by Kevin Latner
Area: total area: 1,040 sq km
land area: 990 sq km
comparative area: six times the size of Washington, DC
Land boundaries: 30 km with China 30 km
Population: 6,305,413 (July 1996 est.)
Population growth rate: 1.77% (1996 est.)
0-14 years: 19% (male 609,493; female 593,687)
15-64 years: 70% (male 2,312,141; female 2,094,156)
65 years and over: 11% (male 307,186; female 388,750) (July 1996 est.)
Economic overview: Hong Kong has a bustling free market economy with few tariffs or non-tariff barriers. Natural resources are limited, and food and raw materials must be imported. Manufacturing and construction account for about 18% of GDP. Goods and services exports account for about 50% of GDP. Real GDP growth averaged a remarkable 8% in 1987-88, slowed to 3.0% in 1989-90, and picked up to 4.2% in 1991, 5.0% in 1992, 5.2% in 1993, 5.5% in 1994, and 5.0% in 1995. Unemployment, which has been declining since the mid-1980s, edged up from 2% to 3.5% in 1995. A shortage of labor continues to put upward pressure on prices and the cost of living. Prospects for 1997 remain bright so long as major trading partners continue to have free access to this market after the takeover in July 1997.
GDP: purchasing power parity - $152.4 billion (1995 est.)
GDP real growth rate: 5% (1995 est.)
GDP per capita: HK $ 27,500 (1995 est.)
GDP composition by sector: agriculture: 0.2%; industry: 18.4%; services: 81.4% (1995 est.)
Inflation rate (consumer prices): 8.4% (1995)
Labor force: 2,915,400 (1994) by occupation: manufacturing 28.5%, wholesale and retail trade, restaurants, and hotels 27.9%, services 17.7%, financing, insurance, and real estate 9.2%, transport and communications 4.5%, construction 2.5%, other 9.7% (1989)
Unemployment rate: 3.5% (1995 est.)
revenues: $19 billion
expenditures: $14.1 billion, including capital expenditures of $289 million (FY94/95)
Industries: textiles, clothing, tourism, electronics,
plastics, toys, watches, clocks
Industrial production growth rate: 2% (1993 est.)
Agriculture: fresh vegetables; poultry
Exports: $177.1 billion (including re-exports)(f.o.b., 1995
commodities: clothing, textiles, yarn and fabric, footwear, electrical appliances, watches and clocks, toys; principle importers: China 33%, US 22%, Germany 5%, Japan 5%, UK 3% (1993)
Imports: $195.4 billion (c.i.f., 1995)
commodities: foodstuffs, transport equipment, raw materials, semi-manufactures, petroleum; principle exporters: China 38%, Japan 17%, Taiwan 9%, US 7% (1993)
Hong Kong has been a British colony for the past 155 years and is to be handed over to the sovereignty of the People's Republic of China at midnight on June 30 this year.
Looking at Hong Kong is like looking at the city of the future. It is a service-based economy (85%), technologically advanced, driven by information, where information--some of it true, some of it not so true--drives markets. Wired to the rest of the world, Hong Kong offers customized service, financing, communications and intelligence, and efficient managers and traders. Its lifeblood is openness, transparency, flexibility and especially the free flow of money, people and information.
Hong Kong is a major international center for agricultural and commercial trade, finance, communications and media. It has attracted about $ 14 billion of U.S. investment in 1996, another $ 14 billion in annual United States (U. S.) exports including $ 1.6 billion dollars in mostly high value agricultural exports. About 1,250 American companies maintain offices in Hong Kong, and 450 of those are regional headquarters. It has been estimated that U. S. companies employ nearly 10 percent of Hong Kong's work force. Hong Kong also has the largest American Chamber of Commerce outside the United States. Their most recent business confidence survey indicated more than 95 percent of U.S. companies in Hong Kong consider the future environment as "very favorable."
Hong Kong is one of the most modern and vibrant cities in the world, with cutting edge trading and services, an active social and political life, a gigantic, established foreign presence and vibrant property and stock markets. Basic factors which seem most important are: a basic legal framework, laissez-faire economic environment, low taxes, social stability, a professional civil service with minimal government, anti-corruption efforts, a free press, an independent judiciary, the international environment and finally, location - at China's doorstep.
Half of China's foreign trade and two-thirds of its investments comes from or through Hong Kong. It is important to note that Hong Kong is not going to become a part of China in the same sense that cities like Shanghai or Guangzhou are parts of China. It is going to become a Special Administrative Region that remains independent, with a high degree of autonomy in all matters except foreign affairs and defense. The border does not disappear at midnight on June 30, 1997.
Hong Kong and China will remain different legal jurisdictions. The U. S. will have a separate extradition treaty with Hong Kong, for example, which will forbid fugitives returned from the U. S. to Hong Kong from then being transferred to China. The government of the Hong Kong Special Administrative Region will be in the hands of people from Hong Kong. The Chinese Ministry of Foreign Affairs and the People's Liberation Army will have representatives in Hong Kong to handle foreign affairs and defense matters which are reserved to the central government in Beijing much the same way the British do now. However, all other issues -- housing, education, welfare, agriculture, commerce, judicial matters, shipping, law enforcement, aviation, trade and the things that affect the everyday lives of people -- are to be decided by the people of Hong Kong. Taxes collected in Hong Kong will be spent in Hong Kong, not in China; its entire financial and currency system will be separate from the Mainland's. Hong Kong will maintain its own currency, reserves and monetary policy. The Hong Kong dollar will continue as the only local tender and is directly linked to the US dollar.
