With its strategic location at the doorway to
the Mainland and in a time zone that bridges the gap between Asia
and Europe, the Hong Kong Special Administrative Region (HKSAR)
serves as a global centre for trade, finance, business and communications.
Hong Kong is now the 11th largest trading entity in the world. It
operates the busiest container port in the world in terms of throughput,
as well as one of the busiest airports in terms of number of passengers
and volume of international cargo handled. In addition, it is the
world's 14th largest banking centre in terms of external banking
transactions, and the sixth largest foreign exchange market in terms
of turnover. Its stock market is Asia's second largest in terms
of market capitalisation.
Hong Kong is characterised by a high degree of
internationalisation, business-friendly environment, rule of law,
free trade and free flow of information, open and fair competition,
well-established and comprehensive financial network, superb network
of transport and communications infrastructure, sophisticated support
services, and a well-educated workforce complemented by a pool of
efficient and enterprising entrepreneurs. Added to these are substantial
foreign exchange reserves, a fully convertible and stable currency,
prudent fiscal reserves and a simple tax system with a low tax rate.
On these virtues, Hong Kong is widely regarded as among the freest
and most competitive economies in the world. The US Heritage Foundation
ranks Hong Kong as the world's freest economy for the 11th year
in a row in 2005. The Cato Institute of the United States, in conjunction
with the Fraser Institute of Canada and other research bodies around
the world, also consistently ranks, Hong Kong as the freest economy
in the world.
Over the past two decades, the Hong Kong economy
has more than doubled in size, with GDP growing at an average annual
rate of 4.8 per cent in real terms. This outpaces considerably the
growth of 3.5 per cent for the world economy and 2.9 per cent for
the Organisation for Economic Co-operation and Development (OECD)
economies. Over the same period, Hong Kong's per capita GDP has
doubled, producing an average annual growth rate of 3.6 per cent
in real terms. Its level at US$23,700 in 2004 was among the highest
in Asia (Chart 1).
Chart 1 |
Gross Domestic Product |
(year-on-year rate of change
in real terms) |
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In line with increased external orientation of
the Hong Kong economy, trade in goods expanded by almost eight times
and trade in services by almost three times in real terms over the
past two decades. In 2004, the total value of visible trade (comprising
re-exports, domestic exports and imports of goods) reached $4,127
billion, corresponding to 325 per cent of GDP. This was distinctly
larger than the ratios of 171 per cent in 1984 and 233 per cent
in 1994. If the value of exports and imports of services is also
taken into account, the ratio is even greater, at 376 per cent in
2004, compared with 207 per cent in 1984 and 270 per cent in 1994.
As another indication of the high degree of external
orientation, the stock of inward direct investment in Hong Kong
amounted to $2,960 billion in market value at end-2003, equivalent
to 245 per cent of GDP. Hong Kong is the second most favoured destination
for inward direct investment in Asia, next only to the Mainland.
The corresponding figures for the stock of outward direct investment
in Hong Kong were likewise substantial, at $2,637 billion and 218
per cent, much larger than those for many other economies in Asia.
As a major financial centre in the region with huge cross-territory
fund flows, Hong Kong's external financial assets and liabilities
were also substantial, at $10,746 billion and $7,401 billion respectively
at end-2003. The corresponding ratios to GDP in that year were 846
per cent and 583 per cent. Reflecting Hong Kong's sound international
investment position, net external financial assets amounted to $3,345
billion at end-2004, equivalent to 264 per cent of GDP. Gross external
debt, which is the sum of the non-equity liability components in
international investment, stood at $3,366 billion at end-2004, equivalent
to 265 per cent of GDP. The major proportion of it arose from normal
operations of the banking sector.
The Gross National Product (GNP), comprising GDP
and net external factor income flows, stood at $1,300 billion in
2004. This was higher than the corresponding GDP by 2.4 per cent,
owing to sustained net inflow of external factor income. In gross
terms, inflows and outflows of external factor income remained substantial
in 2004, at $395 billion and $365 billion respectively, equivalent
to 31 per cent and 29 per cent of GDP. This was related to the huge
volume of both inward and outward investment in Hong Kong.
Contributions of the Various Economic Sectors
Primary production (including agriculture, fisheries,
mining and quarrying) is insignificant in Hong Kong, in terms of
both value-added contribution to GDP and share in total employment.
This reflects the predominantly urbanised nature of the economy.
