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Andrew Leung International Consultants LtdInternational Consultants Ltd

An introduction to Hong Kong’sEconomic and Business Environment

At the School of Oriental and African Studies

20 August 2009

Andrew K P Leung, SBS, FRSA

Hong Kong in the 21st Century

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Government & Rule of LawGovernment & Rule of LawSystem of Government

• CE (5-yr term) – CJ, CS, FS + 12 Bureau Secretaries (with appointed deputies) ExCo (29 appointedMembers inc 15 Principal Officials)

• LegCo – Elected (30 geographical + 30 functional constituencies); current term 2008-2012• Political development – Universal suffrage - NPCSC (29.12.2007)

– CE in 2017 (now elected by Election Committee (800 Members inc 96 NPC HK delegates))- LegCo in 2020

• District Councils (405 elected,102 appointed, 27 ex-officio Rural Committee chairmen (elected)• > 400 Advisory committees and Statutory bodies (> 4,000 appointed members)• External affairs – high degree of autonomy subject to Basic Law

- MFA, HKMAO, Constitutional and Mainland Affairs Bureau- BJO + ETOs in GZ, SH, CD

• Civil Service - 58 Depts with 154,300 staff exc judges and ICAC staff (independent)

Rule of Law

• Basic Law + National Laws listed in Annex III• HKSAR laws (English Common Law)• International treaties (235 as at 2008)• Judiciary – Court of Final Appeal, High Court, C of A, DC, MC• Legal Aid, Intellectual Property Dept• HKIAC – awards enforceable in 135 jurisdictions• Individual rights – 14 international human rights treaties applicable, inc ICCPR, ICSECR, Bill of Rights,

Equal Opportunities, anti-discrimination laws on Sex, Disability, Family Status, and Race, Privacy protection

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Economy, Finance & CommerceExtremely externally-oriented

• GNP 4% > GDP• Inward investment = 391% of GDP; Outward investment = 357% of GDP• Re-exports = 95.9% of Exports• World’s 13rd largest trading economy; 12th largest exporter of services• Largest external investor in Mainland China (40%, 63% of GD Province)• Largest trading partners: Mainland, US, Japan, EU• Approved to issue RMB bonds (June 2007) in addition to RMB deposits (subject to daily limits)• 142 licensed banks,258 foreign financial institutions inc 68/100 world’s largest banks• Stock market > 1240 companies listed, 7th largest in world and 3rd in Asia• 4 Economic Pillars – GDP share

– Trading and logistics (25.8%)– Financial services (19.5%)– Professional and other services (11%)– Tourism (3.4%)

• Manufacturing = 3%

Very low taxation

• Corporate tax 16.5%• Unincorporated profits tax 15%• Salaries tax – maximum aggregate (Standard Rate) 15%• Entirely duty free except on petrol, liquor, alcohol, and tobacco• Estate duty abolished 11.02.2006

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Impact of Global Crisis and ResponsesImpact of Global Crisis and ResponsesImpact 2008 1H 2009• GDP + 2.8% -5.8%• Inflation (CPI) + 4.3% +0.8%• Retail sales + 10.6% - 4.5%• Visitors + 4.9% (29.5m = 4x population) - 3.4%• Unemployment 3.6% 5.4% (3m end June)• Exports + 5.1% -17.2%• Re-exports + 6% - 16.3%• Imports + 5.5% - 18.6%• Total trade + 5.3% - 17.9%• Services exports + 8.8% - 12.6%• Services imports + 7.5% - 13.4%• Total services trade + 8.3% - 12.9%

Policy Address October 2008; Budget 2009-10 Feb 2009• Counter-cyclical HK $40b deficit (2% GDP) (jobs (+62,000 + internship), strengthening fundamentals

(support for creative industries, HK/GD/Taiwan/Macao cooperation, tourism and convention); HK asRMB offshore financial centre + social relief; $100b loan guarantees; tax rebates

Task Force on Economic Challenges• To promote 6 sectors; educational services, medical services, testing and certification, environmental

industry, innovation and technology, cultural and creative industriesCEPA• Extra concessions from Oct 2009 + 29 measures + 20 service sectors (total 42 sectors)

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HK & pan-PRD development strategy

Central government expanding the Greater-PRD concept to cover a huge cluster of ninesouthern provinces with a total population and GDP equivalent to 1/3 of the nation

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Hong Kong and the Pearl River Delta

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Greater Pearl River Delta Blueprint• Three economic rims :

- Greater Guangzhou Economic Rim - Guangzhou and Foshan– Greater Shenzhen Economic Rim - Shenzhen, Dongguan and Huizhou– Greater Zhongshan Economic Rim - Zhongshan, Zhuhai and Jiangmen– Current 21 prefecture-level cities to consolidate into nine cities

• Strategies- Enhanced infrastructural development –expressway to increase from 806 km to

2200 km by 2010. Power generation capacity to 48.64 million kW.- By 2010, 70% Greater PRD to be urbanized, six cities with population > 1 m.- Two principle axes – Guangzhou-Shenzhen-HK + Guangzhou-Zhuhai-Macau.- Hi-tech industries to account for 25 per cent of total industrial output- National demonstration region in IT application – IT application to match

moderately developed countries, IT to account for 20 per cent of GDP of the regionin 2010.

