Global Environment - Hong Kong

GCSE Business Studies

GLOBAL ENVIRONMENT

HONG KONG

Submitted to: Professor Tsiklis

Submitted by: Stéphane Eros

Table of Content:

Introduction: Hong Kong history

Demographics

Political System

Legal System

Economy:

General Information
Tax System
Trade Information
Foreign Direct Investment
Labour Force

6. Conclusion

Introduction: Hong Kong history

The region of Hong Kong, which had long been a haven for coastal pirates was occupied by the British during the Opium War (1839-42). The colony prospered as an east-west trading center, the commercial gateway to, and distribution center for, South China. It was efficiently governed, and its banking, insurance, and shipping services quickly became known as the most reliable in Southeast Asia. In 1921 the British agreed to limit the fortifications of the colony, and this contributed to its easy conquest by the Japanese. It was reoccupied by the British on Sept. 16, 1945.

After 1949, when the Communists took control of mainland China, hundreds of thousands of refugees crossed the border, making Hong Kong's urban areas some of the most densely populated in the world. Problems of housing, health, drug addiction, and crime were the target of aggressive governmental programs, and Hong Kong's long-standing water problem was eased by the construction of an elaborate system of giant reservoirs and the piping in of water from China.

In May, 1967, Hong Kong was struck by a wave of riots and strikes inspired by China's Cultural Revolution. The government reacted firmly, and, although the Chinese retaliated by briefly stopping the piping of water and by attacking British representatives in Beijing, relations between Hong Kong and China soon resumed the surface harmony that had existed since the late 1950s.

After several years of negotiations, on Dec. 19, 1984, Britain and the People's Republic of China agreed that Hong Kong would become a special administrative region of China as of July 1, 1997, when Britain's lease expired. Under a policy of “One Country, Two Systems,” China agreed to give Hong Kong considerable autonomy, allowing its existing social and economic systems to remain unchanged for a period of 50 years.

The crackdown in 1989 at Tiananmen Square in Beijing inspired fears that China would not respect Hong Kong's autonomy, and in the next few years many business people left, affecting Hong Kong's economy. In 1991, Hong Kong's first direct legislative elections were won almost entirely by liberal, pro-democracy candidates, and no pro-China candidates were elected.

In 1992, Britain introduced a number of democratic measures, which were denounced by China. Talks between the two countries proved pointless, and in 1994 Hong Kong's legislature approved further democratic reforms in the colony still going against Chinese ideology. In the 1995 elections prodemocracy candidates received about 60% of the popular vote. Upon Hong's return to China, Beijing abolished the legislature set up by the British and established a provisional legislature; a chief executive, Tung Chee-hwa, was also appointed. Elections were held in 1998, with prodemocracy parties taking 16 of the 20 directly elected seats. Hong Kong was affected by the Asian financial crisis of 1997-98, but its economy began to rebound in 1999. In the Sept. 2000 legislative council elections, prodemocracy parties won 15 of the 24 directly elected seats.

Hong Kong Demography: People, Languages and Culture

Situated at the South-eastern tip of China, Hong Kong is composed of Hong Kong island, the Kowloon peninsula and the New Territories which cover a total of 1100 square kilometres. It’s population is of about 6.7 million people, which implies a density of about 6250 people per square kilometres. Nationalities found in Hong Kong are very varied, though 95% remain Chinese. The largest groups of foreigners are composed of Phillipinos followed Indonesians and Canadians. The total amount of foreign passport holders is of the order of 526000.

Chinese and English are still the two official languages in Hong Kong. The latter is widely used in the government, the legal system and business sectors in general. It is therefore easy to find well educated people who speak more than one language.

Looking at the presence of the medias in Hong Kong, it is fair to say they have played a prominent role in the city’s success. Free and quick flow of information contribute to the success of a free economy which is why you will find a choice of over 50 daily newspapers, in Chinese, English both or even other languages. Coupled with those are 710 periodicals that cover everything from business to entertainment, politics to technical matters.

Government Structure

The Hong Kong Special Administrative Region (HKSAR) of the People's Republic of China is headed ...

