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Hong Kong risk: Legal & regulatory risk
(RiskWire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT
RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentA16A16Legal & regulatory riskA18A18Note: E=most risky; 100=most risky.SUMMARY
Contractual arrangements are generally secure in Hong Kong, which has a transparent, common-law legal system inherited from the UK. China's intervention at the Hong Kong government's request in a landmark immigration case in 1999 notwithstanding, the judiciary has proven to be independent and impartial. Protection of property and freedom of exchange are enshrined in the Basic Law, Hong Kong's mini-constitution, which is protected by international law. The attitude of the government, local business, media and the public towards foreign investment is favourable. Price-fixing and cartels are not outlawed, except in the telecommunications sector, which has its own regulator. Perhaps as a result, certain sectors have become dominated by a small number of conglomerates. Intellectual property rights are legally recognised, but the government acknowledges that copyright protection is a problem and has been passing new laws and improving enforcement.
SCENARIOS
Companies are held liable for failing to adhere to strict legal environmental standards (Moderate Risk)
Environmental protection and quality-of-life issues have become staple issues for the Hong Kong media. As the economy returns to solid growth environmental issues are likely to become more prominent after being overshadowed by issues of economic hardship during the downturn. Companies should consider the risk of future liabilities from environment-related lawsuits when deciding which standards to observe in their Hong Kong-based operations. Even if not mandated by law now, environmental standards on a par with (and in some cases above) those in Western countries are likely to become the legal norm. Businesses may save money in the long run--as well as their public images--by honing to standards that exceed those legally required.
Land and property prices fall or are volatile (High Risk)
The governments decisions on how much land to sell and its policy on privatising public property have a large impact on the property market. They could affect the value of corporate assets in Hong Kong. Although the property market has recovered strongly from its recent woes, rising interest rates have hurt the sector, and sales over the second half of 2005 were sharply down on 2004 levels. Companies should consider the implications of volatile property prices when purchasing property or land-use rights in Hong Kong. Land-use rights purchases in neighbouring Guangdong province on the mainland could appear to offer good value, but the risk that property rights may not be respected or fully enforced is much higher under the mainlands legal system.
BACKGROUND
(Background material is updated twice yearly. Last update: March 20th, 2006)
Enforceability of Contracts
Contractual arrangements are generally secure in Hong Kong, aided by its transparent common-law legal system inherited from the UK. Protection of private property and freedom of exchange are enshrined in Hong Kongs mini-constitution; they are in no danger of being weakened in the foreseeable future.
Independence of the Judiciary
Since the 1997 handover, Beijing has kept its promise to allow Hong Kong a high degree of autonomy. So far, it has even tolerated decisions taken by Hong Kong officials that appear to go against mainland Chinese views.
Beijing's intervention in a landmark immigration case in 1999 notwithstanding, Hong Kong's judiciary has proven to be independent and impartial. For example, the Hong Kong government has thus far resisted pressure from local allies of Beijing to outlaw the meditation group Falun Gong. China outlawed the group in 1999 but it remains legal in Hong Kong.
The judicial process is swifter than in many other countries. Protection of private property and freedom of exchange are enshrined in Hong Kong's mini-constitution, and are in no danger of being weakened in the foreseeable future.
Foreign Investment: Discriminatory Practices
The government, local business, media and the public view foreign investment favourably. Attracting foreign investment is a priority, and the government has a worldwide network of economic and trade offices to promote overseas investment in Hong Kong. Foreign investment is widely considered beneficial, even crucial, for economic stability, and there is tacit rivalry with Singapore over the amount of investment made in each country and even over the number of multinational headquarters in each region.
