People’s Republic of China-Hong Kong Special Administrative Region: Selected Issues and Statistical Appendix

This study estimates quantitative, industry-level measures of the intensity of competition and also discusses various methodologies and data used for measuring competition. The following data are also included in the study: gross fixed capital formation, selected price indicators, labor force, employment, and unemployment, property market development, public expenditure by function, monetary indicators, balance sheet of all authorized institutions, equity price developments, exchange fund balance sheet, wages, labor productivity, public expenditure by function, revenue, government expenditure under the general revenue account, and so on.


This study estimates quantitative, industry-level measures of the intensity of competition and also discusses various methodologies and data used for measuring competition. The following data are also included in the study: gross fixed capital formation, selected price indicators, labor force, employment, and unemployment, property market development, public expenditure by function, monetary indicators, balance sheet of all authorized institutions, equity price developments, exchange fund balance sheet, wages, labor productivity, public expenditure by function, revenue, government expenditure under the general revenue account, and so on.

II. A Note on the Impact of Mainland China’s Accession to the WTO on Hong Kong SAR1

A. The Agreement

1. On November 15, 1999, the United States and the Mainland reached a bilateral agreement on the terms of the Mainland’s entry into the World Trade Organization (WTO). Provided bilateral agreements with remaining WTO members, including the European Union, can be reached quickly, the Mainland could become a member of the WTO in the second half of 2000. So far, only limited details of the agreement have been published, including in respect of the tariff reductions proposed; and the final terms of accession will also depend on the outcome of the remaining bilateral negotiations. However, the staff understands the key elements to be the following (Box II.1):

  • The Mainland will reduce tariffs on nonagricultural products (which account for 95 percent of total imports) to 9.4 percent by 2005, and lower tariffs on agricultural products to 17 percent by January 2004;2 eliminate quotas and nontariff restrictions on industrial products (by 2005); introduce a tariff rate quota system in agriculture; and provide full trading and distribution rights to foreign firms.

  • The Mainland will significantly expand market access in the services sector, including through eliminating geographic and other restrictions in most key sectors (by 2005); through increasing foreign ownership limits in telecommunications (50 percent by 2002), life insurance (50 percent on accession), and securities (49 percent by 2002); and through giving full national treatment to foreign banks (by 2005).3

  • The United States will eliminate import quotas under the Multi-Fiber Agreement (MFA) on the Mainland’s textile imports by 2005, subject to anti-surge provisions through 2008, and give the Mainland permanent Normal Trade Relations (NTR) status. It will continue to apply nonmarket economy methodology for anti-dumping cases for 15 years.

The Main Elements of the China-U.S. Agreement

China will:

1. Agriculture
  • Reduce average tariffs for agricultural products from 20 percent to 17 percent by January 2004.

  • Establish a tariff rate quota system for bulk commodities, with quota quantities increasing over time, and subject to tariffs between 1-3 percent. Eliminate export subsidies on cotton and rice.

  • Give U.S. exporters the right to sell and distribute imported goods directly to Mainland consumers, without going through state trading enterprises or other specified middlemen.

2. Industrial goods
  • Reduce average tariffs from 18½ percent in 1998 to 9.4 percent by 2005, phased in on a straight line basis, with particularly large cuts for automobiles, high tech products, wood, and paper.

  • Eliminate quotas and nontariff restrictions within 5 years (and most in 2002–03). In the interim, base-level quotas will grow at IS percent annually.

  • Give full trading and distribution rights for imported goods to foreign companies.

3. Services
  • Telecommunications: Join the Basic Telecommunications Agreement, and phase out all geographic restrictions on services in 2-6 years. Permit 49 percent foreign ownership in all telecommunications services on accession, rising to SO percent in some sectors in 2 years.

  • Insurance: Phase out geographic and service restrictions over 3-5 years. Permit 50 percent foreign ownership in life insurance and 51 percent ownership in nonlife insurance on accession (the latter rising to 100 percent in 2 years). Reinsurance is completely open on accession.

