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

International Monetary Fund

doi:10.5089/9781451816891.002.A002

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

Author: International Monetary Fund

Publication Date:: 06 Apr 2000

eISBN:: 9781451816891

ISBN:: 9781451816891

Language:: English

Keywords:: ISCR; CR; Mainland; Hong Kong SAR; P-AC margin; firm; SAR firm; enterprise restructuring; trading enterprise; casualty firm; WTO accession; Imports; Tariffs; Foreign direct investment; Foreign banks

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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.

Abstract

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.

Box II.1.

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.

Box II.2.

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

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

^{^[a]}Included in “other employment.”

^{^[b]}Included in “other services.”

^{^1/}GDP based on production method (at current factor cost).

^{^2/}Includes wholesale, retail and import/export trades.

^{^3/}Includes other business services.

^{^4/}Adjustment for financial intermediation services indirectly measured.

^{^5/}Not elsewhere specified.

Table II.1.

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

Economic Activity		HKS ^1/ (In billions)	PercentofGDP	Employment (in ‘000)	Employment (in percent)
Agriculture and fishing		1.2	0.1	^[a]	^[a]
Industry		179.7	15.2	…	…
	Mining and quarrying	0.0	0.0	^[a]	^[a]
	Manufacturing	73.3	6.2	391.9	12.2
	Electricity, gas and water	33.1	2.8	^[a]	^[a]
	Construction	72.1	6.1	319.5	10.0
Services		1001.5	84.7	2461.5	75.5
	Restaurants and hotels, trades ^2/	283.8	24.0	973.9	30.4
	Transport, storage and communications	110.0	9.3	363.3	10.0
	Financing, insurance, real estate ^3/	302.7	25.6	419.0	13.1
	Community, social and personal services	235.3	19.9	^[b]	^[b]
	Ownership of premises	171.4	14.5	^[b]	^[b]
	Other services			705.3	22.0
	Adjustment ^4/	-100.5	-8.5
Other employment ^5/				28.2	1.0
Total production-based GDP (at current factor cost)		1,182.4	100.0	3201.0	100.0

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

^{^[a]}Included in “other employment.”

^{^[b]}Included in “other services.”

^{^1/}GDP based on production method (at current factor cost).

^{^2/}Includes wholesale, retail and import/export trades.

^{^3/}Includes other business services.

^{^4/}Adjustment for financial intermediation services indirectly measured.

^{^5/}Not elsewhere specified.

Table II.1.

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

Economic Activity		HKS ^1/ (In billions)	PercentofGDP	Employment (in ‘000)	Employment (in percent)
Agriculture and fishing		1.2	0.1	^[a]	^[a]
Industry		179.7	15.2	…	…
	Mining and quarrying	0.0	0.0	^[a]	^[a]
	Manufacturing	73.3	6.2	391.9	12.2
	Electricity, gas and water	33.1	2.8	^[a]	^[a]
	Construction	72.1	6.1	319.5	10.0
Services		1001.5	84.7	2461.5	75.5
	Restaurants and hotels, trades ^2/	283.8	24.0	973.9	30.4
	Transport, storage and communications	110.0	9.3	363.3	10.0
	Financing, insurance, real estate ^3/	302.7	25.6	419.0	13.1
	Community, social and personal services	235.3	19.9	^[b]	^[b]
	Ownership of premises	171.4	14.5	^[b]	^[b]
	Other services			705.3	22.0
	Adjustment ^4/	-100.5	-8.5
Other employment ^5/				28.2	1.0
Total production-based GDP (at current factor cost)		1,182.4	100.0	3201.0	100.0

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

^{^[a]}Included in “other employment.”

^{^[b]}Included in “other services.”

^{^1/}GDP based on production method (at current factor cost).

^{^2/}Includes wholesale, retail and import/export trades.

^{^3/}Includes other business services.

^{^4/}Adjustment for financial intermediation services indirectly measured.

^{^5/}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