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Country Profile 2006

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ISSN 1741-024X

Symbols for tables �n/a� means not available; �� means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Hong Kong SHENZHEN

New Territories

Lantau Island

LammaIsland

Cheung Chau

Hei Ling Chau

Peng Chau

Po Toi Is.

Sharp Is.

Kau Sai Chau

Tiu Chung Chau

Basalt Is.

Grass Is.

Ninepin Group

Tung Lung Chau

TapShekKok

Victori a

Harbour

East Lamm

a Channel

Wes

t Lam

ma

Chan

nel

Tolo Harbour

Tolo Channel

Mirs Bay

Deep Bay

Special Economic Zone

Tin ShuiwaiTin ShuiwaiTin Shuiwai

Yuen LongYuen LongYuen Long

Shekou

Sheung ShuiLok Ma Chau

Fanling

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Tsuen WanTsuen WanTsuen Wan

Kwat ChungKwat ChungKwat Chung

Ma OnMa OnMa On Shan

AirportRailway

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Tai LamChung

Reservoir

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StonecuttersIsland

High IslandReservoir

Aberdeen

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Stanley

Plover CoveReservoir

SOUTH CHINA SEA

KowloonKowloonKowloon

0 km 5 10

0 miles 5

Ma On ShanMa On Shanrail extensionrail extension(under(underconstruction)construction)

Ma On Shanrail extension(underconstruction)

West rail

(under(underconstruction)construction)

(underconstruction)

© The Economist Intelligence Unit Limited 2006

Chek Lap KokInternational Airport

0 km 10 20

0 miles 10

Shenzhen

Qianshan

Zhuhai

Macau Hong KongSpecial Administrative

Region

Lantau Island

Tai Pang Wan(Mirs Bay)

Hau Hoi Wan(Deep Bay)

LingdingYang

Zhu JiangKou

SOUTH CHINA SEA

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Po ToiIslands

Taipa IslandMacau InternationalAirport

Coloane Island

Soko Islands

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Dangan DaoWanshan Qundao




Qi'ao NeilingdingDao

Victoria

Kowloon

New Territories

Aberdeen

Tsuen Wan

Kwun Tong

Sai Kung

Stanley

Tuen Mun

Yuen Long

Shekou

Tai Po

Fanling

Nantou

Coloane

Taipa

CHINA

CHINAHong Kong and Macau

Lema Channel

October 2006

Railways

Main roads

Main airport

Built-up area

Major town

Other town

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006

Comparative economic indicators, 2005

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product(% change, year on year)


Consumer prices(% change, year on year)


Gross domestic product per head(US$ '000)


1,911.7

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Macau

Vietnam

Philippines

Indonesia

China

Thailand

Malaysia

Taiwan

South Korea

Hong Kong

Singapore

0 200 400 600 800 1,000

Macau n/a n/a

Vietnam

Philippines

Singapore

Malaysia

Thailand

Hong Kong

Indonesia

Taiwan

South Korea

China

0.0 2.0 4.0 6.0 8.0 10.0 12.0

Singapore

Hong Kong

China

Taiwan

South Korea

Malaysia

Macau

Thailand

Philippines

Vietnam

Indonesia

0.0 2.0 4.0 6.0 8.0 10.0 12.0

South Korea

Taiwan

Thailand

Philippines

Malaysia

Indonesia

Singapore

Macau

Hong Kong

Vietnam

China

2,263.6

Hong Kong 1

© The Economist Intelligence Unit Limited 2006 www.eiu.com Country Profile 2006

Contents

Hong Kong

3 Basic data

4 Politics 4 Political background 6 Recent political developments 8 Constitution, institutions and administration 10 Political forces 12 International relations and defence

14 Resources and infrastructure 14 Population 16 Education 17 Health 18 Natural resources and the environment 18 Transport, communications and the Internet 21 Energy provision

22 The economy 22 Economic structure 24 Economic policy 30 Economic performance

33 Economic sectors 33 Agriculture 33 Mining and semi-processing 34 Manufacturing 35 Construction 35 Financial services 37 Other services

39 The external sector 39 Trade in goods 40 Invisibles and the current account 41 Capital flows and foreign debt 42 Foreign reserves and the exchange rate

44 Regional overview 44 Membership of organisations

45 Appendices 45 Sources of information 45 Reference tables 45 Population 46 Labour force 46 Transport statistics 47 National energy statistics 47 Government finances

2 Hong Kong


48 Money supply 48 Interest rates 48 Gross domestic product 49 Gross domestic product by expenditure 49 Gross domestic product by sector 50 Prices 50 Wage indices 51 Manufacturing production 51 Miscellaneous manufacturing statistics (excl civil service) 51 Construction statistics 52 Banking statistics 52 Stockmarket indicators 53 Retail sales 53 Tourism statistics 53 Domestic exports by main commodity 54 Re-exports by end-use category 54 Imports by end-use category 54 Trade volume indices 54 Domestic exports by main destination 55 Re-exports 55 Imports by supplier 56 Trade in services 56 Trend of foreign trade 57 Balance of payments, IMF series 57 External debt 58 Exchange rates 58 Foreign reserves

Hong Kong 3


Hong Kong

Basic data

1,104 sq km

Hong Kong Island 81 sq km Kowloon 47 sq km New Territories and outlying islands 976 sq km (Reclamation since 1887) 67 sq km

6,994,500 (mid-2006 government estimate)

Population in �000 (mid-2006):

Hong Kong Island 1,264 Kowloon 2,070 New Territories 3,598 Marine less than 4

Subtropical

Hottest months, July and August, 26-31°C; coldest month, January, 15-19°C; driest month, January, 23 mm average rainfall; wettest month, August, 391 mm average rainfall (climatological norms)

English and Chinese (mainly Cantonese)

UK imperial system changing to metric system. Local measures are used including: 10 fan=1 tsun (Chinese inch)=0.037 metres; 10 tsun=1 chek (Chinese foot)=0.371 metres; 10 tsin=1 leung (tael)=37.8 g; 16 leung=1 kan (catty)=0.605 kg; 100 kan=1 tam (picul)=60.48 kg

1 Hong Kong dollar (HK$)=100 cents. Estimated annual average exchange rate in 2006: HK$7.784:US$1. Exchange rate on October 20th 2006: HK$7.784

April-March

GMT plus eight hours

New Year!s Day, January 1st-2nd; Chinese New Year!s Eve, January 28th-31st; Ching Ming Festival, April 5th; Easter, April 14th-17th; International Labour Day, May 1st; Buddha!s Birthday, May 5th; Dragon Boat Festival, May 31st; Hong Kong Special Administrative Region Establishment Day, July 1st; China!s National Day, October 1st-2nd; Mid-Autumn Festival, October 7th; Chung Yeung Festival, October 30th; Christmas, December 25th-26th.

