HONG KONG SPECIAL ADMINISTRATIVE
392. Since Hong Kong returned to China in 1997, the
UK has retained a strong interest in developments in the Special
Administrative Region (SAR), and significant business and people
to people links. The Government reports biannually to Parliament
on developments in Hong Kong. We visited Hong Kong during our
visit to China and held meetings with government, legislative,
business, human rights and other interlocutors.
393. Hong Kong's system of government and procedures
for choosing its Chief Executive and Legislative Council (LegCo)
were set out in the Basic Law, which became operational in 1997.
The Basic Law, which was drafted by a Committee of Chinese and
Hong Kong members, between 1985 and 1989, was adopted on 4 April
1990 by the Seventh National People's Congress. The basis for
the Law was the Sino-British
Joint Declaration on the Question of Hong Kong, which was signed
by the Chinese and British Governments on 19 December 1984.
394. Hong Kong's current Chief Executive, Donald
Tsang, was appointed by a "broadly representative" Election
Committee made up of 800 Hong Kong residents, "drawn from
all walks of life".
The current Legislative Council comprises Members elected by different
means: 50% of seats are elected directly according to geographical
constituencies; and 50% by "functional" constituencies
representing professional groups and business sectors.
Functional constituencies comprise the following sectors: commercial,
industrial, finance, accountancy, medical, legal, real estate
and construction, architecture, surveying and planning, financial
services, textiles and garment, import and export, wholesale and
retail, insurance, rural landowning interests, tourism, transport,
catering and information technology.
395. The Basic Law also institutionalised a presumption
of gradual progression towards election by universal suffrage.
 The Chinese
Embassy stated in evidence to us that: "The Central Government
highly values and actively supports Hong Kong SAR to act in accordance
with the stipulations of the Basic Law to develop [a] democratic
system that suits the actual situation of Hong Kong in a gradual
The memorandum describes developments since 1997 in the selection
of the Chief Executive and composition of LegCo as steps towards
universal suffrage. 
396. In December 2005, the current Chief Executive,
Donald Tsang, brought before LegCo further proposed changes to
the electoral system. The package of proposals had been drawn
up by a Constitutional Development Task Force, created in 2004.
In April 2004, the Standing Committee of the National People's
Congress in Beijing restricted the Task Force's ambit by denying
the possibility of election of the Chief Executive in 2007 by
universal suffrage, and by stating that the 50:50 ratio of functional
constituencies and geographical constituencies in LegCo should
be retained for the 2008 elections, leading to accusations of
undue interference. 
397. The final proposals of December 2005 included
expanding LegCo by another ten seats, five of which would be elected
by geographical constituencies and five by District Councillors
(of whom 427 are directly elected and 102 appointed). In addition,
procedures for electing the Chief Executive were also to be changed.
The Election Committee was to double in size to 1600 members.
The political sector of the Committee would be expanded by the
inclusion of all District Councillors, and the commercial, social
and professional sectors of the Committee would also each gain
an additional 100 members. Candidates running for Chief Executive
would have to gain 200 nominations (rather than the current 100
required nominations) in order to stand. 
398. Presenting the package, Donald Tsang stated
that: "While some consider that the current pace of constitutional
development as proposed in the package is not quick enough and
would want to have universal suffrage for the C[hief] E[xecutive]
and LegCo elections as soon as possible, others are concerned
that by moving too fast we may undermine the merits of the current
system which would impact negatively on balanced participation"
and urged all sides to accept his solution as a compromise.
However, a protest march organised by pro-democracy legislators
on 4 December attracted a reported 250,000 people (although the
police estimate was 63,000).
On 21 December LegCo rejected the package, because although there
were 34 votes for, 24 votes against, and two abstentions, a majority
of two-thirds was required to pass the change. 
399. The UK Government had described the proposed
changes as "an incremental step in the right direction"
and said that "in the short term they are the best way of
making progress". 
We are less convinced.
400. We conclude that the package of constitutional
changes presented by the Chief Executive in December 2005 was
a very limited measure which did not go far enough towards the
introduction of representative democracy and universal suffrage.
401. In the wake of the failure of the constitutional
reform measures, the Chief Executive stated that he would not
bring forward alternative suggestions in the short term, saying
that: "It is regrettable because Hong Kong has, gratuitously,
missed an opportunity for a giant step towards democracy."
402. We recommend that the Government urge the
Hong Kong Special Administrative Region to make significant, major
steps towards representative democracy and to agree with Beijing
a timetable by which direct election of the Chief Executive and
LegCo by universal suffrage will be achieved.
