Comparing with the last two years, Hong Kong economy has been growing not only at a brisker pace but also in a more broad-based manner, with external trade, local spending and capital investment picking up shoulder-to-shoulder in 2004. For the first nine months of 2004, the value of total imports and exports of goods surged by 18.8% and 16.1% respectively over the same period in 2003, while export of services showed a 16.8% year-on-year growth. On the domestic front, private consumption expenditure went up by 7.3%, reversing the protracted slide seen in year 2002 and 2003. Moreover, overall investment spending rose by 5.5%, 12.7% and 4.9% in the first three quarters respectively, reflecting the firming of business confidence. In tandem with the across-the-border economic recovery, both the property market and stock market have gathered steam, and the labor market conditions are steadily turning to the better with unemployment rate dropping to 6.7% from 7.3% at the beginning of this year.

2005: Continued but Subsided Growth

It is believed that such balanced and broad-based growth pattern will extend into the year 2005. The continued improvement in employment situation, coupled with the wealth effects resulting from vibrant asset markets, would translate into stronger consumer spending. Renewed weakening of US dollar would continue to provide a stimulant for the capital inflow, pump-priming liquidity into our financial sector and keeping the interest rate of Hong Kong dollar at a relatively low level. To a certain extent, this would bode well for the sustainable expansion of domestic investment.

However, there are still uncertainties besetting the global economy, notably the high oil price, geopolitical disturbances and the financial risks that may loom large with the precipitation of greenback. Haunted by lingering "twin deficits," the economic growth in US is set to level off, now that household spending is losing steam, the interest rate is edging up, and the stimulating effects of expansionary fiscal and monetary policies fading out. Much likely, a continuation of weakening US domestic demand and its currency could place a drag on the recent export-driven recovery in Euro Zone and Japan, thereby setting in train a synchronized slowdown among developed economies.

On the other hand, Mainland China is orchestrating a series of tightening measures to achieve a "soft landing" and to address the economic imbalances; its GDP growth is expected to ease from this year's 9% to 7% in 2005. Since China has become one of the most important destinations for the shipments from Southeast Asia economies, the slower growth in China may have some repercussions on the intra-region trade, introducing new uncertainties to Hong Kong's re-export trade.

In a nutshell, although the global economic growth may shift gear, the baseline prospects remain cautiously optimistic for 2005. Benefiting from weaker US dollar and strong inbound tourism, Hong Kong's exports of goods and services will both achieve an above-trend though somewhat abated growth in 2005. It is also expected that domestic demand and investments should play a more important role in keeping our economic afloat on the track of growth. We predict Hong Kong GDP in real terms will rise by 4.5% in 2005 and the unemployment rate will drop further to 5.7%. Driven by buoyant domestic demand and the rising prices of imported goods, the long-awaited inflation will stage a comeback with composite CPI turning up by 2%.

Manufacturing: A New Day Has Come?

With Hong Kong economy back on the growing track and the industrial restructuring deepening, the developmental environment for local manufacturing has been on the improvement. Recently, there are signs that a stronger-than-expected recovery is taking shape in our manufacturing sector. Domestic exports registered positive growth in 10 out of the past 11 months; and the index of industrial production for the manufacturing sector as a whole rose by 1.8% and 1.1% in the first and second quarter of 2004, representing the first year-on-year increase over the past some five years. In the first three quarters, loans extended to the manufacturing industry surged by 17.9%, 22.3% and 20.7% respectively, at a pace far greater than the overall loans for local use. More significantly, investment in industrial machinery and equipment, after several years of setback, has gained momentum this year, registering a pronounced 33% rise in Q1, 12% in Q2, and 33% in Q1.

Indeed, some nascent factors that are conducive to the development of local manufacturing industry seem to be rising on the horizon. In the first place, as China is moving up rapidly on the developmental curve, the cost differences between Hong Kong and its hinterland have been diminishing, especially in the recent two years, when shortages of water, power and labour force have become a common headache plaguing many foreign investors in the coastal regions. This has, to some extent, prompted a re-evaluation of Hong Kong's pros and cons as a location for high value-added manufacturing activities.

Secondly, according to the second phase of liberation measures under the CEPA framework (CEPA II), essentially all Hong Kong-produced products can enjoy zero tariff when exporting to Mainland China. It is worth noting that among the 713 types of products newly-added to the CEPA tariff-free list, 184 have not yet been manufactured in Hong Kong. This is an indicator as good as any that CEPA is providing a boost for Hong Kong industry to upgrade and expand.

Thirdly, there is anecdotic evidence that manufacturing has of late become a bright spot of Hong Kong's inbound foreign direct investment (FDI). In 2002, manufacturing sector received HK10 billion or 13.2% of the total inward FDI, as compared to about 1% in 2000 and 2001. With the implementation of CEPA, it is anticipated that some overseas manufacturers would consider conducting strategic investments in Hong Kong, so as to be qualified for the Hong Kong origin requirements. Also, capitalizing on CEPA as well as our unrivalled edges in geographic location, pro-business environment, and sound institutional frameworks, Hong Kong is in a good position to become an important bridgehead for Mainland manufactures in pursuit of the "go international" strategy.

Nevertheless, the task to revitalize Hong Kong manufacturing should be shouldered by both the business community and the SAR Government. Among other thing, it is imperative for the Government to reaffirm and promote the strategic importance of manufacturing as one of our pillar industries, while providing fiscal and other incentives to attract investments by local industrialists as well as investors from overseas and Mainland China.