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Cablegate: Hong Kong's 2008 Investment Climate Statement

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

UNCLAS SECTION 01 OF 11 HONG KONG 000179

SIPDIS

SIPDIS

STATE FOR EAP/CM AND EEB/IFD/OIA
TREASURY FOR OASIA
USDOC FOR 3132/USFCS/OIO/EAP
STATE PASS USTR FOR LEE AND RAGLAND

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC MO
SUBJECT: HONG KONG'S 2008 INVESTMENT CLIMATE STATEMENT

REF: 07 STATE 158802

1. The following is the 2008 Investment Climate Statement for the
Hong Kong Special Administrative Region.

-----------------------------------
A.1 Openness to Foreign Investment
-----------------------------------

2. Hong Kong pursues a free market philosophy with minimal
government interference in the economy. The Hong Kong Government
welcomes foreign investment. It neither offers special incentives
nor imposes disincentives for foreign investors. Hong Kong's
well-established rule of law is applied consistently and without
discrimination. There is no distinction in law or practice between
investments by foreign-controlled companies and those controlled by
local interests. Hong Kong is a member of the World Trade
Organization in its own right and is a separate customs territory.
Hong Kong is a duty free port, except for a small number of tariffs
on products such as cigarettes and alcohol. There are no quotas or
dumping laws.

3. Foreign firms and individuals are allowed freely to incorporate
their operations in Hong Kong, register branches of foreign
operations, and set up representative offices without encountering
discrimination or undue regulation. There is no restriction on the
ownership of such operations. Company directors are not required to
be citizens of, or resident in, Hong Kong. Reporting requirements
are straightforward and not onerous. Hong Kong's extensive body of
commercial and company law generally follows that of the United
Kingdom, including the common law and rules of equity. Most
statutory law is made locally. The local court system provides for
effective enforcement of contracts, dispute settlement, and
protection of rights. Formalities are minimal in company
incorporation and business registration. Foreign and domestic
companies register under the same rules and are subject to the same
set of business regulations.

4. The Hong Kong Government's InvestHK encourages inward investment
as a means of introducing new or improved products, processes,
designs and management techniques. U.S. and other foreign firms can
participate in government financed and subsidized research and
development programs on a national treatment basis.

5. There is no capital gains tax, nor are there withholding taxes on
dividends and royalties. Profits can be freely converted and
remitted. Foreign-owned and Hong Kong-owned firms are taxed at the
same rate, 16.5 percent of profits in 2008-09. There are no
preferential or discriminatory export and import policies that
affect foreign investors. There are no direct subsidies to domestic
industries. There are no disincentives to foreign investment such
as quotas, bonds, deposits, or other similar regulations. The Hong
Kong Code on Takeovers and Mergers (1981) sets out general
principles for acceptable standards of commercial behavior.

6. According to Hong Kong Government statistics, there were 3,890
regional operations of overseas companies in Hong Kong in 2007. The
Government defines regional operations as: regional headquarters
that control the operation of other branches in the region without
frequent referrals to the parent company outside Hong Kong; and
regional offices as offices that coordinate operations elsewhere in
the region with frequent referrals to the parent company outside
Hong Kong or a regional headquarters. The U.S. has the largest
number of regional headquarters and offices in Hong Kong (891
companies), followed by Japan (748 companies) and the UK (347
companies). The major lines of business of the regional
headquarters include wholesale/retail, import/export, finance and
banking, manufacturing, and transport and related services.

7. The Hong Kong Government owns all land, granting long-term leases
without transferring title. Local and foreign leaseholders are
treated equally. The Government plays a significant role in the
housing market: about 50 percent of homes in Hong Kong are rented
from the Government or purchased with government assistance at below
market rates.
With few exceptions, the Hong Kong Government does not attempt to
limit the activities of foreign investors either in specified
projects or sectors. Foreign investment in Hong Kong flows freely
into the industrial sector as well as into services, franchises,
restaurants, the entertainment industry, and the ownership of
property, both residential and commercial. The telecommunications
services market has been fully liberalized since January 1, 2003.

8. The exceptions to the Hong Kong Government's open foreign
investment policy are:

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--Broadcasting - Voting control of free-to-air television stations
by non-residents is limited to 49 percent. There are also residency
requirements for the directors of broadcasting companies.
--Legal Services - Foreign lawyers are able to practice foreign and
international law in Hong Kong. Foreign lawyers can apply to take
the Hong Kong Bar Examination and, if successful, practice Hong Kong
law. Foreign law firms may not hire local lawyers to advise on Hong
Kong law, but may themselves become "local" firms after satisfying
certain residency and other requirements. They may thereafter hire
local attorneys, but must do so on a 1:1 basis with the foreign
lawyers. They also can form associations with local law firms.