  • Banking: Allow foreign banks to conduct local currency business with Chinese enterprises after two years, and retail business after 5 years. Nonbank companies can offer auto financing on accession.

  • Securities Business: Allow foreign firms to hold minority stakes in securities funds, with shares rising from 33 percent initially to 49 percent after three years.

  • Distribution: Foreign companies with existing domestic investments will be able to undertake wholesale business with a Chinese partner on accession. Foreign invested retail business will be permitted in a limited set of major cities on accession; all quantitative and geographic restrictions will be removed by January 2003.

  • Other services: Allow foreign firms with foreign majority control to provide a broad range of professional services, including accountancy, taxation, and management consultancy. Foreign movie companies will be allowed to form joint ventures for distribution of video and sound recordings. China will allow 100 percent foreign-owned hotels in three years.

The United States will:
  • Eliminate import quotas on China’s textile and clothing exports by end-2005, subject to anti-surge provisions through 2008.

  • Maintain its current anti-dumping methodology (treating China as a nonmarket economy) for 15 years after accession.

  • Seek permanent Normal Trading Relations (NTR) status for China from Congress.

Financial Sector Components of China-U.S. Bilateral WTO Agreement

Banking Sector

Currently foreign banks are not permitted to do local-currency business with Chinese clients (a few can engage in local currency business with their foreign clients), and China imposes severe geographic restrictions on the establishment of foreign banks. China has committed to full market access in five years for foreign banks:

  • Foreign banks will be able to conduct local-currency business with Chinese enterprises starting 2 years after accession;

  • Foreign banks will be able to conduct local-currency business with Chinese individuals from 5 years after accession;

  • Foreign banks will have the same rights (national treatment) as Chinese banks within designated geographic areas; and

  • Both geographic and customer restrictions will be removed in five years.

Nonbank Financial Institutions

China has made commitments for nonbank foreign financial institutions to be able to provide auto financing upon China’s accession. This in combination with commitments regarding importation, distribution, sale, financing, and maintenance and repair of automobiles will help open up this key sector for U.S. industry.

Securities Business

China will permit minority foreign-owned joint ventures to engage in fund management on the same terms as Chinese firms. As the scope of business expands for Chinese firms, foreign joint venture securities companies will enjoy the same expansion in scope of business. Minority joint ventures will be allowed to underwrite domestic securities issues and underwrite and trade in foreign-currency-denominated securities (debt and equity).

Insurance Business

Currently, China restricts foreign companies to operate in Shanghai and Guangzhou. Under the agreement:

  • Geographic Limitations. China will permit foreign property and casualty firms to insure large-scale risks nationwide immediately upon accession, and will eliminate all geographic limitations in 3 years;

  • Scope. China will expand the scope of activities for foreign insurers to include group, health and pension lines of insurance, which represent about 85 percent of total premiums, phased in over S years;

  • Prudential Criteria. China agrees to award licenses solely on the basis of prudential criteria, with no economic needs test or quantitative limits on the number of licenses issued; and

  • Investment. China agrees to allow 50 percent ownership for life insurance. Life insurers may now choose their own joint venture partners. For nonlife, China will allow branching or 51 percent ownership on accession and form wholly owned subsidiaries in 2 years. Reinsurance is completely open upon accession (100 percent, no restrictions).

2. In assessing the impact of the agreement on the Mainland, two particular characteristics of its trade and investment regime are of importance:

  • First, the trade regime for processing goods—which covers goods produced entirely for export, and accounts for about 60 percent of total trade flows—is very liberal: imports of inputs and intermediate goods for this sector are duty free, and most enterprises can engage directly in foreign trade. The remaining 40 percent of trade (so-called “ordinary” trade) is subject to a much more restrictive regime, including tariff and nontariff barriers, including restrictions on trading and distribution rights.

