Economic & Trade Information on Hong Kong (tdctrade.com)

^a Mid-2002; ^b 2001; ^c Second quarter of 2002; ^d January-November 2002; ^e 3-month moving average ended November 2002.

Hong Kong's economy is recovering from the setback brought about by the global slowdown. After turning around to a modest growth of 0.8% in the second quarter, the gross domestic product (GDP) picked up further by 3.3% in real terms in the third quarter of 2002 over a year earlier. The recovery was underpinned by robust trade performance, in both merchandise and services exports. However, domestic activity remained generally weak as consumer confidence and business sentiment have been hit by moderated income and weakness in asset prices. Given the strong rebounds in trade performance, the official forecast of GDP growth was lately revised upward from 1.5% to 2% for the whole of 2002.

Consumer spending remained lacklustre amid the fast worsening employment condition and the continued weakness in the asset markets. Retail sales dropped by 4.3% in value in the first eleven months of 2002, further slackening from a decline of 1.2% in 2001. Retail volume also declined by 2.8% in that eleven-month period against an increase of 1.2% in 2001. Reflecting the subdued demand condition locally, falls in overall prices have also widened. The Composite Consumer Price Index (CCPI), which covers 90% of households, dropped by 1.6% in 2001 and 3.2% in the first eleven months of 2002. Labour market conditions were also weak, with the seasonally-adjusted unemployment rate at 7.1% in the three months ended November 2002, despite easing from a historic 7.8% in the period ended July.

Conditions remained depressed in the asset markets, although the local interest rates have eased twelve times since 2001. The best lending rate quoted by the Hongkong Bank, the market leader, is currently set at 5% p.a. Still, residential properties have remained slack, as flat prices continued to fall by 12.5% in 2001 from a year earlier and about 10% in the first half of 2002. Stock prices also showed weakness, with the Hang Seng Index tipping 9,321.29 at the end of December 2002, a decrease of 18% from the previous year.

On the contrary, the external sector has been robust on entering 2002. Inbound tourism showed marked performance, with tourist numbers rising by 19.9% in the first eleven months of 2002, continuing on a 5.1% growth for the whole of 2001. Over 13.7 million visitors came to Hong Kong in 2001, of which about one-third were from the Chinese mainland. Effective from January 2002, the quota system for mainland tourists under the Hong Kong Group Tour Scheme was abolished. Accordingly, the number of mainland tourists travelling Hong Kong soared by 52.1% in the first eleven months of 2002.

2. Budget and Government Initiatives

In his Policy Address delivered in January 2003, Mr. C. H. Tung, Chief Executive of Hong Kong, outlined initiatives setting the direction for Hong Kong's future development and measures to eliminate the fiscal deficit. He emphasised that the main pillars of Hong Kong economy -- financial services, logistics, tourism and producer services should be reinforced and enhanced. Specifically, Hong Kong should elevate from its traditional role as an intermediary to become a major hub connecting China and the international market, and meanwhile, its position as the financial and commercial centre of China should be further strengthened. In forging closer economic co-operation with the Chinese mainland, a Closer Economic Partnership Arrangement has been under discussion with the central government. It was hoped that an arrangement could be reached on the main parts by June 2003. The Chief Executive also suggested ways to further strengthen Hong Kong's economic tie with the Pearl River Delta (PRD), including pushing ahead with infrastructure projects to enhance their linkage. In addition to strengthening the core pillars, the government will also seek to actively promote creative industries in Hong Kong. They include the performing arts, film and television, publishing, art and antique markets, music, architecture, advertising, digital entertainment, computer software development, animation production, fashion and product design.

In November 2002, the government introduced a new set of housing policies and some specific measures to facilitate the efficient operation of the property market and restore public confidence in it. The role of government in the property market is to be reoriented mainly to issues on land supply and provision of rental assistance to low-income families. Noting that there exists supply and demand imbalance in the property market, the government has decided to stop all scheduled land auctions and call of the two remaining land auctions in the financial year ended March 2003. The government has also decided to suspend land application from developers until end 2003. Thereafter, the supply of new land will be triggered only from land application, not land auctions.

In the Budget for 2002/03 delivered in March 2002, Mr. Antony Leung, Financial Secretary of Hong Kong, proposed no major change in Hong Kong's tax structure, leaving unchanged the rates of profits tax and salaries tax. The policy direction of strengthening Hong Kong as an international financial and high-value-added services centre remains in place. In addition, noting the future of Hong Kong lies in the kind and value of services it can deliver, the Financial Secretary reiterated the government's commitments to upgrading manpower quality, by improving education and attracting outside talent. The government will also take initiatives to enhance flows of people, goods, capital, information and services to and from the Chinese mainland.