9. Hong Kong has a free trade agreement with Mainland China,
referred to as CEPA, or the Closer Economic Partnership Arrangement.
CEPA provides tariff-free export to Mainland China of Hong
Kong-origin goods and preferential access for specific services
sectors. The agreement was originally implemented at the beginning
of 2004 and has been expanded three times. When the third phase was
implemented at the beginning of 2006, all Hong Kong-origin products
became eligible for tariff-free access to Mainland China. The
fourth phase, announced in July 2007 expanded access for service
providers. Service providers in 38 sectors (e.g., logistics,
distribution) now enjoy preferential treatment on the mainland.
U.S. and other foreign firms with a significant presence in Hong
Kong are eligible to take advantage of CEPA concessions to enter the
mainland market.

-------------------------------------
A.2 Conversion and Transfer Policies
-------------------------------------

10. There are no restrictions on conversion and inward or outward
transfer of funds for any purpose. The Hong Kong dollar is a freely
convertible currency that, since late 1983, has been linked via a
currency board to the U.S. Dollar at an exchange rate of
approximately HKD7.75 = US$1. There is no allocation of foreign
exchange.

-----------------------------------
A.3 Expropriation and Compensation
-----------------------------------

11. The U.S. Consulate General is not aware of any expropriation
actions in the recent past. Expropriation of private property may
occur if it is clearly in the public interest, but only for
well-defined purposes such as implementation of public works
projects. If this is the case, expropriations are to be conducted
through negotiations, in a non-discriminatory manner in accordance
with established principles of international law. Due process and
transparency are to be observed. Investors in and lenders to
expropriated entities are to receive prompt, adequate, and effective
compensation. Property may be acquired under the State Land
Resumption Ordinance, the Land Acquisition Ordinance, the Mass
Transit Railway (Land Resumption and Related Provisions) Ordinance
or the Roads Ordinance. These ordinances provide for payment of
compensation. If agreement cannot be reached on the amount payable,
either party can refer the claim to the Land Tribunal.

-----------------------
A.4 Dispute Settlement
-----------------------

12. The U.S. Consulate General is not aware of any investor-state
disputes in recent years involving U.S. or other foreign investors
or contractors and the Hong Kong Government. The Hong Kong
Department of Justice is also not aware of any such disputes.
Private investment disputes are normally handled in the courts or
via private negotiation. Alternatively, disputes may be referred to
the Hong Kong International Arbitration Center.

13. The Hong Kong Government accepts international arbitration of
investment disputes between itself and investors. Following
reversion to Chinese sovereignty on July 1, 1997, Hong Kong applies
provisions of the International Center for the Settlement of
Investment Disputes (ICSID), known as the Washington Convention, and
the New York Convention of 1958 on the Recognition and Enforcement
of Foreign Arbitral Awards. Hong Kong has also adopted the United
Nations Commission on International Trade Law (UNCITRAL) model law
for international commercial arbitration.

14. Hong Kong and the People's Republic of China signed a Memorandum
of Understanding in June 1999 on an arrangement parallel to the New
York Convention for the reciprocal enforcement of arbitral awards,
since the New York Convention, being an international agreement, is
no longer applicable to the enforcement of arbitral awards between

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Hong Kong and Mainland China.

15. Hong Kong's legal system is firmly based on the rule of law and
the independence of the judiciary. Courts of justice in Hong Kong
include the Court of Final Appeal, the High Court (composed of the
Court of Appeal and the Court of First Instance), the District
Court, the Magistrate's Courts, the Coroner's Court, and the
Juvenile Court. There are also a Lands Tribunal, Labor Tribunal,
and other statutory tribunals.

--------------------------------------------
A.5 Performance Requirements and Incentives
--------------------------------------------

16. Consistent with its non-interventionist economic philosophy,
Hong Kong imposes no export performance or local content
requirements as a condition for establishing, maintaining or
expanding a foreign investment. Hong Kong offers no special
privileges to attract foreign investment. There are no requirements
that Hong Kong residents own shares, that foreign equity be reduced
over time, or that technology be transferred on certain terms.

17. All of Hong Kong is a duty-free zone. Subject to
non-discriminatory application of excise taxes and restricted entry
in some sectors, as noted above, local and foreign firms are free to
take advantage of investment opportunities as they arise.

--------------------------------------------- ----
A.6 Right to Private Ownership and Establishment
--------------------------------------------- ----

18. Hong Kong law and regulations provide for the right of foreign
and domestic private entities to establish, own and dispose of
interests of business enterprises. Foreign investors are allowed,
except for the sectors noted above, to engage in all lawful forms of
remunerative activity. The Hong Kong Government does not generally
engage directly in business activity via public enterprises.
Business privileges, franchises and land development rights are
granted on the basis of competitive equality.

----------------------------------
A.7 Protection of Property Rights
----------------------------------

19. Hong Kong's commercial and company laws provide for effective
enforcement of contracts and protection of corporate rights. Hong
Kong has filed its notice of compliance with the trade-related
intellectual property requirements of the World Trade Organization.
The Intellectual Property Department, which includes the Trademarks
and Patents Registries, is the focal point for the development of
Hong Kong's intellectual property regime. The Customs and Excise
Department is the principal enforcement agency for intellectual
property rights (IPR). Hong Kong has acceded to the Paris
Convention for the Protection of Industrial Property, the Bern
Convention for the Protection of Literary and Artistic Works, and
the Geneva and Paris Universal Copyright Conventions. Hong Kong
also continues to participate in the World Intellectual Property
Organization, as part of Mainland China's delegation.