Land area

Population

Main regions

Climate

Weather in Victoria (altitude 33 metres)

Languages

Measures

Time

Fiscal year

Currency

Public holidays in 2006

4 Hong Kong


Politics

On July 1st 1997 Hong Kong, which had been a UK colony since 1841, became a Special Administrative Region (SAR) of the People�s Republic of China (PRC). Hong Kong is now ruled on the basis of a mini-constitution, the Basic Law, which guarantees the SAR its own legislature, legal and judicial system, and full economic autonomy, while giving the central government in Beijing responsibility for defence and foreign affairs. The SAR has an executive-led government, headed by the chief executive, Donald Tsang, who was sworn in as the territory�s head of government in June 2005. The Legislative Council (Legco) election that took place on September 12th 2004 saw one-half of the body elected by universal suffrage for the first time. The next set of elections for the chief executive and Legco, to be held in 2007 and 2008, respectively, will take place under the current rules.

Political background

Before it was seized from China by the British navy in January 1841 at the height of the first opium war (1839-43), Hong Kong Island was home to fewer than 6,000 Chinese. The territory grew rapidly thereafter as an entrepôt for trade between the Chinese empire, which Britain prised open with its gunboats, and the rest of the world. At the end of the second opium war, in 1860, Britain extended its territorial holdings to include Kowloon, situated on the mainland peninsula facing Hong Kong Island, and Stonecutters Island. In 1898 Britain forced China to cede the New Territories"north of Kowloon adjacent to Shenzhen across the border in China"on a 99-year lease to expire in June 1997. With the exception of the second world war, when the territory was occupied by Japan, Hong Kong remained a colony ruled by Britain through an appointed governor, until its return to China on July 1st 1997.

By late 1981 it became clear that the government in Beijing intended to resume sovereignty over all of Hong Kong in 1997. Retaining British sovereignty over the parts of Hong Kong unaffected by the lease was never really an option, as the New Territories accounted for 92% of the colony�s land area. In any case, the Chinese government did not accept the validity of the documents under which the other parts of Hong Kong had been ceded to the British. Following negotiations between the British and Chinese governments, an agreement was signed on December 19th 1984, the main document of which was the Joint Declaration. In this, the UK agreed to surrender Hong Kong to China on July 1st 1997. For its part, China agreed that Hong Kong would, under the guiding principle of �one country, two systems�, become an SAR of China, with its capitalist way of life guaranteed for the following 50 years under the Basic Law.

In July 1992 a former government minister and Conservative Party chairman, Chris Patten, was appointed as Hong Kong�s last British governor. In his first annual policy address, in October 1992, Mr Patten announced that he intended to widen the franchise for elections to Hong Kong�s three tiers of government. The most important of the governor�s proposed reforms affected Legco, an

Colonisation by Britain

The 1984 Sino-British Joint Declaration

1992-95: the Patten plan

Hong Kong 5


election to which was due in 1995. The proposals included broadening the electorate for the functional constituency seats in Legco"originally intended to represent business and other interests"from 110,000 to 2.7m; and filling an election committee that was responsible for electing ten Legco members with directly elected members of district boards. Mr Patten pressed ahead with the reforms without agreement from China. In the subsequent poll held in September 1995 candidates seen as close to Beijing were trounced by the pro-democracy camp.

This result served to reinforce China�s fears that the territory would become a centre for subversion that required tight control. China therefore decided to abolish the �through train� legislature upon the handover of the territory, replacing it with an appointed Provisional Legislative Council established in 1996. In the same year a 400-member election committee, chosen by a Beijing-appointed preparatory committee, appointed Tung Chee-hwa, a former shipping executive whose ailing family company had been rescued by China in 1985, as the first chief executive of the Hong Kong SAR. China made some attempt to preserve continuity by allowing several top officials, including the chief secretary, Anson Chan, and the financial secretary, Donald Tsang, to continue in their roles after July 1st 1997.

The reduction in the number of Legco seats elected by universal franchise that was imposed following the 1997 handover reduced the prominence of pro-democracy forces. In the May 1998 Legco election, the pro-democracy parties won two-thirds of the popular vote but just one-third of the seats. In the September 2000 Legco election, the percentage of the direct vote won by the Democratic Party (DP) fell to 34.7% from the 43.7% won in the 1998 election, allowing the party to win 12 of the 24 directly elected seats, with a further three members elected to represent functional constituencies. The pro-government Democratic Association for the Betterment of Hong Kong (DAB) took 29.7% of the popular vote, gaining seven directly elected members, four members elected by functionary constituencies and one selected by committee. The pro-business Liberal Party took only 1.9% of the vote, but won eight seats owing to support among the functional constituencies.

The waning of the fortunes of the pro-democracy camp in the first few years following Hong Kong�s reversion to China reflected not only structural changes to the electoral process, but also the democrats� perceived inability to move on from the constitutional issues that had been so important in the boom years before 1997 to deal with the concrete problems of economic hardship that arose as Hong Kong fell into its worst recession in living memory in 1998. The pro-democracy parties survived, however, owing to the unpopularity of the government and a series of crises that buffeted the SAR government.

Although the Hong Kong way of life is supposedly protected by the Basic Law, in 1999 the standing committee of China�s National People�s Congress (NPC, the Chinese legislature) intervened to interpret the Basic Law on a matter of immigration law, in the first of a series of interventions that have raised questions about China�s commitment to Hong Kong�s autonomy.

China dismantles the �through train�

The Democrats decline in prominence after 1997

China intervenes in Hong Kong

6 Hong Kong


Recent political developments

Mr Tung was reselected as the SAR�s chief executive (by an 800-strong election committee) for a second five-year term in 2002. However, his second term got off to a bad start in early 2003, when the administration, perhaps unfairly, was blamed for the local outbreak of Severe Acute Respiratory Syndrome (SARS), which led to the deaths of 299 people in Hong Kong.

