Unit. The Basic Law and Hong Kong s Economy (2) Teacher Version BUDGET BUDGET

Transcription

1 Unit The Basic Law and Hong Kong s Economy (2) BUDGET BUDGET Personal, Social and Humanities Education Section The Education Bureau HKSARG First published in 2012 Reprinted in 2015 Teacher Version

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3 In what way does Hong Kong s economy enjoy a high degree of autonomy? BUDGET BUDGET.1 The Hong Kong SAR enjoys financial independence. Does this mean full autonomy in matters of revenue and expenditure?.2 What does a high degree of autonomy mean for Hong Kong s trading and financial systems? Extended Part Does Hong Kong enjoy a high degree of autonomy in other economic areas?

4 Do I need to pay tax to the Central People s Government? The 20XX Budget Press Conference TAX There is a budget deficit this year. Are we violating the Basic Law? Do you accept US dollar? I am sorry! We only accept HK dollar. p.2 The Basic Law and

5 .1 The HKSAR enjoys financial independence. Does this mean full autonomy in matters of revenue and expenditure? Hong Kong keeps its capitalist system after reunification. This means economic activities are mainly organized by individuals and private enterprises. However, to ensure public safety, hygiene and development of society as a whole, the Government provides certain services such as the police, water supply, education and so forth. The Government also needs to take care of those who cannot take care of themselves. Therefore, it needs to have a certain amount of financial resources in order to fulfill its social responsibility. Public order Public hygiene Basic education General functions of Government Infrastructure As part of the People s Republic of China, does the HKSAR have any financial responsibility for the Central People s Government? The Basic Law states the following clearly: Article 10 The Hong Kong Special Administrative Region shall have independent finances. The Hong Kong Special Administrative Region shall use its financial revenues exclusively for its own purposes, and they shall not be handed over to the Central People s Government. The Central People s Government shall not levy taxes in the Hong Kong Special Administrative Region. The Basic Law and p.3

6 What do we mean by financial independence? Article 10 of the Basic Law says that the HKSAR shall be financially independent. What is meant by financial independence? Read the Report of the Shanghai Municipal Final Accounts and explore the financial relationship between Shanghai and the Central Authorities. Source 1 Financial relationship between Shanghai and the Central Authorities... In 2009, the total fiscal revenue 2 of the city was RMB billion, which was up 7.7% compared to 2008 and amounting to 101.% of the budget. After adding the tax return from the Central People s Government, and subtracting RMB 17.5 billion from its revenue to be submitted to the Central People s Government, as well as the amount brought forward from last year... Source: Website of Shanghai Municipal People s Government, accessed 15 August Do provincial and municipal governments on the mainland enjoy financial independence in relation to the Central People s Government? On the mainland, some taxes such as consumption tax are levied by local governments, but they do so on behalf of the Central People s Government. After receiving the tax revenue, the Central People s Government will return part of the sum to the local governments to support their work. On the other hand, local governments will submit part of their revenue to the Central People s Government. As a result, the finances of the Shanghai Municipal Government is not independent of the Central People s Government because part of its revenue comes from the Central People s Government, and part of its expenditure is submitted to the Central People s Government. p.4 The Basic Law and 1 Final accounts ( 決算 ) - Final accounts on the mainland are made on two levels: central and local. At the end of each fiscal year, final accounts should be made according to the actual income and expenditure of that year at all levels from the people s governments, departments and units. 2 Fiscal revenue ( 財政收入 ) - income of the government

7 Source 1 indicates that part of the revenue of the Shanghai Municipal Government comes from the Central People s Government, while part of its revenue is submitted to the same as expenditure. Whereas the finance of Hong Kong is not part of the national finance and it is managed by the Government of the HKSAR. The Basic Law requires the HKSAR to use its financial revenues exclusively for its own purposes, and they shall not be submitted to the Central People s Government. Also, the Central People s Government does not levy taxes in Hong Kong. The HKSAR controls and uses all of its local resources and revenue for its own purposes, and makes its own decisions. Furthermore, the finance of the HKSAR is not subject to the leadership, guidance and supervision of the Ministry of Finance. The HKSAR draws up its own budget and reports to the Central People s Government for the record only (Article 48 of the Basic Law) and not for approval. This makes real the principles of Hong Kong people governing Hong Kong and a high degree of autonomy. What are the differences in the financial arrangement between Hong Kong and mainland provinces and cities? The HKSAR Government Find the differences, and put a tick the appropriate space. in The Shanghai Municipal Government Its budget is prepared subject to the leadership of the Ministry of Finance. Part of its revenue is to be sent to the Central People s Government. The general public pays taxes to the Central People s Government. Financial resources are available from the Central People s Government. Financially independent of the Central People s Government. The Basic Law and p.5

