In the 2004 Annual Report on the Hong Kong SAR, the Commission notes that, the “one country/two systems” principle, in 2004, was characterised by a trend towards greater influence of the Mainland authorities in the governance of the Territory. This is highlighted, in particular, with the election of the Chief Executive. Although, an estimated 100 000 people marched peacefully at the beginning of the year expressing their will to participate more in politics and government, the National People’s Congress decreed later in the year that only minor changes to the election system for the HK Chief Executive should be made, indicating that the move towards universal suffrage (an ultimate aim of the Basic Law) is being seriously undermined.

Notwithstanding these developments, orderly elections were held for the Legislative Council in September, which produced a record high turn-out, with 62% of voters supporting pro-democracy candidates. According to the Commission, the overall conduct of the elections was a testament to the political maturity of the SAR and showed that there is a sound base for further democratisation. Along a similar vein, Hong Kong civil society and the press continued to operate freely and became more critical during the year.

The report’s authors indicate that accountability within the HKSAR is strong and point to the often vociferous criticism many members faced throughout the year from the press and interest groups. The resignation of the Health Minister in the wake of a damning report on the handling of the SARS crisis, is testament to the growing sense of accountability, a key element in any democracy.

As far as the economy is concerned the economies of Hong Kong and China became more symbiotic, inter-dependant and convergent throughout 2004. Economic growth in 2004 was 8.1% for the year, unemployment fell, property and share markets rose, deflation was replaced by modest price inflation and the government deficit narrowed. Trade and financial flows between Hong Kong and the European Union continued to expand and deepen. The EU was Hong Kong’s third largest supplier of goods in 2004 after Mainland China and Japan and was the third largest market for HK exports after the US and Mainland China. In the financial sector and other services EU companies continue to play a leading and influential role.

A number of issues outstanding issues persist including the lack of a competition law in Hong Kong as well as the ongoing production of counterfeit goods originating in Hong Kong. For example, Hong Kong remains the third largest provenance of counterfeit goods imported into the EU. Although some IPR progress has been made over the past year, the Report concludes that, more needs to be done.

On a final point, high-level contacts between the EU and the Hong Kong authorities continued throughout 2004. In March 2004, Pascal Lamy visited Hong Kong. Also, the Commission welcomes the WTO agreement to hold the 6 th Ministerial WTO Conference in Hong Kong in December 2005.

This report constitutes the Annual Report 2003 on Hong Kong SAR. The Commission states that the year was especially eventful for the Hong Kong SAR. Hong Kong was affected by its worse epidemic in decades, an outbreak of Severe Acute Respiratory Syndrome (SARS), which caused many economic losses and revealed some weaknesses in the health system. On the political side, after an unprecedented protest march that gathered half a million persons on July 1 and the resignation of the Chairman of the Liberal Party from the Executive Council, the Hong Kong Government withdrew its controversial 'Article 23' draft bill on national security on 5 September. The EU, which issued three statements expressing concern over the proposed legislation, and called for early progress towards universal suffrage in the latter statement welcomed the withdrawal of the bill. While the October District elections reflected public dissatisfaction with the government's handling of the national security bill and the SARS epidemic, the political debate rapidly shifted to democratisation of the Hong Kong political system, as a way to improve governance, and has since come to the forefront. In this context, the SAR Government had previously announced a timetable for the launching of a public consultation on constitutional development. The designation of a Task Force on constitutional development by the Chief Executive in January 2004 and the starting of a consultation process with the Central authorities of Beijing have however superseded these plans. At the same time, Hong Kong pursued further economic integration with Mainland China, notably through the signing of CEPA, a free-trade arrangement that will ensure access for Hong Kong products and services to the Mainland market ahead of China's WTO implementation timetable. The economy rapidly recovered from the consequences of the SARS outbreak and resumed encouraging growth in the second half of the year. EU-Hong Kong relations were marked by steady development and friendliness. Total bilateral trade slightly decreased to EUR 27.3 billion, but the EU remained Hong Kong's third largest trading partner and foreign investor. The EC-Hong Kong readmission agreement came into force in March 2004 and perspectives for further contacts in the field for migration bode well of the development of our cooperation. The European Commission welcomes the passage in 2003 of new legislation in mergers and acquisitions in the telecommunications sector, but remains concerned about the lack of general competition legislation in the SAR. Efforts in combating cross-boundary intellectual property rights violations also need to be intensified. The Commission welcomes the renewed dynamism of Hong Kong's people and its economy and is encouraged by the greater involvement of citizens in political life, something that was facilitated by the various civil movements which were active throughout 2003. The EU remains fully in support of the preservation of the specific status recognised for Hong Kong SAR under the 'One country, two systems" principle, and the respect for human rights and freedoms enjoyed by Hong Kong citizens, as enshrined in the Basic Law. It is therefore to be hoped that early progress will be made towards the Basic Law's ultimate aim of election of the Chief Executive and Legislative Council by universal suffrage, bearing in mind the aspirations of Hong Kong people for further democratisation, as shown by the events of 2003.

