VII. INVESTMENT CLIMATE A. Openness to Foreign Investment Hong Kong pursues a free market philosophy with minimum interference with corporate intitiative. The territory welcomes foreign investment in that context. It offers no special incentives nor does it impose disincentives for foreign investors. Hong Kong's well established rule of law is applied consistently and without discrimination. There is no distinction in law or practice between investments by foreign-controlled companies and those controlled by local interests. There are no direct subsidies to domestic industries and, as a duty free port, no tariff barriers. There is no discrimination against foreign investors either at the time of initial investment or afterwards. There is no capital gains tax nor are there withholding taxes on dividends and royalties. Profits can be freely converted and remitted. Foreign-owned and domestically owned firms are taxed at the same rate, currently 16.5 percent. There are no preferential or discriminatory export and import policies which affect foreign investors. With a few exceptions, there are no specific regulations governing foreign investments and reinvestments, nor are there specific screening requirements. Exceptions include nondiscriminatory prudential requirements imposed on banks and other financial institutions and restrictions on foreign ownership in television broadcasting and media. No laws per se regulate acquisition and takeover activities. However, the Hong Kong Code on Takeovers and Mergers (1981) sets out general principles for acceptable standards of commercial behavior. Hong Kong's legal system makes no distinction between local and foreign corporations. The territory's extensive body of commercial and company law generally follows that of England and Wales, including the common law and rules of equity. Most statutory law is made locally. The local court system provides for effective enforcement of contracts, dispute settlement and protection of rights, including intellectual property. Hong Kong is a Contracting Party to the General Agreement on Tariffs and Trade and is a signatory to the WTO; in each case, in its own right as a separate customs territory -- a status it will retain after reversion to PRC sovereignty in 1997. Formalities are minimal for company incorporation and business registration. Foreign and domestic companies register under the same rules and are subject to the same set of business regulations. Regulations governing the relative degree of local participation in ownership apply in broadcasting. At present, no more than 49 percent of the voting shares of a satellite television licensee can be held by a non-resident, (essentially, one who has not been ordinarily resident in Hong Kong for at least one continuous period of not less than seven years). Current regulations for terrestrial or subscription television require approval of the broadcasting authority if a non-resident seeks to acquire two percent or more of voting shares of a licensee. The HKG's Industry Department encourages inward investment as a means to introduce new or improved products, processes, designs and management techniques. U.S. and other foreign firms can participate in government financed and subsidized research and development programs on a national treatment basis. Hong Kong's Reversion to Chinese Rule in 1997 ------------------------------------------------------------- The Sino-British Joint Declaration, signed in 1984, and the Basic Law, promulgated by China in 1990, form the basis for China's "One Country, Two Systems" guarantees for Hong Kong when it becomes a Special Administrative Region of China (SAR) on July 1, 1997. The HKSAR will enjoy a high degree of autonomy, especially in commercial and economic issues. The Basic Law guarantees the rights and freedoms that Hong Kong residents now enjoy, the continued rule of law, and the maintenance of Hong Kong's capitalist system for 50 years. The HKSAR will maintain its capitalist economic and trade systems, shall retain the status of a free port and continue a free trade policy with free movement of goods and capital. It will retain its status as an international financial center. It will, on its own, formulate monetary and financial policies and safeguard the free operation of business and financial markets. The HKSAR will have independent finances, using revenues exclusively for its own purposes. The Hong Kong Dollar will continue to be freely convertible and foreign exchange, gold and securities markets will continue to operate. Systems currently in place, including Hong Kong's regulatory and supervisory framework, will remain unchanged. Hong Kong's legal system, including the independence of the judiciary and obligation of the executive autorities to abide by the law, will continue. B. Conversion and transfer policies There are no restrictions on conversion and inward or outward transfer of funds for any purpose. The HK dollar is a freely convertible currency that, since late 1983, has been linked to the U.S. dollar at an exchange rate of HKD7.8 = USD1. Authorities are committed to exchange rate stability through maintenance of the linked rate. There is no allocation of foreign exchange; reserves are estimated at US$43 billion. C. Expropriation and Compensation Private property is only expropriated in the public interest for well- defined purposes such as implementation of