  • Second, foreign direct investment in the export-oriented manufacturing sector has been substantially liberalized (reflected in the rapid growth of processing trade), but significant constraints remain on investment in the services sector (foreign direct investment in services was less than one-third of the total in 1998). In particular, foreign investment in telecommunications is essentially forbidden; activities of foreign insurance companies and banks are severely restricted; and distribution and trading rights are very limited.

3. From a sectoral perspective, the staff expects the WTO to have the following main effects:

  • Accession will primarily affect “ordinary” imports coming in under the regular trade regime, especially of agricultural goods, automobiles, and certain capital-intensive industries (including telecommunications and petrochemicals). There will be a modest boost to ordinary exports (depending on the extent that they use ordinary imports as inputs).

  • There will be little impact on processing trade in the short run. However, processing exports (and therefore imports) are likely to increase sharply from 2005 and beyond, following the elimination of the MFA.

  • The liberalization in the services sector is likely to lead to a substantial increase in inward foreign direct investment, particularly in telecommunications, insurance securities, banking and the retail and distribution sectors.

  • There will be a further acceleration of structural reform in the bank and enterprise sectors in response to greater foreign competition. This would result in higher imports of services to support restructuring (especially financial, accounting and legal).

4. From an overall macroeconomic perspective, the Mainland is likely to experience an initial deterioration in its external current account position, with an improvement thereafter as the effects of MFA elimination are felt. This would be offset by higher foreign direct investment in the services sector; overall, the balance of payments position would be expected to remain in surplus. While there might be a modest negative impact on GDP growth in the short run, GDP growth would be expected to be higher over the medium term as restructuring led to higher productivity growth (and latterly an increasing boost from the textile sector as the MFA is abolished).

5. The remainder of this note discusses the potential impact of the Mainland’s accession to WTO on Hong Kong SAR, on the assumption that the present agreement approximates the final terms of accession. Section B sets out background information on the structure of Hong Kong SAR’s production, and balance of payments, including the linkages with respect to the Mainland; and Section C considers the impact on Hong Kong SAR.

B. Background

6. The Hong Kong SAR economy is dominated by the services sector, which accounts for 85 percent of GDP (Table II.1). Of this, about one quarter of GDP is due to the financial sector; another quarter comes from trade and tourism (most of which is with the Mainland); 20 percent from community and personal services; and 9 percent from transport, storage and communication. Industry accounts for 15 percent of GDP, of which 6 percent of GDP comes from manufacturing; within this about 1½ percent is due to apparel and textiles, and 1 percent comes from printing and publishing. The agricultural sector is very small.

Table II.1.

Hong Kong SAR: GDP and Employment by Economic Activity, 1998

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Sources: Census and Statistics Department, web site; and Leung Chuen Chau, “Labour and Labour Market” (1961-81).

Included in “other employment.”

Included in “other services.”

GDP based on production method (at current factor cost).

Includes wholesale, retail and import/export trades.

Includes other business services.

Adjustment for financial intermediation services indirectly measured.

Not elsewhere specified.

7. Hong Kong SAR is a highly open economy, with exports and imports of goods and nonfactor services totaling over 250 percent of GDP (Table II.2), and very large inward and outward capital flows. For our purposes, the following points are worth noting:

  • Entrepôt trade accounts for about two-thirds of total trade flows and almost all of it either comes from, or goes to, the Mainland (Table II.3). Nearly 90 percent of the reexports from the Mainland, and a little over 40 percent of the reexports to the Mainland, are directly related to the Mainland’s processing trade. The SAR’s value-added on reexports to the Mainland—around 6 percent—is much smaller than on reexports from the Mainland—around 27 percent.4

  • Domestic exports account for only about 15 percent of GDP,-half of which comes from the textile sector (Figure II.1). About one-third of domestic exports go to the Mainland, of which three quarters are related to the processing trade. Retained imports account for nearly 40 percent of GDP, of which less than 10 percent comes from the Mainland, mostly products of ordinary trade.5

  • Exports of services, at over 20 percent of GDP, are significantly larger than domestic exports. While not much detailed information is available about the nature of trade in invisibles, service exports are concentrated in tourism and trade-related services, such as financial services and transportation, and to some extent in professional services. Service imports mostly relate to travel by Hong Kong SAR residents abroad. As in most economies, no data on the direction of services trade is available.