Rule of Law and Protection of Human Rights
403. One of the concerns raised at the time of Hong
Kong's handover was that human rights and the rule of law would
be eroded by incorporation into the People's Republic. We met
human rights organisations in Hong Kong and also took evidence
on this issue. Amnesty International expressed some concerns about
freedom of expression and the press, freedom of association and
assembly, violence against women, lack of anti-racial discrimination
legislation, and legislation covering discrimination on grounds
of sexual orientation, the protection of asylum seekers and refugees
and rendition and the death penalty.
The FCO told us that their overall assessment of rights and freedoms
in Hong Kong was positive, but highlighted concerns over the freedom
of the media, and restrictions placed on travel to the mainland
by pro-democracy politicians.
404. We conclude that, despite some concerns,
overall Hong Kong remains a vibrant, dynamic, open and liberal
society with a generally free press and an independent judiciary,
subject to the rule of law.
Economy and Business
405. The UK retains strong economic links with Hong
Kong and UKTI described it as "a crucial centre for UK business
interests in the Asia Pacific region".
Hong Kong is the UK's 13th largest export market with exports
in 2004 of £2.6 billion, exceeding UK exports to mainland
China. In 2004,
bilateral trade amounted to £8.5 billion; approximately 1,000
British companies have offices in the Hong Kong market.
Hong Kong invests around £19 billion in the UK, which is
70% of its total investment in Europe.
UKTI stated in evidence that while the UK acts as gateway to the
EU market for Hong Kong, Hong Kong performs a similar role for
the UK, allowing British companies a way into mainland China.
In 2004, 19% of the UK's exports to China went through Hong Kong.
406. Hong Kong's economic relationship with mainland
China is significant. China accounts for 45% of Hong Kong's total
trade; and Hong Kong accounts for about 10% of China's total trade.
Hong Kong is the largest direct investor in China: the
Hong Kong Association told us that Hong Kong businesses are estimated
to have set up over 60,000 factories in China.
The Closer Economic Partnership Arrangement (CEPA), signed in
2003, allows Hong Kong products to be exported tariff-free to
the mainland, and gives preferential treatment to Hong Kong-based
This agreement has given impetus to the integration of the Pan
Pearl River Delta economic area, comprising nine Chinese provinces,
Hong Kong and Macao. The British Chamber of Commerce told us that
this integration denoted the creation of "a Pearl River Delta
Professor Schenk stated that: "it is much more evident now
that Hong Kong's economic future lies through further integration
with the booming mainland economy and, indeed, that prosperity
in Hong Kong is dependent on this relationship". 
The advantage works both ways. The British Chamber of Commerce
told us that:
A further phenomenon has been the unprecedented
growth in the number of mainland Chinese businesses that have
established themselves in Hong Kong. These companies are increasingly
using Hong Kong to network with international business, to raise
capital and to explore global markets.
Moreover, Hong Kong has a role to play in offering
China its experience to assist the mainland's efforts to improve
business structures and governance.
407. Hong Kong has advantage of close links with
the Chinese economy but a business culture aligned with international
corporate governance and a common-law system based on the British
legal system. In addition, the Hong Kong Association told us:
it is one of the most open and dynamic economies
in the world; it has a strong legal system, with an independent
judiciary and rule of law; it has an anti-corruption environment
and sound corporate governance; a world class communications infrastructure
and an international financial centre.
408. Moreover, Hong Kong has its own currency, which
is free of exchange controls, fiscal independence from China,
and controls its own labour and product market regulation, and
Hong Kong also performs a significant regional role, in part because
of its geographical position, which gives it easy access by air
to mainland China and other Asian countries. The Hong Kong Association
told us that 1,167 international companies have regional headquarters
in Hong Kong, 115 of which are from the UK.
409. Hong Kong's attractions lead many companies
to use Hong Kong as "as a springboard to leap into China".
The British Chamber of Commerce in Hong Kong described the "significant
risk mitigation benefits of using Hong Kong as an access point
for Mainland business".
By comparison with China's patchy enforcement of intellectual
property rights, "Hong Kong, [
] with its solid legal
infrastructure and tradition of contract enforcement, is far better
able to protect intellectual property rights".
While businesses with long experience of mainland China can successfully
navigate the challenges of the Chinese market, the Chamber stated
For businesses with little or no experience of
Mainland Chinese business norms, Hong Kong companies offer the
expertise and trust required. Contracts originating in Hong Kong
provide British companies with the assurance that the goods that
they have ordered will be delivered on time, to the correct specifications
and at the agreed price.
410. Given Hong Kong's economic importance, the UK
has a strong interest in making the most of its historical connections
with Hong Kong to exploit the business opportunities. However,
the Hong Kong Association told us that "there is a feeling
that the [UK-Hong
Kong] relationship has not strengthened as much as it could have
done since the 1997 handover".
UK share of Hong Kong's total trade has fallen from 2.8% in 1997
to 2.1% in 2005.
