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Last Updated: July 2010

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Hong Kong SAR

	Score	Rank
Financial Standards Index	51.67 out of 100	32
Business Indicator Index	11.23 out of 12	4

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12 Key Standards Overview
Summary by Standard
Business Indicator Summary
Quick Facts & Global Indices

Overall Standards Summary

Hong Kong achieves medium overall compliance with international standards and codes, with a score of 51.67 out of 100 in our Financial Standards Index. Hong Kong demonstrates a high level of transparency in terms of disclosing its adherence to the international standards, with only two standards – insolvency and payment systems – having insufficient information in this regard. Hong Kong’s performance in the area of macroeconomic fundamentals and financial sector supervision is almost on par with international best practices. Since 2000, the country has been meeting all the requirements of the IMF’s Special Data Dissemination Standard, and the level of transparency in fiscal and monetary policies is high. Hong Kong was one of the first jurisdictions to implement Basel II, and the announcement in July 2010 of the proposal to set up an independent Insurance Authority with powers, functions, and autonomy in accordance with international regulatory standards is a notable development. As far as the institutional framework is concerned, Hong Kong has made considerable progress in complying with the accounting and auditing standards bringing its requirements in line with the International Financial Reporting Standards and the International Standards on Auditing, respectively. The main challenge now lies in their effective implementation. There have also been recent enactments aimed at strengthening the corporate governance framework in the country, and although the country's compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) standard has not yet been achieved, Hong Kong was named as one of the jurisdictions that have endorsed the FATF's 40 plus 9 recommendations.

Choose a standard for a detailed compliance report:

12 Key Standards for Sound Financial Systems	Compliance Level
Special Data Dissemination Standard	CP
Code of Good Practices on Transparency in Monetary Policy	CP
Code of Good Practices on Transparency in Fiscal Policy	CP
Effective Insolvency and Creditor Rights Systems	II
International Financial Reporting Standards	EN
Principles of Corporate Governance	EN
International Standards on Auditing	EN
Anti-Money Laundering/Combating Terrorist Financing Standard	ID
Core Principles for Systemically Important Payment Systems	II
Core Principles for Effective Banking Supervision	CP
Objectives and Principles of Securities Regulation	EN
Insurance Core Principles	ID
II = Insufficient Information \| NC = No Compliance \| ID = Intent Declared \| EN = Enacted \| CP = Compliance in Process \| FC = Full Compliance

Macroeconomic Policy and Data Transparency

CPSpecial Data Dissemination Standard

The website of the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) discloses that Hong Kong became a subscriber to the Standard 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. The SDDS website reports that Hong Kong meets all requirements for periodicity, coverage, and timeliness of data, but avails itself of the periodicity and timeliness flexibility options on its producer price and production index data. It disseminates advance-release calendars for all required datasets, and generally practices simultaneous release of data to all interested parties. However, daily exchange rate and share-price index data is released "on request." While information is generally made available to ministerial entities prior to public release, the conditions of such early access are publicized. Where ministerial commentary accompanies the data, it is identified. Hong Kong does not generally provide advance notice of major methodological changes, publishing such information only upon the first release of data. Advance notice of such changes is provided only for such large statistical projects as the Population Census. In its 2008 Annual Report of Observance of the SDDS, the IMF concluded that Hong Kong provided available information on the methodology, sources, and reconciliation of data categories that would facilitate users in assessing the quality of the data. Hong Kong, however, does not provide any information on the IMF's SDDS website as to the availability of resources that may be used to facilitate cross-checking and reconciliation of general government or public sector operations data.

CPCode of Good Practices on Transparency in Monetary Policy

According to the 2003 IMF's Financial Systems Stability Assessment (FSSA), Hong Kong's adherence to international monetary policy transparency standards is very strong. While the ROSC does not specifically address Hong Kong's compliance level with any of the principles, its findings are supported by the Hong Kong Monetary Authority's (HKMA) 2007 Annual Report, which asserts the Authority's commitment to international standards of transparency and accountability. 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 the HKMA regulatory and supervisory powers over banks. Nevertheless, the IMF's 2003 FSSA pointed out a number of areas where Hong Kong could further improve its monetary policy transparency. For instance, it suggested that transparency objectives could be clarified within the governing legislation by specifying the modalities of accountability for monetary policies. Additional enhancement could be achieved by subjecting members of the Exchange Fund Advisory Committee to a Code of Conduct.