A fiscal deficit of HK$ 65.6 billion (equivalent to 5.2% of GDP) would likely show up in the government account for 2001/02. For the year of 2002/03, a deficit of HK$ 45.2 billion was forecast in the Budget. (But in January 2003, the Chief Executive mentioned in his Policy Speech that the budget deficit may reach over HK$ 70 billion.) A package of one-off relief measures was announced to help out the community while civil service pay was cut effective from October 2002. Fiscal deficits would likely sustain for some years before restoring to balance by 2006/07. To redress the fiscal imbalances, the growth of government spending will be controlled at 2% in 2002/03 and 1.5% afterwards in order to reduce government spending to 20% of GDP by 2006/07.

According to the UNCTAD World Investment Report, Hong Kong was the second largest source of outward foreign direct investment (FDI) in Asia and the fourteenth in the world in 2001. Hong Kong also ranked as the second largest recipient of inward FDI in Asia and the tenth in the world. This ranking came in a year when world FDI flows shrank by more than half. FDI inflows to Hong Kong, in parallel, fell to US$ 22.8 billion in 2001 from US$ 61.9 billion a year earlier. FDI outflows from Hong Kong also dropped to US$ 9.0 billion from US$ 59.4 billion in that period. However, it is important to note that the volume of Hong Kong's FDI was unusually high in 2000, largely due to a major transaction among China Mobile (Hong Kong), its British Virgin Islands parent and Chinese acquisitions. FDI inflows in 2001 were still above the average level over the past decade. In terms of cumulative amount on approval basis, Hong Kong is the largest investor in the Chinese mainland, and is among the leading investors in Indonesia, Taiwan, Thailand, Vietnam and the Philippines.

According to a recent government survey, Hong Kong's total stock of inward direct investment was estimated at HK$ 3,269.7 billion at end-2001, corresponding to 256% of GDP in that year. One distinct feature of such direct investment was the indirect channelling of capitals from non-operating companies in tax haven economies. Against this background, British Virgin Islands, Bermuda and Cayman Islands accounted for 28.9%, 9.7% and 3.7% of the total stock of inward direct investment in 2001. Excluding tax haven economies, the Chinese mainland was the most important source of direct investment in Hong Kong (accounting for 29.3% of the total), followed by the Netherlands (6.1%), US (5.9%) and Japan (3.6%). The majority of the stock of investment was related to service industries such as real estate and business services, trading, banking, finance and communications.

Following a rebound of 16.6% in the preceding year, total exports of Hong Kong declined by 5.8% in 2001, comprising a drop of 15.2% in domestic exports and 4.6% in re-exports. The export falls were attributable to the contracting demand of overseas markets that was dampened further by the terrorist attacks on the US in September. The adverse impact of the terrorist attacks floated up immediately in the fourth quarter, with total exports falling year-on-year by 12.0% in the last three months. The export weakness continued until the first quarter of 2002. Export performance returned to growth from the second quarter and onward, leading to a 4.4% growth in the first eleven months as a whole. However, the ongoing structural shift from re-exports towards offshore trade appears to have speeded up and will continue to be a drag on Hong Kong's export performance in coming years.

Hong Kong's major export markets are the Chinese mainland, the US, the EU and Japan. They respectively made up 37%, 22%, 14% and 6% of Hong Kong's total exports in 2001. In the first eleven months of 2002, total exports to the Chinese mainland grew by 10.9%, while those to the US levelled off. Total exports to the EU and Japan dropped by 4.3% and 5.3% respectively. Hong Kong's trade performance is noticeably fuelled by outward processing activities in Guangdong where the majority of Hong Kong companies have extended their manufacturing base. In the first nine months of 2002, 46% of Hong Kong's total exports to the Chinese mainland were related to outward processing activities; the figure was 69% for domestic exports and 44% for re-exports.

For 2001 as a whole, imports of Hong Kong dropped by 5% after a 19% increase a year earlier, resulting in a trade deficit of US$ 11.8 billion, compared to a deficit of US$ 10.9 billion in the previous period. Hong Kong's sluggish macro-economic environment continued to drag down its retained imports, which account for around one-third of Hong Kong imports. But with a strong pick-up in re-exports, overall imports grew year-on-year by 2.2% in the first eleven months.

2. Trade Issues and Regulations

US: The US has adopted various security initiatives since the terrorist attack of September 11, 2001, including the introduction of the Container Security Initiative (CSI) in January 2002 that purports to push the US cargo screening process to major sea ports in the world. The US now implements the CSI with Belgium, Canada, France, Germany, Hong Kong, Japan, the Netherlands and Singapore.

