
requirement exists for a prospective new entrant into the maritime transport sector, except as far as
some auxiliary services and inland waterways transport are concerned.  Shipping lines forming
conferences under the U.N. Convention on a Code of  Conduct for Liner Conferences are required to
enter into commercial negotiations on the admission of new members, as stipulated in the Merchant
Shipping (Liner Conference) (Hong Kong) Order.  No restrictions exist on the participation of
shipping lines in the commercial arranged conferences, nor on the withdrawal of members from the
conferences.
83. According to the authorities, Hong Kong has no market access restrictions or exceptions to
MFN treatment for shipping service.  The only exception to national treatment pertains to the
international operations of ships registered in Hong Kong;  the income for owners of these ships
derived from cargo uplifts or towage operations in  Hong Kong or elsewhere is exempt from Hong
Kong's profits tax.82  Such an exemption constitutes tax reli ef for the export of shipping services.
Though employment of all categories of personnel in the maritime transport sector is subject to an
economic needs test, the total number of foreign natural persons that may be employed in the sector or
that a maritime transport services supplier may employ is not restricted.
84. The maritime transport sectors, like all others, operate on free market principles. Monopoly or
exclusive service supplier arrangements apply in respect of the provision of certain auxiliary maritime
services and port services, including the provision of buoys and pilotage; licensing of vessels for
carriage of passengers within Hong Kong waters; and operation of cargo and passenger terminals.83
Restrictions essentially apply to services that require public utility concession or occupation of publicland and are equally applicable to domestic and foreign suppliers.  In addition, franchise arrangementsexist for some passenger ferry services.  The Government is of the view that such arrangements are
needed to safeguard public interest so that the co mpanies operate not only profitable routes but also
less attractive (unprofitable) routes.  Bids for these franchises are open to domestic or foreign firms.
85. Hong Kong's ports are privately funded and port facilities are owned and operated mainly by
private firms.  The Government operates 600 vessels to support port safety and security functions aswell as government transport requirements such as movement of stores and personnel to Government
installations on offshore islands.  Pilotage services are provided by persons qualified by the Pilotage
Authority of the Government.
84
                                                     
81For all foreign ships in Hong Kong, and Hong Kong registered ships, the constructional and
operational safety requirements and the pollution contro l requirements are covered by the Merchant Shipping
(Safety) Ordinance and Merchant Shipping (Prevention and Control of Pollution) Ordinance respectively.
82The Government estimates that HK$28 million in tax revenue were forgone per annum as a result of
this exemption.
83These are regulated through the Shipping and Port Control Ordinance, the Pilotage Ordinance and the
Port Control (Cargo Working Areas) Ordinance.
84Pilotage service is compulsory for ships of 3,000 grt. and above.  Gas carriers require pilotage
services regardless of size.WT/TPR/S/52 Trade Policy Review
Page 88
86. Hong Kong, China made specific commitments in its GATS Schedule in the maritime
transport services subsectors of freight transportation, rental of vessels with crew, and maintenance
and repair of vessels. Though Hong Kong, China did not bind the internal waterways transport
subsector, there are, according to the authorities,  no market access restrictions or exceptions to MFN
or national treatment for internal waterways transport.85
(vi) Other services
(a) Tourism
87. Tourism has been one of Hong Kong's largest earners of foreign exchange. Exports in tourism
accounted for about 27% of total services exports, contributing to some 6.5% to GDP.  The number of
visitor arrivals has decreased recently, from 11.7 million visitors in 1996 to 10.4  million in 1997.
Visitor arrivals in January-August 1998 declined 13.5% compared with the same period in 1997.However, the industry started to show initial sign s of recovery in mid-1998, recording in August and
September 1988 the first positive growth since mid-1997.
88. The Travel Agents Registry and the Economic Services Bureau are responsible for
administering the outbound and inbound travel business, respectively.  A licence by the Registrar of
Travel Agents is required under the Travel Agen t's Ordinance to conduct outbound travel business in
the HKSAR. The licensing criteria require that the applicant is a member of the Travel Industry
Council of Hong Kong (TIC).