20. The Hong Kong Government devotes significant attention and
resources to IPR enforcement. Implementation of laws passed in
recent years, including aggressive raids at the retail level, has
significantly reduced illegal production and retail sales of
copyright and trademark protected products. The Hong Kong courts
have imposed longer jail terms for violations of Hong Kong's
copyright ordinance. The Hong Kong Government has conducted public
education efforts to encourage respect for intellectual property
rights. Nevertheless, pirated and counterfeit products remain
available at the retail level throughout Hong Kong. In addition,
end-use piracy of software and textbooks, the rapid growth of
peer-to-peer downloading via the Internet, and the illicit
importation and transshipment of pirated and counterfeit goods,
including optical discs and name brand handbags and apparel from
Mainland China and elsewhere in the region, are continuing problems.
Hong Kong authorities have taken steps to address these problems
by: continued monitoring of suspect shipments at points of entry;
establishing a task force to monitor and crack down on peer-to-peer
(P2P) piracy over the Internet in December 2004; prosecuting
software end-use piracy, and proposing a new Copyright Amendment.
The P2P task force made its first arrest for distributing
unauthorized movies via this technology in January 2005. The court
sentenced the offender to three months' imprisonment in November
2005. In December 2006, the Court of Appeal upheld this conviction
and sentence. Another vulnerability is that health authorities
continue to permit the registration of generic drugs for marketing

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without regard to whether these products infringe on valid patents.
Despite extensive consultations with industry, no progress has been
made on closing this loophole.

21. The Copyright Ordinance protects any original copyright work
created or published by any person anywhere in the world. The
government made amendments to the Copyright Ordinance and enacted
the changes in July 2007. In particular, two new provisions create
a criminal offence against the copying and distribution of
infringing copies of printed works in business and a separate civil
liability against the act of circumventing technological protection
measures. These provisions will be enacted by the government in the
form of two pieces of subsidiary legislation which define the scope
within which the relevant acts do not attract the new liabilities.
While the government is still consulting the stakeholders, it
targets to submit the subsidiary legislation to the Legislative
Council in the second quarter of 2008. The Copyright Ordinance
provides for rental rights for sound recordings, computer programs,
films and comic books. It provides for enhanced penalty provisions
against copyright piracy and additional legal tools to facilitate
enforcement. It decriminalizes parallel imports of copyrighted
products 15 months after their release anywhere in the world, but
maintains civil penalties. It retains the existing scope of the law
defining an offence as possession of an infringing copy of computer
programs, movies, TV dramas, musical recordings (including visual
and sound recordings) for use in business. This criminal liability
applies equally to individuals and business organizations. The
possession of an infringing copy of other categories of works for
use in one's business will not attract criminal liability but may
incur civil liability. In addition, the government introduced a
public consultation in December 2006 on making unauthorized
downloading of copyrighted materials a criminal offence. The Hong
Kong government has received about 600 submissions by the end of the
consultation period and plans to release the preliminary proposals
in early 2008 to facilitate further public consideration. The
Patent Ordinance allows for granting of an independent patent in
Hong Kong based on the patents granted by the UK and the Chinese
Patent Offices. The patent granted in Hong Kong is independent and
capable of being tested for validity, rectified, amended, revoked
and enforced in Hong Kong courts.

22. The Registered Design Ordinance is modeled on the EU design
registration system, with certain modifications. To be registered,
a design must be new. The system requires no substantive
examination. Protection is for an initial period of five years, and
may be extended for four periods of five years each, up to a maximum
of 25 years.

23. Hong Kong's trademark law is TRIPS-compatible and allows for
registration of trademarks relating to services. All trademark
registrations originally filed in Hong Kong are valid for seven
years and renewable for 14-year periods. Proprietors of trademarks
registered elsewhere must apply anew and satisfy all requirements of
Hong Kong law. When evidence of use is required, such use must have
been in Hong Kong.

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

------------------------------------------
A.8 Transparency of the Regulatory System
------------------------------------------

25. Hong Kong's body of law and regulation recognizes the value of
competition in economic endeavor. Tax, labor, health and safety and
other laws and policies avoid distortions or impediments to the
efficient mobilization and allocation of investment. Bureaucratic
procedures and "red tape" are held to a minimum and are equally
transparent to local and foreign investors. Hong Kong does not have
an anti-trust law. Hong Kong has, however, set up a Competition
Policy Review Committee that issued recommendations in June 2006.
These recommendations included a call for legislation to regulate
price-fixing, bid-rigging, market allocation, sales and production
quotas, joint boycotts, unfair or discriminatory standards and the
abuse of dominant market position. The government began a public
consultation period, which ended on February 5, 2007. The
government will publish a consultation paper outlining the main
scope of the legislation to consult the public again in the first
quarter of 2008. Currently, only the telecommunications and, to a
lesser degree, the broadcasting sectors have competition regulations
in place. Certain sectors of the economy are dominated by monopolies

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or cartels, not all of which are regulated by the Hong Kong
Government. These entities do not discriminate against U.S. goods
or services, but they can use their market position to block
effective competition.