8 The diagram below shows how the Government of the HKSAR draws up its budget. You can see that the Central People s Government or the Ministry of Finance does not participate in the process. Examined and passed by the Legislative Council Signed by the Chief Executive The HKSAR draws up its budget on its own. The HKSAR Government prepares budget Reports to the Central People s Government for the record p. The Basic Law and

9 What does the Basic Law say regarding Hong Kong s fiscal policies? Fiscal policies are policies which a government uses to influence the economy by means of tax revenue and expenditure. The Basic Law only provides restrictions in principle on how Hong Kong should draw up its budget. Ever since the reunification, the Government of the HKSAR has usually referred to these restrictions in its budget. Find these restrictions in the following source. Revenue Expenditure What is a budget? A budget is the accounts of a government s estimated revenue and estimated expenditure in a fiscal year. In Hong Kong, the fiscal year starts on 1 April of each year and ends on 31 March of the next year. In the budget, the estimated revenue can be larger or smaller than or equal to the estimated expenditure, and they are called surplus budget, deficit budget and balanced budget respectively. No budgets are necessarily accomplished according to plan. At the end of the fiscal year, the actual balance (the actual revenue minus actual expenditure) may be different from the estimated balance. An estimated deficit may even turn out to be an actual surplus. The Basic Law and p.7

10 Source 2 Living within our means most of all, we have to be prudent in our fiscal policy and observe the relevant provisions of the Basic Law Let me now turn to the management of our public finances. If I (Donald TSANG Yam-kuen( 曾蔭權 ), former Financial Secretary) had to choose one phrase to characterise the fiscal policy which Hong Kong has successfully followed for many years, that phrase would be living within our means The International Monetary Fund (IMF), after its visit last October, commended Hong Kong for having gained an almost unrivalled reputation for fiscal prudence The international financial community draws great comfort from the Basic Law provision which requires Source: The and Budgets, website of the Government of the HKSAR, accessed 10 December According to Source 2, what principle of fiscal management does the Basic Law set out for the HKSAR? The HKSAR practises fiscal prudence. This is living within its means. 2 What does the international community say about the HKSAR s compliance with this principle of fiscal management? The international community has confidence in the financial management of the HKSAR. p.8 The Basic Law and

11 When the Basic Law was being drawn up, the Drafting Committee took into consideration Hong Kong s experience and made the following provisions for the HKSAR in drawing up its budget: Article 107 The Hong Kong Special Administrative Region shall follow the principle of keeping 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 3. 1 If your monthly spending exceeds your pocket money, what would you do? 2 If the HKSAR shows persistent budget deficit, what shortterm and long-term measures do you think the Government of the HKSAR should take? Short-term solutions: make use of fiscal reserves, take up external loans, issue public bonds Long-term solutions: reduce spending, increase taxation 3 Gross domestic product reflects the economic performance of a place. Government s expenditure promotes the economic growth of a place. This Article stipulates that the HKSAR Government s increase of expenditure should be in pace with its economic growth. The Basic Law and p.9

12 What are the impacts of the government s fiscal policies on the overall economy? A government may stimulate the economy with fiscal policies. The diagram below illustrates how the government stimulates the economy by cutting tax and increasing expenditure. Cutting tax After-tax income of the general public increases General public spending increases More economic activities Increasing expenditure Government employs more people to provide services, such as education Government buys more goods, such as construction materials for public housing Higher demand for goods and services More job opportunities and income Unemployment figures fall p.10 The Basic Law and

13 The Basic Law requires fiscal balance for the HKSAR. Can this be justified economically? There is a view that the principles of saving for a rainy day, keeping expenditure within the limits of revenues, fiscal prudence... are too conservative for fiscal management. However, the Drafting Committee thought otherwise. If Hong Kong runs into many years of serious deficit, solutions such as higher taxes, taking out loans, issuing public bonds or issuing more currency might lead to serious financial difficulties, even economic crisis. Do you recall the huge fiscal deficit of ? Hong Kong people were very much worried. The then Chief Executive TUNG Chee-hwa( 董建華 ) made Source 3 Strong fiscal reserve 4 to keep financial stability Our fiscal deficit has already attracted attention in international markets and the local financial market is becoming increasingly concerned. To maintain financial stability, we need to put in place sound and comprehensive fiscal policies, make continuous efforts to improve the regulation of our market mechanisms and have the backing of strong fiscal reserves. The Asian financial crisis amply demonstrated the need for these safeguards. The current deficit is serious and is threatening to undermine our financial strength and market confidence. If the problem is not solved as soon as possible, Hong Kong risks being exposed to heightened speculation, which may trigger outflows of capital, rising interest rates, turmoil in the financial markets leading ultimately to possible attacks on our linked exchange rate system. Source: Website of the Government of the HKSAR, accessed 1 August Fiscal reserve ( 財政儲備 ) - an accumulation of fiscal surplus (actual reserve in excess of actual expenditure) over time The Basic Law and p.11

