HONG KONG 2004
The Economy
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Introduction
Structure and Development of the Economy
The Economy in 2004
Economic Policy
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Structure and Development of the Economy
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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)
Gross Domestic Product (year-on-year rate of change in real terms)
 
Over the past two decades, the Hong Kong economy grew by an average of 4.8 per cent in real terms, outpacing the corresponding growth rates of 3.5 per cent for the world economy and 2.9 per cent for OECD economies as a whole. In 2004, the economy entered a full-fledged upturn and posted 8.1 per cent growth.

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
 
Gross Domestic Product by broad economic sector
 
Over the past two decades, the economic structure has shifted towards increasing service orientation, concurrent with a diminishing share of the secondary sector in GDP.

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
 
Employment by broad economic sector
 
Over the past two decades, the share of the services sector in total employment has greatly increased.

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
 
Gross Domestic Product by major service sector
 
Community, social and personal services showed a more distinct increase in net output than other major service sectors over the past two decades. Yet ranked in terms of value added contribution to GDP, the wholesale, retail and import/export trades, restaurants and hotels, together with finance, insurance, real estate and businesses services, remained the two largest service sectors in 2003.

 

Chart 5
Employment by major service sector
 
Employment by major service sector
 
Employment in the wholesale, retail and import/export trades, restaurants and hotels took up the largest share in total employment in 2004.

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
 
Visible trade between Hong Kong and the Mainland
 
Since the Mainland adopted its economic reform and open door policy in 1978, there has been a rapid expansion in merchandise trade, especially re-export trade, between Hong Kong and the Mainland.

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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