public works projects through negotiations, and then, in a nondiscriminatory manner in accordance with established principles of international law. Due process and transparency of purposes are observed. Investors and lenders to expropriated entities receive prompt, adequate, and effective compensation. Post is aware of no expropriation actions in the recent past. Property may be acquired under the Crown Land Resumption Ordinance, the Land Acquisition Ordinance, the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance or the Roads Ordinance. These ordinances provide for payment of compensation. If agreement cannot be reached on the amount payable, either party can refer the claim to the Land Tribunal for jurisdiction. D. Dispute Settlement Post is aware of no investment disputes in recent years involving U.S. or other foreign investors or contractors. Investment disputes are normally handled in the courts or via private negotiation. In some cases, disputes may be referred to the Hong Kong International Arbitration Center. The HKG accepts international arbitration of investment disputes between itself and investors. Via the United Kingdom, Hong Kong is a member of both the International Center for the Settlement of Investment Disputes (ICSID, the Washington Convention) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The local court system provides effective enforcement of contracts, dispute settlements and protection of rights, including intellectual property. Secured interests in property are recognized and enforced. Hong Kong's legal system is firmly based on the rule of law and the independence of the judiciary. Courts of justice in Hong Kong include the Supreme Court, which comprises the Court of Appeal and the High Court, the District Court, the Magistrate's Court, the Coroner's Court and the Juvenile Court. There is also a Lands Tribunal, Labor Tribunal, and other statutory tribunals. Pursuant to the Sino-British Joint Declaration, the power of final judgement in the HKSAR shall be vested in a five-member court of final appeal. The HKG owns all land in the territory. When land is sold, it is done by way of granting a long-term lease, not by transfer of freehold title. Local and foreign leaseholders are given equal treatment. Under the Joint Declaration, rights under existing leases will be protected. Up until June 30, 1997, the HKG may continue to create new leases which can run until 2047. E. Performance Requirements/Incentives Consistent with its generally laissez faire economic philosophy, Hong Kong imposes no export performance or local content requirements as a condition for establishing, maintaining or expanding a foreign investment except as previously noted (e.g. broadcasters, medical doctors). Hong Kong offers no special privileges to attract foreign investment. There are no requirements that Hong Kong residents own shares, that foreign equity be reduced over time, or that technology be transferred on certain terms. Such matters are left to the market. F. Right to Private Ownership and Establishment Hong Kong law and regulations provide for the right of foreign and domestic private entities to establish, own and to dispose of interests of business enterprises. Foreign investors are generally allowed to engage in all lawful forms of remunerative activity. Restrictions on the latter involve regulated entry of practice in the mass transit, electric power generation, medical services, legal, telecommunications and broadcasting sectors. The Hong Kong Government does not generally engage directly in business activity via public enterprises, preferring to leave this to the private sector. In general, business privileges, franchises and land development rights are granted on the basis of competitive equality. G. Protection of Property Rights The territory's commercial and company law provide for effective enforcement of contracts and protection of corporate rights. The Intellectual Property Department, which includes the Trade Marks and Patents Registries, is the focal point for the development of Hong Kong's intellectual property regime. Hong Kong has acceded to the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, and the Geneva and Paris Universal Copyright Conventions. Hong Kong has developed comprehensive laws covering trade marks, trade descriptions, copyrights, industrial designs and patents. Hong Kong's patent and copyright laws are currently dependent on the United Kingdom. The Registration of Patent Ordinance provides for the registration with the Hong Kong Registrar of Patents of U.K. patents. Patent protection extends as long as the original patent in the U.K. Hong Kong provides full patent protection for chemical compounds and foodstuffs. There are no restrictions on the licensing of patents, nor is licensing compulsory. After conducting a comprehensive review of copyright law at the request of the HKG, the Law Reform Commission in January 1994 released to the HKG its recommendations for updating Hong Kong's copyright and design law in line with international developments and for localizing appropriate provisions to reflect Hong Kong's transfer of sovereignty in 1997. The HKG plans that English statute law which applies to Hong Kong will be replaced by Hong Kong enactments. Copyrights are protected under the U.K. Copyright Act and the Hong Kong Copyright Ordinance. Foreign works are protected provided