The political situation deteriorated further for Mr Tung, following his government�s insistence on introducing legislation outlawing �treason, secession, sedition and subversion� towards the Chinese state. The proposed legislation provoked popular outrage, leading to a political crisis in July 2003. More than half a million Hong Kong residents took to the streets on July 1st"a public holiday to commemorate the founding of the SAR"to protest against the proposed new laws. The government was eventually forced to withdraw the legislation. In the process, Mr Tung lost two ministers: the financial secretary, Antony Leung, and the secretary for security, Regina Ip, who had been charged with piloting the security laws on to the statute books.

The focus of the political crisis then moved on from the issue of security laws to the wider question of political reform. The unrest was sparked by China!s decision in April 2004 that universal suffrage would not be allowed for the next chief executive election (due in 2007) and the next Legco election. Despite the fact that Hong Kong!s post-colonial constitution, promulgated by China, speaks of universal suffrage as an ultimate goal.

As a result, the 2004 Legco election went ahead under the old system. There were claims of political intimidation in the run-up to the September 12th 2004 election. The fact that only 30 of the 60 seats in Legco would be elected from geographical constituencies (the balance being �functional constituencies� representing business and other interests) meant that the pro-democracy camp was never likely to win a majority in the body. Pro-democracy parties and individuals in the so-called pan-democratic alliance won 60% of the popular vote, but under the Hong Kong electoral system this translated into only 25 of Legco�s 60 seats (18 of the directly elected seats and seven of the functional constituencies). The DP itself won only nine seats in Legco, compared with the 12 won by the DAB. The Liberal Party held its eight functional constituency seats and gained two geographical seats to emerge with ten seats in Legco.

This result was a disappointment to the democratic camp, and led to the resignation of the DP�s leader, Yeung Sum, in November 2004. (Lee Wing Tat was elected as the party leader in December.) However, the result still left the government with a problem, as the support of at least 40 legislators would be needed to pass constitutional reforms that were finally unveiled in October 2005. Although the Chinese government had seemed prepared to soldier on with Mr Tung until his five-year of office expired in 2007, China�s president, Hu Jintao, in December publicly voiced his dissatisfaction with Mr Tung�s administration.

Amid continued rumours over his future, it was announced that Mr Tung had offered his resignation to Mr Hu, which was accepted by the central

China �reinterprets� Hong Kong�s Basic Law

Substantive political reform is ruled out

Democrats make only limited gains in the 2004 Legco poll

Mr Tung resigns in mid-term and is replaced by Mr Tsang

Hong Kong 7


government on March 12th. It was clear from the outset that the chief secretary for administration, Mr Tsang, was the Chinese government�s candidate in the ensuing selection process. Mr Tsang initially served as acting chief executive before resigning on May 25th to stand officially for the position of chief executive. (The financial secretary, Henry Tang, briefly served as acting chief executive during the interregnum.) In the event, Beijing�s backing was enough to ensure that no alternative candidacies were filed. Mr Tsang was therefore sworn in as chief executive without the formality of an election on June 24th 2005.

The occasion of the selection of a new chief executive saw yet another mainland Chinese �interpretation� of Hong Kong�s Basic Law. Whereas legal opinion in Hong Kong was almost unanimous that the new chief executive would serve a five-year term, the NPC standing committee determined on April 27th that Mr Tung�s successor would not serve for a full term, but would be deemed to be merely serving out the remainder of Mr Tung�s term. Mr Tsang therefore faces another selection round in March 2007, when a chief executive will be selected for a full five-year term.

As a long-serving civil servant, Mr Tsang is expected to govern Hong Kong more competently than Mr Tung, and he began his mini-term in office with a groundswell of goodwill. He has managed to engineer some sort of rapproche-ment between the mainland authorities and the pro-democracy camp. All 60 Legco members were invited to the mainland for a meeting on September 25th 2005 with Zhang Dejiang, the secretary of China�s ruling Communist Party in Guangdong province, adjoining Hong Kong. A total of 59 Legco members were able to attend, including all members of the pan-democratic camp. Mr Tsang has gained the credit for the rapprochement.

However, the goodwill was not enough to push through the limited political reforms that Mr Tsang unveiled in October 2005. According to the reform package, the election committee that selects the chief executive was to be expanded from 800 to 1,600 members, including all members of the elected district councils. Legco was also to be expanded in size, with the ten additional members divided between five directly elected members and five members to represent the district councils.

The proposals were opposed as inadequate by democrats, who were supported by a large turnout for a pro-democracy rally on December 4th. On December 21st when the issue came to a vote, 24 of the territory!s legislators voted against the chief executive!s reform package, blocking its passage (the bill required the support of 40 out of the 60 Legco members). They argued that they could not support proposals that did not include a date for fully democratic elections.

Despite Mr Tsang!s failure to get his package of constitutional reforms passed, he has maintained the support of the central Chinese government, and as a result remains the overwhelming favourite to be re-elected as chief executive in the election due in March 2007. Mr Tsang!s chances of re-election increased in late September when Anson Chan, the former head of the territory!s civil service, decided against standing. Although Ms Chan was unlikely to have won,

Mr Tsang enjoys a honeymoon period

Pro-democracy parties rejected Mr Tsang's political reforms

Mr Tsang remains favourite to be elected chief executive

8 Hong Kong


she was by a long way the strongest candidate favoured by Hong Kong!s pro-democracy parties.

Important recent events

2002

In March Tung Chee-hwa is appointed unopposed for a second term as chief executive, beginning in July. Mr Tung introduces government reforms, reducing the number of government departments from 16 to 11, with each being headed by limited-tenure political appointees rather than job-for-life civil servants (although many of them were recruited from the ranks of the civil service).

2003

The government�s response to the local outbreak of Severe Acute Respiratory Syndrome (SARS) is criticised. In the �Cargate� scandal, there is criticism of the purchase, days before the introduction of an increase in the vehicle purchase tax, of a luxury car by the financial secretary, Antony Leung. The attempt to introduce legislation against �treason, secession, subversion and sedition� brings half a million protesters on to the streets in July. The government is forced to back down as the legislation is shelved. Mr Leung and the secretary for security, Regina Ip, resign. Government-linked parties receive a drubbing in the November district council elections.

2004

A New Year�s Day rally for democracy is attended by around 100,000 people. On April 6th China �reinterprets� Hong Kong�s Basic Law (mini-constitution), allowing the standing committee of China�s National People!s Congress (NPC) to decide when constitutional change is required. On April 26th the NPC rules that Hong Kong is not yet ready for substantive political reform. Organisers of the July 1st march for democracy report that 500,000 joined the march, although the police put the numbers closer to 200,000. The pan-democratic alliance makes gains in the September election to the Legislative Council (Legco), but pro-government parties retain a majority in the chamber. Mr Tung�s administration is publicly rebuked by China�s president, Hu Jintao, in December.