14 According to Source 3, what are the impacts of serious fiscal deficit on Hong Kong s economy? A serious deficit will weaken our financial strength and market confidence. Hong Kong might be exposed to speculation, which may result in capital outflows, rising interest rates, turmoil in the financial markets and ultimately possible attacks on the linked exchange rate system. Government s fiscal deficit would impact on market confidence. Generally speaking, the market would worry if the Government would increase tax or borrow to cut deficit. These measures would affect the willingness of enterprises to invest in Hong Kong. Hong Kong is special because it implements the linked exchange rate system 5, which requires the support of a huge foreign exchange reserve. There will be negative effects on the financial market if citizens or financial organizations start to lose confidence in the linked exchange rate system. Budget deficit, market loses confidence Concern over raising taxes Although the fiscal reserve of Hong Kong is managed by the Exchange Fund, the Hong Kong dollar (or linked exchange rate) is not supported by the fiscal reserve but by the foreign exchange of the same value. What is the relationship between fiscal reserve and the linked exchange rate? p.12 The Basic Law and However, when the Government has a serious or continuous fiscal deficit and the fiscal reserve drops to a worrying level, international credit rating agencies like Standard & Poor s and Moody s will lower the rating of Hong Kong s long-term debt. As a result, borrowing would become more expensive. And as investors become less confident in the Hong Kong dollar, capital will flow out of the city. This will add pressure on the exchange rate. Confidence is very important for a stable banking system and financial market. If investors do not have confidence in the Hong Kong dollar, speculators will more likely attack the linked exchange rate. 5 Linked exchange rate system ( 聯繫匯率制度 ) - an exchange rate system that the value of a currency is linked to that of another currency i.e. HK$7.8 equals US$1.

15 Does this mean there should not be any budget deficits at all? The Basic Law was drawn up in the 1980s. In those days, living within one s means was the principle for fiscal management of the Hong Kong Government. The Drafting Committee put this principle into the Basic Law in order to keep Hong Kong unchanged for 50 years. Now a decade has passed since reunification, and there are different views in society of whether Hong Kong should continue with this principle and keep a huge fiscal reserve. Some have observed that very few countries now would adopt budget surpluses. The United States (US), the largest economy in the world, has been in deficit for many years. Saving for a rainy day, keeping expenditure within the limits of revenues, fiscal prudence... are too conservative for fiscal management government threatens us with pessimistic excuses like deficits, heavy economic burden and tax increases and refuses to help the poor. A Party member For over 10 years, economic stagnancy has been a reason for the difficulty that Hong Kong is in. There is a gap between the rich and the poor, but the gap is not widening. The stagnant economy has slowed down social development and largely reduced social mobility. The government could make people feel better by giving direct benefits, but this does not solve the real problem. We should focus on economic growth. This would be good for everybody. We need to bear in mind that economic growth depends on capital investment and human resources investment Members of the US Congress once had a debate on whether the upper limit of the budget deficit should be raised. There was finally an agreement. But credit rating agencies lowered the sovereignty rating of the US. Hong Kong should learn a lesson from this. The middle class An economist The Basic Law and p.13 Sovereignty rating ( 主權評級 ) - rating of the loans borrowed by the government, the lower the rating, the higher the interest rate the government has to pay.

16 This should be considered on two levels. 1. Is the budget deficit short-term or long-term? Do you think the Government of the HKSAR should give up the principle of fiscal prudence and not be afraid of budget deficit? As of June 2011, the fiscal reserve of the HKSAR Government was around HK$00 billion, and the actual fiscal deficits for the three fiscal years of , and were HK$3.3 billion, HK$1. billion and HK$40.1 billion respectively, totalling around HK$15 billion. One way of dealing with short-term budget deficit is to cut spending. Is it difficult for Government to cut recurring expenditure items? 2. Is the expenditure that leads to budget deficit used for welfare spending to relieve people s hardship? Or is it used to boost economic development and create job opportunities? Should we pursue the policy of fiscal prudence according to the Basic Law? If we want to understand a situation correctly, we need a huge amount of data and study them properly. The following source is the budget data of the fiscal years of the HKSAR from to Let us engage in the following activity. p.14 The Basic Law and

17 1 Has the HKSAR pursued the policy of fiscal prudence? In groups of four, read the source and discuss the following questions. From the figures below, work out the budget deficit and surplus for the fiscal years and of the HKSAR Government. Fill in the spaces. Source 4 Estimated revenue and expenditure of the HKSAR Government in recent years Fiscal Year Estimated Revenue (100 billion dollars) Estimated Expenditure (100 billion dollars) Budget Deficit/ Surplus* (100 billion dollars) *Budget deficit/surplus = Estimated revenue Estimated expenditure Source: adapted from the HKSAR Budget from year to year , website of the HKSAR Government, accessed 10 December The Basic Law and p.15

