Hong Kong achieves high overall compliance with international standards and codes, with a score of 45.83 out of 100 in our Standards Compliance Index. Although standards in all three categories — macroeconomic fundamentals, market infrastructure, and financial supervision — are almost on par with international best practices, Hong Kong’s insolvency framework, anti-money laundering regime, payment systems and insurance supervision standards lag behind due to a lack of independent assessments of their ongoing reform. Hong Kong has made considerable achievements in complying with international financial standards bringing its accounting practices into line with international standards. There have also been recent enactments aimed at strengthening the corporate governance framework and banking supervision regime in Hong Kong. The Banking Capital Rules and the Banking Disclosure Rules came into effect on January 1, 2007 making the Hong Kong SAR one of the first jurisdictions to implement Basel II.

Macroeconomic Policy and Data Transparency

Hong Kong subscribed to the International Monetary Fund’s (IMF) Special Data Dissemination Standard (SDDS) on October 28, 1996 and met all SDDS requirements on July 12, 2000. As required by the SDDS, Hong Kong posts its metadata on the IMF's SDDS website. Based on information provided on the IMF’s SDDS website, Hong Kong meets SDDS requirements for periodicity, coverage, and timeliness of data, albeit availing itself of the flexibility option for a few data points. In its 2007 report, the IMF concludes that, in 2007, Hong Kong's metadata provided timely advance release calendars and the country provided available information on the methodology, sources, and reconciliation of data categories that would facilitate users to assess the quality of the data. However, information posted on the IMF's SDDS website does show that Hong Kong does not provide comprehensive data on certain data categories for the integrity dimension of the SDDS. More »

According to the 2003 IMF Report on the Observance of Standards and Codes (ROSC) on Hong Kong Special Administrative Region (HKSAR), Hong Kong's adherence to international monetary policy transparency standards is very strong. While the ROSC does not specifically address the HKSAR's compliance level with any of the principles, the 2007 Hong Kong Monetary Authority (HKMA) Annual Report, and the IMF's 2007 Article IV Consultation help confirm that the HKSAR strongly adheres to monetary policy transparency standards. For example, the roles, responsibilities, and objectives of the HKMA regarding monetary policy are clearly and primarily defined in the Exchange Fund Ordinance, which establishes the Exchange Fund under the control of the Financial Secretary, and the Banking Ordinance, which gives HKMA regulatory and supervisory powers over banks. Nevertheless, the IMF noted that HKSAR's monetary policy transparency regime could be further improved by clarifying the legal foundation of the HKMA's monetary policy transparency objectives, specifying the modalities of accountability for monetary policies, and subjecting members of the Exchange Fund Advisory Committee to a Code of Conduct. More »

According to the 1999 IMF ROSC, Hong Kong considers fiscal policy transparency a strategic operating principle and takes seriously the duty of communicating its policies and work to the general public. However, the ROSC does not specifically address the HKSAR's compliance level with any of the IMF's fiscal policy transparency principles. The roles and responsibilities of the Financial Services and the Treasury Bureau (FSTB) regarding fiscal policy are clearly defined and transparent, and the HKSAR's fiscal policy is regulated by clear laws and regulations, including the Basic Law, the Public Finance Ordinance, the Audit Ordinance and the Inland Revenue Ordinance. The Basic Law mandates the independence of HKSAR finances from mainland China, promotes a policy of low tax rates, and seeks to achieve fiscal balance and avoid deficits. The roles and responsibilities of the FSTB and other key fiscal management actors are clearly and specifically defined in the Public Finance Ordinance, and the Internal Revenue Ordinance clearly defines tax liabilities. More »