These pledges by China are all laid out in two documents. One is the Sino-British Joint Declaration of 1984, in which both the departing and incoming sovereigns agreed on the principles that ensure Hong Kong's way of life would continue after the handover. The second is the Basic Law, in effect Hong Kong's mini constitution, which was adopted by China's National People's Congress in 1990. So, China has officially signed onto the principles mentioned above, along with others, like progressive democratization and eventual universal suffrage in direct elections for the chief executive and legislature.
The present elected Legislative Council will end at midnight on June 30, 1997 to be replaced by the Provisional Legislature, a group of 60 people (33 of whom are on the current legislature) selected by the Preparatory Committee, which in turn was organized by Beijing. The Provisional legislature will handle transitional matters but is itself to be replaced by an elected legislature within one year after the handover. Originally, the idea was the present Legislative Council would continue through the transition, but unresolved disputes over how to elect it finally led the British to hold the 1995 poll without Chinese concurrence about election rules. The Chinese served notice that no body elected without their agreement would be allowed to continue after the handover. The result of this running dispute is a Provisional Legislature, while technically should not be able to act until July 1, but in fact has already been organized and is meeting regularly across the border in China. An elected legislature through open election is to be held within a year and the first Chief Executive, Mr. Tung, Chee-hwa has already been elected for a single five year term and cannot succeed himself.
Hong Kong's judicial system is also guaranteed continuation under the Joint Declaration and the Basic Law. It will remain separate from the Chinese judiciary and continue the common law tradition. Many observers feel maintenance of the rule of law is essential if Hong Kong's way of life is to continue. It is one of the top factors' in keeping business confidence aloft, and keeping ordinary Hong Kong citizens feeling optimistic about their freedom after July 1, 1997. The Court of Final Appeal will be in Hong Kong, not in Beijing. Usually, it will have the definitive say in legal action after July. However, the Chinese have reserved final decisions for Beijing in cases involving "acts of state" -- without defining precisely what will constitute an "act of state."
Economic prospects are good. Hong Kong's economic indicators are all in very good shape with growth expected over five percent next year. Not surprisingly, hotels are full for most of the year and major construction continues everywhere. The stock exchange and property markets are booming. Hong Kong today is almost the perfect open market. With limited government involvement in the regulation of the economy, Hong Kong boasts only 180,000 civil servants, no capital gains or sales taxes and maximum income tax of 15% for individuals and 17.5% for incorporated businesses. The new Special Administrative Region Government will continue to be committed to a laissez-faire model economy and low level of government interference.
After the handover, Hong Kong will maintain its separate identity in such bodies as the WTO (World Trade Organization) and the APEC (Asia Pacific Economic Cooperation Forum). It will remain a separate international customs territory. Also, it will continue to issue its own currency free from foreign exchange controls, directly linked to the Hong Kong dollar. Hong Kong is bound by many international standards and practices, and reciprocal arrangements with other governments. The U. S. has negotiated a series of agreements with Hong Kong on everything from Import Standards to Prisoner Transfers. All of these treaties and international agreements will remain in effect.
Leaf imports in 1996 reached approximately 22,250 metric tons with about 9,500 tons, or 18 percent, coming from the United States. Most leaf tobacco imported into Hong Kong is used to manufacture cigarettes for export. There are three manufacturers of cigarettes in Hong Kong, Hong Kong Tobacco Co., a small local producer, a Chinese government owned enterprise, and the British-American Tobacco Co. (BAT). With the exception of BAT, which is making trademark cigarettes, local producers are making low quality cigarettes for export. The Chinese enterprise, Nanyang Brothers Tobacco Co., Ltd., exports almost all of its output to China.
Imports of unmanufactured tobacco dropped 17 percent as a result of large stocks and a continued decrease in domestic demand. South Africa, the United States and Zimbabwe are the three largest suppliers of tobacco. In 1996, 65 percent of the export market, or 4,005 MT went to China. In Hong Kong, a Chinese enterprise, Tian Li International Co. Ltd., represents the China Tobacco Import & Export Corporation in the territory and is the only company in Hong Kong having the right to import and export all tobacco and cigarettes for China.
In 1996, the import of flue cured tobacco dropped 19 percent because of large carryover stocks and a further drop in domestic consumption. The higher price of U. S. leaf resulted in a 65 percent decrease in U. S. exports to Hong Kong, only 18 percent of market share. Of the 2,503 tons of flue-cured Virginia tobacco exported by the United States, 452 tons or 18 percent was re-exported. The U. S. also shipped 899 tons of burley, none of which was re-exported. Imports of flue-cured tobacco from Zimbabwe made significant gains into the Hong Kong market, increasing 581 percent over 1995 and becoming the second largest supplier of flue-cured Virginia tobacco. Supplies from Zimbabwe were abundant; quality was above average and priced very competitively. The largest supplier of leaf tobacco to Hong Kong is South Africa with a 34 percent market share. While Hong Kong's total burley imports dropped 7 percent in 1996, all supplying countries, except the United States, which was disadvantaged by higher prices, increased their exports to Hong Kong. Malaysia, China and United States were the three largest suppliers. Vietnam was the largest export destination for burley exports from Hong Kong.