This is a preview of the whole essay

Government Structure

The Hong Kong Special Administrative Region (HKSAR) of the People's Republic of China is headed by the Chief Executive.

He is advised on major policy decisions by the Executive Council.

The HKSAR has a two-tier system of representative Government. At the central level is the Legislative Council which legislates, controls public expenditure and monitors the performance of the Administration. At the district level, 18 district councils advise on the implementation of policies in their respective areas.

The Administration, the executive arm of the Government, is organised into the Government Secretariat and departments. Government Secretariat Bureaux formulate policies and initiate legislative proposals. Departments implement laws and policies and provide direct services to the community.

The HKSAR has an independent judiciary system. It is responsible for the administration of justice and interprets the laws enacted by the legislature.

The systems practiced in Hong Kong are prescribed by the Basic Law, the constitutional document of the Hong Kong Special Administrative Region (HKSAR) which came into effect upon its establishment on July 1, 1997.

The Chief Executive

The Basic Law stipulates that the Chief Executive shall be elected by a broadly representative Election Committee in accordance with the Basic Law and appointed by the Central People's Government.

The first and incumbent Chief Executive was chosen by a committee of 400 Hong Kong residents, drawn from all walks of life. The Chief Executive leads the Government of the HKSAR, decides on government policies and issues executive orders. He is responsible for the implementation of the Basic Law and other laws which apply in the HKSAR.

He signs bills passed by the Legislative Council and promulgates laws. He also signs budgets passed by the Legislative Council and reports the budgets and final accounts to the Central People's Government for the record.

The Chief Executive nominates and reports to the Central People's Government. He implements the directives issued by the Central People's Government in respect of the relevant matters provided for in the Basic Law and conducts. The Chief Executive approves the introduction of motions regarding revenues or expenditure to the Legislative Council. His other functions include pardoning of persons convicted of criminal offences or commuting their penalties and handling of petitions and complaints.

Executive Council

Members of the Executive Council of the HKSAR are appointed by the Chief Executive from among the principal officials of the executive authorities, members of the Legislative Council and public figures. Members' appointment or removal is decided by the Chief Executive.

Members hold office for a period no longer than the expiry of the term of office of the Chief Executive who appoints them.

Legislative Council

According to the Basic Law, the Legislative Council of the HKSAR is to be constituted by election. The method for its formation is to be specified in the light of the actual situation in the HKSAR and in accordance with the principle of gradual and orderly progress.

The term of office of the Legislative Council is four years. The President of the Legislative Council is elected by and from among members of the Legislative Council.

The Legislative Council of the HKSAR exercises the following powers and functions:

To enact, amend or repeal laws in accordance with the provisions of the Basic Law and legal procedures;
To examine and approve budgets introduced by the Government;
To approve taxation and public expenditure;
To receive and debate the policy addresses of the Chief Executive;
To raise questions on the work of the Government;
To debate any issue concerning public interests;
To endorse the appointment and removal of the judges of the Court of Final Appeal and the Chief Judge of the High Court;
To receive and handle complaints from Hong Kong residents;
To summon, as required when exercising the above-mentioned powers and functions, persons concerned to testify or give evidence.

The Government's budget is presented to the Legislative Council in the form of an Appropriation Bill. After the Finance committee has completed examining the estimates, the debate on the Second Reading of the bill is resumed.

Other public expenditure proposals not contained in the Appropriation Bill will be scrutinized and approved by the Finance Committee which will note the financial implications of new policies.

Finance Committee The Finance Committee consists of all members except the President of the Legislative Council. The chairman and the deputy chairman are elected from among its members. The committee normally meets in public to scrutinize and approve public expenditure proposals put forward by the Government.

One of the roles of the Finance Committee is to scrutinize the budget presented by the Financial Secretary to the Legislative Council in the form of an Appropriation Bill, which sets out the Government's annual expenditure proposals for the following financial year.

There are two subcommittees under the Finance Committee: the Establishment Subcommittee and the Public Works Subcommittee. The Establishment Subcommittee examines and makes recommendations to the Finance Committee on the Government's proposals for the creation, redeployment, and deletion of directorate posts, and for changes to the structure of civil service grades and ranks.