Institutional and market infrastructure

In HKSAR, different laws apply to insolvency of individuals and entities. Individual insolvency matters are governed by the 1998 Bankruptcy Ordinance, whereas the Companies Ordinance of 1997 regulates corporate insolvencies. Osborn and Gilligan, writing for the 2006 Asia-Pacific Restructuring and Insolvency Guide, mention the following options available in Hong Kong for companies in financial distress: out-of-court restructuring, schemes of arrangement, compulsory liquidations, creditors’ voluntary liquidations, and receiverships. The authors note, however, that no formal corporate rescue procedure is available. Charles D. Booth in 2007 observes that the only option for restructuring in Hong Kong is the scheme of arrangement, which is very complex and expensive to use and is, therefore, rarely applied. Realizing the need to reform the insolvency regime in the country, the government of Hong Kong proposed to introduce a corporate rescue procedure known as provisional supervision, in which a company in financial distress is allowed to hire a qualified individual to manage the company and to develop a rescue plan. In 2006, Osborn and Gilligan observed that the attempts to adopt provisional supervision procedure had failed. As far as cross border insolvency matters are concerned, Hong Kong has not implemented the United Nations Commission for International Trade Law's Model Law on Cross-Border Insolvency, although the courts usually recognize foreign liquidators. However, there is insufficient publicly available information regarding Hong Kong’s compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank. More »

In Hong Kong, the Companies Ordinance governs accounting practices for listed companies, private enterprises, governmental, and not-for-profit organizations. The Professional Accountants Ordinance provides the Hong Kong Institute of Certified Public Accountants (HKICPA) with the legal authority to set accounting standards to be applied for the preparation of financial statements for the above-mentioned companies. According to the Preface to Hong Kong Financial Reporting Standards (HKFRSs), in 2001, the HKICPA adopted the policy of achieving convergence of its standards with the standards set by the International Accounting Standards Board. As a result, Hong Kong adopted in January 2005 HKFRSs which are almost identical to the International Financial Reporting Standards (IFRSs). The only differences remaining are, in some cases, effective dates, and transitional provisions. The Preface to HKFRSs states that the HKICPA may add additional disclosure requirements, if deemed appropriate, or in some cases it may depart from the text of IFRSs. All differences from the international equivalents are clearly identified in the text of the Hong Kong standards. The Preface to HKFRSs states that the standards issued by the HKICPA are intended for use by all profit-oriented entities. Starting January 1, 2005, eligible small and medium-size enterprises have been applying a simplified framework known as the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard. In May 2008, the HKICPA issued a consultation paper titled "Financial Reporting by Private Companies," in which it proposes to introduce a simplified financial reporting framework for private companies to alleviate what it seems to be the unjustified reporting burden imposed by the requirement to use HKFRs. The comment period ends on September 1, 2008. More »

Companies controlled by a dominant shareholder, often a family, represent the prevailing corporate model in Hong Kong. Ensuing corporate scandals in the Hong Kong Special Administrative Region have, in the past, highlighted the entanglement between public and private interests of some majority shareholders, as noted in the IMF 2003 Financial System Stability Assessment. The IMF report includes an assessment of the Hong Kong's compliance with the Organization for Economic Co-operation and Development Principles of Corporate Governance, According to the report, Hong Kong has shown a strong commitment to improving corporate governance. It has strengthened laws and practices, and undertaken a number of consultation papers and reforms. According to a 2008 study by the international law firm Allens Arthur Robinson, the Securities and Futures Commission has recently implemented a more aggressive enforcement regime to ensure high levels of compliance with corporate governance standards in light of the upcoming "through train" which will allow direct investment by Mainland individuals or businesses into the securities market in Hong Kong. The Hong Kong Exchanges and Clearing Limited (HKEX) enacted the new Code on Corporate Governance Practices in 2005, replacing the 1993 Code of Best Practice. As a result of the reform, listed issuers are required by the HKEX to prepare and present a Corporate Governance Report disclosing their compliance with the new Code. More »