--------------------------------------------- ----------
A.9 Efficient Capital Markets and Portfolio Investment
--------------------------------------------- ----------

26. There are no impediments to the free flow of financial
resources. Non-interventionist economic policies, complete freedom
of capital movement and a well-understood regulatory and legal
environment have greatly facilitated Hong Kong's role as a regional
and international financial center. Hong Kong's has one of the most
active foreign exchange markets in Asia.

27. Hong Kong has a three-tier system of deposit-taking
institutions: licensed banks, restricted license banks, and
deposit-taking companies. Only licensed banks can offer
current(checking) or savings accounts. At the end of November 2007,
Hong Kong had 142 licensed banks, 29 restricted licensed banks, 30
deposit-taking institutions, and 80 representative offices. The
Hong Kong & Shanghai Banking Corporation (HSBC) is Hong Kong's
largest banking group. With its majority-owned subsidiary Hang Seng
Bank, and 190 branches, the group controls more than 30.2 percent of
Hong Kong dollar deposits. The Bank of China (Hong Kong) is the
second-largest banking group (219 branches), and controls 14.6
percent of Hong Kong dollar deposits. Thirty-five American
"authorized financial institutions" operate in Hong Kong. U.S.
banks licensed in Hong Kong are listed in Chapter 7 - U.S. Banks and
Local Correspondent Banks. Most banks in Hong Kong maintain U.S.
correspondent relationships.

28. Hong Kong's five largest banks, in terms of total assets (2006),
are as follows:
Total
Rank Institution Assets (US$ Billion)
---- ------------- ------
1 HSBC 404.0
2 Bank of China (HK) 117.2
3 Hang Seng Bank, Ltd. 85.8
4 Standard Charter Bank, HK 50.1
5 Bank of East Asia, Ltd. 37.7

Sources: Company Annual Reports

29. Credit in Hong Kong is allocated strictly on market terms and is
available to foreign investors on a non-discriminatory basis. The
private sector has access to the full spectrum of credit instruments
as provided by Hong Kong's banking and financial system. Legal,
regulatory, and accounting systems are transparent and consistent
with international norms. The Hong Kong Monetary Authority (HKMA)
functions as a de facto central bank. It is responsible for
maintaining the stability of the banking system and managing the
Exchange Fund backing Hong Kong's currency. The HKMA, with the
assistance of the banking sector, has upgraded Hong Kong's financial
market infrastructure. Real Time Gross Settlement helps minimize
risks in the payment system and brings Hong Kong in line with
international standards. The Hong Kong Mortgage Corporation (HKMC)
promotes the development of the secondary mortgage market in Hong
Kong. The HKMC is 100 percent owned by the Government through the
Exchange Fund. The HKMC purchases residential mortgage loans for
its own retained portfolio and also repackages mortgages into
mortgage-backed securities for sale. In 2006, (the latest figures
available) the HKMC's outstanding amount of debt totaled US$3.0
billion.

30. On September 26, 2006, a Deposit Protection Scheme (DPS) began
operations. Depositors are now protected up to a maximum of
HK$100,000 (US$12,820) per bank. The DPS Fund (funded by
contributions paid by member banks) amounted to US$ 47.9 million by
the end of March 2007, and is expected to reach the target amount of
US$166.7 million in three years. While Hong Kong requires locally
licensed banks to participate, overseas-incorporated banks may apply
for an exemption if a comparable scheme in their home jurisdiction
covers deposits taken in by its Hong Kong branches. In 2004, the
Hong Kong Monetary Authority (HKMA) and Dun & Bradstreet (HK) Ltd.
(D&B) jointly launched a Commercial Credit Reference Agency (CCRA)
to collate information about the indebtedness and credit history of
small and medium-sized enterprises (SMEs) and make such information
available to members of the Hong Kong Association of Banks (HKAB)
and the Hong Kong Association of Deposit Taking Companies.

31. Under the Insurance Companies Ordinance, insurance companies are
authorized by the Insurance Authority to transact business in Hong

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Kong. Hong Kong has the highest number of authorized insurance
companies in Asia. As of December 2007, there were 178 authorized
companies. Of these, 88 were foreign companies from 23 countries.
A number of the world's top insurance companies in terms of assets
have branch offices or subsidiaries in Hong Kong.

32. With a total market capitalization of US$1,710 billion and 1,173
listed firms at year-end 2006, Hong Kong's stock exchange ranked
second in Asia after Tokyo, and sixth in the world in terms of
capitalization. Hong Kong Exchanges and Clearing Limited (HKEx), a
listed company, operates the stock and futures excanges. The
Securities and Futures Commission,an independent statutory body
outside the civil service, has licensing and supervisory powers to
ensure the integrity of markets and to protect investors.

33. In April 2003, the Government implemented a major modernization
of the legal framework for Hong Kong's securities market designed to
upgrade transparency and corporate governance, boost regulators'
enforcement powers, and improve investor protections. To enhance
market competitiveness, HKEx in the same month removed the rule on
minimum brokerage commission rates for stock and futures
transactions.