The purpose of the Commission’s 2002 Annual Report is to assess developments taking place in Hong Kong’s SAR as well as Hong Kong’s relationship with the European Union. In particular, it analyses progress on the implementation of the ‘one country, two systems’ principle and reviews developments on the legislative, institutional and human rights front. An assessment of economic developments and main EU-Hong Kong relations is equally covered in the Annual Report for 2002.

The Report begins with a thorough assessment of the ‘one system, two countries’ principles and the impact this is having on democratisation, human rights and freedom of speech in Hong Kong.

On a number of occasions, the Central Chinese Government in Beijing has reiterated their adherence to the principle, stating that the policy of ‘one country, two systems’ combined with the Basic Law of the Hong Kong SAR must be implemented in a comprehensive and accurate manner. Activities throughout 2002 appear to bear this approach out. Falun Gong, which is banned on mainland China is given leave to practice in Hong Kong and it does so in venues run by government departments such as Leisure and Cultural Services Department. Moreover, the right of assembly and demonstration was permitted on numerous occasions, albeit under a controlled manner. Of particular concern to the political establishment in Hong Kong, as well as its citizens, was the question of Article 23 of the Basic Law, which requires the HKSAR to enact laws “to prohibit any act of treason, secession, sedition and subversion against the Central People’s Government”. The sensitivity of this matter, which treads a fine line between freedom of speech and sedition, aroused much debate throughout 2002. The issue was open for public debate and as such generated much comment – a record 97 000 submission and 340 000 signatures. The Report’s authors acknowledge that Article 23 will need to be monitored closely by the EU as it evolves into the Basic Law of Hong Kong. However, the fact that views were expressed freely is an indication of the openness and freedom of Hong Kong.

Regarding the Economy of Hong Kong, the Report notes that the year 2002 underwent a serious adjustment process following on from the Asian financial crisis. Two issues captured the public’s attention, namely the fiscal deficit and unemployment, both of which peaked in 2002. On the external front Hong Kong’s exports of goods and services to Mainland China continued to increase. The SAR government actively pursued the proposal of building a bridge linking Hong Kong, Macao and Zhuai. The Western corridor linking Hong Kong and Shenzen is due to be completed in 2005.

A number of high profile exchanges between the EU and Hong Kong SAR officials also marked the year 2002. In November 2002 an agreement between the EU and the HKSAR was signed on the readmission of persons residing without authorisation. It will enable Hong Kong and the EU to ensure, on a reciprocal basis, the rapid and effective identification and return of persons entering or remaining illegally in their respective territories. Counterfeiting and Intellectual Property Rights continue to exercise considerable concern amongst EU companies doing business in Hong Kong. Recent seizures in Hong Kong of counterfeited pharmaceutical products were again highlighted by the EU pharmaceutical sector. As far as EU interests are concerned with Hong Kong, the EU was Hong Kong’s third largest supplier in 2002 after Mainland China and Japan and was the third biggest market for Hong Kong’s exports after Mainland China and the United States. Total bilateral trade decreased to EUR 29.6 billion (imports from Hong Kong: EUR 19.9 billion/ exports to Hong Kong: 19.9 billion – in other words a EUR 10 billion Euro surplus for the EU.)

To conclude, the Report notes that, Hong Kong’s economic adjustment is understandable given the recent changeover. It suggests though that the people of Hong Kong should remain confident about future economic developments and continue to take full advantage of the assets the SAR as an international financial centre and services-oriented economy has to offer them.