86 A travel agent's licence is renewable for a period up to 12 months.87
The Registry is also responsible for financial and character investigation of licensed travel agents andthe hearing of appeals and handling of complaints concerning suspected unlicensed travel agents.  As
of 31 August 1998, there were some 1,150 licensed travel agents.
89. There appear to be no restrictions on conducting inbound tourism business in the HKSAR.
Recent measures for inbound tourism include a reduction, on 1 April 1998, of the HotelAccommodation Tax rate (from 5% to 3%) and the Marine Ferry Terminal Passenger Fee (from
HK$25 to HK$18 per person), and on 6 July 1998, with the effect from the opening of the new
airport, of the Air Passenger Departure Tax (from HK$100 to HK$50 per person).  The Government
established a Tourism Development Fund of HK$50 million  in 1996;  and in 1998 established an
                                                     
85Foreign-based vessels must obtain a licence before they are permitted to operate on domestic routes.
According to the authorities, the restriction is aimed at ensuring that these vessels are safe to operate withinHong Kong waters and properly manned to that effect.
86There are two types of membership for the TIC:  ordinary and affiliate.  To be an ordinary member,
an applicant must be a limited company incorporated or registered in Hong Kong conducting travel-related and
tourism business only; have a minimum paid-up capital of HK$500,000 and HK$250,000 for each additionalbranch office; be a member of one of the eight Associ ation Members (Hong Kong Association of Travel Agents
Limited, The Federation of Hong Kong Chinese Travel Agents Limited, International Chinese TouristAssociation Limited, Society of IATA Passenger Agents Limited, Hongkong Taiwan Tourist Operators
Association Limited, Hong Kong Association of Chin a Travel Organizers Ltd., Hong Kong Association of
China Travel Organizers Ltd., Hong Kong Outbound tour Operators' Association Limited, and Hong KongJapanese Tour Operators Association Limited); employ at each office a manager with two years' relevantexperience and at least one other full-time staff member.  Affiliate members may not have any branch officesand may not register, organize or operate outbound tours.
87A travel agent must apply for renewal of its licence at least one month before its expiry. The
application must be accompanied by the agent's latest statements of accounts. In addition, the licensee shall,
within a month of receipt of the auditor's report on statements of accounts in respect of the business of theprevious financial year, submit a copy of the report to the Registrar; and upon request by the Registrar, thelicensee shall submit a quarterly return on the financial position of his business in a form specified by theRegistrar.Hong Kong, China WT/TPR/S/52
Page 89
International Events Fund of HK$100 million to support the staging of some 50 events in the coming
five years by way of loans and grants.
(b) Legal services
90. The legal profession in Hong Kong is classified in two categories:  solicitors and barristers.
At 31 August 1998, there were 4,739 solicitors in H ong Kong, and at end-September, 676 barristers.
A practising solicitor is not allowed to practise as a barrister, and vice versa.  Hong Kong has made nocommitments in the legal services sector in its GATS Schedule.
91. The Legal Practitioners Ordinance regulates participation in the sector. The Department of
Justice is the regulatory authority for legal services in the HKSAR, and, according to the
Government's principle that the legal profession should be self-regulatory, the Law Society and the
Bar Association also play an important regulatory role, including admission to practise. There existsome preferential arrangements for the recognition of qualifications for barristers and limited market
access restrictions.
92. Foreign lawyers and foreign law firms must register with the Law Society before they may
practise foreign law in Hong Kong.
88  They are prohibited from practising Hong Kong law.  A
registered foreign law firm is not permitted to practise Hong Kong law or employ and/or enter intopartnership with Hong Kong solicitors.  It may enter into an association with a local law firm,
provided that the number of foreign lawyers does not exceed that of local solicitors in the
association
89.  A branch of a foreign law firm registered as a local law firm (i.e. practicing Hong Kong
law) may bear the same name as the foreign firm provided that a registered foreign firm of the same
name has practised foreign law in Hong Kong in the immediate past three years;  at least one of the
principals of the Hong Kong firm is a partner in the overseas firm;  and one of the principals of the
Hong Kong firm has, for not less than three years during the five years immediately preceding theestablishing of the firm, been a partner in, or a cons ultant to, or employed by, the foreign firm or the
overseas firm.