The British Chamber of Commerce stated that "the perception
in the British, Hong Kong and Mainland Chinese business communities
alike has been that the UK has refocused its attention on the
Mainland, at the cost of its involvement and profile in Hong Kong".
The Chamber called for "a more visible acknowledgement of
the scale of UK business interests in Hong Kong and continued
firm support from government in promoting Hong Kong".
However, the Chamber did note signs of progress in this area,
stating that: "In the earlier days of the China Task Force
initiative, the Chamber was concerned that Hong Kong was not fully
included in the process" but that Chamber members have since
been assured that "this was not the case and that senior
UK government policy makers were well-aware of the advantages
that Hong Kong provides".
411. Particular opportunities available to UK business
were described as follows:
Declining birth rates and increased life expectancy
mean that Hong Kong is facing an aging population, which in turn
is putting significant strain on health care services. Economic
success and demographic changes are also increasing demand for
manpower and educational services. Competition in the manufacturing
sector is increasingly driving companies to look for improved
hi-tech solutions. The environment, however, represents Hong Kong's
greatest challenge. Poor air quality and a lack of space in local
landfills, in particular, are leading to calls for greater investment
in renewable energy and recyclables. These challenges present
obvious potential opportunities for British companies skilled
in these fields.
412. The Chamber suggested various ways in which
the Government could assist UK business in Hong Kong, including
greater promotion of UK business in Hong Kong, focusing on highlighting
the UK's core strengths, creation of "an easily accessible
database providing statistics on the UK's existing engagement
in the region" and "regular meaningful updates on UK/China-related
events and policy developments".
The Chamber also suggested research to isolate the relevant industry
sectors which are likely to need help in the future.
413. We recommend that the Government ensure that
its strategy on China recognises the continuing economic importance
of Hong Kong in its own right, and its role as a gateway to China.
We recommend that the Government work with business organisations
to identify priority sectors which could benefit from opportunities
in Hong Kong, and to offer assistance in delivering market research
and trade promotion.
British National (Overseas) Passport holders
414. The FCO told us that: "There are nearly
3.5 million holders of the British National (Overseas) (BN(O))
passport, most of whom live in Hong Kong. There are also an estimated
200,000 British Citizens in Hong Kong".
The FCO Six-monthly Report on Hong Kong (July-December
2005) stated that:
The British Government remains fully committed
to providing the highest standard of consular and passport services
to the holders of the British National (Overseas) (BN(O)) passport.
We continue to offer the same level of consular service to BN(O)
passport holders in third countries as we do to other British
Nationals and regularly remind all our overseas missions of their
obligations towards BN(O)s.
415. However, the FCO pamphlet Support For British
Nationals Abroad: A Guide states that:
We cannot help British nationals (overseas) of
Chinese ethnic origin in China, Hong Kong and the Macao Special
Administrative Regions. The Chinese authorities consider British
nationals (overseas) of Chinese ethnic origin as Chinese nationals,
and we have no power to get involved if they are held in mainland
China. However, we provide the same help to all British nationals
(overseas) living or travelling outside China, Hong Kong and Macao
as we do to any other British national in difficulty.
416. In past Reports, our predecessor Committee raised
the issue of visa rights for BN(O) and Hong Kong SAR passport
holders. 136 countries now allow visa-free or visa on arrival
access to holders of Hong Kong SAR passports
and 100 countries allow visa-free/ visa on arrival access to holders
of BN(O) passports.
The latest FCO Six Monthly Report stated that:
We continue to lobby other European countries
and the European Commission to ensure that BN(O) passport holders
enjoy the same access within Europe as SAR passport holders. The
Foreign Secretary has written to the EU Commission to take this
forward and we are working hard to secure early and positive progress.
417. In July, the European Commission published a
proposal to amend the Regulation covering visa requirements for
third country nationals travelling to the Schengen area.
Among the proposed amendments is one that would allow visa-free
travel to the Schengen area by holders of BN(O) passports, for
a period of three months at a time. This provision already applies
to holders of Hong Kong SAR passports. The Council of Ministers
will begin to consider this proposal in September, though, as
it is a measure applying to the Schengen area, the UK will not
formally participate in its adoption.
418. We recommend that the Government set out,
in its response to this Report, what progress has been made on
the issue of visa-free travel worldwide, by holders of British
National (Overseas) passports resident in Hong Kong, and what
efforts the Government has made to improve this position. We further
recommend that the Government build support within the Council
of Ministers for the European Commission proposal to allow visa-free
travel to the Schengen area by British National (Overseas) passport
holders, to ensure that the proposal is agreed by the Council
as soon as possible. We further recommend that the Government
set out, in its response to this Report, what potential obstacles,
if any, there may to the successful adoption of the proposal.