 |
   |
|
 |
|||
|
4 January, 2001 Quarterly Hong Kong Review (First Quarter, 2001) |
|
|
|
|
|
|
|
|
|
GDP growth expected to average 10% in 2000
Hong Kong's real GDP growth remained robust in the third quarter of 2000 at 10.4% year-on-year, down only marginally from the 10.9% growth recorded in the second quarter. This brings real GDP growth for the first three quarters of the year to an average of 11.7%.
Despite the rapid headline GDP growth, the recovery of Hong Kong's economy has so far been narrowly based. While exports surged 17.7% over a year earlier in the third quarter thanks to a decade-high world economic growth, domestic demand remained sluggish. Construction spending declined further by 3.5% year-on-year in the third quarter after a 12.4% plunge in the first half, as property developers held off their projects amidst a weakening residential market. The 5.6% growth of private consumption in the third quarter also lagged behind the pace of overall economic growth, dragged mainly by modest pay rise and persistently high unemployment. With the recovery of local economy still narrowly based, many companies have remained cautious in increasing head-counts. Unemployment rate, therefore, declined only marginally by 0.2% to 4.8% in the third quarter. The only bright spot of domestic demand was the 28% surge of investment in machinery and equipment, which was partly underpinned by massive public infrastructure projects such as the West Rail and the MTRC Tseung Kwan O Extension.
For the remaining quarter of 2000, Hong Kong's economic growth is likely to have weakened due to a slowdown of exports. Economic growth in the US, which began to lose momentum in the middle of the year, continued to moderate due to higher oil prices, widening corporate credit spread and sharp correction of the NASDAQ share prices. As a result, Hong Kong's real GDP growth is expected to decline to 5.5% in the fourth quarter, bringing the average growth for 2000 to 10%.
Looking ahead, however, the easing of local interest rates following the more aggressive cuts in US rates as evidenced in the 50 basis points reduction of Federal Funds target rate on January 3 should help reverse the slowing trend of consumption and investment and lend support to GDP growth this year.
Retail sales growth continued to weaken
After having declined from 12.3% in the first half of 2000 to 5.8% in the third quarter, Hong Kong's retail sales volume growth continued to lose momentum and eased to only 2.9% year-on-year in October 2000. The narrower growth was attributed to the negative wealth effect brought about by the weaker asset prices.
Dragged by a round of panic selling of technology stocks that washed over the region from the US NASDAQ counter and concerns over rising oil prices, the Hang Seng Index plunged by 19% over the past nine months from the peak of 18,302 points reached on March 28, 2000. Property prices, meantime, remained in the doldrums as government efforts to bolster sentiments in the middle of 2000 provided the market with only a temporary relief. Mass residential property prices, which managed to improve by 1% in September 2000, weakened again since October while property transactions as represented by the value of sales and purchase agreements declined by 14.7% in the fourth quarter of 2000.
Looking ahead, the introduction of the Mandatory Provident Fund (MPF) which requires employees to contribute 5% of their monthly salaries to a pension scheme beginning December 2000, is expected to put a further drag on consumers' purchasing power in the coming months. The impact is, however, expected to be alleviated by the more aggressive interest rat cut in the US. Following the January 3 announcement of the 50 basis points cut in the US Federal Funds target rate, Hong Kong's banks are likely to reduce interest rates shortly. The market is now looking for another cut of US interest rates as early as end-January, which would prompt further reduction in local interest rates. Through increasing the purchasing power of mortgage paying homeowners, the decline of interest rates would lend support to a stronger pick up in retail sales growth this year.
Tourism receipts rebounded by 12.3% in the first half of 2000
Hong Kong's tourism industry continued to benefit from the favorable global economic conditions in 2000. According to the latest statistics released by the Hong Kong Tourist Association (HKTA), the number of visitor arrivals for the first ten months of 2000 reached 10.7 million, up 15.8% from the same period of 1999. The number of visitors from South Korea and Japan in particular posted over 20% increase due to improvement in their economic growth and steadier exchange rates trends, while those from China, Taiwan, Southeast Asia, Europe and the US also managed over 10% growth.
As tourist spending increased with the growth in visitor arrivals, tourism receipts reversed the declines recorded since the Asian financial crisis took toll in 1997, and increased by 12.3% year-on-year in the first half of 2000 to HK$ 29 billion. Except for tours, receipts from all other expenditure categories recorded positive growth rates. Receipts from mainland tourists remained the most important source of income for the tourism industry, accounting for 30.4% of total tourism receipts during the first half of the year. The 23% growth in receipts from China was also the strongest amongst the major market areas, thanks to the extended holidays and pay hikes introduced by the Chinese government since late 1999.