18 1 Since 1997, for how many times did the HKSAR run into budget deficits? 10 times. 2 Based on the above data, do you think that the HKSAR Government has always strived to achieve fiscal balance and avoid deficits? Explain. Any reasonable answers are acceptable. 3 Ever since reunification, Hong Kong s economy has come in for a few shocks, such as the Asian financial crisis in and the SARS outbreak in Budget deficits occurred in those years. Why did budget deficits occur during an economic downturn? During an economic downturn, people s income drops sharply. Government expects it will receive less revenue from taxation. At the same time, the Government needs to increase expenditure in order to stimulate the economy. This results in budget deficit. 4 From the answer to Question 3, why do you think the Basic Law requires the HKSAR to keep expenditure within the limits of revenues and try to achieve fiscal balance? Any reasonable answers are acceptable. 5 Do you think the present fiscal policy of the HKSAR fulfils the requirements of the Basic Law? Any reasonable answers are acceptable. p.1 The Basic Law and

19 Is it all right for the HKSAR to have fiscal imbalance? There is a view that the requirements of the Basic Law should not be taken in a rigid manner. In some fiscal years or periods, for some special reasons, extraordinary measures may have to be taken which lead to budget deficit or budget imbalance. For long-term considerations, however, it is important to keep expenditure within the limits of revenues as a principle in drawing up budgets. Hong Kong needs fiscal balance for economic stability. Brief Summary The Basic Law stipulates that the HKSAR shall be financially independent and shall draw up its own fiscal policies to implement one country, two systems and a high degree of autonomy. However, Hong Kong s economy is small and is likely to go up and down because of external factors, so the Government needs to be prudent fiscally. This is in line with the requirement of the Basic Law. The Basic Law and p.17

20 Can Hong Kong decide on a taxation system of its own? Hong Kong enjoys financial independence. It can also develop its own system of taxation. The Basic Law has this to say: 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. An independent taxation system in Hong Kong is important for the economy. For example, now that the Government has removed the tax on wine, the number of wine auctions in Hong Kong has increased sharply (see pp Free trade encourages enterprises to develop. Can you name some examples? in Unit 5 for details). The following activity helps us further analyse the effect of Hong Kong s independent taxation system on its economy. Tax rate Country/ Region Source 5 UAE 55 % Japan 40.9% Corporate profits tax rates in some countries/ regions 2010 USA 40 % India 33.99% France 33.33% Canada 31 % New Zealand 30 % Germany % Norway 28 % Sweden 2.3 % 25 % The mainland of China Taiwan 17 % Singapore 17 % Hong Kong 1.5 % p.18 The Basic Law and The Average global corporate profits tax rate 2010 was 24.99%. Source: Website of KPMG s Corporate and Indirect Tax Survey 2010, accessed 1 August 2011.

21 A b Source Types of tax on the mainland and in Hong Kong TAX According to the State Administration of Taxation, the following taxes are levied on the mainland in 2010: stamp duty urban and township land-use tax contract tax enterprise income tax personal income tax land appreciations tax vehicle and vessel usage tax valueadded tax consumption tax TAX import/ export tax Types of major tax in Hong Kong : city maintenance and construction tax tobacco leaf tax farmland occupation tax business tax property tax vehicle acquisition tax resource tax TAX stamp duty profits tax TAX property tax salaries tax betting duty Sources: 1. Website of the State Administration of Taxation of the People s Republic of China, accessed 10 December Website of the Inland Revenue Department of the HKSARG, accessed 10 December The Basic Law and p.19

22 2 Does Hong Kong have an independent taxation system? Discuss with 2 to 3 of your classmates the following questions based on the two sources above: 1 According to Source 5, what is the difference in corporate profits tax rate between the HKSAR and the mainland, and other regions of the world? The tax rate in the HKSAR is lower than that on the mainland and in other regions. 2 According to Source, do you think the HKSAR or the mainland has fewer types of tax? The HKSAR has fewer types of tax. 3 According to Sources 5 &, the taxation system of the HKSAR is independent of the mainland. Is this true? Yes, tax rates and types in the HKSAR are different from those of the mainland. 4 From the point of view only of the taxation system, do you think the HKSAR or the mainland is more attractive to foreign investors? Why? The taxation system of the HKSAR is more attractive. With lower tax rates, enterprises keep more of their profits. The above information shows that the taxation system of the HKSAR is independent of the mainland. The HKSAR has lower tax rates, fewer tax types and the taxation system is simpler. The Basic Law allows Hong Kong to practise an independent taxation system so that it can decide on tax rates, types and other matters of taxation. This raises Hong Kong s competitiveness, attracts foreign investors, encourages people to pursue and create wealth, and promotes the economic development of the HKSAR. p.20 The Basic Law and