34. There are no discriminatory legal constraints to foreign
securities firms establishing in Hong Kong via branching,
acquisition, or subsidiaries. In practice, foreign firms typically
establish in Hong Kong as subsidiaries. Rules governing operations
are the same, irrespective of ownership. Portfolio investment
decisions are left to the private sector. There are no laws or
regulations that specifically authorize private firms to adopt
articles of incorporation/association that limit or prohibit foreign
investment, participation, or control.

35. The stock exchange plays a significant role in raising capital
for Chinese state-owned enterprises. Chinese state enterprises
raise equity (through the issuance of so-called "H" shares) in Hong
Kong provided they meet Hong Kong regulatory and accounting
requirements. These "H" shares are denominated in Renminbi, but
must be purchased in Hong Kong Dollars. In 2006, a total of 141
Chinese enterprises had "H" share listings on the stock exchange,
with market capitalization of US$141.0 billion.

36. Hong Kong has made a concerted effort to develop a local debt
market with the Exchange Fund bills and notes program. Maturities
now extend to ten years. Hong Kong Dollar debt (public and private)
has increased gradually, from US$3.46 billion at the end of 1989 to
US$97.0 billion by the end-September of 2007. Regional
infrastructure financing requirements and increasing investor demand
are projected to stimulate further development of the local debt
market. In May 2004, for the first time, Hong Kong issued bonds
securitizing the revenues from Government tunnels and bridges. In
June 2004, the governmental Hong Kong Mortgage Corporation
established a US$2.6 billion retail bond program. In July 2004, the
Hong Kong Government issued its first sovereign bonds totaling
US$2.6 billion to raise cash for its public works program.

37. The Hong Kong Government requires workers and employers to
contribute to retirement funds under the Mandatory Provident Fund
(MPF) scheme. Contributions are expected to channel US$3-4 billion
per year into various investment vehicles. By the end of September
2007, the net asset values of MPF funds amounted to US$33.0 billion.


38. The Exchange Fund Investment Limited (EFIL), established by the
Government to dispose of the stock portfolio it purchased during the
Asian Financial Crisis, completed its operations in January 2003.
EFIL disposed of the stocks in the form of a mutual fund, the
Tracker Fund of Hong Kong (TraHK). The Government decided to retain
a portion of the stocks (worth about US$410 million) as a long-term
investment. The HKMA is responsible for the management of these
stocks. TraHK is traded on the stock exchange.

------------------------
A.10 Political Violence
------------------------

39. Hong Kong is politically stable. Demonstrations are almost
always peaceful. During the Sixth Ministerial Meeting of the World
Trade Organization in December 2005, there were a number of
incidents and arrests involving demonstrators. Otherwise, the U.S.
Consulate General is not aware of any incidents involving
politically motivated damage to projects or installations.

----------------
A.11 Corruption

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----------------

40. Hong Kong has an excellent track record in combating corruption.
U.S. firms have not identified corruption as an obstacle to foreign
direct investment. The Independent Commission Against Corruption
(ICAC) is responsible for combating corruption. The ICAC is
independent of the public service and the ICAC Commissioner is
responsible directly to the Chief Executive. A bribe to a foreign
official is a criminal act, as is the giving or accepting of bribes,
for both private individuals and government employees. Penalties
are stiff. For example, a civil servant who solicits or accepts any
advantage without special permission of the Government can receive
one year's imprisonment and a HK$100,000 fine if convicted.
Individuals in both the private and public sector can receive up to
seven years imprisonment and a HK$500,000 fine for offering,
soliciting or accepting a benefit for performance or non-performance
of an official duty.

-------------------------------------
A.12 Bilateral Investment Agreements
-------------------------------------

41. Hong Kong is negotiating a series of bilateral investment
agreements -- the Hong Kong Government calls them "Investment
Promotion and Protection Agreements" -- with major foreign
investors. To date, Hong Kong has signed agreements with Australia,
Austria, Belgo-Luxembourg Economic Union, Denmark, France, Germany,
Italy, Japan, Korea, the Netherlands, New Zealand, Sweden,
Switzerland, Thailand and the United Kingdom. The Hong Kong
Government has initialed agreements with Canada and Vietnam. It is
negotiating agreements with Singapore and Thailand. All such
agreements are based on a model text approved by Mainland China
through the Sino-British Joint Liaison Group. The United States and
Hong Kong held talks on a bilateral investment agreement in the late
1990s, but certain differences could not be resolved and
negotiations were suspended. U.S. firms, however, are not at a
competitive or legal disadvantage since Hong Kong's market is open
and its legal system impartial.

--------------------------------------------- -----
A.13 OPIC and Other Investment Insurance Programs
--------------------------------------------- -----

42. Overseas Private Investment Corporation (OPIC) coverage is not
available in Hong Kong. Hong Kong is a member of the World Bank
Group's Multilateral Investment Guarantee Agency (MIGA).