The Professional Accountants Ordinance provides the Council of the HKICPA with the legal authority to set accounting and auditing standards in Hong Kong. The HKICPA's E-Handbook indicates that in 2001 the Council of the HKICPA reached a decision to converge the Hong Kong Standards on Auditing (HKSAs) with International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB). The Council mandated the Auditing and Assurance Standards Committee to develop Hong Kong Standards on Quality Control, Auditing, Assurance, and Related Services so that convergence with ISAs can be achieved. According to the 2007 comparison between Hong Kong Auditing Standards and ISAs prepared by the HKICPA and the March 2008 edition of the HKICPA's E-Handbook, the vast majority of ISAs were adopted as the national standards, with the exception of ISA 600 and ISA 800, which at that time, were being revised by the IAASB. More »

According to the 2003 IMF ROSC, the HKSAR had a comprehensive legal and supervisory anti-money laundering and combating the financing of terrorism (AML/CFT) framework and was largely in compliance with the Financial Action Task Force's (FATF) 40+8 Recommendations and Special Recommendations on Money Laundering and Terrorism Financing. The ROSC stated that HKSAR fully complied with 28 of the FATF recommendations, although HKSAR's compliance with the 8 FATF special recommendations was less complete. However, the 2003 IMF ROSC was based on an assessment conducted per the 2002 FATF methodology, which was revised in 2004. There is little information publicly available regarding Hong Kong's compliance with the FATF recommendations and special recommendations since the 2004 revision. The 2008 U.S. Department of State's International Narcotics Control Strategy Report suggests that HKSAR could improve its AML/CFT regime by establishing threshold reporting requirements for currency transactions and structuring provisions to counter evasion efforts. More »

There are five systems in Hong Kong classified as designated systems by HKMA. A designated system is defined as a system that is or is likely to become a clearing and settlement system whose proper functioning is material to the monetary or financial stability of Hong Kong. Of the five designated systems, the IMF assessed only one, the Hong Kong Dollar Clearing House Automated Transfer System (HKD CHATS), which the IMF deemed to be of systemic importance to the financial infrastructure in Hong Kong. The IMF assessed the HKD CHATS against the Committee on Payment and Settlement Systems' Core Principle for Systemically Important Payment Systems (CPSIPS) and reported its findings in a 2003 Report on the Observance of Standards and Codes (ROSC). According to the 2003 ROSC, the HKD CHATS is an efficient and reliable system, and the liquidity risks associated with the system are well monitored and managed. The major deficiencies identified by the 2003 IMF report were the lack of proper legal arrangement addressing settlement finality in payment systems and the lack of a unified law on the HKMA's oversight responsibilities for payment systems. Subsequent to the 2003 ROSC, a 2006 report by the HKMA noted that both shortcomings were remedied by the enactment of the Clearing and Settlement Systems Ordinance (CSSO) in November 2004. The CSSO provides the HKMA with statutory oversight powers and settlement finality over the HKD CHATS and other important clearing and settlement systems in Hong Kong. The 2003 ROSC and the other reports that are publicly available regarding payment systems in Hong Kong do not explicitly address Hong Kong's actual compliance with the CPSIPS, although the general outlook is positive. However, the HKMA's 2007 Annual Report does mention that all designated systems were found to be in compliance with the safety and efficiency requirements under the CSSO. More »

Financial Regulation and Supervision

The HKSAR is a major international financial center with one of the highest concentrations of banking institutions in the world. Authorized institutions (AIs) include licensed banks, restricted license banks, and deposit-taking companies, which account for two thirds of total assets of the financial system. According to the U.S. Department of State’s 2008 International Narcotics Control Strategy Report, HKSAR’s banking supervisory framework is in line with the Basel Core Principles (BCPs) for Effective Banking Supervision. In its 2003 Financial System Stability Assessment, the IMF also concludes that HKSAR has a very high degree of compliance with international best practices in banking regulation and supervision. Moreover, the banking sector is overseen by a strong regulatory framework and supervisory practices. The HKMA functions as the de facto central bank, and is responsible for the supervision and oversight of AIs under the Banking Ordinance, which provides the legal framework for banking supervision in HKSAR. The IMF report notes that improvements are still needed in the areas of governance, liquidity, reputational and legal risks to banks, and cooperation with other supervisory authorities. In October 2006, the Basel Committee released an updated version of the BCPs. As noted on its website, the HKMA has been undertaking a self-assessment focusing on these revisions. The Banking Capital Rules and the Banking Disclosure Rules came into effect on January 1, 2007, as noted in the HKMA's 2007 Annual Report, making the HKSAR one of the first jurisdictions to implement Basel II. More »