On a per capita basis, however, only tourists from the mainland, Taiwan, Malaysia and Thailand spent more than they did in 1999, while purchasing powers of visitors from Europe and other Asian countries continued to be dragged by weaker currencies. Moreover, the continued decline in visitors' average length of stay also put a cap on visitors' per capita spending. Visitors' length of stay, which used to average 3.6 days in 1997 narrowed to only 3 days in the first half of this year.
By the estimates of the HKTA, visitor arrivals in 2000 are expected to come close to the peak of 13 million recorded in 1996. With continued efforts to enhance competitiveness in terms of pricing and service quality, together with government initiatives to develop new tourist attractions such as the Disney theme park and international wetland park, Hong Kong's tourism industry would see stronger growth potential ahead.
Policy Address responded to pressing community concerns
Against the backdrop of rising public discontent with the government's performance, Chief Executive Tung Chee-hwa delivered his fourth Policy Address to the Legislative Council on October 11, 2000. As anticipated, Tung has responded to the pressing concerns of the grassroots and unveiled a series of measures to help the disadvantaged. For the first time in his policy speech, Tung also addressed the hot topic of political reform and pledged to enhance the accountability of senior government officials. This year's policy address, however, was short on initiatives that would have a direct impact on the economy in the near term.
In face of the widening wealth gap between the rich and the poor as a result of on-going economic restructuring, Tung pledged to spend HK$ 2.7 billion in the next two years to finance various measures to assist the poor and the needy. Programs will be devised to retrain grassroots workers to help them upgrade their skills and enhance their competitiveness in the labor market. Plans will also be drawn up to create 15,000 new jobs to help the jobless find work and earn a living.
Apart from the short-term measures, the government will also tackle the poverty problem at its source through providing more opportunities for education. As part of a bigger program to reform the education system, the government will allocate resources to double the number of places of higher education within the next ten years to 55,000. By then, 60% of the secondary school graduates will receive tertiary education, up from the current 30% and in line with other major cities in Asia.
On the political front, the government will look into ways of enhancing the accountability of the over 20 principal officials who play an important role in the formulation and implementation of government policies pivotal to the effectiveness of the administration. The pledge comes in wake of the public housing scandal this summer, which culminated in the unprecedented resignation of the Housing Authority Chairperson. The establishment of an accountability structure will require a revamp of the current system of appointing principal officials, most of whom are pensionable civil servants, and pave the way for the setting up of a ministerial system under which the government is run by politicians appointed on contract basis.
On the positive side, Tung's pledge to hold principal officials responsible for the outcome of their policies would help avoid the kind of policy slippage that could further dampen people's confidence in the government. This is crucial in maintaining effective governance of the executive-led government enshrined in the Basic Law. Meanwhile, measures taken by the government to assist the disadvantaged would also help bolster social harmony and facilitate concerted efforts to further the progress of the society. On the other hand, the reform of the education system would go a long way towards cultivating the talents needed by Hong Kong to meet the challenges of the new knowledge-based economy.
A system of public accountability may, however, induce more community influence on the formulation of government policies. This could translate into increased government intervention especially in social and economic affairs, as the public generally expects the government to play a major role in resolving issues affecting economic well being.
The pressure for the government to boost social welfare is already mounting following September's election of the Legislative Council, which saw politicians campaigning for improving people's livelihood gaining a larger voice in the legislature. Increased public accountability of the executive branch could exacerbate such demand for greater government involvement, which if not properly managed, could risk undermining the positive non-interventionalist economic policy that has contributed to Hong Kong's past success.
Hong Kong launched Mandatory Provident Fund
To ensure that people have enough retirement cover without having to over-stretch government funds, Hong Kong launched the Mandatory Provident Fund (MPF) scheme on December 1, 2000. Under the MPF, employers and employees must each contribute 5% of the employee's salary to a pension scheme. The maximum mandatory contribution is HK$ 1,000 per month by each side, although this may be topped up with voluntary contribution. Contributions to the MPF will be entrusted to privately managed trustees approved by the Mandatory Provident Fund Schemes Authority (MPFA) for administration and investment. Employers and employees would have the liberty to choose to invest this money in a variety of funds covering equities, bonds, and cash management instruments. Withdrawal from the MPF, meantime, would only be allowed when the employee reaches the retirement age of 65.
The introduction of the MPF will have important implications to the Hong Kong economy. Prior to the launching of the MPF, only about a third of Hong Kong's 3.4 million workers have pension cover under 19,000 voluntary schemes set up by the larger-sized employers. With the introduction of the MPF, the rest of the working population will also be forced to save for retirement. As participation in the MPF scheme entails shifting part of the working population's income into the new fund, the reduction in disposable income across all workers could dampen consumer spending and put a drag on economic growth, at least in near term.