23 The Basic Law does not require the HKSAR to adopt a low tax policy. Why? A low tax policy is good for the economy. But why does the Basic Law make it as reference only? Pick the reasons from the table and put a tick in the appropriate boxes. There are a lot of variables in the economy. A long-term low tax policy is not feasible. The HKSAR should be flexible in making policies. The HKSAR enjoys a high degree of autonomy. No one knows for sure which taxation system is right for the development of the HKSAR. Hong Kong does not have the conditions to implement a low tax policy. The Basic Law and p.21

24 Should the HKSAR give up its low tax policy? Some media think that while the economic performance of the HKSAR is good in recent years, the living standard of the public has not really improved. An analyst points out that the gap between the rich and the poor has become a concern in Hong Kong. Even middle class and professional people find it difficult to buy a flat. Therefore, it is suggested that the corporate profits tax and the salaries tax for high income earners should be raised. Support Object Support More social welfare services could be provided. Object Weakens competitiveness, encourages outflow of capital. Support The gap between the rich and the poor could be narrowed. The business sector can do a better job subsidising social enterprises and helping the poor. Raising taxes is unnecessary. Object p.22 The Basic Law and

25 Should we keep the low-tax policy? 1 Suggest one advantage and one disadvantage for increasing the corporate profits tax or the salaries tax of high income earners. Advantage: Disadvantage: Any reasonable answers are acceptable. Any reasonable answers are acceptable. 2 To conclude, do you agree that Government should give up its previous low tax policy? Any reasonable answers are acceptable. Tax deductions Donation Box Not all the income of Hong Kong residents is taxable. There are deductions in the taxation system. For example, donations to charitable organizations are tax-deductible. This is an example of tax exemptions as stated in Article 108 of the Basic Law. You can find information on deductions and tax rates on the website of the Inland Revenue Department. The Basic Law and p.23

26 Brief Summary The Basic Law allows the HKSAR to have an independent taxation system and to enact laws and regulations related to taxation on its own. This shows the principle of a high degree of autonomy at work in the HKSAR. The HKSAR has been maintaining a simple taxation system and low tax policies since reunification. p.24 The Basic Law and Hong Kong ' s Economy ( 2 )

27 .2 What does a high degree of autonomy mean for Hong Kong s trading and financial systems? Trade and finance are two important pillars of the Hong Kong economy. Under the principles of one country, two systems and a high degree of autonomy, Hong Kong practises the capitalist system. The Basic Law states that Hong Kong may on its own make policies in these two areas favourable to their development. How much autonomy does Hong Kong enjoy in trade? Trade involves agreements with other countries and international organizations. This more or less means some external affairs. The Basic Law clearly states that the Central People s Government is responsible for the foreign affairs of the HKSAR. But Article 11 also says that Hong Kong is a separate customs territory and may, using the name Hong Kong, China, participate in relevant international organizations and international trade agreements and enjoy tariff preferences 7 and valid export quotas. Changes in international trade organizations The Basic Law was passed on 4 April Over the past 20 years, many changes have taken place in important international organizations. For example, the World Trade Organization was established on 1 January 1995 to replace the General Agreement on Tariffs and Trade and the World Trade Organization Agreement on Textiles and Clothing replaced the Multifibre Agreement for textiles and garments. 7 Tariff preferences ( 關稅優惠 ) - the privilege of paying a lower (zero) tax on imports/exports The Basic Law and p.25

28 In foreign trade, you must have identification documents for the goods and products being traded. Article 117 of the Basic Law states that the Hong Kong Special Administrative Region may issue its own certificates of origin for products in accordance with prevailing rules of origin. How much autonomy does Hong Kong enjoy in its financial system? Article 110 of the Basic Law states that the financial system of the HKSAR shall be prescribed by the law, and the Government of the HKSAR has the power to enact monetary and financial policies on its own. What are the features of the financial system in Hong Kong? Put a tick in the appropriate space. The financial system in Hong Kong efficient and transparent market, properly regulated. government provides favourable business conditions. financial market open to foreign companies all regulations comply with international standards. low and simple taxation encourages initiatives and innovation. government regulates capital movements. 3 9 government intervention based on clear policy objectives. rule of law supports fair competition in the market place. no foreign exchange control. p.2 The Basic Law and

29 In short, the financial system in Hong Kong ensures a free, open and fair market under effective and transparent supervision. Since you have covered Unit 5, do you know what institutions oversee and regulate the financial markets in Hong Kong? What laws and regulations do the supervising institutions enforce? The following logos represent the three major regulatory institutions of Hong Kong s financial markets. Can you match their names and the regulations they enforce? Institutions Hong Kong Monetary Authority Mandatory Provident Fund Schemes Authority Regulations Securities and Futures Ordinance The Mandatory Provident Fund Schemes (Amendment) Ordinance 2009 Securities and Futures Commission Banking Ordinance The Government of the HKSAR sets up relevant supervising institutions and enacts relevant supervising regulations for each type of financial organizations. The supervisory regulations are constantly updated to keep in pace with the development of the financial industry. Let s take the Lehman Minibond incident as an example. After the closing of Lehman Brothers Holdings Inc. during the global financial tsunami in 2008, Government introduced adjustments to the regulations, giving better protection to small investors. Investigate Lehman Brothers products incident. The Basic Law and Alliance of Lehman Brothers Victims p.27