CPCode of Good Practices on Transparency in Fiscal Policy

As indicated in the 1999 Report on the Observance of Standards and Codes (ROSC) by the IMF, 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. The roles and responsibilities of the Financial Services and the Treasury Bureau (FSTB) regarding fiscal policy are clearly defined and transparent, and Hong Kong's fiscal policy is regulated by clear laws and regulations. The Basic Law mandates the independence of Hong Kong's finances from mainland China, promotes a policy of low tax rates, seeks to achieve fiscal balance and avoid deficits. While striking a generally positive tone, the IMF’s Article IV consultations over the years have pointed out areas where fiscal transparency practices in Hong Kong could be improved, such as creating an anchor to guide longer-term fiscal policy that accounts for demographic trend. In the latest 2009 consultations, the IMF suggested placing greater emphasis on the degree to which the budget’s social and economic outcomes are achieved and improving in the medium-term expenditure framework, so that government agencies be given greater responsibility for setting spending priorities over the medium-term thus creating greater agency accountability.

IIEffective Insolvency and Creditor Rights Systems

There is insufficient publicly available information regarding the compliance of Hong Kong with the World Bank's principles of effective insolvency and creditor rights systems. 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's 2007 article 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 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. However, Osborn and Gilligan observe that the attempts to introduce such a provisional supervision procedure had failed. Spurred by the damage caused by the global economic crisis, Hong Kong authorities revisited the need for the corporate rescue procedure, and in October 2009, the FSTB published a consultation paper entitled "Review of Corporate Rescue Procedure Legislative Proposals” in which it solicited views and opinions for consideration regarding the proposed legislative changes, to be taken into account before the final decisions were to be made regarding the final legislative draft to be submitted to the Legislative Council in 2010-2011. The solicitation period for the consultative report closed on January 28, 2010. The core of the proposed legislation is the creation of the provisional supervision procedure – one in which a court order is not required at the outset (although it is needed to extend the procedure beyond an initial 45-day limit), and which allows for a moratorium on creditor actions against the debtor firm as the provisional supervisor works out a settlement plan for the creditors to vote on.

ENInternational Financial Reporting Standards

In Hong Kong, the Companies Ordinance governs accounting practices for listed companies, private enterprises, governmental, and not-for-profit organizations. The Hong Kong Institute of Certified Public Accountants (HKICPA) has 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 were almost identical to the International Financial Reporting Standards (IFRSs). The only differences remaining were, 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. As of May 2010, all subsequent annual improvements to IFRSs have been incorporated into HKFRSs. Starting January 1, 2005, eligible small and medium-size enterprises have been applying a simplified framework known as the Small and Medium-sized Entity (SME) Financial Reporting Framework and Financial Reporting Standard. On April 30, 2010, the HKICPA released the Hong Kong Financial Reporting Standards for Private Entities as an option to be used by larger private companies, instead of the full HKFRSs or the SME standards. These new standards are reported by the Deloitte IAS Plus website to be identical to IFRSs for SMEs, with the exception of modification regarding income tax requirements.

ENPrinciples of Corporate Governance

Companies controlled by a dominant shareholder, often a family, represent the prevailing corporate model in Hong Kong. Ensuing corporate scandals in Hong Kong have, in the past, highlighted the entanglement between public and private interests of some majority shareholders, as noted in the IMF's 2003 FSSA. The IMF report included 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. Despite this however, the IMF concluded that further strengthening was still needed. Following this, in 2005, the Hong Kong Exchanges and Clearing Limited (HKEx) enacted the new Code on Corporate Governance Practices, replacing the 1993 Code of Best Practice. Further changes to the Code were introduced on January 1, 2009, and included provisions regarding companies’ accounting and financial reporting functions, as well as shareholder communications. Improvements in the quality of corporate governance practices in Hong Kong were indeed identified in a 2009 survey by the Hong Kong Institute of Directors and the Hong Kong Baptist University on the corporate governance practices of listed companies. Furthermore, amendments to the Companies Bill were passed in July 2010, which per the FSTB's press release, will enhance the “business friendliness” of the jurisdiction.

ENInternational Standards on Auditing

The Professional Accountants Ordinance provides the Council of the HKICPA with the legal authority to set auditing standards in Hong Kong. The HKICPA's E-Handbook indicates that in 2001 the Council of the HKICPA adopted a policy of converging the Hong Kong Standards on Auditing (HKSAs) with International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC). 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. In its 2009 Action Plan prepared for the IFAC, the HKICPA reiterates its commitment to convergence and notes that all revisions to ISAs will be incorporated into the Hong Kong requirements on an ongoing basis. A review of the June 2010 edition of the HKICPA's E-Handbook reveals that Clarified HKSAs in line with the ISAs that were issued as a result of the IAASB Clarity Project have been adopted in Hong Kong, with the exception of the HKSA 505 (Clarified). According to HKICPA’s 2009 Annual Auditing Update, HKSA 505 (Clarified) was expected to be issued by the end of 2009 pending a discussion with the Hong Kong Association of Banks. As of June 2010, however, there is insufficient information publicly available regarding the issuance of this HKSA.