The Public Works Subcommittee examines and makes recommendations to the Finance Committee on the Government's expenditure proposals under the Capital Works Reserve Fund for projects in the public works program and building projects carried out by or on behalf of organizations.

The Legal System

The legal system of the Hong Kong Special Administrative Region (HKSAR) is firmly based on the rule of law and the independence of the Judiciary. The constitutional framework for the legal system is provided for by the Basic Law. Under the principle of ‘one country, two systems’, the HKSAR legal system, which is different from that of the

Mainland China, is based on the common law and is supplemented by a large amount of local legislation. The laws in force in the HKSAR are:

the Basic Law;
national laws listed in Annex III to the Basic Law;
the laws in force before July 1, 1997, that were

adopted as laws of the HKSAR by the Standing

Committee of the National People’s Congress

laws enacted by the legislature of the HKSAR.

The Judiciary: It is fundamental to Hong Kong’s law that members of the judiciary are independent of the executive and legislative branches of government.

The courts of justice in Hong Kong comprise the Court of Final Appeal, the High Court, the District Court, the Lands Tribunal, the Magistrates’ Courts, the Coroner’s Court, the Labour Tribunal, the Small Claims Tribunal and the Obscene Articles Tribunal.

The Department of Justice: It consists of five professional divisions responsible for legal work. It is headed by the Secretary for Justice who is a member of the Executive Council and is the Government’s chief legal adviser. She has ultimate responsibility for the prosecution of all offences in the HKSAR.

The Legal Policy Division, as well as the Secretary for Justice’s Office, services the professional needs of the Secretary for Justice and provides input on all legal policy issues being considered by the Government. The division advises on issues relating to the administration of justice, the legal system, the legal profession, human rights, the Basic Law and law of Mainland China.

The Law Reform Commission Secretariat, which provides research and secretarial support to the commission, is within the division.

The Civil Division provides legal advice to the Government on civil law, drafts commercial contracts and franchises and conducts civil litigation, arbitration and mediation, on behalf of the Government.

The Law Drafting Division is responsible for drafting all legislation, including subsidiary legislation, in Chinese and English, and assists in steering legislation through the Executive and Legislative Councils. It is also responsible for the editorial work of the Laws of Hong Kong and updating the version in the Bilingual Laws Information System.

The International Law Division advises the Government on issues relating to public international law.

The Legal Profession: In December 2001, the HKSAR has 778 practising barristers, 5 046 practising solicitors and 628 local law firms, plus some 39 foreign law firms, 718 registered foreign lawyers and seven registered associations between foreign law firms and local law firms.

The Economy

General Information

Hong Kong is toady recovering from the effects of the global economic slowdown. Interesting to note is the fact that Hong Kong still remains, the world’s freest economy, the 2nd highest per capita holder of foreign currency, the 2nd largest source of outward foreign investment in Asia, the 2nd largest recipient of Foreign Direct Investment again in Asia and the 5th largest foreign exchange reserve holder. Looking at key indicators of economic state, we see constant decrease in Real GDP growth as well as increasing deflation and rising unemployment.

Hong Kong has been known to be a market-led economy. This means that the government does not try to direct or plan the course that the economy or markets should take as investors and entrepreneurs are said to better understand the markets needs. The Hong Kong government works under a ‘maximum support, minimum intervention’ policy. It’s role is to provide the most business-friendly conditions again through the use of the Rule of Law and a somewhat efficient administration. The protection and promotion of Hong Kong’s commercial interests is helped by representation in organisations such as the World Trade Organisation as well as the Asia-Pacific Economic Co-operation group.

Tax System

The tax system in Hong Kong can easily be viewed as one of the most business-friendly in the world. It is based on being relatively low and simple. There are only three types of income where taxes are levied: profits, salaries and property.

Taxes are levied on profits only if those arise or are derived from Hong Kong from trade, profession or business. Those are of a rate of 16% for corporations and 15% for other businesses.

In terms of taxes on salaries, anyone with income in Hong Kong arising from profession, office or pension is liable for payment. The rate of this tax is applied on a graduate scale, but will not exceed 15% of the total income.

On property, taxes are charged on property rental income. Here the rate is also of 15%.