Hong Kong is a major international financial center with its stock exchange ranking third in Asia, after Tokyo and Shanghai, and seventh worldwide at the end of 2007, according to the U.S. Department of Commerce 2008 Country Commercial Guide. The Securities and Futures Commission (SFC) acts as an independent statutory body with licensing and supervisory powers over the securities, futures, and financial investment industries. The Hong Kong Exchanges and Clearing Limited performs a self-regulatory function by overseeing the conduct of its members, and all its rules are subject to the SFC approval. According to the 2003 International Monetary Fund's Financial System Stability Assessment, which includes an assessment of the Hong Kong Special Administrative Region's compliance with the International Organization of Securities Commissions Objectives and Principles of Securities Regulation, the general preconditions for an effective securities regulatory regime appear to be in place. Moreover, the regulatory framework is in line with most international best practices. Weaknesses remain regarding the independence of the supervisory authority, disclosure by listed companies, and compliance with international accounting standards. Per a 2008 study by the international law firm Allens Arthur Robinson, the SFC has recently implemented a more aggressive enforcement regime to ensure high levels of compliance and corporate governance standards in light of the upcoming "through train," which will allow direct investment by mainland individuals or businesses into the securities market in Hong Kong. The Securities and Futures Ordinance entered into force on April 1, 2003, to detect and deter manipulation, and improve investor protection. More »

The HKSAR has the highest number of authorized insurance companies in Asia, as noted in the U.S. Department of Commerce 2008 Country Commercial Guide. Another unique feature of the HKSAR insurance market is the reliance on self-regulatory organizations (SROs) for the supervision of insurance agents and brokers. In its 2003 Financial System Stability Assessment (FSSA), the IMF concluded that the preconditions for effective insurance supervision were generally satisfied in HKSAR. The IMF report further commended the well-functioning and well-developed legal system. Shortcomings were identified regarding the Office of the Commissioner of Insurance's (OCI) lack of institutional independence and budgetary autonomy. Moreover, the OCI relied heavily on the use of actuaries for prudential controls of life insurance entities and SROs. Given that the IMF's 2003 FSSA was based on the Insurance Core Principles (ICPs) of 2000, and that the International Association of Insurance Supervisors revised the ICPs and Methodology in October 2003, there is insufficient information publicly available regarding HKSAR’s compliance with the new, more stringent principles. The OCI was established as the regulatory body responsible for supervising and examining compliance of insurance institutions under the Insurance Companies Ordinance of 1997, which provides the legal framework for insurance supervision in HKSAR. The OCI is headed by the Commissioner of Insurance, who is appointed by the Chief Executive as the Insurance Authority. According to the IMF's 2007 Article IV Consultation Report, the current proposal in HKSAR to establish an independent insurance regulator would bring the supervisory framework better in line with international regulatory practices. More »

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Credit Ratings

Moody's Aa2/Stable

Fitch AA/Stable

Standard & Poor's AA/Positive

Macroeconomic Data

2007 GDP (Current Prices): 206.707 billion USD (IMF)

2007 GDP (Per Capita): 29,650 USD (IMF)

2008 GDP (Growth Forecast): 4.3% (IMF)

2008 Inflation (CPI): 3.6% (IMF)

2007 Unemployment: 4.2% (CIA)

2006 Foreign Direct Investment

FDI (Inward): 42.892 billion USD (UNCTAD)

FDI (Outward): 43.459 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)