2005

The central Chinese government accepts Mr Tung!s resignation. Donald Tsang is selected without the formality of an election in June. In December Legco rejects a set of limited political reforms, after the pro-democracy parties voted against the proposals, arguing that they fell well short of a full transition to universal suffrage.

2006

Anson Chan, the former head of the territory!s civil service, decides not to stand against Mr Tsang in the 2007 chief executive election. Legco passes a controversial bill on phone-tapping and other covert surveillance, despite the strong opposition of pro-civil-rights groups.

Constitution, institutions and administration

Under the Basic Law the SAR has its own legislature, legal and judicial system and full economic autonomy, but defence and foreign affairs are the

The Basic Law

Hong Kong 9


responsibility of the central government in Beijing. Hong Kong is able to participate in international organisations and agreements where appropriate. It continues to function as an international financial centre, with no exchange controls, free convertibility of the Hong Kong dollar and free inward and outward movement of capital. The Basic Law guarantees existing freedoms, including free speech and assembly, press, religion, and the right to strike and travel. Business ownership, private property, the right of inheritance and foreign investment are also protected by law. The Basic Law may be interpreted or amended by China�s NPC.

The chief executive, Mr Tsang, was appointed for a two-year term in June 2005. The selection was supposed to be have been by election by an 800-member election committee. In the event, no opposing candidate managed to garner the 100 nominations from members of the election committee in order to stand against him, and so the formality of an election, even by the small number of people entitled to vote, was dispensed with. Mr Tsang is deemed to be serving out the remainder of the term of his predecessor, Tung Chee-hwa, who resigned in mid-term. The next selection process will take place in March 2007. The Basic Law limits the tenure of any chief executive to two terms. Although the Basic Law states that the ultimate aim is for the selection of the chief executive by universal suffrage, no changes are currently in the pipeline, and at the moment the 2012 chief executive election is due to take place under the current system.

The current Legco, elected in September 2004, has 60 members, of whom 30 were directly elected and 30 elected to represent functional constituencies. Legco�s powers are limited. Although Legco�s approval is needed for legislation and policy changes, in practice the executive-led administration has almost invariably been able to gain Legco backing for legislative proposals"with the notable exception of the controversial national security laws that were shelved in July 2003, and the constitutional reform bill that was rejected in December 2005. Legco votes of no-confidence are not legally binding.

Hong Kong has a competent bureaucracy, albeit one more skilled in policy execution than initiation. Senior officials appointed by the last UK administration, including Mr Tsang, now the chief executive, hold influential positions in government. There is relatively little corruption, especially by the standards of other regional governments. The political system is reasonably open and transparent; opposition parties frequently speak out against the government, and major issues are vigorously"if not always decisively"debated in Legco. Mr Tsang has tinkered with the accountability system by placing officials under the chief secretary for administration, rather than directly under the chief executive.

Since reforms in 2000 Hong Kong has had only one tier of local government, the district councils, which have only the power to �advise� the SAR government. The latest district council elections were held in November 2003. The 18 district councils have 529 members. Of these, 400 are directly elected, 27 are ex officio positions and 102 are appointed. The councils elected in 2003 will sit until December 31st 2007.

The bureaucracy

The chief executive

The Legislative Council

Local government

10 Hong Kong


The power of final adjudication lies with the Court of Final Appeal (CFA). The chief justice of the CFA and the chief judge of the High Court must be Chinese citizens who are permanent residents of Hong Kong with no right of abode in any foreign country. Judges in the High Court, comprising the Court of Appeal and the Court of First Instance, are appointed by the chief executive on the recommendation of an independent commission composed of local judges, persons from the legal profession and other �eminent persons�. The basic principles of judicial independence and trial by jury are guaranteed by the Basic Law.

The Liaison Office of the Central People�s Government conducts liaison activities with local groups and maintains information contacts. It also monitors the activities of mainland officials who have connections with Hong Kong. Other mainland government organisations represented in Hong Kong include the Ministry of Foreign Affairs and the People�s Liberation Army (PLA). In addition, China has many non-governmental channels of influence in the SAR, including pro-China newspapers such as the Wen Hui Pao and Ta Kung Pao, as well as major corporate groups, including the Bank of China, China Resources and the China International Trust and Investment Corporation (Citic).

Political forces

Political parties"and recognisable politicians"began to appear after direct elections for some Legco seats were introduced in the early 1990s. However, since they lack the power to do anything other than obstruct the administration, there is little incentive to develop meaningful policy platforms. The largest party is the Democratic Party (DP), but the Chinese authorities have branded some of its members �subversives�. The DP�s position as Hong Kong�s most popular party had been slipping, until its fortunes were revived in mid-2003 by the government�s bungled attempt to push through controversial security laws. The party�s decline following the 1997 handover reflected its preference for debating broad constitutional questions rather than dealing with the economic issues that formed the focus of voter concern during the prolonged economic downturn. The DP made a political recovery in the second half of 2003, and polled well in the November 2003 district elections. The party lost seats in the September 2004 Legco election. This was partly attributed to poor co-ordination between members of the pan-democratic alliance under Hong Kong�s skewed electoral system.

The party that gained most from the DP�s difficulties in the early years after the territory�s reversion to China was the DAB. Its share of the direct vote in the 2000 election rose to 29.7% from 25.2%. Although broadly pro-China, the DAB has also advocated democratisation, although less vociferously than the DP. The party was brought into the government in 2002, but suffered from its association with the government in the November 2003 district elections. The party took only 26.6% of the direct vote in the 2004 election, but won 12 seats to emerge as Legco�s largest political party.

The judiciary

Mainland Chinese bodies

The Democratic Party

The DAB

Hong Kong 11


The Liberal Party was established in 1993 to ensure �stability and prosperity�"in other words, to avoid upsetting China. The Liberal Party won only 1.9% of the popular vote in the 2000 election, but has nevertheless played a large role in politics owing to the eight Liberal Party Legco members that were elected by functional constituencies. The Liberal Party kept these seats and won an additional two geographical seats in the September 2004 election.