ownership is vested in a country which is a signatory to one of the international conventions. There is no need to register a copyright; protection under the Copyright Ordinance is automatic. Three- dimensional representations of two-dimensional works are protected as are registered designs. In March 1994, legislation was enacted to provide specific statutory protection for the layout-designs (topographies) of integrated circuits. Most of the provisions of the bill are based on similar legislation in the U.K. and Australia. The bill also meets standards set out in the Treaty on Intellectual Property in Respect of Integrated Circuits (The Washington Treaty 1989) and the agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). All trade mark 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. Trade marks are registered under the Trade Marks Ordinance, with provisions similar to trade marks legislation in the United Kingdom. The Trade Marks (Amendment) Ordinance, which came into effect in 1992, extends the trade marks law to allow for registration of trade marks relating to services. The Patent Registry registers patents that have been granted in the United Kingdom and European Patents registered in the United Kingdom. Hong Kong has no specific ordinance to cover trade secrets. Under the Trade Description Ordinance, however, the government has the duty to protect the information being disclosed to other parties. The Trade Description Ordinance prohibits false trade descriptions, forged trade marks and misstatements in respect of goods supplied in the course of trade. The Customs and Excise Department is responsible for the enforcement of protection for intellectual property rights. The Department has a special IPR unit with over 100 employees. In addition to conducting raids on local establishments and street vendors, this unit works closely with the Hong Kong Government anti- smuggling task force to combat suspected smuggling operations. During 1993, there were 546 seizures of copyright infringing products with a total value of HKD 29.2 million (USD 3.7 million) and 1,051 seizures of goods violating trademarks and trade descriptions with a total value of HKD 176 million (USD 22.6 million). Most pirate manufacturers have been driven out of Hong Kong in the past several years. However, many have since re-established operations across the border in South China. Despite numerous seizures of pirate goods in Hong Kong and at the PRC-Hong Kong border, customs officials are fighting an uphill battle. Software piracy continues to be a serious problem in Hong Kong, as does compact disc music piracy. Pirated software diskettes are readily available in certain well-known retail outlets. H. Regulatory System: Laws and Procedures Hong Kong's body of law and regulation implicitly and explicitly promotes competition in all forms of economic endeavor. The only exceptions are those previously mentioned, where entry is restricted. Tax, labor, health and safety and other laws and policies avoid distortions or impediments to the efficient mobilization and allocation of investment. Bureaucratic procedures and "red tape" are held to the minimum and are equally transparent to local and foreign investors. I. Efficient Captial Markets and Portfolio Investment There are no impediments to the free flow of financial resources. Laissez faire economic policies, complete freedom of capital movement and a well understood regulatory and legal environment have greatly facilitated Hong Kong's growing role as a regional and international financial center. At year-end 1993, eighty one of the world's top 100 banks operated in Hong Kong. Hong Kong's five largest banks and their assets were as follows: Total Assets Rank Institution (USD millions) ------ ------------ ------------------- 1 Hong Kong & Shanghai 145,073 Banking Corporation 2 Hang Seng Bank Ltd. 35,798 3 Bank of East Asia, Ltd. 9,169 4 Nanyang Commercial Bank Ltd. 6,932 5 Wardley Ltd. 5,706 Source: KPMG Peat Marwick Banking Survey Report 1993-94 Credit is allocated strictly on market terms and is available to foreign investors on a nondiscriminatory basis. The private sector has access to the full spectrum of credit instruments as provided by Hong Kong's banking and financial system. Legal, regulatory, and accounting systems are transparent and consistent with international norms. The Hong Kong Monetary Authority (HKMA) functions as the territory's de facto central bank. The HKMA is responsible for maintaining the stability of the financial system and managing the exchange fund backing Hong Kong's currency -- linked to the U.S. dollar at HKD7.8 = USD1. Hong Kong banks have consistently enjoyed healthy profits in recent years. Bad debt charges as a percentage of loans were 0.12 percent in 1993, compared to 0.15 percent in 1992. The Stock Exchange of Hong Kong was ranked sixth-largest worldwide at the end of 1993, up from fifteenth-largest in 1990. From 1990 to 1993, market capitalization increased 3.5 times, while the number of listed firms grew from 299 to 477. Operation and regulation of Hong Kong's stock and futures markets have been considerably strengthened during the 1990s. The Securities and Futures Commission (SFC), established in 1989, is responsible for the integrity of the markets and the protection of investors. Since establishment, the SFC has worked effectively to build a regulatory framework consistent