  • There are substantial financial flows between the SAR and the Mainland. The SAR is the largest source of foreign direct investment in the Mainland, accounting for 40 percent of the total.6 Hong Kong SAR banks’ gross exposure to the Mainland has been growing steadily, peaking at 30 percent of GDP prior to the Asian crisis. The Mainland has also been a major investor in the SAR, with cumulative flows accounting for 19 percent of the total stock of inward direct investments by 1997.

  • The linkages between Hong Kong SAR and the Mainland have increased significantly in recent years. The growing integration of the two economies has been reflected in a generally high correlation between their economic cycles, as well as equity and exchange markets, all of which typically range above 0.6.7

Table II.2.

Hong Kong SAR: External Balances, 1998

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Source: Census and Statistics Department, Hong Kong SAR.

Domestic exports less retained imports.

Reexports less nonretained imports.

Table II.3.

Hong Kong SAR: Trade Account, 1998

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Source: Census and Statistics Department, Hong Kong SAR.

Includes reexports from China to China routed through Hong Kong SAR ($6.5 billion).

Staff estimate.

Figure II.1:
Figure II.1:

Hong Kong SAR: Domestic Exports by Commodity, 1998

Citation: IMF Staff Country Reports 2000, 048; 10.5089/9781451816891.002.A002

Source: HKMA

8. Hong Kong SAR’s trade regime is extremely liberal. There are no tariffs and no trade restrictions, except those under the WTO, related to specific bilateral trade agreements, and related to health and security concerns (alcoholic beverages, tobacco, and hydrocarbon oils). The territory became a separate contracting party to the General Agreement on Tariffs and Trade (GATT) in 1986, and is a founding member of the WTO established in 1995.

Since the transfer of sovereignty in 1997, Hong Kong SAR continues to participate in WTO as a separate customs territory with autonomy in the conduct of its external commercial relations.

C. The Impact on Hong Kong SAR

9. Since the Mainland is unlikely to join the WTO until the second half of 2000, there will be little direct impact on the SAR until 2001. Thereafter, the effects can be considered under four broad headings: (i) the direct impact of trade and services liberalization on the SAR (ii) the second round impact of changes in the Mainland (iii) the impact of the elimination of the MFA from 2005, and (iv) the long run implications for the SAR’s relationship with the Mainland. The following sections focus on each of these in turn.

10. While direct quantitative estimates are very difficult to make, some purely illustrative scenarios showing the impact of tariff reductions and the elimination of the MFA are set out in Tables II.4 and II.5, to illustrate the potential orders of magnitude and the channels through which the SAR could be affected. It should be stressed that the calculations are partial equilibrium in nature, and illustrate the long run impact of the changes (in the short term of course, the impact would be considerably smaller).

Table II.4.

Hong Kong SAR: Impact of WTO Tariff Reductions—An Illustrative Example Using 1998 Data 1/

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Sources: Census and Statistics Department, and staff estimates.

This calculation assumes that Mainland non processing imports increase by 9.7 percent (based o a 7.7 percent cost reduction of imports due to a 9 percent reduction in tariffs, and a price elasticity of demand of -1.3 percent); Mainland non processing exports increase by 2.3 percent (based on the same tariff and elasticity assumptions and assuming a non processing import content of exports of 20 percent); that SAR domestic exports have an import content of 50 percent; and that the SAR’s value added is 6 percent on re exports to the Mainland and 27 percent on reexports from the Mainlan

Trade and Services Liberalization

11. The reduction in Mainland tariffs will benefit the SAR’s domestic exports through 2005. However, the impact will be modest since domestic exports to the Mainland are mostly related to the processing industry which will not be affected by accession in the short run (Table II.4); in addition, the SAR does not produce the products which have been most liberalized. There will also be a small increase in retained imports due to the lower costs of the Mainland’s nonprocessing exports,8 and the import content of the increase in the SAR’s domestic exports.