Secondary production (manufacturing, construction,
and supply of electricity, gas and water), which constituted a significant
contributor to GDP up to the early 1980s, has since diminished in
relative importance. Within this broad sector, the value-added contribution
from manufacturing shrank from 23 per cent in 1983 to 11 per cent
in 1993 and distinctly more to only 4 per cent in 2003, consequential
to ongoing relocation of the more labour-intensive production processes
to the Mainland. For the construction sector, its contribution to
GDP edged lower from 6 per cent in 1983 to 5 per cent in 1993, and
further to 4 per cent in 2003. As to supply of electricity, gas
and water, the corresponding share held relatively stable, at around
2-3 per cent over the past two decades.
The open door policy and economic reform in the
Mainland have not only provided an enormous production hinterland
and market outlet for Hong Kong's manufacturers, but also created
abundant business opportunities for a wide range of service activities.
These activities include specifically freight and passenger transport,
travel and tourism, telecommunications, banking, insurance, real
estate, and professional services such as financial, legal, accounting
and consultancy services. In consequence, the Hong Kong economy
has become increasingly service-oriented since the 1980s.
Reflecting this, the share of the tertiary services
sector (comprising the wholesale, retail and import/export trades,
restaurants and hotels; transport, storage and communications; finance,
insurance, real estate and business services; community, social
and personal services; and ownership of premises) in GDP went up
visibly, from 67 per cent in 1983 to 81 per cent in 1993 and further
to 88 per cent in 2003 (Chart 2).
Chart 2 |
Gross Domestic Product by
broad economic sector |
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Contributions of the various economic sectors
The profound structural change in the economy was
also borne out by a concurrent shift in the sectoral composition
of employment. Over the past two decades, the share of the services
sector in total employment went up distinctly, from 52 per cent
in 1984 to 76 per cent in 1994 and further to 86 per cent in 2004.
(Chart 3). On the other hand, the corresponding share for
the manufacturing sector shrank visibly, from 38 per cent in 1984
to 15 per cent in 1994 and further to only 5 per cent in 2004.
Chart 3 |
Employment by broad economic
sector |
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The Services Sector
The services sector has not only flourished but
also diversified in types of activities, concomitant with the structural
transformation of the economy. Trade-related and tourism-related
services, community, social and personal services, and finance and
business services such as banking, insurance, real estate and a
host of related professional services, have all grown distinctly
over the past two decades. Strong expansion was also observed in
information technology in recent years, especially telecommunications
services and Internet applications, in line with the shift in economic
structure towards more knowledge-based activities.
Exports and imports of services both grew by an
annual average of 7 per cent in real terms over the past two decades.
In 2004, civil aviation, travel and tourism, trade-related services,
and various financial and banking services were the largest components
of trade in services. Within exports of services, offshore trade
and merchandising services remained the most important component
in 2004, accounting for 35 per cent of the total value in that year.
For transportation, the corresponding share was 32 per cent. This
was followed by travel and tourism (with a share of 17 per cent),
and financial and banking services (6 per cent). As to imports of
services, travel and tourism remained the largest component, accounting
for 45 per cent of the total value in 2004. Transportation ranked
next (with a share of 27 per cent), followed by offshore trade and
merchandising services (8 per cent), and financial and banking services
(3 per cent).
Between 1993 and 2003, net output or value added
of the services sector as a whole rose visibly, by an annual average
of 4 per cent in value terms. Among the major constituent sectors,
net output of community, social and personal services had the fastest
growth (at an average annual rate of 7 per cent). This was followed
by transport, storage and communications (4 per cent); the wholesale,
retail and import/export trades, restaurants and hotels (3 per cent);
and finance, insurance, real estate and business services (2 per
cent).
In 2003, the wholesale, retail and import/export
trades, restaurants and hotels continued to be the largest service
sector, accounting for 27 per cent of value added contribution to
GDP. This was followed by finance, insurance, real estate and business
services (23 per cent), community, social and personal services
(22 per cent), and transport, storage and communications (11 per
cent) (Chart 4).
In terms of employment, the wholesale, retail and
import/export trades, restaurants and hotels were the largest sector,
accounting for 32 per cent of the total in 2004. This was followed
by community, social and personal services (with a share of 27 per
cent), financing, insurance, real estate
and business services (15 per cent), and transport, storage and
communications (11 per cent) (Chart 5).