A new political party, the Civic Party, was established in Hong Kong in March 2006. The party was formed by members of the Article 45 Concern Group, which was founded to support the pro-democracy Article 45 of the Basic Law (Hong Kong!s mini-constitution). The Civic Party is dominated by former chairs of the Hong Kong Bar Association, with Audrey Eu as its first leader. The new party has six seats in Legco, making it the fourth-largest political party in the body. The aim of the Civic Party is to reach supporters who feel alienated by the DP!s sole focus on political and, in particular, democracy issues. It is also an attempt to reinvigorate the entire pro-democracy camp, as it struggles to cope with the shift in the political landscape following the arrival of the politically astute Mr Tsang as chief executive.

Main political figures

Donald Tsang

Hong Kong�s chief executive. As financial secretary, Mr Tsang guarded the fixed link between the Hong Kong and US dollars with vigour. He was appointed as chief secretary for administration on May 1st 2001, and emerged as the Chinese government�s preferred candidate to succeed his predecessor, Tung Chee-hwa, following the latter�s resignation in March 2005. Mr Tsang, a practising Roman Catholic, was long subject to suspicion by pro-China parties owing to his long years of service in the pre-1997 British colonial administration, for which he received a knighthood. Mr Tsang is likely to prove a capable administrator of Hong Kong.

Henry Tang

Appointed financial secretary in August 2003 to replace Antony Leung, Mr Tang was regarded as a potential rival of Mr Tsang for the position of chief executive. Following his decision not to stand, Mr Tang served briefly as the territory�s acting chief executive. Mr Tang may stand for the position of chief executive in 2007.

James Tien

As leader of the normally pro-government Liberal Party, Mr Tien precipitated a crisis in July 2003 when he called on the government to delay the introduction of controversial security laws. Until the September 2004 Legco election, Mr Tien sat in Legco as the representative of functional constituency controlled by the Hong Kong General Chamber of Commerce. Since then, Mr Tien has represented a geographical constituency.

Lee Wing Tat

Mr Lee was elected as chairman of the Democratic Party in December 2004 following the party�s relatively poor showing in the Legco election held in the preceding September. Mr Lee attempted to stand against Mr Tsang for the position of

The Liberal Party

The Civic Party

12 Hong Kong


chief executive, but failed to gain the requisite 100 nominations from members of the 800-member election committee.

Anson Chan

The former head of the territory!s civil service is a favourite of Hong Kong!s pro-democracy parties. Although she has decided not to stand against Mr Tsang for the position of chief executive in 2007, she has promised to continue campaigning for greater democracy in the territory.

Ma Lik

The chairman of the Democratic Alliance for the Betterment of Hong Kong (DAB) since the resignation of his predecessor, Tsang Yok-sing, following the party�s poor showing in the November 2003 district council elections.

International relations and defence

Hong Kong�s �high degree of autonomy� does not extend to security, defence and international relations, which after July 1st 1997 became the preserve of the central government in Beijing. Hong Kong is still allowed to maintain separate representation in many international bodies, such as the World Trade Organisation (WTO) and the IMF, under the title of �Hong Kong, China�.

As well as defending Hong Kong against potential external enemies, China�s People�s Liberation Army (PLA) is also available for emergency use in the unlikely event of �turmoil� that the local government is unable to control. Otherwise, the PLA does not have an official public order role. Defence-related costs are borne by China�s national budget, not by Hong Kong. A law on troops stationed in the SAR defines their functions, powers, management and jurisdiction, and the relationship between the troops and the SAR. The troops have to respect Hong Kong laws and must not interfere with local affairs or engage in business activities. Troops also receive in-depth political education, military training and education on Hong Kong�s basic social situation and existing laws. To date, PLA troops have been conspicuous by their absence from the streets of Hong Kong.

Security risk in Hong Kong

Armed conflict

The likelihood of armed conflict is remote. Hong Kong is not a sovereign state but a Special Administrative Region (SAR) of the People�s Republic of China. Although Hong Kong enjoys considerable autonomy in most areas, foreign policy and defence remain the purview of the central government in Beijing. Any external conflict that might affect businesses operating in Hong Kong would probably have to originate in a larger international disturbance involving China. Even in the event of a conflict between China and another sovereign state, the prospect of armed intervention in Hong Kong"the autonomy of which is widely respected and supported internationally"is virtually non-existent. This would also hold true in the event of a military conflict between China and Taiwan"although the Economist Intelligence Unit does not expect a full-scale confrontation across the Taiwan Strait during the foreseeable future, the direct security spillover in Hong Kong

China handles foreign policy

The role of the Chinese army

Hong Kong 13


in the event of such a conflict (as distinct from the economic, financial and social reaction) would be minimal. Within the SAR, there are no armed opposition groups or insurgencies. There are no domestic terrorist groups operating in or from Hong Kong, and the territory has not been subjected to terrorist attacks. Although the government is, in effect, appointed by the authorities in Beijing, the current chief executive, Donald Tsang, is popular and opposition parties continue to operate through normal political channels. Although concerns about the motives and practices of the Chinese government continue in some quarters, armed opposition within Hong Kong is unlikely.

Unrest and demonstrations

Hong Kong is the scene of frequent demonstrations, although they are usually peaceful, and few protestors are ever arrested. The largest protests usually occur in June, when several thousand people generally attend a candle-lit vigil to remember the victims of the 1989 Beijing massacre, and on the July 1st anniversary of the founding of the SAR. In July 2003 more than half a million Hong Kong residents took to the streets to protest against the proposed introduction of laws against �treason, secession, sedition and subversion� against the Chinese state, and organisers claimed a similar attendance for the July 2004 democracy march. Most demonstrations are usually sparked by purely local issues"democracy, transport, health, students� issues"and are generally restrained, and typically have little effect on foreign-operated businesses. Moreover, the gradual fall in unemployment makes it unlikely that public demonstrations by low-skilled and unemployed workers will become frequent. Visits by senior Chinese officials are often the occasion for pro-democracy demonstrations. Hong Kong has also been a favourite site for well-behaved protests by followers of the Falun Gong spiritual movement. The group was outlawed in 1999 on the mainland as an �evil cult�, but has remained legal in Hong Kong. It is clear, however, that some members of the SAR government are uncomfortable with the group�s activities, and in 2002 legal action was taken against Falun Gong activities, with 16 adherents being convicted in August 2002 of obstruction.