12. The liberalization of the services sector in the Mainland is likely to lead to a significant rise in the SAR’s outward foreign direct investment. This would likely be concentrated in the financial, telecommunications, distribution and freight forwarding sectors, where SAR firms would be particularly well placed to compete. This may be partly offset initially by a reduction in foreign direct investment in the manufacturing sector (to the extent that this has been prompted by high Mainland tariffs in the past).

The Second Round Impact of the Effects of the Mainland

13. The impact of WTO entry on the Mainland’s imports and exports will have a direct effect on the volume of entrepôt trade through Hong Kong SAR. Reexports to the Mainland will grow as foreign exporters of nonprocessing goods benefit from lower tariffs (Table II.4). This could lead to a significant increase in reexport value; however, because the SAR’s margins on reexports to the Mainland are modest, the net impact on the trade account would be much smaller. Reexports from the Mainland will also increase—again because Mainland non processing exports are cheaper—but the impact is again likely to be small, especially given the small share of nonprocessing reexports coming from the Mainland.

14. As noted in paragraph 3, the Mainland’s accession to the WTO is likely to be accompanied by an acceleration of the pace of bank and enterprise restructuring, resulting in increased demand for financial, accounting, and legal services. SAR and SAR-based corporations would appear to be in a strong position to supply such services, which will directly boost services output and exports in the SAR. It may also lead to addition inward foreign direct investment by foreign firms using the SAR as a base to expand their Mainland operations, indirectly boosting the domestic financial and property sectors. While the size of such effects is obviously very difficult to judge, it could potentially be substantial.

The Impact of the Elimination of the MFA

15. The elimination of the MFA will have important effects on the SAR, from at least two perspectives. On the one hand, the SAR’s textile and apparel sector—which accounts for 1½ percent of GDP, employs 78,000 people and generates nearly one-half of domestic exports—will face greater competitive pressures. On the other, since the Mainland’s textile and apparel exports will increase substantially, the SAR will benefit in its role as an entrepôt center (and, less importantly, as a supplier of inputs for the processing sector itself).9

16. Against this background, the staff would see the following broad effects:

  • First, there are likely to be substantial incentives for the SAR’s textile industry to move to the Mainland in the run up to MFA elimination. This could result in a substantial drop in domestic exports and employment, offset by higher investment income from the Mainland.

  • Second, the jump in the Mainland’s exports of textiles and apparel will provide a substantial boost to the entrepôt trade sector. Reexports from the Mainland—on which the SAR’s margins are relatively high—would increase substantially (Table II.5). There would also be increases, of smaller size, in SAR domestic exports and reexports to the Mainland which are used in the processing industry.

Table II.5.

Hong Kong SAR: The Impact of an Increase in Mainland Apparel and Textile

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Sources: Census and Statistics Department; and staff estimates.

This calculation assumes that the elimination of the MFA results in a 20 percent increas in the Mainland’s processed textile and a 100 percent increase in the Mainland’s processed apparel exports, implying a 16 percent increase in Mainland processing exports. For simplicity, we assume that the Mainland’s ordinary exports of textile and apparel products do not change.