Trade Information

Hong Kong is most definitely one of the most active places for trading in the world. It ranks as the 10th largest trading economy and 9th largest for exporting commercial services. Lately and due in part to the terrorist attacks in the US in 2001, exports dropped as demand in overseas markets dampened. They are back at growing at the moment but the uncertainty and rather small trade activity world-wide is still showing presence.

Hong Kong’s main export locations are first and foremost, the Chinese Mainland. In 2001, it accounted for around 40% of total trade value. It’s main field is that of commercial services providing the Mainland with a range of financial services like banking, insurance and accounting amongst others.

The other major countries that deal in trade with Hong Kong are the United States of America, Japan and the European Union.

Financial Market & Foreign Direct Investment

First let us quickly look at the monetary system in place in Hong Kong.

The objective of the monetary policy is obviously to maintain currency stability. As the local economy looks to the outside, the policy implies a need for external value stability. This is why the Hong Kong dollar is linked (PEG) with US dollar. A rate of 7.80 HK$ is chosen to 1 US$.

Looking now at what characterises financial markets, we see that they involve a high degree of liquidity. International standards are met with transparent and effective regulation and develop well thanks to well-educated staff and a relative ease to enter. Lets now look at the three sectors that make Hong Kong’s financial market, meaning the banking sector, the exchange market and the stock market.

The banking sector is extremely well developed, Hong Kong having a 142 licensed banks present. 128 of those were foreign owned. Furthermore, 75 of the top 100 banks have operations in the SAR. The banking sector’s external assets are among the highest in the world.

The foreign exchange market is also well developed. It has created links with centres overseas to be able to deal 24 hours a day. International Settlements has ranked Hong Kong’s foreign exchange market as the number 7 largest centre for dealing.

The stock market is 3rd in Asia, behind only Japan and China (Mainland). It comprises the first stock exchange as well as a recently introduced (1999) Growth Enterprise Market which is a second market for ‘Start up’ high-tech businesses. This provides them with access to equity market financing.

Hong Kong has the most open and liquid equity market in Asia (apart from Japan). This has made it particularly exposed to the recent financial markets crisis in Asia. It has nevertheless remained an open market to investors as this is the local policy. The tendency is even to increase the market’s attractiveness by minimising dealing costs as well as stamp duties.

Hong Kong has been qualified as the world’s second most popular destination for foreign investment. This is the result given by a survey led by the United Nation and found in its 2002 World Investment Report. This amidst the fact FDI in Hong Kong has shrunk by more than half, from 61 to 22 billion dollars between 2000 and 2001. These numbers take into consideration only inward flows coming from abroad towards Hong Kong. On the investing side, Hong Kong is the largest investor in Mainland China as well as a leader in other Asian countries such as Taiwan, Indonesia and Thailand among others.

The Labour Market

Hong Kong’s labour market consists of a total 3.42 million employed people. Those are distributed in the different employment sectors as follows:

Unemployment is somewhat of a new issue in Hong Kong. It stands today at around 7% which is very high for local standards. This is in part due to the recent increase in female employment as well as obviously by actual economic tendencies.

In terms of labour income, it has been decreasing relatively rapidly as of late. This is in part due to the constant deflation in prices in Hong Kong, the government having decided to further decrease wages by 10% this year. The average wage in Hong Kong is around 11,234 HK$ per month which is equivalent to 1440 US$.

Conclusion

What does the future hold for Hong Kong? In terms of business, Hong Kong should stay an economic platform due to it’s highly attractive financial markets as well as it’s geographical location. Also, China’s agreement to work under the ‘one country, two governments’ regime will allow the Special Administrative Region to keep it’s autonomy for the first 50 years following the 1997 Handover. Nevertheless, it seems evident that recent development in regions such as Shanghai and the Guangdong province will have an effect on Foreign Investment in Hong Kong as more and more investors will look to new capital intensive markets. Furthermore, the high prices existing in Hong Kong make it a less attractive place to live than the emerging ‘business cities’ which offer all existing advantages at lower cost. Today, the political aspect of the region seems more stable and less uncertain than the economic one. Autonomy and lifestyle will remain the same, what will happen to the economy.