Violent crime

The incidence of both petty and violent crime in Hong Kong is low. The total number of crimes reported in 2005 was 77,437, 4.8% lower than the year before, as the number of burglaries and thefts fell, probably reflecting the strong economic recovery in that year. Violent crime fell by 0.9%. In 2005 a total of 34 cases of murder or manslaughter were reported, down from 45 in 2004 and 52 in 2003. The trend in recent years for a levelling-out or a reduction in most types of serious crime, but an increase in less serious property crimes, seems to have been halted as petty property crime rates have fallen back. There remains concern among residents that crime may increase as the border with China becomes more porous. Illegal immigrants have been blamed by the police for a number of high-profile robberies, but in general the large number of tourist arrivals from the mainland is responsible for high spending on luxury goods rather than an increase in petty crime.

Organised crime

Organised crime is a persistent problem, although it does not often affect major corporations and foreign firms. Local criminal organisations"secret societies known as triads"are commonplace, and tend to engage in drug-trafficking, prostitution,

14 Hong Kong


gambling, loan sharking and extortion. Many of the triads are little more than groups of young thugs. A few, like the Sun Yee On and the Wo Shing Wo, are syndicates of sophisticated criminals that are equivalent, in some ways, to the mafia. The government estimates that around 50 triad groups are functioning in the SAR at present; although they have a nominal combined membership of 100,000, relatively few members are active. Triads prey mostly on local businesses, especially restaurants, bars, entertainment outlets and street vendors; the film-making industry is also a target. Triads exist in China and Taiwan as well as Hong Kong, and they have been criss-crossing into each other�s territory. Reportedly, criminal gangs in southern China have been infiltrating Hong Kong since the 1997 handover of the SAR by the UK. The issue of the extradition of triad members arrested for serious crimes remains a thorny one for all three jurisdictions.

Kidnapping

Abductions have received more attention in recent years, although kidnappings typically centre on local business disputes. Foreigners have not been targeted for abduction, but high-profile Hong Kong residents have, including a property magnate, Chan Kwai-hung. Executives who travel to China�s Guangdong province are at greater risk.

Resources and infrastructure

Population

Hong Kong is one of the most densely populated places in the world. According to the government�s most recent census (conducted in March 2001), Hong Kong has a population of 6.71m people living on a land area of about 1,100 sq km (the Census and Statistics Department�s mid-2006 population estimate is 7m). Since Hong Kong still has substantial areas of undeveloped land (about 40% of the territory is protected by country parks), the population density can vary greatly from the average for Hong Kong of about 6,380 people per sq km (official estimate for mid-2004). In Kwun Tong, the most densely populated district, the density is 50,910 people per sq km.

In 2000-02 the population grew by 0.9% a year. The population growth rate fell to only 0.2% in 2003, picked up to 1.2% in 2004, and remained at this pace in 2005. The natural rate of increase has been slowing in recent years. The crude birth rate that fell gradually from 9.9 per 1,000 population in 1996 to 6.9 per 1,000 in 2003 has reached 8.2 per 1,000 in 2005. The crude death rate, meanwhile, has remained at around 5 per 1,000 population in recent years, reaching 5.6 per 1,000 in 2005.

A population of almost 7m

Hong Kong 15


Population by nationality 1991 1996 2001Chinese Place of domicile�Hong Kong 5,191,545 5,623,467 6,261,864 Place of domicile�outside Hong Kong 48,029 64,717 76,898

Filipino 64,658 120,730 143,662Indonesian 7,905 22,057 54,629Indian, Pakistani, Bangladeshi & Sri Lankan 14,329 20,955 28,642

British 68,502 175,395 25,418Thai 11,787 15,993 14,791

Japanese 10,850 19,010 14,715American 18,383 28,946 14,379

Nepalese n/a n/a 12,379Canadian 15,135 32,515 11,862Others 71,158 93,771 49,150

Total 5,522,281 6,217,556 6,708,389

Source: Census and Statistics Department, 2001 Population Census: Summary Results.

The population has been boosted in recent years by immigration, particularly from mainland China. The number of lawful immigrants from China increased from around 27,000 a year in the late 1980s to around 55,000 a year in the early 2000s. The number of legal immigrants fell back in 2004 to 38,100 under a scheme that makes legal migration easier. The government is keen to address the need for high-skilled workers by allowing more mainland professionals to move to Hong Kong. However, the numbers of immigrants approved under the mainland professionals scheme has so far remained very low.

According to the 2001 census (a detailed breakdown of the 2006 census is not expected until early 2007), 6.3m people, or 94.5% of Hong Kong�s population, are ethnically Chinese. The next biggest groups are Filipinos and Indonesians, who together accounted for almost 3% of the population, and many of whom have jobs as domestic workers. The number of British citizens in Hong Kong has, perhaps unsurprisingly, fallen sharply in recent years. In 2004 there were 17,780 British people in Hong Kong, accounting for 0.3% of the total population, down from 175,395 people (2.8% of the population) in 1996. The number of Japanese, American and Canadian people living in Hong Kong also dropped between 1996 and 2001, but the economic recovery may now be attracting more foreign workers back to Hong Kong. In 2004 there were 29,900 Americans in Hong Kong, up from 14,400 in 2001.

As in many developed economies, Hong Kong�s population is ageing. According to census data, the proportion of the population aged over 65 was 8.7% in 1991, and is currently estimated to be around 12%. Based on government projections the proportion will rise further to 24% in 2031. In an attempt to begin to tackle the financial consequences of this development, the government implemented a Mandatory Provident Fund (MPF) in December 2000. This scheme requires both employers and employees to make contributions of 5% of salary into a pension fund. Private firms that have been approved by the government�s MPF Schemes Authority manage the funds.

The population is ageing

Immigration boosts the population

16 Hong Kong


Population by age group (%)

1996 2001 20050-14 18.5 16.5 14.115-24 14.0 13.7 13.1

25-34 19.1 16.5 1535-44 19.0 20.3 18.845-54 11.0 14.3 17.3

55-64 8.3 7.5 9.565+ 10.1 11.1 12.2

Total 100.0 100.0 100.0

Source: Census and Statistics Department, 2001 Population Census: Summary Results.

In order to cope with the growing population, Hong Kong has developed nine new towns since 1973. The new towns are aimed at allowing people to move away from the overcrowded central urban areas to less populated areas in the New Territories. According to the 2001 population census, the proportion of the population living in the New Territories and outlying islands increased from 41.9% in 1991 to 49.8% in 2001. Hong Kong people are starting to move even further north, into mainland China itself. This migration is likely to accelerate as crossing points are opened 24 hours a day"the first 24-hour checkpoint was opened in January 2003"and smart cards are issued, allowing quicker immigration clearance. These developments, together with the establishment of better north-south transport links, will make it easier for Hong Kong people to take advantage of the cheaper land available on the mainland while retaining their jobs in Hong Kong.