However, in the long run the MPF is expected to benefit the economy as it shifts private spending from consumption to investment in the financial markets. According to government estimates, annual contributions to the MPF are expected to total HK$ 10 billion in the first year, quickly growing to HK$ 30 billion in 2011, and hit HK$ 60 billion by 2030. By then, the outstanding MPF assets will reach HK$ 960 billion, comparable to the current size of the Exchange Fund. As required by law, 30% of the MPF funds must be invested in local currency assets. This implies a HK$ 3 billion inflow into the Hong Kong financial markets in 2001 and HK$ 288 billion by 2030. As many employees are expected to choose to place their MPF contribution in guaranteed or balanced funds, which mainly invest in fixed income products, the scheme will particularly help to promote the development of Hong Kong's bond markets. A more developed debt market will provide an additional venue for the corporate sector to raise funds to finance their productive investment.
Growth Enterprise Index dragged by weak global sentiments
Since its debut on March 20, 2000, the Growth Enterprise Index (GEI) which was designed to track the price movements of a group of 16 companies listed on the Growth Enterprise Market (GEM) has fallen by a massive 69%. The dismal record was largely due to the burst of the technology stocks bubble in April 2000. Given that the GEM was created particularly to help new innovative emerging enterprises raise capital for their development and expansion needs, companies listed on the GEM board are mainly software, internet, and information technology related firms. Amidst a sell off in global technology stocks which first hit the US NASDAQ counter in April, GEM listed companies had inevitably suffered a severe blow.
As at December 29, the GEI has fallen to 306 points from the 1,000 points base value set at the index's launch date. Corresponding to the weak market performance, turnover at the GEM counter also shrunk from a daily average of HK$ 1.5 billion in March to only HK$ 115 million in December.
Despite the poor showing of the GEI, Hong Kong's second board had attained reasonable achievement over the past year. Since the counter started trading in November 1999, 55 emerging enterprises have been listed on the GEM, and another 50 companies have submitted applications for listing. To date, a total of HK$ 16.4 billion in capital has been raised from the GEM for the emerging enterprises. The majority of the GEM-listed companies are based in Hong Kong, although a number of companies from the mainland, Taiwan and other Southeast Asian countries were also attracted to list on Hong Kong's second board. Through providing a convenient venue for raising equity capital, the GEM has played an important role in help realizing the expansion plans of these emerging enterprises.
TopResidential property market weakened anew
After a short-lived recovery in the third quarter of 2000, Hong Kong's housing market has weakened again. Since early October 2000, the confidence of homebuyers has been falling due to tumbling stock prices. Confidence in the housing market further deteriorated after Chief Executive Tung Chee-hwa unveiled in his Policy Address on October 11 that the government has drawn up a program involving the potential production of about 730,000 flats over the period 2000/01 to 2007/08. This translates into an annual housing supply of 91,000 units, surpassing the 85,000 housing supply target that Tung denounced in July in an attempt to bolster the sluggish property market.
As uncertainty clouded the government's housing policy, earlier signs showing a recovering of the property market have quickly faded. Mass residential prices as reflected by the price indices of selected popular developments tracked by the Rating and Valuation Department, which picked up by 2.3% between June and September, slid again by 0.1% in October and are expected to have weakened further in November. Market activity also declined, with the number and value of sales and purchase agreements falling by 27.7% and 14.7% respectively in the fourth quarter. Having already fallen by 24.6% in 1999, the value of sales and purchase agreements declined further by 13.3% in 2000 and reached only HK$ 222.5 billion in 2000.
Financial Secretary Donald Tsang attempted to clarify the government's housing policy in November, saying that the government has not set any housing supply or land sales target, and that supply would always depend on the prevailing market situation. Housing Director Tony Miller further reiterated that government subsidized Home Ownership Scheme (HOS) units would not put competitive pressure on the private housing market and that HOS units for sale will be limited to only 20,000 units per year. These attempts, however, failed to ease market concerns over possible oversupply of housing, as reflected in the lower-than-expected sales price recorded in the last government land auction held on December 6.
The prolonged slump in market confidence has led to a growing backlog
of unsold residential units. As such, property developers will be
under greater pressure to cut prices again. The renewed downturn of
the housing market, if prolonged, will hit consumer confidence and
put a drag on Hong Kong's economic recovery.
HONG KONG MAJOR ECONOMIC
INDICATORS
Jason Kwok
North Asia Chief Economist
Joe Lo
Senior Economist
Ellen Cheuk
Economist
Alice Chan
Senior Information Officer
Tel:(852) 2868-8443