-----------
A.14 Labor
-----------

43. In the 1980s and much of the 1990s, Hong Kong's unemployment
rate hovered around two percent. Reflecting structural changes in
the local economy and weak global economic conditions, the
unemployment rate rose to a record level of 8.3 percent in May 2003.
The job market has improved gradually since then, with the
unemployment rate standing at 3.6 percent in November 2007, the
lowest level since April 1998. The Employees Retraining Board
provides skills retraining for local employees to cope with ongoing
structural change in the economy.

44. To address a shortage of highly skilled technical and financial
professionals, the Hong Kong Government has made efforts to attract
qualified foreign and mainland Chinese workers. As of July 2003,
conditions for admitting mainland Chinese for employment were eased
and aligned with those applicable to foreign nationals.

45. In 2005, membership in Hong Kong's 715 registered unions totaled
668,034, a participation rate of about 20.88 percent. Hong Kong has
implemented 41 conventions of the International Labor Organization
in full and 18 others with modifications.

46. Local law provides for the right of association and the right of
workers to establish and join organizations of their own choosing.
The Government does not discourage or impede the formation of
unions. Workers who allege discrimination against unions have the
right to have their cases heard by the Labor Relations Tribunal.
Although legislation does not prohibit strikes, in practice most
workers must sign employment contracts that state that walking off
the job is a breach of contract and can lead to summary dismissal.
Collective bargaining is legal in Hong Kong, but there is no
obligation on employers to engage in it. In practice, collective
bargaining is not widely used. For more information on labor
regulations in Hong Kong, please refer to the following website:
http://www.justice.gov.hk/home.htm (click on Chapter 57 "Employment

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Ordinance").

------------------------------------------
A.15 Foreign Trade Zones/Free Trade Zones
------------------------------------------

47. Hong Kong is a free port without foreign trade zones. Hong
Kong's modern and efficient infrastructure supports Hong Kong's role
as a trade entrepot and regional financial and services center.
Rapid growth has placed severe demands on that infrastructure,
giving rise to plans for major new investments, particularly in
transportation and shipping facilities, over the next few years.
Significant elements include a planned expansion of container
terminal facilities, additional roadway and railway networks, major
residential/commercial developments, community facilities, and
environmental protection projects. In May 2004, the Legislative
Council passed a bill allowing the Hong Kong Government to issue
US$2.6 billion bonds to fund infrastructure or other investment
projects.

48. Airport: In the first 11 months of 2007 Hong Kong's
international airport at Chek Lap Kok handled daily an average of
806 flights, 129,904 passengers, and more than 10,161 tons of cargo.
Seventy-nine international airlines operated some 5,500 scheduled
flights per week between Hong Kong and 150 cities around the world.
Hong Kong is a major gateway to Mainland China. There are direct
flights from Hong Kong to nearly 40 mainland cities. The demand for
services to Mainland China is growing. The Hong Kong airport is in
the world's top ranks in terms of passenger and cargo throughput.

49. With 24-hour operations, two all-weather runways, an ability to
cater to all types of commercial aircraft, and high-speed transport
links from the terminal to the city, the airport is well positioned
to meet Hong Kong's aviation needs in the coming decades.

50. The airport has a multi-modal marine cargo terminal that
provides vessel services between various ports in the Pearl River
Delta and the airport. To strengthen Hong Kong's position as the
economic gateway of Mainland China and Asia and to boost revenues,
the Airport Authority (AA) has built "SkyCity", which includes a
world-class exhibition center, Asia World-Expo; SkyPlaza, an office
and retail complex; SkyPier, a cross-boundary ferry terminal; and a
nine-hole golf course. In December 2006, AA held an open tender to
build its third cargo terminal. AA anticipates that the tender
process will be completed in 2008 with the new facility beginning
operations around 2011. The organization responsible for safety
oversight, the Civil Aviation Department, plans to introduce
satellite-based Communications, Navigation, Surveillance/ Air
Traffic Management (CNS/ATM) Systems. The new equipment will
enhance flight safety and efficiency as well as maintain Hong Kong's
status as a center of international and regional aviation. The
project will take 15 years.

51. Shipping and Port Activities: Hong Kong enjoys one of the best
natural deep-water ports on the Chinese coast. With continued high
economic growth and industrialization in Mainland China, the
development of deep-water ports at Yantian and Gaolan in southern
China should complement Hong Kong's facilities over the medium term.
Over the longer term, the Hong Kong port will face increased
competition from those ports and from Shanghai, which are improving
their service efficiency.

52. Hong Kong's container port is one of the world's busiest. In
the first 8 months of 2007, Hong Kong's nine privately-operated
container terminals and mid-stream operators handled 15.6 million
twenty-foot equivalent units (TEUs) of cargo. Some 80 international
shipping lines are providing over 500 container liner services per
week connecting to over 500 destinations worldwide.