Education

According to the 2001 population census, 100% of children aged six to 11 were attending schools, with the enrolment ratio dropping to 97.5% for children aged 12-16 and 71% for those aged 17-18. The three types of curriculum available"grammar, technical and pre-vocational"are all five-year courses leading to the Hong Kong Certificate of Education Examination (HKCEE). Students staying at school after completion of the HKCEE enrol on a two-year course to study for the Hong Kong Advanced Level Examination, which is the standard entry test for the tertiary-level institutions of the Special Administrative Region (SAR). Since 1997 there has been a reduction in the use of English in secondary schools, leading to concern in the business community that Hong Kong is losing a competitive advantage. Under the government�s mother-tongue teaching policy, many schools have dropped English-medium instruction, although a number of English-medium schools with a high achievement record have been permitted to continue.

Hong Kong now has 12 degree-awarding higher education institutions. Seven of these are self-accrediting, degree-awarding universities"the City University of Hong Kong; Hong Kong Baptist University; Lingnan University; the Chinese University of Hong Kong (HKCU); Hong Kong Polytechnic University; the Hong Kong University of Science and Technology (HKUST); and the University of

Enrolment ratios are high

Higher education is expanding

The population is moving north

Hong Kong 17


Hong Kong (HKU). These seven institutions, together with the Hong Kong Institute of Education, are funded through the University Grants Committee (UGC), and in 2003 boasted a total of 50,129 undergraduate and 15,899 postgraduate students. The other four degree-awarding institutions are the Hong Kong Academy for Performing Arts and the self-financed Open University of Hong Kong, the Hong Kong Shue Yan College and the Chu Hai College of Further Education. In addition, educational institutions in Hong Kong have been offering a large variety of degree programmes in collaboration with universities abroad. These are degree programmes offered by foreign universities with courses taught mainly in Hong Kong. The Hong Kong education system has also branched out on to the mainland, with its universities setting up joint programmes with top mainland universities. Higher education in Hong Kong is mainly conducted in English.

The official policy of the Hong Kong government is to promote biliteracy and trilingualism, whereby people are encouraged to acquire a basic knowledge of written Chinese and English, as well as becoming fluent in spoken Cantonese, Mandarin Chinese and English. However, achieving widespread trilingualism is still a distant objective, and complaints about inadequate English-language ability are frequently heard.

Health

The standard of healthcare in Hong Kong is generally high. At the end of 2004 Hong Kong had 34,400 hospital beds, or 4.95 beds per 1,000 people. However, Hong Kong had only 11,242 registered doctors in 2004, or 1.7 doctors per 1,000 people. The Hospital Authority (HA), funded through government subvention, is an independent body responsible for the management of all of Hong Kong�s 41 public hospitals. HA institutions provide 83% of hospital beds in Hong Kong. The remainder are supplied by 36 nursing homes and private hospitals. The HA also runs 52 specialist outpatient clinics. A network of 62 general outpatient clinics is maintained by another public body, the Department of Health (DH). The DH also operates 50 maternal and child health centres.

Healthcare in government hospitals is not free, but is subsidised, and costs can be waived. These low user costs have not led to an explosion in government health expenditure, which remains low at around 15% of recurrent public-sector expenditure. Outside experts have suggested, however, that upward pressure on health expenditure will grow over time. A government-commissioned report concluded in April 1999 that, without changes, spending on health would rise to 21-23% of public spending by 2016. The report suggested that the government establish a health insurance scheme to be paid for by contributions from wages. The commission also recommended a rise in user costs.

The government has not implemented these proposals. Officials did propose in December 2000 that workers between the ages of 40 and 64 contribute 1-2% of their wages to a medical savings scheme. The government has since backed away from this proposal, but it has been reviewing hospital charges, and may revisit the issue of a �health tax� in the future. At the end of November 2002

Future funding problems are likely

Healthcare standards are high

Trilingualism is encouraged

18 Hong Kong


the government began levying a HK$100 (US$13) fee for accident and emergency services, which were previously free of charge.

Natural resources and the environment

Hong Kong is small and hilly, with several high peaks. Consequently, agricultural land"or indeed any flat land"is scarce. Land has therefore been extensively reclaimed from the sea for housing, offices, factories and major infrastructure projects such as the old Kai Tak airport and the new Hong Kong International Airport. Despite high rainfall, Hong Kong is unable to meet its own domestic and industrial water requirements, so supplies are piped in from the neighbouring Chinese province of Guangdong.

About 40% of the territory is protected by country parks, one of the highest proportions in the world, but the very high overall population density puts pressure on the environment. Air, sea and noise pollution has risen rapidly over the past decade, contributing to a rise in respiratory diseases (including lung cancer). These problems, combined with the rising expectations of a more affluent society, have resulted in greater concern about the environment among the general population. These environmental problems have also started to cause the government concern, with officials fearing that worsening pollution will harm Hong Kong�s tourism business and reduce the territory�s attractiveness to foreign investors and professionals.

In recent years the government has implemented a range of reforms aimed at improving the quality of the natural environment, introducing, for example, the requirement that all government bureaux and departments publish annual environmental reports, and ruling that newly licensed taxis run on liquefied petroleum gas rather than diesel fuel. Critics still argue that the government has not gone far enough. This may be true, but it is also clear that Hong Kong cannot solve the pollution problem single-handed. A majority of the territory�s environmental problems are, after all, caused by emissions originating in mainland China. The governments of Hong Kong and China�s Guangdong province currently aim to reduce pollutant emissions by between 20% and 55% from the 1997 level by 2010. Hong Kong is also working with Shenzhen, across the border in China, on a 15-year programme to reduce pollution in Deep Bay to restore the bay to a healthy state by 2015.

Transport, communications and the Internet

Hong Kong�s transport and communications networks are among the best in the region, and are undergoing constant improvement. Businesses established in the region can expect workers to have ready and reliable access to air, sea and rail transport. The public transport system in Hong Kong, which includes two high-capacity railway systems, trams, buses, minibuses, taxis and ferries, handled a total of 4bn passenger journeys in 2005.