- High-level open-economy cluster – to create a special zone with foreigninvestment in operational and legal environments conforming with internationalpractices.

- To create a regional living environment with sustainable development.

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Greater PRD in national development strategy

• To build the Greater PRD into one of the dynamic regions in theworld within 10 to 20 years

• To consolidate strength of the Yangtze River delta led by Shanghai• To continue development of the Western Region• To improve the competitiveness of North-East (with a higher

proportion of SOEs)• To enhance coordination and cooperation within and between

regions• To expand development to benefit the central provinces

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China MegaChina Mega--trendstrends (1)(1)(a) Explosive urbanization (Mckinsey Global Institute, March 2008), by 2025 + 350m = 1b; 221 cities@ 1m

(EU 35); 15 super-cities@25m; 11 hub-&-spoke conurbations @60m; 50,000 skyscrapers = 10 NYCs;GDP x 4 by 2020; concentrated urbanization mode = savings in 2.5% GDP in public expenditure and in35% emissions

(b) Largest and fastest-built national transport infrastructure in human history – 2001-5 = West 50 yrs, 2nd

only to US interstate highway system in 17yrs, biggest railway expansion since 19th C, 78,000 km (25%world traffic but 6% of total length) to 100,000 km by 2020, 6-lane 36km world’s longest sea-spanningbridge (US$ 1.64b) over Hangzhou Bay linking Shanghai to Ningbo conurbation + Zhejiang, Jiangsu =total population 72.4m

(c) Rise of the ‘Middle Class’ – Urban household income US$1,000 p.m.= PPP US$3,200 p.m.= 9.4% (2005),21.2% (2015), 59.4% (2025) (McKinsey Quarterly 2006 Special Edition); 12% world luxury sales to growto 1/3 by 2015; Private cars 11@1000 v 500@1000 US, 500M cars by 2050 (Goldman Sachs); TheYoung and Restless – ladies in UK, gentlemen in US?, Post-80s Little Emperors, avant-garde Me-Generation, Post-Torch Relay + Sichuan Earthquake impact; young entrepreneurs, 300,000 USDmillionaires + 50,000 p.a.

(d) Green Revolution - 11th FYP, @ CO2 emission 87% of world average but largest polluter, 2.6 m sq kmdesertification affecting 400m people; 1978 Green Great Wall 4,480 km afforestation (recent snowstormdamaged 10%); world’s largest ecological project ^ coverage to 18.21% absorbing total 5b tons of CO2,now 500m tons p.a.= 8% green-house gas emissions, to increase to 20% by 2010, to reduce 1b tons CO2p.a. by 2010; energy efficiency - small coal power plants closed (< 10m kW completed 2007, target 50mkW); hydro, nuclear, coal-seam gas, biomass, wind, solar, terrestrial heat and wave energies; DongtanEco-City; Electric Vehicles manufactured in Tianjin (NY Mayor Bloomberg visited) –Miles XS500capable of 120 miles at 80 mph to launch in 2009 (Zoom: The Global Race to Fuel the Car of the Future);praised for proactive role in post-Kyoto Bali Roadmap; e-airtickets only and ban on plastic bags 1.6.08

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China MegaChina Mega--trends (2)trends (2)(e)(1) Drive for Science and Technology: 4 m graduates pa, 40% of overseas post-doctorates in US,32M

scientists/technologists, 5th largest no. of published scientific papers (Science Watch 1996-2006),leading strengths inbiotech, genomics, stem cell, gene therapy research, world’s largest agricultural science program, Shenzhou VI (2005),Chang’e (2007), Shenzhou VII (space-walk 2008), 11th FYP 60% GDP, 2.5% on R&D by 2010, Aircraft industry –regional jets roll-out

(e)(2) Building a Nation of Innovation: biggest market for IC, 3 x India’s 24 PCs @1,000, 750 international R& D centres (India100) , world proportion in China (35%) = France v UK (47%) US (59%), home-grown IGRS (Intelligent Grouping andResource Sharing) Standards approved June, 2005 & 3rd G 3G network TD-SCDMA for 3C (Computers, Communications,Consumer Electronics) and IPTV (Internet Protocol TV); satellite launch on 14.04.07 for China GPS (v US’s GPS, Russia’sGlonass and EU’s planned Galileo); Technologies in energy and water resources, environmental conservation, proprietarytechnologies, life sciences, aeronautics, ocean sciences; 11th FYP - 20 Fortune 500 by 2010 (Lenovo, Haier, Huawei etc)

(f) China going Global – (a) Resources (b) Overseas markets – home overcapacity + higher margins (c) technology (e.g. inJapan, Shanghai Electric Group bought Akiyama (high tech printers), Midea bought Sanyo Electric’s microwave ovendivision, Huawei JV with NEC + Matsushita for 3G mobile phone technology (d) China joins the Capitalist Club

(g) Outsourcing and In-sourcing – from science and technology parks to BPO parks + universities (India), Chinese MNCs tooutsource overseas compliance to host countries?