53. Hong Kong's container terminal handling capacity is 18 million
twenty-foot equivalent units (TEUs) a year, which will be able to
cope with the forecast growth in demand to the end of this decade.
The container terminals handle about 68 percent of the port's total
throughput. The river trade terminal, mid-stream operators and
other facilities handle the remaining 32 percent. The Hong Kong
Government commissioned a study on "Hong Kong Port - Master Plan
2020" to formulate a competitive, sustainable strategy and a master
plan for Hong Kong's port development, including the location of a
new container terminal and related infrastructure, for the coming
twenty years. The study has been presented to industry and the
Legislative Council for consultation. Taking into account the
comments received, the Government is working out an action plan to
implement the recommendations of the study. In particular, the
Government has commissioned consultants to work out the optimal
timing for the construction of Container Terminal 10 and to conduct

HONG KONG 00000179 009 OF 011


an ecology study on Northwest Lantau so as to decide whether it is
environmentally suitable for development of container terminal.
These two studies are expected to be completed in 2007.

54. Roads and Railroads: Hong Kong's roads have one of the highest
vehicle densities in the world. In September 2007, there were
550,000 licensed vehicles and about 1,994 kilometers of roads, or
276 vehicles per kilometer of road. This high vehicle density,
combined with difficult terrain and high density building
development, poses a constant challenge to transport planning, road
construction and maintenance. To cope with worsening traffic
congestion, largely due to the rapid growth in the number of private
cars, the Highways Department has launched an extensive road
construction program. The Highways Department has budgeted US$5.4
billion for road projects between 2005/2006 and 2010/2011. Hong
Kong will also build a bridge from the Western tip of Lantau Island
to Macau and Zhuhai, paving the way for accelerated development of
the Western Pearl River Delta region.

55. Two railway corporations managed Hong Kong's metro and rail
systems: the Mass Transit Railway Corporation (MTRC) and the
Kowloon-Canton Railway Corporation (KCRC). The two railway companies
merged on December 2, 2007. The integrated system is operated and
managed by MTRC, including 9 lines of railway network with a total
length of over 200 kilometers.

56. Hong Kong is working on a massive expansion of its rail system.
Investment in Hong Kong's domestic and cross-boundary rail networks
in the next decade is expected to exceed in scale the US$20 billion
spent on the transportation facilities associated with the airport.
Most of the projects involve linking existing lines or creating
extensions to new points of interest. In his 2007-08 Policy
Address, Chief Executive Donald Tsang announced that Hong Kong will
push ahead with 10 large-scale infrastructure projects, of which 3
are rail networks including the South Island Line (an extension of
seven-kilometer rail to the South Island), the Sha Tin to Central
Link (connecting Northeast New Territories and Hong Kong Island via
East Kowloon), and the Guangzhou-Shenzhen-Hong Kong Express Rail
Link (a high-speed national rail network of 12,000 kilometers
linking up major cities, with maximum train speeds of 200 to 300
kilometers per hour).

------------------------------------------
A.16 Foreign Direct Investment Statistics
------------------------------------------

57. Tables:

--Table 1: Position of Inward Foreign Direct Investment by Major
Investor Country/Territory, as at end of 2005.

US$ %Share
Country Billion of Total
------- --------- ---------
China 163.1 43.6
Netherlands 41.9 11.2
Bermuda 30.2 8.1
United States 26.4 7.1
British Virgin Islands 26.2 7.0
Japan 16.9 4.5
United Kingdom 11.3 3.0
Singapore 10.8 2.9
Cayman Islands 6.0 1.6
Thailand 4.3 1.1
Others 36.8 9.8
--------- ---------
TOTAL 373.9 100.0

Source: Hong Kong Census and Statistics Department
Note 1: Excluding inward direct investment from offshore financial
centers, which was originally from Hong Kong.
Note 2: US$1 = HK$7.8
Note 3: Total not sum due to rounding.

--Table 2: Position of Inward Foreign Direct Investment by Major
Economic Activity, as at end of 2005.

US$ %Share
Sector Billion of Total
-------- --------- ---------
Investment holdings, real estate 185.0 49.5
and various business services
Wholesale, retail and import/ 68.4 18.3
export trades
Banks and deposit-taking 51.9 13.9

HONG KONG 00000179 010 OF 011


companies
Financial institutions other than 19.1 5.1
banks and deposit-taking companies
Transport and related services 10.7 2.9
Insurance 9.4 2.5
Manufacturing 7.8 2.1
Communications 5.6 1.5
Construction 4.3 1.2
Restaurant and Hotels 2.4 0.7
Other Activities 9.2 2.5
--------- ---------
TOTAL 373.9 100.0

Source: Hong Kong Census and Statistics Department
Note 1: Excluding inward direct investment from offshore financial
centers, which was originally from Hong Kong.
Note 2: Total not sum due to rounding.

--Table 3: Position of Outward Foreign Direct Investment by Major
Investor Country/Territory, as at end of 2005.

US$ %Share
Country Billion of Total
------- --------- ---------
China 189.4 58.8
British Virgin Islands 69.7 21.6
Bermuda 11.6 3.6
United Kingdom 7.6 2.4
Singapore 5.1 1.6
Japan 3.8 1.2
United States 3.4 1.0
Thailand 2.9 0.9
Liberia 2.9 0.9
Malaysia 2.8 0.9
Others 23.2 7.2
--------- ---------
TOTAL 322.3 100.0

Source: Hong Kong Census and Statistics Department
Note 1: Excluding outward direct investment of offshore financial
centers that was channeled back to Hong Kong.
Note 2: Total not sum due to rounding.