30 1000 The HKSAR Government enacted many laws to supervise the financial organizations. Is this intervention in the free market? Does this agree with the spirit of capitalism? Supervision is not the same as intervention. The role of government in a capitalist society is to provide sound regulations and laws for fair competition in the market. A good system reduces cost and increases market efficiency. What does the Basic Law say about the monetary system of the HKSAR? The monetary system is important for any economy. Trade, for instance, depends on whether people have confidence in a currency and accepts it. There are stipulations in the Basic Law about the currency issuing system of Hong Kong. Which institutions issue Hong Kong banknotes? Which institutions issue the following Hong Kong banknotes of different values? p.28 Hong Kong Monetary Authority The Basic Law and 1. Bank of China (Hong Kong) Limited 2. Standard Chartered Bank (Hong Kong) Limited 3. The Hongkong and Shanghai Banking Corporation Limited

31 Which Article of the Basic Law stipulates who can issue Hong Kong s legal tender? Article 111 The Hong Kong dollar, as the legal tender in the Hong Kong Special Administrative Region, shall continue to circulate. The authority to issue Hong Kong currency shall be vested in the Government of the Hong Kong Special Administrative Region. The issue of Hong Kong currency must be backed by a 100 per cent reserve fund. The system regarding the issue of Hong Kong currency and the reserve fund system shall be prescribed by law. The Government of the Hong Kong Special Administrative Region may authorize designated banks to issue or continue to issue Hong Kong currency under statutory authority, after satisfying itself that any issue of currency will be soundly based and that the arrangements for such issue are consistent with the object of maintaining the stability of the currency. What is legal tender? It is the currency that the government designates as the legal tender and is used to repay any debt in the region under the government s authority. Can we use the currencies of other countries for shopping in Hong Kong? 1 We know some shops accept Renminbi for payment. But can the shop operator refuse to accept it? Yes, Renminbi is not the legal tender of the HKSAR. 2 How about if you pay in Hong Kong dollar, and the shop refuses it and asks you to pay in US dollar? No, the shop cannot do that. Hong Kong dollar is the legal tender of the HKSAR. The Basic Law and p.29

32 What are the stipulations of the Basic Law for issuing banknotes? Reserve US$100 = HK$780 Before reunification, Hong Kong dollar was the legal tender of Hong Kong. To issue Hong Kong dollar, the Government had to set aside an equivalent amount in US dollar (HK$7.8 for US$1). In other words, US$100 were to be set aside as reserve in order for the Hong Kong Government to issue HK$780. Article 111 of the Basic Law keeps this system unchanged. This helps stabilize Hong Kong s monetary and financial system. If the value of the Hong Kong currency remains stable, more foreign investment will come in, and this will strengthen the city s status as an international financial centre. Brief Summary The Basic Law stipulates that Hong Kong shall keep its previous capitalist system and that Hong Kong may enact financial and monetary policies on its own. This would ensure a stable, free and open financial market supervised by a sound regulatory system. p.30 The Basic Law and

33 Summary K S A R ke ep s it s H e th w o h es at B as ic L aw st ri va te C h ap te r V o f th e e p ro te ct io n o f p th g in d u cl in, em lly, t sy st ic system. Specifica p re vi o u s ca p it al is om on ec ee fr e th g al keepin international financi property rights and d an t or p ee fr of the status fi n a n c ia l m a rk e t s it the HKSAR keeps t a th d n a, e d in fr e e tr a ne country, two o of s c e n tr e, e n g a g e s le p ci rin p e en. Under th Basic Law gives e th, remains free and op y m no to au eas gh degree of its own in many ar systems and a hi on s ie ic ol p e ak m n, er to ude finance, taxatio the HKSAR the pow cl in s ie ic ol p e es stem. Th issues, land leases cy of the capitalist sy en rr cu t, ke ar financial m supervision of the and so on. n o m ic av e g iv en th e ec o h s ar ye t n ce re l in ie s in g Kong scores wel In te rn at io n al b o d on H g. in nk ra gh hi e g Kong is suggests that th Th performance of Hon. ss ne ve iti et p m ent and co for Hong Kong s od go business environm e ar w La ic as ter V of the B provisions of Chap ment. economic develop The Basic Law and Hong Kong ' s Economy ( 2 ) p.31