with international standards, to encourage greater efficiency and transparency in trading systems and to strengthen supervision and enforcement. Portfolio investment decisions are left to the private sector. Cross shareholding agreements have been used by at least one large Hong Kong firm. In this well publicized case, the cross shareholding agreement was implemented to stabilize control of its majority shareholders and protect against all hostile takeovers, not primarily foreign hostile takeovers. There are no laws or regulations that specifically authorize private firms to adopt articles of incorporation/association which limit or prohibit foreign investment, participation or control. J. Political Violence Hong Kong is economically stable and secure. The territory enjoys an enviable reputation for tranquility. The Consulate General is not aware of any incidents over the past few years involving politically motivated damage to projects or installations. There has been no major unrest in the territory since the 1967 Cultural Revolution spilled across the border. K. Bilateral Investment Agreements Hong Kong is negotiating a series of bilateral investment agreements -- the HKG calls them "Investment Promotion and Protection Agreements" -- with major foreign investors. To date, Hong Kong has signed agreements with Australia, the Netherlands, Denmark and Sweden. The HKG has initialed agreements with Canada, Italy, France, Germany and Switzerland. All such agreements have been based on a model text approved by the PRC through the Sino-British Joint Liaison Group. The United States and Hong Kong held a first round of negotiations on a bilateral investment treaty; however, progress has been stymied by both sides' insistence on using their own model text as a basis for negotiation. L. OPIC and Other Investment Insurance Programs OPIC coverage is not available in Hong Kong. Hong Kong is a member of the Multilateral Investment Guarantee Agency (MIGA). Its membership will continue after the territory reverts to Chinese sovereignty in 1997. M. Labor Availability Labor remains in tight supply, with the unemployment rate hovering around 2 percent. To alleviate the labor shortage, the HKG in 1993 expanded its labor importation scheme by doubling the quota of skilled and semi-skilled workers to 25,000. It also introduced a pilot scheme to admit 1,000 professionals into the territory from China. There has been a continuous shift of employment away from manufacturing and into services, which now account for close to 80 percent of Hong Kong's GDP. Hong Kong manufacturers continue to shift their production facilities to lower-cost operations in China. Meanwhile, China's booming economy and expanding trade links have enabled Hong Kong to specialize in higher value-added production and service activities. Labor-management relations are generally smooth. The average number of days lost due to industrial conflicts is one of the lowest in the world. In 1992, the latest year for which statistics are available, membership in Hong Kong's 522 unions totalled 542,700, for a participation rate of about 21 percent. Hong Kong has implemented 29 conventions of the International Labor Organization in full and 19 others with modifications. The PRC maintains that Hong Kong will continue to adhere to these conventions after 1997. N. Foreign Trade Zones/Free Ports All of Hong Kong is a duty-free zone, as the territory is a free port. Subject to nondiscriminatory application of excise taxes and restricted entry in some sectors (e.g. broadcasting, electric power, telecommunications), local and foreign firms are free to take advantage of investment opportunities in the territory. O. Capital Outflow Policy Hong Kong has no restrictions on capital outflow nor does it maintain incentives for investment outside the territory. P. Foreign Direct Investment Statistics The Hong Kong Government gathers statistics on foreign direct investment only in the manufacturing sector. Data for inward investment by the United States and Japan are from U.S. Department of Commerce and Japanese Ministry of Finance statistics respectively. No official statistics are available on the amount of PRC investment in Hong Kong. Various local estimates placed PRC investment in the range of USD12 billion to USD20 billion at the end of 1992. Q. Major Foreign Investors * United States: Motorola, Digital Equipment Corp., Sea-land, Exxon, Citibank, Caltex, ATT, IBM, Kodak, Bank of America, Dun and Bradstreet, American International Group. Japan: Kumagai Gumi, Yaohan, Jusco, Daimaru, Mitsubishi, Uny, Nishimnatsu, Seibu, Daido Concrete, C. Itoh. United Kingdom: Inchcape Pacific, Cable and Wireless, Standard Chartered Bank, Jardine Matheson, Swire Group. West Europe: Carlsberg (Denmark), Hong Kong Petrochemicals (Italian/Korean/Chinese joint venture), Melitta (Germany), Philips (Netherlands), Dragages (France), Sonopress PanAsia (Germany). China: China International Investment and Trust, China Merchants, Bank of China, China Travel Services, China Overseas Construction, Guangdong Enterprises, Yue Xiu Enterprises, China Everbright. Asia: San Miguel Brewery (Philippines), Pioneer (Australia), Shangrila/Kerry Trading (Malaysia), Chyau Fwu Properties (Taiwan), Lippo Group (Indonesia), C.P. Pokphand (Thailand). *NOTE: This list is not in rank order nor is it comprehensive as Hong Kong does not register foreign investment.