--Table 4: Position of Outward Foreign Direct Investment by Major
Economic Activity, as at end of 2005.

US$ %Share
Sector Billion of Total
-------- --------- ---------
Investment holdings, real estate 185.8 57.6
and various business services
Wholesale, retail and import/ 47.0 14.6
export trades
Manufacturing 20.1 6.2
Banks and deposit-taking 12.3 3.8
companies
Communications 10.8 3.3
Transport and related services 10.3 3.2
Financial institutions other than 9.9 3.1
banks and deposit-taking companies
Restaurant and Hotels 6.7 2.1
Insurance 3.8 1.2
Construction 3.3 1.0
Other Activities 12.2 3.8
--------- ---------
TOTAL 322.3 100.0

Source: Hong Kong Census and Statistics Department
Note 1: Excluding outward direct investment of offshore financial
centers that was channeled back to Hong Kong.
Note 2: Total not sum due to rounding.

--Table 5: Amount and Growth of U.S. Investment in Hong Kong in
2002/2003/2004/2005/2006 in US$ Billions.

Year Amount %Change
---- -------- -------
2002 40.3 24.0
2003 36.4 -9.7
2004 27.9 -23.4
2005 32.6 16.8
2006 38.1 16.9

Source: U.S. Department of Commerce, Bureau of Economic analysis,
U.S. Direct Investment Position Abroad on a Historical Cost Basis

HONG KONG 00000179 011 OF 011


Note 1: The U.S. Department of Commerce estimates the total U.S.
direct investment position in Hong Kong at historical cost (the book
value of U.S. direct investors' equity in, and net outstanding loans
to, their foreign affiliates).
Note 2: U.S. Department of Commerce statistics differ from HKG
statistics. Per Table 1 above, the latter indicates total U.S.
investments of US$26.4 billion at year-end 2005.
Note 3: Preliminary figures for 2006.

--Table 6: Hong Kong's Pledged and Actual Direct Investment in
Mainland China in US$ Billions and Percent Share of Total Investment
in Mainland China.

Amount % Share
Year Pledged Invested of Total
---- --------- ---------- ----------
2001 20.7 16.7 35.7
2002 25.2 17.9 33.9
2003 40.7 17.7 33.1
2004 50.1 19.0 31.3
2005 N.A. 18.0 29.8
2006 N.A. 20.2 32.1
1978-2006 N.A. 279.8 40.8

Source: PRC Ministry of Commerce
Note: PRC Ministry of Commerce stopped reporting the pledged foreign
investment figures in December 2005.

--Table 7: Major Foreign Investor Firms.

United States:
American International Group, AT&T, Bank of America, Caltex,
Citigroup, Coca-Cola, Compaq Computer, Disney, ExxonMobil, Federal
Express, Goldman Sachs, IBM, JP Morgan Chase, Kodak, Merrill Lynch,
Morgan Stanley, Motorola, Pacific Waste Management, Pepsi, Dell,
Isagenix Worldwide LCC.

Japan:
C. Itoh, Citizen Watches, Daido Concrete, Hitachi, Jusco,
Mitsubishi, NEC, Nishimatsu, Nomura, Olympus, Uny, Kadokawa
Intercontinental Publishing (Asia).
United Kingdom: HSBC, Inchcape Pacific, Jardine Matheson, Lloyds, P
& O Shipping, Standard Chartered Bank, Swire Pacific Group.

Continental Europe:
Carlsberg, Hong Kong Petrochemicals (Italian/Korean/Chinese joint
venture), Siemens, Heraeus, Philips, Bouygues/Dragages,
Bachy-Soletanches, Banque National de Paris, Banque Indosuez,
Chanel, Cartier, Christian Dior, Remy, Ericsson, Asea Brown Boveri,
Tetrapak, Electrolux, Refratechnik, Lotto Sport Italia.

Mainland China:
Bank of China (Hong Kong), Beijing Enterprises, China Everbright,
China Investment and Trust Corporation (CITIC), China Merchants,
China Mobile, China National Offshore Oil Corporation (CNOOC), China
National Petroleum Corporation, China Ocean Shipping Co (COSCO),
China Overseas Construction, China Resources, China Travel Services,
China Unicom, Guangdong Enterprises, Lenovo Group, Petro China,
Shanghai Industrial, Yue Xiu Enterprises, China Construction Bank
Corporation, China Life Insurance.

Asia:
San Miguel Brewery, News Corp., Pioneer, Sime Darby,
Shangri-la/Kerry Trading, Park View Properties, Lippo Group, C.P.
Pokphand, LG, First Pacific Group, UTI Bank, Allahabad Bank.

58. Resources:

--Hong Kong Census and Statistics Department:
http://www.info.gov.hk/censtatd/
--Hong Kong Monetary Authority: http://www.info.gov.hk/hkma/
--Independent Commission Against Corruption:
http://www.icac.org.hk/

CUNNINGHAM

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