34 ded n e t Ex art P Does Hong Kong enjoy a high degree of autonomy in other economic areas? What power does Hong Kong enjoy in shipping and civil aviation? Hong Kong does well in foreign trade not only because of its free trade policy, but also because of the contributions from its shipping and aviation industries. There are many provisions in Chapter 5 of the Basic Law about the development of the two industries. Areas where HKSAR has power and where it has no power are clearly set out. The next page speaks about Articles 124 to 135 of the Basic Law. Please refer to the Appendix on pp There are shipping and aviation issues which the HKSAR can decide on its own. And there are others which require authorization of the Central People s Government. p.32 The Basic Law and Hong Kong ' s Economy ( 2 )

35 To be decided by the Government of the HKSAR on its own the management of seaman ship inspections its functions and responsibilities in shipping the management of civil aviation the management of airports and the provision of aviation services within the flight information region of the HKSAR To require authorization of the Central People s Government ship registration and certification the renewal and amendment of previous civil aviation services agreements licensing airlines incorporated in the HKSAR with their principal place of business in Hong Kong To be handled by the Central People s Government Air service agreements between other parts of the People s Republic of China and other states and regions with stops at the HKSAR On some shipping and civil aviation matters, Hong Kong cannot act without authorization from the Central People s Government. But it is not always the case in the area of finance. Why? The Shipping and civil aviation involve agreements between two or more countries or regions. It is an external affair. Therefore Hong Kong needs the permission of the Central People s Government. Basic Law and p.33

36 Can the HKSAR make policies on the development of other industries? There are many provisions in the Basic Law that allow the HKSAR enact on its own policies to keep the development of trading, financial and shipping industries. Can the HKSAR develop other industries? The Basic Law requires the Government of the HKSAR to provide a good economic and legal environment for industries such as manufacturing, commerce, tourism, real estate, transport, public utilities, services, fishery and agriculture, etc. Hong Kong is encouraged to make policies for their development. The Basic Law does not set out clear directions for Hong Kong s development of various industries. Articles 118 and 119 of the Basic Law only require the Government of the HKSAR to provide a good economic and legal environment and make suitable policies for developing the industries mentioned above. They do not give detailed instructions. Why? The Basic Law was written in the late 1980s and it will apply to the development of the HKSAR for 50 years after reunification. In order to enable the HKSAR to cope with the changing needs of society and develop its economy, the Basic Law gives the Government of the HKSAR the power and autonomy to make suitable policies. p.34 The Basic Law and

37 To facilitate the HKSAR s economic re-structuring and upgrade technological standards, the Government founded research and development centres in 200 for five key technologies: Automotive parts & accessory systems Information and communication technologies Logistics and supply chain management enabling technologies Textiles & clothing Nanotechnology and advanced materials With the global financial tsunami in 2008 and the recession which followed, the Chief Executive in his Policy Address announced the development of six industries to facilitate diversity and long-term economic growth. Education services Testing and certification services Medical services Innovation and technology Environmental industries Cultural and creative industries The Basic Law and p.35

38 3 In what direction may Hong Kong develop its economy? There are many different views on this subject. Do you have something in mind? In small groups, discuss Hong Kong s future development. Each group has four persons: an owner of a small and medium enterprise, a university student, a member of the financial industry and an unemployed person. Put yourselves into their roles and give your opinions on the following suggestions: The Government should provide concessions on tax and land leases and develop labourintensive industries again to provide job opportunities for low-skilled workers and improve the livelihood of the grassroots. Political party A The HKSAR should develop an education industry and export these services to its neighbours and other regions of the world. Care for the grassroots Protect the working class A University lecturer An environmentalist An economist Hong Kong should avoid direct competition with neighbouring regions. Instead, it should develop modern commercial services with the strengths it already has. p.3 The Basic Law and Hong Kong should rethink its development strategies. Environmental protection is a global trend. Government should give strong support to environment-friendly industries such as organic farming.

39 Each group should state their opinions, and report to the whole class. The class should then decide on the best way forward for Hong Kong. Owner of a small and medium enterprise University student Political party A Hong Kong s strength does not lie in labour-intensive industries which yield low added value... University lecturer Economist Environmentalist Member of financial industry Unemployed Political party A Hong Kong s strength does not lie in labour-intensive industries which yield low added value... University lecturer Economist Environmentalist Free Talk Which view do you think is best for the future economic development of the HKSAR? Or do you have a better suggestion? Any reasonable answers are acceptable. The Basic Law and p.37

40 Brief Summary Apart from foreign trade and the financial industry, the Basic Law also gives the HKSAR specific power to make policies to keep Hong Kong s status as a shipping centre. As for the development of other industries in Hong Kong, the HKSAR may make decisions on its own. Over the decade since reunification, the Government has used such powers to enrich the diversity and competitiveness of the HKSAR economy. logy Parks ce and Techno cien Hong Kong S p.38 omotes Hong Kong pr The Basic Law and Hong Kong ' s Economy ( 2 ) ent of high the developm dustry technology in