Chart 4 |
Gross Domestic Product by
major service sector |
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Chart 5 |
Employment by major service
sector |
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The Manufacturing Sector
Manufacturing firms in Hong Kong are renowned for
their versatility and flexibility in coping with changing demand
conditions in overseas markets. Moreover, through increased outward
processing arrangements in the Mainland, Hong Kong's productive
capacity has effectively been expanded by multiples, which has helped
uphold the price competitiveness of its products.
Apart from relocating the more labour-intensive
production processes to the Mainland, Hong Kong's manufacturers
have also been striving hard to diversify their products and markets,
in response to the challenges from globalisation of trade and keen
competition from other export producers. Concurrently, productive
efficiency and product quality have been continuously upgraded by
incorporating more advanced skills and technology.
Within the local manufacturing sector, printing
and publishing, and textiles and clothing are the two most important
industries. Other major industries include machinery and equipment,
electrical and electronics products, food processing and metal products.
Generally speaking, those manufacturing operations still remaining
in Hong Kong are more knowledge-based with a higher value added
and a greater technology content. Between 1994 and 2004, labour
productivity in the local manufacturing sector, as measured by the
ratio of the industrial production index to the manufacturing employment
index, rose visibly, by an annual average of around 6 per cent.
In 2004, the United States and the Mainland were
the two largest markets for Hong Kong's domestic exports, accounting
for 31 per cent and 30 per cent, respectively,
of the total. In recent years, new markets have been developed for
Hong Kong's exports, including markets in the Middle East, Eastern
Europe, Latin America and Africa.
Increasing Economic Links between the Hong
Kong Special Administrative Region and the Mainland
Since the Mainland adopted its economic reform
and open door policy in 1978, economic links between Hong Kong and
the Mainland have gone from strength to strength. This has brought
substantial economic benefits to both places.
Visible trade between Hong Kong and the Mainland
has expanded rapidly since 1978, at an average annual rate of 22
per cent in value terms. But the pace of growth moderated in the
more recent years, to an average annual rate of 8 per cent during
1994-2004, partly due to increased direct shipment of goods into
and out of the Mainland upon enhancement of port facilities and
simplification of customs procedures there. The Mainland remained
Hong Kong's largest trading partner in 2004, accounting for 44 per
cent of the total trade value in Hong Kong. The bulk (91 per cent)
of Hong Kong's re-export trade was related to the Mainland, making
it the largest market for and the largest source of Hong Kong's
re-exports. Reciprocally, Hong Kong was the Mainland's third largest
trading partner in 2004 (after the United States and Japan), accounting
for 10 per cent of the Mainland's total trade value (Chart 6).
Chart 6 |
Visible trade between Hong
Kong and the Mainland |
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In recent years, there has been an increasing shift
in the mode of Hong Kong-Mainland trade from re-exports to offshore
trade. Between 1990 and 1995, Hong Kong's exports of trade-related
services grew by an average of 5 per cent in real terms, much slower
than the growth in re-exports involving the Mainland, at an annual
average of 22 per cent. The growth pattern was reversed during 1995
to 2004, when exports of trade-related services surged by an average
of 15 per cent in real terms, outpacing the growth in re-exports
involving the Mainland, at an average of 8 per cent.
Over the past two decades, there has also been
a sharp increase in people, service and investment flows between
Hong Kong and the Mainland. Hong Kong is a major service centre
for the Mainland generally and South China in particular, providing
a wide array of financial and other business support services like
banking and finance, insurance, transport, accounting and sales
promotion.
Hong Kong is also a principal gateway to the Mainland
for business and tourism. Between 1994 and 2004, the number of trips
made by Hong Kong residents to the Mainland grew at an average annual
rate of 9 per cent to 60 million trips, and the number of trips
made by foreign visitors to the Mainland through Hong Kong at an
average annual rate of 7 per cent to 3.6 million trips. In 2004,
these two types of trips surged by 14 per cent and 33 per cent respectively,
partly due to a low base of comparison caused by the outbreak of
SARS in 2003.