Hong Kong does not enforce any local-content rules, but certain other governments, such as the United States, do so as a condition of admitting Hong Kong products. For this reason, Hong Kong maintains an official certification-of-origin system with three classifications:
(1) a certificate for products of Hong Kong origin;
(2) the generalised preference certificate (also called Form A) for markets in countries that grant preferential tariff treatment to Hong Kong goods; and
(3) a certificate of origin designating processing, which applies to those goods that have undergone processing within Hong Kong that is not considered principal processing. An example of this would be clothing fabrics manufactured and cut elsewhere and then shipped to Hong Kong for final assembly.
The Trade Department issues all types of certification-or-origin certificates for textile products. The fees are HK$110 per application for CHKO and COP, HK$300 for Certified True Copy of Certificate of Origin and HK$324 for a generalised preference certificate. Traders are advised to apply for the certificates of origin at least two working days before departure of the consignment. Since 1999 applications for the certificates of origin, PN and factory registration have been available electronically via Tradelink Electronic Commerce, an exclusive franchise to provide front-end services for processing official trade-related documents.
The Hong Kong General Chamber of Commerce, the Federation of Hong Kong Industries, the Indian Chamber of Commerce, the Chinese Manufacturers Association and the Chinese General Chamber of Commerce are authorised to issue the CHKO and the COP.
The United States grants Hong Kong and China separate safeguard quotas for imported clothing, and the Hong Kong Trade Department must show that all of Hong Kongs quota was in fact made in the territory. This is a tedious task for both Hong Kong exporters and the Trade Department, according to the Rushford Report, a USbased newsletter on trade politics. Three days before assembling a consignment of shirts, for example, Hong Kong factory representatives submit the PN form to the Trade Department, which can spot check its accuracy. The Trade Department also uses computers to compare each factorys production capacity with the reported performance records. The department regularly draws up a watch list of suspected violators, employs surveillance and makes spot inspections at factoriesall to satisfy US requirements that the Hong Kongquota garments are made in Hong Kong and not in China.
In June 2001 Hong Kong expanded the Trade Controls Branch of the Customs and Excise Department to crack down on traders who sell garments manufactured on the mainland but labelled "Made in Hong Kong".
Hong Kong offers no special incentives to overseas investors or foreign-owned firms. Nevertheless, its free-port status, low tax rates, good infrastructure, relative freedom from government interference and substantial available capital make it attractive to potential investors and thus competitive with other countries in the region that do offer specific incentives.
While Hong Kong offers no general investment incentives, the government offers several industry-based incentives and grants. It also manages three industrial estates, with fully serviced land offered at cost to investors introducing products and processes new to Hong Kong. All three are in the New Territories and are managed by the Hong Kong Science and Technology Parks Corp.
Unfair Competitive Practices
Price-fixing and cartels are legal in Hong Kong except in telecommunications, which has its own regulator (Office of the Telecommunications AuthorityOfta) to ensure fair competition. As a result, too few players organised into cartels dominate certain sectors of the economy. The absence of a general competition law hinders authorities efforts to investigate anti-competitive behaviour and to trigger a remedial process.
Instead of enacting such a law, the government has opted to adopt appropriate sector-specific measures when necessary. Among the sectors liberalised in recent years are telecoms, the television industry and the wholesale rice market. The government also scrapped the last remaining interest rate rules in July 2001, thus restoring free competition for savings of bank customers. In the electricity sector, the government held public consultations throughout 2005 as part of a review of the regulatory framework for Hong Kongs power providers. It intends to break the monopoly of CLP Holdings and Hong Kong Electric Holdings when their franchises expire in 2008.
The government began opening the telecoms market to free competition in 1995, ending the monopoly held by Hong Kong Telecom. Along with the liberalisation, the government also increased regulation of the industry, establishing Ofta in 1993 to curb anti-competitive practices. A 1999 amendment to the Telecommunication Ordinance enhanced competition safeguards for the sector.
Ofta established a Competition Affairs Branch (a spin-off of its regulatory affairs branch) in June 2001 to curb anti-competitive practices, investigate complaints, and help draw up regulations and strategy to ensure a level playing field among licensees. The issuance of new telecoms licences (part of a broader government strategy to liberalise the sector) has tremendously boosted telecoms capacity in Hong Kong.
