Comprehensive Study Notes on National Security, Public Finance, and Economic Development in the HKSAR

Comprehensive Concepts of National Security

• Verbatim Definition of National Security: National security means a status that the power, sovereignty, unity, territorial integrity, welfare of the people, sustainable economic and social development, and other major interests of the state are relatively not faced with any danger and not threatened internally or externally, and the capability to maintain a sustained security status.

• Importance of Safeguarding National Security: National security is related to the core interests of the country and the fundamental interests of the people. It is the fundamental prerequisite for its survival and development and an important cornerstone of stability.

• Jurisdiction of National Security:   - National security falls solely within the jurisdiction of the Central Authorities.   - Central government handles affairs concerning national security, while local governments play a complementary role.   - Constitutional Basis: According to Article 28 of the Constitution of the People's Republic of China, the state shall maintain public order and suppress treason and other criminal activities that endanger national security.

• Introduction of the "Holistic Approach to National Security":   - Proposed by President Xi Jinping, this approach expands the scope beyond traditional security into other major fields.   - Five Essential Elements:     1. Taking the people's security as the ultimate goal.     2. Taking political security as the fundamental task.     3. Taking economic security as the foundation.     4. Taking military, science and technology, cultural, and societal security as means of guarantee.     5. Taking the promotion of international security as support.   - Twenty Major Fields:     - Traditional Security: Political security, Homeland security, Military security.     - Non-traditional/Emerging Security: Economic security, Financial security, Cultural security, Science and technology security, Societal security, Cybersecurity, Food security, Ecological security, Resource security, Nuclear security, Overseas interests security, Biosecurity, Artificial intelligence security, Data security, Outer space security, Deep sea security, and Polar security.

The Legislative Framework and Constitutional Duties of HKSAR

• Legislative Process of the "Hong Kong National Security Law":   - 18th May 2020: Receipt of the report; NPCSC points out the necessity of establishing a legal system and enforcement mechanism.   - 28th May 2020: Authorization of legislation; the NPC decides to authorize the NPCSC to enact the law.   - 30th June 2020: Passage and implementation; the NPCSC passed the law unanimously, President Xi signed the Decree, it was included in Annex III of the Basic Law, and the Chief Executive promulgated it in the HKSAR.

• Constitutional Responsibility:   - HKSAR is an inalienable part of China and has a constitutional responsibility to safeguard national security under Article 40(3) of the National Security Law.   - Article 11(2): States it is the shared obligation of all Chinese people, including compatriots in Hong Kong, Macao, and Taiwan, to safeguard national sovereignty, unity, and territorial integrity.

• Obligations of Citizens under the Constitution:   - Article 51: Shall not undermine the interests of the state, society, or collectives.   - Article 52: Obligation to safeguard national unity and ethnic solidarity.   - Article 53: Must keep State secrets.   - Article 54: Safeguard security, honor, and interests of the motherland; must not behave in any way that endangers them.   - Article 55 (1): To defend the motherland and resist aggression.

• Article 23 of the Basic Law:   - Stipulates that the SAR shall enact laws on its own to prohibit treason, secession, sedition, subversion against the Central People's Government, or theft of state secrets.   - Legislation for Article 23 was completed in 2024 to improve the legal framework for safeguarding national security.

Institutional Framework and Offences under the National Security Law

• Four Categories of Offences Endangering National Security:   1. Secession: Organizing or committing acts with a view to committing secession or undermining national unification.   2. Subversion: Using force, threat of force, or illegal means to subvert State power.   3. Terrorist Activities: Organizing or committing acts causing grave harm to society to coerce the government or intimidate the public.   4. Collusion with Foreign Countries/External Elements: Stealing or unlawfully providing state secrets/intelligence to foreign entities; conspiring with or receiving funding/support from foreign entities to commit acts endangering national security.   - Penalties: Maximum penalty for serious crimes can be life imprisonment or imprisonment for 10 years or more.

• Main Bodies for Safeguarding National Security:   - CPG Office on National Security: Represents the Central People's Government in the HKSAR to perform duties and exercise powers.   - HKSAR Committee for Safeguarding National Security: Chaired by the Chief Executive; bears primary responsibility and is subject to CPG supervision.   - National Security Adviser: Designated by the CPG to sit in on meetings and provide advice.   - National Security Department (HK Police Force): Responsible for investigating cases.   - National Security Prosecutions Division (Department of Justice): Responsible for prosecuting cases.

Principles and Management of Public Finance in Hong Kong

• Definition of Public Finance: Refers to the government's financial revenue and expenditure used to improve social development, competitiveness, and provide public services.