(h) Central and Western expansion: Balanced development, New Socialist Countryside, Rising mass consumers in Tier 2-3cities (Marketing to Hinterland, Mckinsey Quarterly, 2006 Special Edition)

(i) Inbound and Outbound Tourism (Top Tourism Destination before 2020)

(j) Emerging civil society (public consultation and public hearings mandated by law, local elections of all village andcounty chiefs and urban neighbourhood committees, online community forums, media role in monitoring consumerrights and environment, 36m blogs (60m bloggers), officials read public internet feedback, 250,000 NGOs,80-100M Christians (Jesus in Beijing, David Aikman, 2003); Post 5.12

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Regional hub - 40% world population within 5 hrs

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The Hong Kong Advantage• The world's 12th largest trading economy• The world's 13rd largest exporter of commercial services• The world's freest economy• The world's most services-oriented economy (> 90% of GDP)• The world's 9th largest & 2nd highest per capita holding of foreign exchange reserves• The 2nd largest source of foreign direct investment (FDI) in Asia• The largest foreign investment source of Mainland China• The 2nd largest recipient of FDI in Asia• The largest venture capital centre in Asia• A leading hub for regional headquarters and representative offices• A leading telecommunications hub for the Asia-Pacific region• The world's busiest airport for international cargoes• The world's 3rd busiest container port• The 3rd largest stock market in Asia, the eighth largest in the world• The 3rd largest foreign exchange market in Asia, the sixth in the world• The key offshore capital-raising centre for Chinese enterprises• Mainland China as Hong Kong's second largest source of external investment• The most important international entrepot for Mainland China

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HK: Asia’s World City• A hub for international finance and services & a supply chain and logistic hub for the Mainland market

handling 40% of trade and investing in >60,000 enterprises

• Financial centre for Mainland international businesses, including regional fund management. Selected HKbanks allowed to conduct RMB businesses in deposits, currency exchange, remittance as well as creditcards. > 440 Mainland enterprises listed in HK raising HK$362 b (65% of HK total)

• A hub for regional headquarters for international corporations > 3,890 regional HQs & offices in HKmany > Singapore and Shanghai

• World’s leading busiest container port and air passenger and cargo hub; international flights from 95cities and 45 others on the Mainland; 5 hours flying time to 40% of the world’s population; 170 countriesenjoy visa free access.

• A leading regional communication, media & convention centre > 200 conventions/exhibitions perannum.

• Best-practice professional services for the whole of China- financier, deal maker, risk manager, projectmanager, insurer, legal services centre, upholder of contracts, arbitrator of disputes and protector ofintellectual property rights

• Window to the World and international metropolis for Mainland enterprises to ‘walk out’ to the globalmarket-place

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Long-term challenges• Preserving Hong Kong’s pre-eminence

– March 25, 2009 State Council decision to develop Shanghai as a Global Financial Centre (+New York and London)by 2020; all RMB transactions to be settled in Shanghai

– Oct 2008 State Council approved Qinhai Bay Bonded Port Area in Nanshan near Shenzhen; Jan 2009 NDRC PRDDevelopment Guideline – development of services + high tech industries in Qinhai Bay

• Pool of talent, knowledge, and skills to leverage Mainland China’s developments

– Competitiveness v Mainland, including the China play, R & D, innovation and creativity– HK’s role in PRD’s metamorphosis– Political and civil service talent pool

• Governance - Political evolution to an elected CE amidst growing multi-party politics and rising expectations; ‘OneCountry Two Systems’ to work its magic economically and politically for HK and Mainland

• ‘Harmonious society’- Balancing of interests and HK’s core strengths - ‘Functional Constituencies’, politicalrepresentation of the Middle Class

• Inequalities - Gini Coefficient

• Aging population – affordable and sustainable healthcare system

• Housing – managing value appreciation v affordability

• Pollution – in-bred + PRD manufacturing-related (to improve as PRD is changing?)

• The ‘Final Uncertainty’ – preparedness for eventual run-up to 2047

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Andrew LeunAndrew Leungg International Consultants LtdInternational Consultants Ltd

Thank you

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com