Longer-Run Implications for the SAR’s Relationships with the Mainland

17. Over the longer term, the WTO agreement will lead to greater integration between Hong Kong SAR and the Mainland. There will be a further shift of lower value added services and manufacturing production from the SAR to the Mainland; while this will increase efficiency, it will also require a corresponding redeployment of labor. More generally, accession will gradually reduce Hong Kong SAR’s role as the main window to the Mainland, both for trade and finance. This will increase competition between the SAR and other trade and financial centers, both within and outside the Mainland. However, given the SAR’s special advantages—including its location and its knowledge of the Mainland market—it should be in a strong position to compete.

The Macroeconomic Impact

18. At the present stage, it is very difficult to make quantitative predictions of the impact of WTO accession, either for the Mainland or the SAR, and any assessment is subject to wide margins of error. However, based on the above, and in light of the illustrative calculations set out in Tables II.4 and II.5, the staff draws the following tentative conclusions:

  • Between 2000 and 2004, the SAR’s external current account would improve, due to a modest improvement in the trade account, and—more importantly—increased services exports. This would be offset by higher outflows of foreign direct investment, in services and latterly manufacturing. Unless the WTO accession led to a marked slowdown in the Mainland economy—which appears unlikely—the effect on GDP growth should be positive.

  • The Mainland’s accession to WTO will accelerate the ongoing restructuring of the SAR economy, in both the services and textiles sectors, which may require substantial redeployment of labor in coming years. While the SAR has traditionally adjusted to such changes very rapidly, developments will need to be closely monitored, and retraining provided as necessary.

  • From 2005 onward, the SAR will benefit from higher Mainland growth, a sharp pickup in entrepôt trade, and rising investment income receipts on WTO-related investments in the Mainland. Against this, there will be—as noted above—downward pressure on domestic exports of goods and services and output as lower value added production moves to the Mainland. Provided that this adjustment is completed as rapidly as in the past, however, the overall effect on growth and the balance of payments would be significantly positive

  • Integration of the SAR and Mainland economies will be accelerated. While this brings obvious efficiency benefits, it could also increase the SAR’s vulnerability to economic shocks on the Mainland.


  • Chau, Leung Chuen, 1989, “Labour and Labour Market”, Chapter 10, Ho, H.C.Y, and L.C. Chau (eds.), The Economic System of Hong Kong (Hong Kong: Asian Research Service), pp. 16989.

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  • Fung, K.C. and Lawrence Lau, April 1999, “New Estimates of the United States-China Bilateral Trade Balances,Institute for International Studies, Stanford University.

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Peter Breuer (ext. 36364) is available to answer technical or factual questions on this paper.


There is some uncertainty with regard to the tariff reductions implied by WTO accession, since the base rate of applied tariffs is not known with certainty and it is unclear whether the agreed tariff reductions refer to simple or weighted averages. For the purposes of this note, the following World Bank estimates of weighted average tariffs in 1998 are used: 20 percent for agricultural products and 18½ percent for manufactures (corresponding simple averages are estimated to be 18 percent and 17½ percent).


See Box II.2 for the financial sector components of the agreement.


Based on staff estimates for U.S.-Mainland trade through the SAR, using data from K.C. Fung and Lawrence J. Lau “New Estimates of the United States-China Bilateral Trade Balance,” Institute for International Studies, Stanford University, April 1999.


Based on staff estimates deriving retained Chinese imports from the value of reexports originating in China, assuming a margin of 27 percent on those reexports.


This may, however, overstate the true position since (a) the SAR is a conduit for foreign direct investment from other countries, and (b) a portion of the flows may be due to “round-tripping” (foreign direct investment inflows financed by illegal outflows from the Mainland, done to take advantage of tax incentives).


However, the correlation of economic growth has decreased since 1995, possibly in part reflecting the omission of SAR factor income from investments in the Mainland.


The cost of the Mainland’s nonprocessing exports will be reduced to the extent that they use imported inputs whose prices have been reduced as a result of the tariff reductions.


It should be noted, however, that the SAR’s entrepôt sector is shrinking in relative terms, due to increasing competition from Mainland ports. Thus, the benefits of MFA elimination are likely to decline over time.