• Management Structure:   - Financial Secretary: Formulates and implements policies; submits the annual government budget to the Legislative Council.   - Legislative Council (LegCo): Enacts laws, examines and approves budgets, monitors government work, and debates public interest issues.   - Article 106 of the Basic Law: HKSAR shall have independent finances and use revenues exclusively for its own purposes; the CPG shall not levy taxes in HKSAR.

• Fiscal Principles (Article 107 of the Basic Law):   - Follow the principle of keeping expenditure within the limits of revenues (Fiscal Balance).   - Strive to achieve a balance between revenue and expenditure.   - Avoid deficits.   - Keep the budget matched to the growth rate of Gross Domestic Product (GDP).

Sources of Government Revenue and Categories of Taxation

• Tax Revenue (Major Source):   - Salaries Tax: Levied on employment income using a progressive tax structure ($2\%$, $6\%$, $10\%$, $14\%$, and $17\%$ thresholds).   - Profits Tax: Levied on profits of a company's business ($16.5\%$ maximum).   - Property Tax: Levied based on rental income from properties.   - Rates and Government Rent: Levied on real estate properties.   - Stamp Duty: Levied on real estate transfers and stock trading.   - Betting Duty: Levied on Mark Six, horse racing, and football betting.   - Duties: Levied on alcohol, tobacco, and specific commodities.

• Other Revenue: Public service charges, fines, land sales (land premium), and investment income.

• Statistical Breakdown (2022-2023):   - Total revenue: $622.1 \text{ billion}$.   - Profits tax: $174.2 \text{B}$.   - Salaries tax: $79.4 \text{B}$.   - Land premium: $69.9 \text{B}$.   - Stamp duties: $69.9 \text{B}$.   - Investment income: $63.8 \text{B}$.   - Betting duty: $25.8 \text{B}$.

Government Expenditure and Social Resource Allocation

• Objectives of Public Finance:   1. Re-distributing Income: Using taxes or fiscal expenditure to transfer wealth from capable payers to vulnerable groups (e.g., CSSA Scheme, Old Age Allowance, Disability Allowance).   2. Driving Economic Development: Investing in infrastructure (e.g., MTR Tuen Ma Line), regional cooperation (GBA), diversification of industries, and supporting SMEs (SME Export Marketing Fund).   3. Responding to Social Needs: Addressing poverty (Working Family Allowance Scheme), housing needs (Public housing, Cash Allowance Trial Scheme), and population ageing (Health Care Vouchers).

• Policy Areas of Expenditure:   - Social Welfare: Providing a safety net for those who cannot support themselves.   - Education: 15-year free education, subsidies for textbooks and transportation, grants and loans for tertiary education.   - Health: Operating hospitals/clinics and disease prevention measures.   - Infrastructure, Security, Economic, Environment/Food, Community/External Affairs, and Housing.

Economic Performance Indicators and Measurement

• Gross Domestic Product (GDP):   - Verbatim: The total market value of goods and services produced in a country or region within a specific period (usually a year).   - HK GDP growth: From $1.32 \text{ trillion}$ in 1997 to $2.83 \text{ trillion}$ in 2022.

• GDP per Capita:   - Formulas: $\text{GDP per capita} = \frac{\text{GDP}}{\text{Total population}}$

• Unemployment Rate:   - Labour Force: People aged 15 or above willing and able to work, including employed and unemployed.   - Unemployed: People aged 15+ willing and able to work but without a job.   - Formula: $\text{Unemployment rate} = \frac{\text{Unemployed population}}{\text{Labour force}} \times 100\%$

• Inflation Rate:   - Measures the change in price levels using the Consumer Price Index (CPI).   - Formula: $\text{Inflation rate} = \frac{P_1 - P_0}{P_0} \times 100\%$, where $P_1$ is current year CPI and $P_0$ is prior year CPI.   - Inflation: Persistent increase in general price levels.   - Deflation: Persistent decrease in general price levels.

Industrial Structures and Economic Restructuring

• Classification of Industries:   1. Primary Industry: Extraction of natural resources (farming, fishing, mining).   2. Secondary Industry: Process of converting raw materials into products (manufacturing, construction, water/electricity/gas supply).   3. Tertiary Industry: Provision of services (retail, finance, real estate).

• Economic Maturity: Less developed countries are prominent in primary industries; as economies take off, secondary industry grows; further development leads to tertiary industry expansion. In Hong Kong, the tertiary industry has accounted for nearly or over $90\%$ of GDP for the past 20 years.