93. Foreign legal professionals may qualify as Hong Kong solicitors after passing the
examinations prescribed under the Overseas Lawyers (Qualification for Admission) Rules under the
Legal Practitioners Ordinance.  Those who have obtained qualifications in the United Kingdom maybe exempted from taking all of the examinations when certain criteria are met, and those who have
obtained qualifications in certain other common law jurisdictions, such as Australia, New Zealand and
Singapore may be exempted from taking some of the examinations for gaining admission as solicitor
in Hong Kong.
94. Admission of foreign legal professionals as barrister is largely restricted to those from
Commonwealth jurisdictions. Under the Legal Practitioners Ordinance, a person may be admitted as
barrister if he/she satisfies the criteria specifying required educational and professional qualifications
either in Hong Kong or in certain foreign countries practising common law.
90  According to the
                                                     
88A person is qualified to be registered as a foreign lawyer if he is a person of good standing in the
foreign jurisdiction in which he is qualified to practise law and if he has satisfied the Law Society that he is a fitand proper person to be so registered.
89This requirement may be waived by the Law Soci ety under exceptional circumstances such as the
death or illness of the lawyers.  Such waiver, which is on a temporary basis, is granted according to merits.
90The approval criteria are that the applicants  (i) ha ve obtained their qualifications in Hong Kong;  (ii)
have been called to the Bar in England, Northern Ireland  or Scotland and have (a) practised as a barrister or
advocate in the United Kingdom for at least three years, or (b) is a Hong Kong permanent resident, or (c) hasbeen ordinarily resident in Hong Kong for at least seve n years; or (iii) are Common wealth citizens or citizens ofWT/TPR/S/52 Trade Policy Review
Page 90
authorities, both the Government and the Hong Ko ng Bar Association recognize the need to change
the entry criteria, and the former is considering proposals formulated by the latter for appropriate
amendments to these criteria.
95. Restrictions on price competition with regard to solicitors' scale fees for conveyancing have,
in effect, collapsed.  According to the authorities, no restriction on price competition exists in the case
of barristers.
                                                                                                                                                                    
the Republic of Ireland, have been ordinarily resident in Hong Kong for at least seven years, and have obtained
a Postgraduate Certificate in Law from a local universi ty (Bachelor of Law may be obtained in their country of
origin); or (iv) have been admitted as a solicitor in Hong Kong for at least three years before the application foradmission and during that time was in practice as a solicitor in Hong Kong or employed by the Government as a
legal officer; or (v) have been admitted as a barrister or legal practitioner in Australia, Canada (except Quebec),
New Zealand, Republic of Ireland, Zimbabwe or Singapore, and have experience in advocacy, and have beenemployed in the Department of Justice of the Government as a legal officer for at least seven years and were soemployed for at least three years on work similar to that  usually undertaken by a barrister of ten years seniority,
and intend, if admitted, to practise as a barrister in Hong Kong within 12 months after admission.Hong Kong, China WT/TPR/S/52
Page 91
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Chen, Duanjie and Kenneth J. McKenzie (1997), "The Impact of Taxation on Capital Markets:  An
International Comparison of Effective Tax Rates on Capital" in Halpern, Paul J. (General Editor)
Financing Growth in Canada, University of Calgary Press.
Consumer Council (1996), Competition Policy:  Th e Key to Hong Kong's Future Economic Success,
Hong Kong.
GATT (1994), Trade Policy Review  Hong Kong, Geneva.
Hong Kong Trade Development Council (1997), Profiles of Hong Kong's Major Manufacturing
Industries,  Hong Kong.
Rose N. (1997), Industrial Organization, NBER Reports.