Country Analysis
Hong Kong
Vision
• Article 5 – Basic Law
– Article 5
The socialist system and policies shall not be
practised in the Hong Kong Special
Administrative Region, and the previous
capitalist system and way of life shall remain
unchanged for 50 years.
http://www.basiclaw.gov.hk/en/basiclawtext/index.html
Goals
• Economic Economic Growth
• Political Reunion with PRC
• Social Societal Stability – No significant
slice of society losers. "Reform without
Losers: An Interpretation of China's DualTrack Approach to Transition" (with
Lawrence Lau and Gérard Roland).
Journal of Political Economy, February
2000, 108(1), pp. 120-143.
Tax Policy
• Article 108
The Hong Kong Special Administrative Region
shall practise an independent taxation system.
The Hong Kong Special Administrative Region
shall, taking the low tax policy previously
pursued in Hong Kong as reference, enact laws
on its own concerning types of taxes, tax rates,
tax reductions, allowances and exemptions, and
other matters of taxation.
Fiscal Policy
• Article 107
The Hong Kong Special Administrative
Region shall follow the principle of keeping
the expenditure within the limits of
revenues in drawing up its budget, and
strive to achieve a fiscal balance, avoid
deficits and keep the budget
commensurate with the growth rate of its
gross domestic product.
Foreign Investment Policy
• Article 112
No foreign exchange control policies shall
be applied in the Hong Kong Special
Administrative Region. The Hong Kong
dollar shall be freely convertible. Markets
for foreign exchange, gold, securities,
futures and the like shall continue.
Foreign Trade Policy
• Article 114
The Hong Kong Special Administrative Region
shall maintain the status of a free port and shall
not impose any tariff unless otherwise
prescribed by law.
Article 115
The Hong Kong Special Administrative Region
shall pursue the policy of free trade and
safeguard the free movement of goods,
intangible assets and capital.
PART II. Taxation of Corporate and Capital Income (2
Table II.1. Corporate income tax rate 1
OECD
Country
• PWC HK HK Corporate
Tax
– “Assessable profits of
corporation are taxed at the
corporate tax rate of
16.5%. There are some
tax incentives for special
business operations, such
as tax exemption for profits
derived by offshore funds
and profits derived from
operating ships in Hong
Kong. “
Australiaa
Austria
Belgiumb
Canada
Czech Republic
Denmark
Finland
Francec
Germanyd
Greece
Hungarye
Iceland
Ireland
Italyf
Japan (2008 data)
Korea
Luxembourg
Mexico
Netherlandsj
New Zealanda
Norway
Polandg
Portugal (2008 data)
Slovak Republic
Spain
Sweden
Switzerlandh
Turkey
United Kingdoma
United Statesi
OECD Tax Database
Central
government
corporate income
tax rate 2
30.0
25.0
33.99 (33.0)
19.0
20.0
25.0
26.0
34.43
15,825 (15,0)
25.0
20.0 (16.0)
15.0
12.5
27.5
30.0
22.0
21.84 (21.0)
28.0
25.5
30.0
28.0
19.0
25.0
19.0
30.0
26.3
8.5
20.0
28.0
35.0
Hong Kong Monetary Policy
• Convertibility Undertaking - An undertaking
by a central bank or Currency Board to
convert domestic currency into foreign
currency and vice versa at a fixed
exchange rate…. Under the strong-side
Convertibility Undertaking, the HKMA
undertakes to buy US dollars from
licensed banks at 7.75. Under the weakside Convertibility Undertaking, the HKMA
undertakes to sell US dollars at 7.85.
http://www.info.gov.hk/hkma/gdbook/eng/c/convertibility_undertak.htm
Hong Kong Industrial Policy
• Logistics Hub
– Airport
– Port
– Roads
– Bridge to Zhuhai
Human Capital Policy
• Education 3-4-4
• Immigration
Context
Resources
• Geographic
– Deep Water Port
– Pearl River Delta
– Little arable or developable land [Constraint]
Financial
• Exchange Fund
Foreign vs. Domestic Currency
Assets
HK: Exchange Fund: Assets
HKD mn
1000000
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
Sep-1999
Sep-2000
Sep-2001
Foreign Currency Assets
Sep-2002
Hong Kong Dollar Assets
Sep-2003
Sep-2004
Human Capital Resources
• Well educated population
• Barro-Lee Database Harvard CIID
http://www.cid.harvard.edu/ciddata/ciddata.html
Educational Attainment of the Total Population Aged 25 and Over
Country
Hiong Kong
Singapore
Population
Highest level attained
Average
Year
over
No
First level
Second Level
Post-Secondary Years
age 25 Schooling Total
Complete
Total Complete Total Complete of
(1000s)
(Percentage of the population aged 25 and over) School
2000
2000
4137
1923
10.7
12.7
26.6
28.3
13.9
16.8
47.4
48.5
28.7
13.2
15.3
10.6
8.7
7.2
9.47
8.12
Rules of the Game
Formal
• Formal
– Common Law Judiciary
– Executive Led System
– CE selected by Election Committee, Legco
represents Geographical and Functional
Constituencies.
• Informal
–
Rules of the Game:
Informal
–
–
–
–
Elimination of Legal and Civil Service
Corruption
Positive Non-Intervention
Rule of Law
Triangle of Influence between Central Govt,
HK Govt and Tycoons
Players of the Game:
Governmental
• Land System
– Gov’t owns all land in HK
– Gov’t makes new land available and
negotiates terms of rezoning.
• Regulating Financial System Regulating
Financial System
• HK Exchange
• SFC
• HKMA
Players of the Game
Private Sector
• Tycoons and Taipans: Conglomerates
based around real estate development
companies own many domestically
oriented consumer companies.
• Hong Kong Bank
• PRC Companies – Red Chips &
Roundtripping
• Multinational Financial Industry
• SME – Focus on China
External Dimension
• Regional Foreign Trade Hub
• Integrating with China
Performance
Inflation
Inflation
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
-7.00%
2000
2001
2002
2003
2004
2005
2006
2007
2008
ICOR: Incremental Capital Output
Ratio
g
Yt  Yt 1
ICORt 
; gt 
I t 1
Yt 1
Yt 1
Y
t
Yt  Yt 1
ICORt 
I t 1
2000
2001
2002
2003
2004
2005
2006
2007
2008
Incremental
Output
Capital
$85,354
$258,398
$5,761
$278,835
$21,440
$286,223
$35,651
$272,799
$103,432
$275,329
$93,844
$282,173
$99,606
$293,610
$96,890
$314,534
$38,205
$325,349
ICOR
0.3303199
0.020661
0.0749066
0.130686
0.3756669
0.3325761
0.3392459
0.308043
0.1174277
GDP
Effective Exchange Rate
Singapore vs. HK Exchange Rat
US vs HK Interest Rates
10 Year