Apart from CSI, the US has introduced since April 2002 the Customs-Trade Partnership Against Terrorism (C-TPAT) program to ensure supply chain security through working with US importers and their suppliers. To date, more than 300 companies have participated in the C-TPAT program. It is expected that C-TPAT will eventually be expanded to port authorities, terminal operators, warehouse operators and overseas suppliers and manufacturers. In August 2002, US Customs also introduced the Sea Cargo Targeting Initiative (SCTI) to better identify high-risk ocean-going shipments.

As agreed in the Agreement on Textiles and Clothing (ATC), the majority of textile and clothing products of Hong Kong origin are subject to import quotas by the US. In compliance with the Phase 3 of the ATC liberalisation process, effective from January 1, 2002, the US removed 37 categories of Hong Kong textile and clothing products fully/partially from quota restrictions. Export visas are not required for customs clearance of the liberalised products.

In August 2002, the US Customs Service released an updated list of foreign entities convicted under US law of violating transhipping and country-of-origin rules relating to textile and clothing products. With one new addition and seven removals, there are 163 Hong Kong manufacturers on the latest list. US Customs will detain shipments from these manufacturers until production records are presented to confirm production.

The US has imposed anti-dumping duties on a range of exports of China origin, including cotton shop towels, porcelain-on-steel cooking ware, forged hand tools and pipe fittings. Textile and clothing products of China origin are also generally subject to import quotas by the US. Starting from December 1998, special treatment and documentation are required for solid wood packing materials imported from China and Hong Kong.

The "Special 301" report on protection of intellectual property rights (IPR) was released by the Office of the US Trade Representative on 30 April 2002. It recognises the ongoing efforts and progress of Hong Kong in resolving issues related to IPR protection over the past year. The US Department of State acknowledged in its annual status report on US-Hong Kong relations that Hong Kong has made substantial progress in the fight against pirated movie, audio and software compact discs and pirated trademark goods over the past two years.

EU: Hong Kong has graduated from the EU's Generalised System of Preferences (GSP) scheme for import tariffs since 1 May 1998, although the impact on Hong Kong is not substantial, as Hong Kong has already lost GSP benefits on most of its products since 1996. GSP benefits were also removed on selected China origin products, including certain chemicals, articles of leather and furskins, clothing, footwear, glass and ceramic products, base metals, furniture, and toys, games and sporting goods, effective from 1 January 1998.

As in the US case, the majority of textile and clothing products of Hong Kong origin are subject to import quotas maintained by the EU according to the ATC. Under EU's Stage 3 liberalisation programme that took effect from January 1, 2002, nine categories of Hong Kong textile and clothing products were removed from quota restrictions when importing into the EU, including certain gloves, singlets, anoraks, nightshirts/nightdresses, women's/girls' skirts, babies' garments and track suits.

The EU currently imposes Union-wide quotas on three categories of non-textile products originated from the Chinese mainland, including certain footwear, porcelain and ceramic tableware/kitchenware, although such quotas are expected to be completely liberalised by 2005. On the other hand, some other non-textile products have come under surveillance, and may be imported upon production of authorisation documents. These include toys, glassware, certain chemicals, gloves, certain footwear, ceramic articles of porcelain and bicycles.

Anti-dumping duties are imposed by the EU on a number of China origin products. Among the affected products of interest to Hong Kong include non-sports footwear with uppers of leather or plastics (the difference between a minimum price of EUR 5.7 and CIF price per pair), certain electronic weighing scales (30.7%), and electronic compact fluorescent lamps (66.1%). On the other hand, the anti-dumping duty on footwear with textile uppers (49.2%) originating from the Chinese mainland has expired since 1 November 2002. As for Hong Kong-origin products, only 3.5-inch floppy disks are currently subject to EU's anti-dumping duties.

To combat the spread of Asian longhorn beetle, the EU introduced in July 1999 emergency controls on wooden packaging material originating in the Chinese mainland. Wood covered by the measures must be stripped of its bark and free of insect bore holes greater than 3mm across, or have been kiln-dried to below 20% moisture content.

Effective from 7 December 1999, the EU took on an emergency ban on the use of phthalates in certain soft PVC toys and childcare articles. The EU has also adopted a Directive on the control of the use of nickel in objects intended to be in contact with the skin, such as watches and jewellery. In addition, the EU has proposed to impose a regulation prohibiting the trading of clothing, footwear and bedclothes which contain azo-dyes. In another development, emergency controls on wooden packaging material originating from China were introduced in July 1999.