• Historical Economic Shifts in Hong Kong:   - Post-WWII: Transition from entrepot to industrial city due to capital, technology, and labour (unskilled and skilled) influx during the Chinese Civil War (1946-1949).   - Korean War (1950): UN embargo on China damaged re-export trade, shifting the economy toward manufacturing.   - Reform and Opening-up (1978): Factories relocated to the Pearl River Delta (PRD) region to lower costs, causing local manufacturing to decline and shifting focus to modern services (finance/logistics).

Economic Globalization: Mechanisms and Impacts

• Meaning of Economic Globalization: Economic activities extend beyond national boundaries, leading to "global economic integration."

• Multinational Corporation (MNC): An enterprise conducting business in more than one country, typically headquartered in developed countries.

• International Division of Labour: A phenomenon where countries specialize in certain products/services for efficiency. Developed countries focus on design/research, while developing countries handle labour-intensive assembly.

• Factors Contributing to Globalization:   - Advancement of IT: Internet and E-commerce eliminate time/space barriers.   - Evolution of Transportation: Speedier modes and networks (e.g., reaching most global cities within 27 hours from HK).   - International Organizations: World Trade Organization (WTO), World Bank, International Monetary Fund (IMF).

• Impacts of Globalization:   - Positive: Optimized use of resources, consumer access to variety and lower prices, process of industrialization in developing countries.   - Negative: Undermining labour rights ("Sweatshops"), widening wealth gap between countries, and excessive interdependence (Chain reaction/domino effect during crises).

Hong Kong as an International Financial Centre

• Characteristics:   - Concentration of global financial institutions (2,597 companies listed on HKEx as of end of 2022).   - Mature financial markets and diverse financial services.   - Free market policy and effective regulations.

• Reasons for Hong Kong's Status:   - Geographical Advantage: Gateway to Mainland China and Asia-Pacific region.   - Time Zone Bridge: Acts as a bridge between New York and London to form a 24-hour global market. (London: HK time $16:00-00:30$; New York: HK time $22:30-05:00$).   - Supportive Policies: Low tax policy, no foreign exchange control (Article 112), and the Linked Exchange Rate System (maintained since 1983 at $HK\$7.75-7.85$ to $US\$1$).   - Strong Rule of Law: Judicial independence and protection of property rights.

• Historical Economic Crises:   - Asian Financial Turmoil (1997-1998).   - Bursting of Dot-com Bubble (2000).   - Outbreak of SARS (2003).   - Global Financial Tsunami (2008).   - European Debt Crisis (2009-2012).   - China-US Trade War (Since 2018).   - COVID-19 Pandemic (2020).

Youth Employment and the Knowledge Economy

• Knowledge Economy: Economic development focused on intangible assets like talents and high technology rather than raw materials.

• Labour Demand Shifts:   - 1st Restructuring: Hardworking, low-skilled labour (manufacturing).   - 2nd Restructuring: Skilled labour with education and experience (service industry).   - 3rd Restructuring: Highly-educated, specialized skills (key industries and priority industries).

• Trends and Challenges:   - Ageing Population: Causes a decline in the overall labour force participation rate.   - Youth Unemployment: Rates for 15-19 and 20-29 year-olds are often higher due to low education levels or lack of experience.   - Gig Economy and Slashers: Young people taking multiple roles for flexibility/autonomy, but facing unstable income and fewer benefits.   - Impact of AI: Advancement of AI may replace certain positions but also creates innovative opportunities.

• Policy Support:   - Greater Bay Area (GBA): Greater Bay Area Youth Employment Scheme and Youth Development Fund assist youth in finding internship and entrepreneurship opportunities in Nine cities: Guangzhou, Shenzhen, Dongguan, Zhuhai, Foshan, Zhongshan, Huizhou, Jiangmen, and Zhaoqing.

Questions & Discussion

• Q Think About It: If a country cannot safeguard its security, what will be the future of the country and its citizens?   - Analysis: National security is the prerequisite for survival; without it, social stability, economic growth, and the personal safety of citizens are compromised.
• Q Interactive Learning Activity: Is it important for all citizens to fulfil obligations? If not, what harm can it bring to HKSAR and the lives of people?   - Analysis: Non-fulfilment leads to instability, vulnerability to external threats, and disruption of livelihood. Article 23 is the most relevant Basic Law provision for SAR responsibility.
• Q Public Finance Discussion: What are the advantages and disadvantages of increasing taxes versus reducing social welfare?   - Analysis: Increasing taxes boosts revenue but might reduce disposable income and discourage investment. Reducing welfare improves government efficiency but hits the quality of life for low-income and vulnerable groups.
• Q Population Ageing: How will population ageing affect long-term fiscal revenue?   - Analysis: Revenue relies on profits and salaries tax; a shrinking workforce reduces salaries tax collected and weakens economic vitality, while healthcare expenditure rises significantly.