41 Summary Chart A high degree of autonomy in economic development Finance Taxation Trades Financial and monetary affairs Independent No submission No taxation No subsidy Not subject to guidance of the Central People s Government Principle of fiscal management Fiscal prudence Living within one s means Fiscal balance Separate customs territory Membership in international trade organizations and agreements under the name of Hong Kong, China Independent Major characteristics Low tax rate Few types of tax Simple taxation system Decide on its own financial system and policies institutions and ordinances to supervise financial industry Decide on its own monetary system issuing currency Other economic areas Shipping and aviation Other industries Methods handled by the HKSAR on its own with power authorized by the Central People s Government by the Central People s Government make development policies by the HKSAR on its own The Basic Law and p.39

42 Section 3, Chapter V of the Basic Law: Shipping Article 124 The Hong Kong Special Administrative Region shall maintain Hong Kong s previous systems of shipping management and shipping regulation, including the system for regulating conditions of seamen. The Government of the Hong Kong Special Administrative Region shall, on its own, define its specific functions and responsibilities in respect of shipping. Article 125 Article 12 Article 127 The Hong Kong Special Administrative Region shall be authorized by the Central People s Government to continue to maintain a shipping register and issue related certificates under its legislation, using the name Hong Kong, China. With the exception of foreign warships, access for which requires the special permission of the Central People s Government, ships shall enjoy access to the ports of the Hong Kong Special Administrative Region in accordance with the laws of the Region. Private shipping businesses and shipping-related businesses and private container terminals in the Hong Kong Special Administrative Region may continue to operate freely. Section 4, Chapter V of the Basic Law: Civil Aviation Article 128 Article 129 The Government of the Hong Kong Special Administrative Region shall provide conditions and take measures for the maintenance of the status of Hong Kong as a centre of international and regional aviation. The Hong Kong Special Administrative Region shall continue the previous system of civil aviation management in Hong Kong and keep its own aircraft register in accordance with provisions laid down by the Central People s Government concerning nationality marks and registration marks of aircraft. Access of foreign state aircraft to the Hong Kong Special Administrative Region shall require the special permission of the Central People s Government. p.40 The Basic Law and

43 Article 130 Article 131 Article 132 The Hong Kong Special Administrative Region shall be responsible on its own for matters of routine business and technical management of civil aviation, including the management of airports, the provision of air traffic services within the flight information region of the Hong Kong Special Administrative Region, and the discharge of other responsibilities allocated to it under the regional air navigation procedures of the International Civil Aviation Organization. The Central People s Government shall, in consultation with the Government of the Hong Kong Special Administrative Region, make arrangements providing air services between the Region and other parts of the People s Republic of China for airlines incorporated in the Hong Kong Special Administrative Region and having their principal place of business in Hong Kong and other airlines of the People s Republic of China. All air service agreements providing air services between other parts of the People s Republic of China and other states and regions with stops at the Hong Kong Special Administrative Region and air services between the Hong Kong Special Administrative Region and other states and regions with stops at other parts of the People s Republic of China shall be concluded by the Central People s Government. In concluding the air service agreements referred to in the first paragraph of this Article, the Central People s Government shall take account of the special conditions and economic interests of the Hong Kong Special Administrative Region and consult the government of the Region. Representatives of the Government of the Hong Kong Special Administrative Region may, as members of the delegations of the Government of the People s Republic of China, participate in air service consultations conducted by the Central People s Government with foreign governments concerning arrangements for such services referred to in the first paragraph of this Article. The Basic Law and p.41

44 Article 133 Acting under specific authorizations from the Central People s Government, the Government of the Hong Kong Special Administrative Region may: (1) renew or amend air service agreements and arrangements previously in force; (2) negotiate and conclude new air service agreements providing routes for airlines incorporated in the Hong Kong Special Administrative Region and having their principal place of business in Hong Kong and providing rights for over-flights and technical stops; and (3) negotiate and conclude provisional arrangements with foreign states or regions with which no air service agreements have been concluded. All scheduled air services to, from or through Hong Kong, which do not operate to, from or through the mainland of China shall be regulated by the air service agreements or provisional arrangements referred to in this Article. Article 134 Article 135 The Central People s Government shall give the Government of the Hong Kong Special Administrative Region the authority to: (1) negotiate and conclude with other authorities all arrangements concerning the implementation of the air service agreements and provisional arrangements referred to in Article 133 of this Law; (2) issue licences to airlines incorporated in the Hong Kong Special Administrative Region and having their principal place of business in Hong Kong; (3) designate such airlines under the air service agreements and provisional arrangements referred to in Article 133 of this Law; and (4) issue permits to foreign airlines for services other than those to, from or through the mainland of China. Airlines incorporated and having their principal place of business in Hong Kong and businesses related to civil aviation functioning there prior to the establishment of the Hong Kong Special Administrative Region may continue to operate. p.42 The Basic Law and

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