Hong Kong is the most important entrepot for the Chinese mainland. About 33% of the mainland's foreign trade is handled via Hong Kong, comprising products sourced on and destined for the mainland. As reflected in Hong Kong's merchandise trade statistics system, 61% of re-exports were of Chinese origin and 37% were destined for the Chinese mainland. According to China's Customs statistics, Hong Kong ranked the third largest trading partner of the Chinese mainland, accounting for 11% of its total trade in 2001.

Hong Kong is the largest source of overseas direct investment in the Chinese mainland. By the end of 2001, among the 389,549 overseas-funded projects registered in the Chinese mainland, 200,031 (accounted for 51.3%) were tied to Hong Kong interests. The stock of contracted and utilized capital inflow from Hong Kong amounted to US$ 348.6 billion and US$ 187 billion respectively, or 46.8% and 47.5% of the national total.

The Chinese mainland is one of the leading investors in Hong Kong. Based on the Hong Kong's Census & Statistics Department, the mainland's cumulative direct investment in Hong Kong was HK$ 1,112.2 billion at end-2000, accounting for 31.3% of the stock of Hong Kong's inward direct investment at end-2000. According to the Chinese official estimate, there are over 1,800 mainland-backed enterprises registered in Hong Kong, with total asset exceeding HK$ 1,600 billion.

There are currently 26 Chinese banks and seven representative offices operating in Hong Kong. The Bank of China is now the second largest banking group in Hong Kong after HSBC. In addition, China's other three specialised banks -- the Industrial and Commercial Bank of China, the Agricultural Bank of China and the People's Bank of Construction of China -- also opened their branch operations in Hong Kong. Some other mainland commercial banks such as the Shenzhen Development Bank, China Everbright Bank and China Merchants Bank also have representative offices in Hong Kong.

Hong Kong is also a key offshore capital-raising centre for Chinese enterprises. Over 100 mainland-backed and state-owned enterprises are listed on the Stock Exchange of Hong Kong and the Growth Enterprise Market (GEM), raising a total equity capital of HK$ 715.2 billion directly or indirectly through Hong Kong by end-August 2002.

Hong Kong is a popular venue for hosting regional headquarters or representative offices for multinational companies to manage their businesses in the Asia Pacific, particularly the Chinese mainland. Based on a government survey, a total of 3,119 overseas companies had regional operations in Hong Kong as of June 2002, representing an increase of 25% from three years earlier. Of these regional operations, 948 were identified as regional headquarters and 2,171 were regional offices. Among the responded companies, the EU as a whole has the largest total number of regional headquarters and offices in Hong Kong with 838 companies, followed by the US (670), Japan (630) and the Chinese mainland (266). Within three years to June 2002, their number grew by 16%, 39%, 31% and 38% respectively.

Hong Kong is an important banking and financial centre in the Asia Pacific. There are 227 banks and 97 representative offices operating in Hong Kong. At the end of 2001, total loans to finance international trade amounted to US$ 11 billion, and other loans for use outside Hong Kong totalled US$ 38 billion. According to the Bank for International Settlements, Hong Kong is the 7th largest centre for foreign exchange trading in the world, with the net daily turnover of foreign exchange and derivatives transactions reaching US$ 71 billion.

Hong Kong's stock market ranks the 9th largest in the world in terms of market capitalisation. There are 959 companies listed on the stock exchange, including 156 companies on the growth enterprise market (GEM), with a total market capitalisation of US$ 460 billion. Hong Kong is also the second largest venture capital centre in Asia, managing 31% of the total capital pool in the region.

Hong Kong is a leading telecommunications hub for the Asia-Pacific region. There are 3.9 million telephone lines (including 564,080 fax lines) in Hong Kong. For every 100 people, there are 72 telephone sets. IDD telephone services are available to over 230 overseas countries/areas and 2,200 Chinese mainland cities, with the total international telephone traffic growing by an average 15% per annum to 4.9 billion minutes between 1989 and 2000. Mobile phone subscription also grows to about 6 million in number.

Dial-up internet traffic increased tremendously from 292 million call minutes in January 1998 to peak 1,441 million call minutes in August 2000, but afterward falling to 680 million in December 2001 due to the proliferation of broadband services, with which internet traffic volume grew in a multiple of 6.6 in 2001. According to a government survey, 37.2% of business establishment had Internet connection as of June 2001. The percentage was much higher for large establishments (86%) and medium establishments (64%).