IDAnti-Money Laundering/Combating Terrorist Financing Standard

In 2008, the Financial Action Task Force (FATF) conducted a mutual evaluation of the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime in Hong Kong against the FATF's 40+9 recommendations and special recommendations. The report on this evaluation concludes that the HKSAR is compliant with 10 recommendations and special recommendations; largely compliant with 20; partially compliant with 15; and noncompliant with 4. More importantly, HKSAR is found to be only partially compliant with three of the six core recommendations as stipulated by the FATF. A country needs to achieve at least a largely compliant rating with these core recommendations to be considered as having in place an effective AML/CFT regime. Further, Hong Kong is noncompliant with all FATF recommendations pertaining to Designated non-Financial Business and Professions, and the terrorism financing confiscation measures in Hong Kong are restricted to indictable offenses listed under the HKSAR's Organized and Serious Crimes Ordinance. Also, confiscation may only occur where the amount involved is more than HKD 100,000 (USD 12,800) and Hong Kong lacks the mechanisms for the confiscation of the proceeds of terrorism financing. Although the law enforcement agents in Hong Kong are fully empowered to seize criminal proceeds anywhere in the jurisdiction, including at the border, Hong Kong does not require reporting of the movement of any amount of currency across its borders; nor does it require reporting large currency transactions of any amount. Nevertheless, Hong Kong is named by the FATF in its 2008-2009 Annual Report as one of the countries that has committed to implement the organization's 40 recommendations and 9 special recommendations.

IICore Principles for Systemically Important Payment Systems

There are six payment systems in Hong Kong classified as designated systems by the Hong Kong Monetary Authority (HKMA). The Hong Kong authorities, however, do not specifically state if these designated systems are systemic only that they are those whose proper functioning is material to the monetary and financial stability of Hong Kong. Of the six designated systems, the IMF has assessed only one, the Hong Kong Dollar Clearing House Automated Transfer System (HKD CHATS), which the IMF classified as systemically important. The IMF reported its findings in a 2003 ROSC, which, however, did not explicitly provide a compliance level for HKD CHATS against the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS), although the general outlook of the report was positive. The report noted that 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 remedied with the enactment of the Clearing and Settlement Systems Ordinance (CSSO) in November 2004, according to a 2006 report by the HKMA. Meanwhile, the HKMA itself conducted assessments of two other designated systems, USD CHATS and Euro CHATS, in 2009. It found the USD system to be fully compliant with the CPSIPS and the Euro system to be fully compliant with six of nine relevant CPSIPS. Finally, a fourth designated system, the Continuous Linked Settlement (CLS) system was reviewed by the CLS Bank in 2009 and was found to be fully compliant with all CPSIPS. The HKMA's 2009 Annual Report notes that all designated systems are encouraged to comply with internationally recognized standards for payment and settlement. Nevertheless, as at the time of this report, there was no publicly available comprehensive assessment of all six systems.

CPCore Principles for Effective Banking Supervision

According to the U.S. Department of State's 2008 report, Hong Kong's banking supervisory framework is in line with the Basel Core Principles (BCPs) for Effective Banking Supervision. In its 2003 FSSA, the IMF also concludes that Hong Kong has a very high degree of compliance with international best practices in banking regulation and supervision. Moreover, the banking sector supervision is supported by a strong regulatory framework and sound supervisory practices. The HKMA functions as the de facto central bank, and is responsible for the supervision and oversight of authorized institutions under the Banking Ordinance, which provides the legal framework for banking supervision in Hong Kong. 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. In general, the website states that the HKMA follows the BCPs in supervising the authorized institutions. 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 Hong Kong one of the first jurisdictions to implement Basel II.