The government further amended the Telecommunications Ordinance in July 2003 to give Ofta the authority to pre-approve any change of 15% or more in the shareholding of a telecoms operator. The measure has been seen as another effort to limit the market power of the dominant firms: PCCW (formerly Pacific Century Cyberworks, which acquired control of the dominant Hong Kong Telecom in 1995) and Hutchison.
In a parallel effort to liberalise the television industry, the government granted licences to five new pay-TV operators in 2000 (there were already two existing operators then) and authorised another operator in February 2004. However, two licensees withdrew in the first half of 2001, and two others surrendered their licences in 2004, highlighting governments failure to broaden competition in the industry. The companies that withdrew cited overcharging by network operators (the companies whose cables carry the service) and high annual licence fees as reasons for ending their pay-TV businesses. Opening the industry to other players has hardly made a dent in the market share of i-Cable, the dominant player.
Meanwhile, the Hong Kong Association of Banks ceased to be a cartel (which routinely set fixed interest rates) in July 2001, when the last interest rate rules were scrapped. The association was established in 1980 to cap the maximum interest rates paid on a range of banking products. These caps were introduced in 1964 in response to a bidding war for deposits that had triggered the collapse of several banks. The interest rate rules were progressively phased out, beginning in 1995, and completely scrapped on July3rd 2001, restoring free competition for the savings of bank customers.
Hong Kong has been under pressure from foreign airlines and cargo handlers to liberalise its 50-year-old one airline, one route policy, which allows only one carrier based in Hong Kong to fly on each route between Hong Kong and anywhere else. Hence, there are only two locally based passenger carriers: Cathay Pacific, Hong Kongs main airline; and Dragonair (partially owned by Cathay), which flies to the mainland. Cathay competes with foreign airlines on virtually all routes, but overseas airlines have limited rights to fly on to other Asian cities.
Hong Kong reached an air-services liberalisation deal with the United States in October 2002 that gave US airlines more rights to fly into Hong Kong and then on to other points. The package falls short of the so-called open skies pacts the US has attained elsewhere, but it does let US airlines compete with Cathay and Dragonair.
Intellectual Property Rights
Hong Kong conforms to the major intellectual property (IP) conventions. Its laws for protecting IP are considered effective, but its enforcement of those laws has not won unanimous praise. In protecting rights, the laws do not distinguish between residents of Hong Kong and foreign entities. A foreign corporation can arrange for coverage in Hong Kong and seek enforcement of its rights in the local courts.
The Intellectual Property (Miscellaneous Amendments) Ordinance went into force on April1st 2001, giving the government wider powers to clamp down on corporations using pirated software in their daily operations. The law amends the Copyright Ordinance to allow the prosecution of any company for knowingly possessing pirated software in the course of business, even if it is not engaged in making the software concerned for sale. The term business as used in the Copyright Ordinance is not confined to commercial activities but can also cover educational, charitable or government activities. Such a copy might therefore be a pirated computer program, an unauthorised photocopy of a newspaper article, an unauthorised recording of a television programme, or an electronic copy or hard copy of a copyrighted work downloaded from the Internet without the authorisation of the copyright owner. In principle, the amending ordinance says that all copyrighted works should be treated equally and that they enjoy the same level of protection under the law.
To address public concerns that the amendments hampered the dissemination of information in enterprises and teaching activities in schools, the Legislative Council passed the Copyright (Suspension of Amendments) Ordinance in June 2001. This legislation suspends until end-July 2006 the implementation of the April 2001 amending ordinance as it applies to certain criminal provisions in the Copyright Ordinance and subject to certain exceptions. The Copyright (Suspension of Amendments) Ordinance will lapse at the end of July 2006, but the Legislative Council passed a new ordinancethe Copyright (Amendment) Ordinance 2004in March 2004 to make permanent (subject to a number of modifications) the suspension amendments under the Copyright (Suspension of Amendments) Ordinance.