Moreover, Hong Kong is the major source of external
direct investment in the Mainland. The cumulative value of Hong
Kong's realised direct investment in the Mainland amounted to US$242
billion at end-2004, accounting for 43 per cent of the total inward
direct investment there. Over the years, there has been a noticeable
shift in the composition of Hong Kong's direct investment across
the boundary, from industrial processing to a wider spectrum of
business ventures, such as hotels and tourist-related facilities,
real estate and infrastructure development. Relative to other places
in the Mainland, Hong Kong's economic links with Guangdong are the
most intimate. At end-2003, the cumulative value of Hong Kong's
realised direct investment in Guangdong was US$95 billion, accounting
for 67 per cent of its total inward direct investment. According
to a survey conducted by the Federation of Hong Kong Industries
in December 2003, 11 million Chinese workers were employed either
directly or indirectly in the Mainland by industrial ventures with
Hong Kong interests, of which 10 million were in Guangdong. This
is about 58 times the size of Hong Kong's own manufacturing workforce.
In the opposite direction, there has been likewise
a sizeable flow of investment capital from the Mainland to Hong
Kong over the past years. By end-2003, the Mainland had invested
a total of US$99 billion in Hong Kong, making it the largest source
of external direct investment here. According to the Ministry of
Commerce, over 2 000 Mainland non-financial enterprises currently
operate in Hong Kong, with total investment amounting to US$4.7
billion. In September 2004, the Ministry of Commerce and the Hong
Kong and Macao Affairs Office jointly promulgated measures to facilitate
Mainland investment in Hong Kong and Macao. Approval authority for
Mainland enterprises registered with provincial governments is delegated
to the provincial level. Processing time for applications is shortened
to 15 working days.
In tandem with the surge in cross-boundary business
activities, financial links between Hong Kong and the Mainland have
strengthened substantially over the past years. Hong Kong's authorised
institutions external claims on and liabilities to entities in the
Mainland were generally on the rise over the period. Comparing end-2004
with a year earlier, external liabilities of Hong Kong's authorised
institutions to entities in the Mainland grew by 22 per cent to
$400 billion, and their external claims on entities in the Mainland
even faster by 45 per cent to $259 billion.
The Bank of China (Hong Kong) Limited is the second
largest banking group in Hong Kong, after the HSBC Group. It is
also one of the note-issuing banks in Hong Kong, besides the Hongkong
Bank and the Standard Chartered Bank. The other three state-owned
commercial banks, namely the China Construction Bank, the Agricultural
Bank of China, and the Industrial and Commercial Bank of China,
have all been granted banking licences to operate in Hong Kong since
1995. On the other hand, the HSBC Group, the Bank of East Asia and
the Standard Chartered Bank are among the best-represented foreign
banks in the Mainland.
Hong Kong serves as a major funding centre for
the Mainland. Besides being a direct source of funds, it also provides
a window through which foreign funds can be channelled efficiently
into the Mainland for financing development projects there. While
syndicated loans remain the most important means for Mainland-related
enterprises to raise funds in Hong Kong, issuance of securities
has become increasingly popular in recent years. In 2004, listing
activities by Mainland enterprises continued to be a prominent feature
in Hong Kong's stock market. By end-2004, a total of 304 Mainland
enterprises had been listed on Hong Kong's stock market. Among them,
44 were listed in 2004, raising equity capital of $75.4 billion.
These listings have helped broaden the base of Hong Kong's stock
market and entrench further Hong Kong's position as a major fund
raising centre in the region.
The implementation of CEPA on January 1, 2004 and
its continued improvement and development further expand business
opportunities between Hong Kong and the Mainland by enlarging the
scope for cross-boundary trade, services and investment. Under CEPA,
the Mainland has accorded zero tariff for exports from Hong Kong
in 1 108 Mainland product codes (379 items from January 1, 2004
under the first phase of CEPA; 540 items with current production
from January 1, 2005 and 189 new items upon production under the
second phase of CEPA). On services, Hong Kong companies will be
allowed to have earlier entry and wider market access, as well as
to form wholly owned or majority-owned subsidiaries in 26 service
sectors in the Mainland. CEPA also facilitates trade and investment
between Hong Kong and the Mainland through promoting cooperation
in customs clearance, electronic commerce, transparency in laws
and regulations and other procedures.
With continuing reform and further liberalisation
of the Mainland economy, particularly after China's entry into the
World Trade Organisation, more foreign investment can be expected
to flow into the Mainland. Hong Kong's service hub role for the
Mainland will continue to strengthen. Hong Kong possesses a strong
niche in partnering with as well as in providing various business
support services to foreign enterprises seeking to enter the Mainland
market. In the other direction, as more Mainland enterprises seek
to extend their business outward, Hong Kong can also help them to
gain access to the overseas markets.
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