Status consciousness and high local income combine to produce a preference for premium American blend cigarettes. This results in an relatively inelastic demand for premium imported cigarettes. Cigarettes and beverages are the only products that carry a duty in Hong Kong. Cigarette prices include a duty of almost HK $ 14.00 (US $ 2.00) per pack. Over 8 billion cigarettes were shipped from the United States to Hong Kong last year. However, most of these were forwarded on to other countries. Officially, Hong Kong residents consumed just over 3 billion cigarettes in 1996. Increased health concerns have pushed smoking down to approximately 20 percent of the population. However, estimates are that about one third of total consumption, or 1.5 billion cigarettes in 1996, is contraband and that actual consumption is a little over 4.5 billion sticks. The relatively high cigarette prices of HK $ 23.00 to 28.00 (US $ 3.25 to 4.00) per pack provides a significant incentive for smuggling.
Anti-smoking sentiment is strong in Hong Kong. Starting August 1, 1992, smoking was banned in cinemas, music halls, amusement centers and on public transportation including buses and taxis. Since February 1, 1993, any advertisement which mentions the sponsor of an activity which has any connection with tobacco products containing words like cigarette, smoking or tobacco is considered to be cigarette advertising. The following health warnings are required on cigarette products and advertisements on a rotational basis since January 1994 and on all tobacco products since October 28, 1995: Hong Kong Government Health Warning Smoking Can Kill; Hong Kong Government Health Warning, Smoking Can cause Cancer; Hong Kong Government Health Warning, Smoking Can Cause Heart Disease; Hong Kong Government Health Warning, Smoking Harms Yourself and Others. The Government also ruled that the size of anti-smoking statements must not be less than 20% of the gross area of any advertisement. There are no restrictions regarding additives and pesticides.
In early 1997, two anti-tobacco bills were proposed. One was introduced by a Legislative Councilor who is a member of the Medical Services Functional Constituency. The bill proposes a total ban on tobacco advertisements in all but foreign publications, which account for less than 20% of total circulation in Hong Kong. Additionally, direct marketing promotions, such as giveaways, sales of packs with less than 20 cigarettes and event sponsorship would also be banned. The 4As (major advertising firms) and Hong Kong Advertising Association (HKAA) are preparing strategies to oppose the advertising ban.
The other bill, proposed by the Hong Kong Health and Welfare Branch, is less severe but would ban display-type tobacco advertisements on walls and public transportation. It also empowers retail outlets to designate any part of their premises as no-smoking, prohibit the sale of cigarettes in packets of less than 20 sticks and the sale of tobacco products from vending machines. It would also provide for stronger and more prominent health warnings, prohibit giveaways of tobacco products, require cigarette packets and advertisements to indicate tar and nicotine yields and lower the maximum tar yield.
In 1996, Hong Kong imported 62,785 million cigarettes, a 6 percent increase over 1995. Of these, 6,803 million were imported from the United States The three largest import suppliers were China (47 percent), United Kingdom (16 percent), and the United States (11 percent). The Hong Kong domestic cigarette market is small, with 96 percent of imported cigarettes (60,259 million sticks) destined for re-exports. Total exports in 1996, including re-exports and domestically manufactured brands, reached 79,570 million sticks. The major re-export markets for U. S. cigarettes transshipped through Hong Kong in 1996 were: China, 44 percent; Philippines, 9 percent; Taiwan, 8 percent; Korea, 6 percent; and Singapore, 7 percent.
Estimates of the quantity of smuggled cigarettes going through the Hong Kong port vary from 10 to 30 percent of official flow, currently 63 billion sticks. Last year Hong Kong Customs seized over 300 million cigarettes. These reported seizures would reflect 2 percent of the 1.5 billion cigarettes estimated to pass through the Hong Kong market. Hong Kong has less than 200 Customs officers to manage the more then 250 thousand boats which Hong Kong hosted in 1996. Because duties apply only to cigarettes and beverages, site inspection of containers in transit is infrequent. Smuggled cigarettes enter the port with false manifests or bills of lading. Smuggled cigarettes are then either distributed within the country or re-exported and smuggled to other Asian countries. False manifests or bills of lading will usually originate in one of the regional re-export ports, such as Singapore or Seoul.
The Foreign Agricultural Service has made U. S. agricultural interests in Hong Kong's future clear, in public and private, through discussion and negotiation. The United States Department of Agriculture will continue to speak out, raise questions and promote the interests of American agriculture in Hong Kong through and after July 1, 1997.
* Commodity information is based on a fact finding trop to South Asia by the Author and draws heavily on reports by ATO Hong Kong.