ENObjectives and Principles of Securities Regulation

The Securities and Futures Commission (SFC) in Hong Kong is an independent statutory body with licensing and supervisory powers over the securities sector. The Hong Kong Exchanges and Clearing Limited performs a self-regulatory function and its rules are subject to the SFC approval. According to a 2003 IMF assessment of Hong Kong'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 securities regulatory framework is in line with most international best practices. However, the IMF assessment does note that it evaluates the legal framework and not the overall implementation regime. Weaknesses remained regarding the independence of the supervisory authority, disclosure by listed companies, and compliance with international accounting standards. In 2008, the SFC implemented a more aggressive enforcement regime to ensure high levels of compliance and corporate governance standards. Further, accounting standards have been converged with international standards. The SAR also plans to consolidate securities laws into a single document and to unify financial regulation under one regulator. The SFC’s enhanced supervisory efforts through increased on-site inspections and investigations into market malpractices to handle the effects of the global financial crisis of 2008 have come for praise by the IMF in its 2008 and 2009 reports. More generally, too, the SFC reiterates that it applies the IOSCO principles in regulating the securities market in the country.

IDInsurance Core Principles

In its 2003 FSSA, the IMF concluded that the preconditions for effective insurance supervision were generally satisfied in Hong Kong. The IMF further commended the well-functioning and well-developed legal system. Shortcomings were identified regarding the insurance regulator’s, 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. However, the IMF's 2003 FSSA was based on the Insurance Core Principles (ICPs) of 2000, and the International Association of Insurance Supervisors (IAIS) revised the ICPs in October 2003, making them more stringent. In a 2007 Article IV Consultation report, the IMF averred that the SAR’s plan to establish an independent insurance regulator would bring the supervisory framework better in line with international regulatory practices. Per the FSTB website, the government issued a consultation paper in July 2010 on its proposals to set up an independent Insurance Authority with powers, functions, and autonomy in accordance with international regulatory standards. Legislation facilitating the establishment is expected to be tabled in the Legislative Council in 2011. Asserting the Hong Kong's intent, the government’s 2008 Yearbook also mentions that as an IAIS member, Hong Kong makes its best efforts to ensure that its insurance supervisory regime is in line with global best practices.

Business Indicators

With an overall score of 11.23/12, Hong Kong SAR is at standard on the economic, legal, and political indicators that make up our Business Indicators Index. Hong Kong SAR is a free market-based economy, with the government active in several economic sectors, including the subsides for most medical and educational services and about half the population's housing. Hong Kong imposes few restrictions on foreign capital flows and investment which has helped the country to become a regional hub for the finance industry. Overall, foreign investment is highly encouraged, and foreign capital is treated the same as domestic capital. An effective court system, efficient incorporation and business registration procedures, and straightforward corporate reporting requirements contribute to an environment conducive to foreign investment. Furthermore, the rule of law is strong and the judicial system is transparent. The level of corruption is low which is reflected in Hong Kong high rating in Transparency International's 2009 Corruption Perception Index.

Global Indices & Quick Facts

Hong Kong is ranked in the 1st quintile in all global indices benchmarking political, economic, business, and human capital climates, as shown below, and it is the world leader in terms of Economic Freedom as measured by the Heritage Foundation Index. Hong Kong's 1st position in the Milken Institute Capital Access Index is supported by a sound banking system, a relatively large equity market, and diversified sources of business funding, including venture capital. An inefficient bureaucracy and an inadequately educated workforce remain the most problematic factors for doing business, as highlighted by the Global Competitiveness Index, where Hong Kong scores one of its lowest overall rankings. Corruption is not perceived to be a concern, as reflected in its ranking on the Transparency International Corruption Perceptions Index.

Name	Year	Rank	Score	Quintile
Bertelsmann Transformation Status Index	2010
Heritage Foundation Economic Freedom Index	2010	1/179	89.7%	1
Economic Freedom of the World Index	2009	1/141	8.97/10	1
World Economic Forum Global Competitiveness Index	2009	11/133	5.22/7	1
Milken Institute Capital Access Index	2009	2/122	7.82/10	1
World Bank Ease of Doing Business Index	2009	3/183	N/A	1
UNDP Human Development Index	2009	24/177	0.94/1	1
Transparency International Corruption Perceptions Index	2009	12/180	8.2/12	1
Freedom House Index	2009	N/A	N/A/7

Credit Ratings

AA/Stable Fitch

Aa2/Stable Moody's

AA+/Stable Standard & Poor's

Macroeconomic Data

2009 GDP (Current Prices): 206.1 billion USD (IMF)

2009 GDP (Per Capita): 29172 USD (IMF)

2010 GDP (Growth Forecast): 3.5% (IMF)

2009 Inflation (CPI): 0.5% (IMF)

2008 Unemployment: 4.1% (CIA)

2008 Foreign Direct Investment

FDI (Inward): 63.0 billion USD (UNCTAD)

FDI (Outward): 59.90 billion USD (UNCTAD)

2007 Official Development Assistance

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

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