The 2004 amendment confines criminal liability for the use of pirated copies of copyright works in business to only four categories of works: computer programs, films, television dramas and musical recordings. It also removes the phrase in connection with from the expression for the purpose of, in the course of, or in connection with, any trade or business where it appears in the Copyright Ordinance (the expression describes the use of the four categories in trade or business subject to criminal liability). The 2004 amendment also provides for a new defence against criminal liability for employees possessing infringing copies of works belonging to the four categories supplied by their employers. Under the amending law, this defence took retroactive effect from April1st 2001. In addition, the Copyright (Amendment) Ordinance 2004 maintained existing restrictions on parallel importation of copyrighted works other than computer software.
The Copyright (Amendment) Ordinance 2004 also introduced the "copyshop offence", into the Copyright Ordinance. A person is now criminally liable if he possesses an infringing reprographic copy of a copyright work as published in a book, magazine or periodical for the purpose of or in the course of providing a copying service business. It was already illegal for any person (including a copyshop) to make for sale or hire an infringing copy of a copyright work without the permission of the copyright owner. However, the prosecution was required to prove that the infringing copy had been made by a copyshop, which could be difficult to establish. The copyshop offence, which went into effect on September1st 2004, was introduced to facilitate enforcement and prosecution of copyright infringement by copyshops. Maximum penalty for the copyshop offence, as for other copyright offences, is imprisonment of four years and a fine of HK$50,000 for every infringing copy.
An earlier amendment to the Copyright law, the Copyright (Amendment) Ordinance 2003, effective November28th 2003, allowed parallel import of computer software, except software whose principal use is to be viewed or played as a film, television drama, or musical audio or visual recording. The government said the move would increase competition and availability of products in the market, and make it easier for companies using pirated computer software to switch to legitimate products.
The Legislative Council passed another law increasing IP protection, the Intellectual Property (Miscellaneous Amendments) Ordinance (No. 2) in February 2001. The law made technical improvements to the Patents Ordinance and the Registered Designs Ordinance. For example, it allows the publication of patents and designs by electronic means, not only through the Government Gazette, and generally simplifies patent application procedures. It also enhanced Section 110 of the Patents Ordinance by providing that a right of priority arising as a result of the filing of a patent application may be assigned or transmitted either together with the application or independently. This allows, for example, the owner of an invention who has filed a patent application in a Paris Convention country but who does not wish to seek patent protection in Hong Kong to assign his right of priority to another party to apply for a short-term patent in Hong Kong based on the same invention.
Enforcement of Hong Kongs IP laws is under the jurisdiction of the Intellectual Property Investigation Bureau, which is part of the Customs and Excise Department. The department said that 502 people were arrested or questioned for copyright offences in the first half of 2005, compared with 608 in the same period in 2004. The total value of goods seized in violation of copyright laws amounted to HK$132m in the first half of 2005, down 16% from HK$157m in the same period in 2004.
In addition to enforcement action, the Hong Kong government spends about HK$8m annually on anti-piracy education and advertising.
Price Controls
Apart from the controls on charges for public transport, electricity and some residential rents, there are no significant price controls. The government has not announced any plans for new controls.
Hong Kong's rent-control system, introduced in the 1973 Landlord and Tenant Act and loosened in 1981, provides for tenure security and controlled rent increases for most tenants in private-sector post-war domestic premises. Hong Kong imposes no controls on commercial or industrial rents, apart from industrial estates.
Tariffs charged by Hong Kongs two electricity providers (CLP Holdings and Hong Kong Electric Holdings) have been tied since the 1960s to a mechanism that limited the companies return on their average net assets to a maximum of 15%. This framework was under review as of September 2005, and a new regulatory regime liberalising the electricity sector is expected to be established when the power companies franchises expire in 2008.
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