Hong Kong's popularity for hosting international conferences and trade fairs also contributes to the rising share of business visitors. Over 300 international conventions and exhibitions are held in Hong Kong each year. The World Bank and International Monetary Fund (IMF) annual meetings were held here in September 1997. Hong Kong also hosted the 2001 Fortune Global Forum in May 2001, a prestigious international event which brought together business leaders, policy makers and scholars from around the world. Held every five years, the 16^th World Congress of Accountants was also hosted in Hong Kong in November 2002. The choices indicate Hong Kong as a favourite place in the world to do business.

The new airport at Chek Lap Kok was opened on 6 July 1998 as scheduled. The airport could handle 35 million passengers and 3 million tonnes of air cargo a year when it was first opened, and these can be expanded in stages to reach 87 million passengers and 9 million tonnes of cargo a year by 2040. With the second runway, which began to operate on 26 May 1999, the flight capacity has increased from 37 to 45 movements per hour.

Besides the new airport core projects, the government spent over HK$ 4.5 billion on other infrastructural improvements, including the construction of the Yuen Long Southern Bypass, the Ting Kau bridge, and the massive West Kowloon reclamation project. The government has also proceeded with the expansion of the rail network. A new Mass Transit Railway (MTR) line linking Tseung Kwan O to Hong Kong Island was introduced in August 2002. It is expected that another five railway projects will be completed by 2007, and another six by 2016, with a total investment of $200 billion. These include the Kowloon-Canton Railway (KCR) East Rail extensions to Ma On Shan, Tsim Sha Tsui and Lok Ma Chau.

The first KCR inter-modal train started operation in 1994, and now there are trains connecting to Zhengzhou, Wuhan, Xian, Luoyang and Shijiazhuang every week, transporting freight from the Chinese mainland's inland provinces to Hong Kong's container ports. The Lok Ma Chau border-crossing started 24-hour operation in 1994 after an agreement was reached between the Hong Kong government and the Chinese authorities. This arrangement forms a crucial link between just-in-time production in southern China and shipping in Hong Kong.

On the development of port facilities, the first-purpose built River Trade Terminal (RTT) in Tuen Mun was completed at the end of 1999. The terminal is designed as a consolidation point for the rising volume of river boat transhipment from the Pearl River Delta ports. The next major development is the construction of Container Terminal 9 (CT9) which is expected to be completed by 2004. Occupying an area of 70 hectares, it has six berths located on Tsing Yi Island opposite Kwai Chung, with a design capacity to handle at least 2.6 million TEUs a year.

* While not being captured by ordinary trade statistics, offshore trade makes up a significant share of the export business managed by Hong Kong companies. A recent survey by the TDC suggests that offshore trade managed by Hong Kong in 2000 could be as high as HK$ 1.4 trillion, or roughly on a par with re-exports. In this economic profile, Hong Kong's trade performance is analysed in a narrow context that does not take into account of offshore trade, as no latest data are available.

	Highlights
	Major Economic Indicators
	Merchandise Trade Performance
	Service Trade Performance
	Current Economic Situation
	Latest Trade Performance and Issues
	Economic Relations with the Chinese Mainland
	Hong Kong as a Regional Centre
	Infrastructure Developments

.	1999	2000	2001	Latest
Population (million)	6.61	6.67	6.72	6.77^a
Gross Domestic Products (US$ billion)	159.8	165.2	164.0	164.0^b
Real GDP Growth (%)	+3.4	+10.2	+0.6	+0.5^c
GDP Per Capita (US$)	24,200	24,800	24,400	24,400^b
Inflation (% Change in Composite CPI)	-4.0	-3.8	-1.6	-3.2^d
Unemployment Rate (%)	6.2	4.9	5.1	7.1^e

.	2000		2001		January-November 2002
.	US$ billion	Growth %	US$ billion	Growth %	US$ billion	Growth %
Total Exports	201.6	+16.6	189.9	-5.8	182.7	+4.4
. Domestic Exports	23.2	+6.1	19.7	-15.2	15.4	-14.7
. Re-exports	178.4	+18.1	170.2	-4.6	167.4	+6.6
Imports	212.6	+19.0	201.1	-5.4	189.4	+2.2
Total Trade	414.2	+17.8	390.9	-5.6	372.1	+3.2
Trade Balance	-10.9	.	-11.2	.	-6.6	.

.	2000		2001		January-June 2002
.	US$ billion	Growth %	US$ billion	Growth %	US$ billion	Growth %
Exports	40.7	+13.8	41.4	+1.7	32.4	+6.2
Imports	24.6	+4.1	24.3	-1.0	18.2	-1.6
Total Trade	65.3	+9.9	65.7	+0.7	50.6	+3.3
Trade Balance	16.2	.	17.1	.	14.2	.

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