Public transport facilities, especially rail, are excellent. The mainly underground Mass Transit Railway Corporation (MTRC) has 52 stations covering 91 km of

Land is scarce

The rail network

Pollution is a concern

Hong Kong 19


track, and carries 2.4m passengers a day, making it one of the most heavily used mass transit systems in the world. The Airport Express covers the 35-km distance between Chek Lap Kok airport and Central in 23 minutes. The Kowloon-Canton Railway Corporation (KCRC) has an East Rail line that runs from the Kowloon peninsula (at Hung Hom) to the Chinese border (at Lo Wu), with 13 stations along a 34-km route. The KCR also operates a light rail system, an East Rail feeder bus, and provides intercity train services from Kowloon to the mainland cities of Guangzhou, Zhaoqing, Shanghai and Beijing.

The rail network is constantly being extended and upgraded. A five-station extension of the MTR system opened in 2002, and on August 1st 2005 the MTR�s Disneyland Resort Line to Lantau island was completed. KCR�s 30.5-km West Rail line opened on December 20th 2003, connecting West Kowloon with the furthest points in the north-western New Territories. The East Rail extension connecting Hung Hom and Tsim Sha Tsui (both in Kowloon) was completed in October 2004, and a rail link connecting Tai Wai and Ma On Shan in the New Territories opened in December 2004. A spur line connecting Sheung Shui and Lok Ma Chau will be completed in mid-2007, easing congestion at the Lo Wu border with mainland China. The Kowloon Southern Link, connecting Sham Shui Po and Tsim Sha Tsui, is expected to be completed by 2009. A Sha Tin-Central link is also planned.

Bus services, run by five franchise holders, are also very efficient. The three largest companies, Kowloon Motor Bus (KMB), New World First Bus and Citybus, operate nearly 600 bus routes in Hong Kong Island, the Kowloon Peninsula and the New Territories, including about 120 cross-harbour routes and 16 airport routes. The two other operators, Long Win Bus and New Lantao Bus, are smaller companies that service Lantau Island. These services are supplemented by public and private light minibus services, and by minibuses used mainly on contract for carrying tourists, factory workers, schoolchildren and commuters.

Hong Kong also has an extensive network of ferry services. The Star Ferry Company (SFC) operates four cross-harbour passenger services, and provided 29.5m passenger journeys in 2004"twice the 14.5m journeys provided by the other main operator, New World First Ferry Company. There is 30 km of tramway track along the north side of Hong Kong Island (which provided 84.9m passenger journeys in 2004); one tramway running to the peak from Central (4.1m passenger journeys in 2004); and around 18,000 taxis operating in Hong Kong (377.8m passenger journeys in 2004). In addition, a system of covered escalators and walkways connecting the business district of Central to the upscale residential area of Mid-levels was opened in 1993 to ease rush-hour traffic.

Hong Kong has 11 road tunnels, including three cross-harbour tunnels. The Tsing Ma bridge system was opened in 1997 to connect Lantau Island with the Kowloon Peninsula to facilitate airport transport needs. The vehicle density on Hong Kong�s roads is among the highest in the world. In June 2005 there were 537,124 licensed motor vehicles (including 348,018 licensed private cars) in Hong

Bus services

Ferry services and trams

Vehicle density is high

20 Hong Kong


Kong, competing for space on 1,943 km of roads. The government has attempted to discourage car use by imposing high registration taxes for private cars and compulsory car inspections for vehicles over six years old.

Passenger and freight traffic to and from China has increased rapidly in recent years. In an attempt to resolve the congestion at the boundary crossing that has become a major problem, the government has been working to improve transport links with the mainland. KCR�s new Sheung Shui to Lok Ma Chau Spur line, which is being fast-tracked for completion by 2007, will provide much-needed relief at the Lo Wu boundary crossing. A new road link with Guangdong province"the Shenzhen to Hong Kong Western Corridor"is scheduled for completion by early 2006 and will have a capacity of 31,000 vehicles a day.

Hong Kong�s container port was one of the busiest in the world in 2005, handling 22.6m TEUs (up by 7% year on year). Most of Hong Kong�s container throughput is handled by the Kwai Tsing container port (formerly the Kwai Chung container port), with the remainder passing through mid-stream and other wharves. Kwai Tsing now has nine container terminals, and the construction of a tenth terminal, CT10, is being considered. The efficiency of the port is very good, with the average turnabout time for container vessels being around ten hours. User costs are high, however, and Hong Kong faces keen competition from other operators, particularly cheaper ports in mainland China. Hong Kong�s main competitor in terms of container traffic measured in TEUs is currently the Port of Singapore, which handled 23.2m TEUs (up by 8.9% year on year) in 2005. Shanghai and Shenzhen in mainland China are placed third and fourth internationally, handling 18.1m and 16.2m TEUs in 2005, but these volumes were up by 24.3% and 19%, respectively, on a year-on-year basis.

The Hong Kong international airport at Chek Lap Kok, in the north of Lantau Island, opened in 1998, and is generally regarded as one of the best in the world. A second runway at Chek Lap Kok was opened in May 1999. The airport, designed to cope with up to 45m passengers a year, handled 13.27m arrivals (up by 7.3% year on year) and 12.7m departures (up by 7.1%) in 2005. This represents a full recovery following the downturn in air travel in 2003 during the regional outbreak of Severe Acute Respiratory Syndrome (SARS).

Hong Kong�s telecommunications infrastructure is excellent. Telecoms policy in recent years has been aimed at increasing competition in both the fixed-line and mobile-phone markets. In the mobile-phone market these policies have been extremely successful. Price competition among the six mobile operators has been intense: in June 2006, according to the Office of the Telecommunications Authority (OFTA), there were 8.914m mobile-phone service subscribers, representing a penetration rate of 127.4%. Competition in the market for fixed-line services has been slower to develop. Although three new operators entered the market in July 1995, the former monopoly, now named PCCW, still had a market share of 67% in the middle of 2005. The government has had more success in opening the market for international services, where the market share enjoyed by PCCW fell from 65% in early 1998

Crossborder traffic increases rapidly

The airport

Telecommunications thrive

Container ports

Hong Kong 21


to 30% in November 2001. Computer use is high; Internet access is mainly via personal computers (PCs). Broadband service is widely available. There were 1.685m broadband Internet access customer accounts in June 2006, according to the OFTA, with a further 957,681 dial-up accounts. Hong Kong has 183 Internet service providers (ISPs).

Hong Kong�s television industry is dominated by two free-to-air broadcasters, Television Broadcasts (TVB) and Asia Television (ATV). Both companies provide English and Chinese channels, with TVB having prime-time ratings three times those of ATV. Radio Television Hong Kong (RTHK) is a government-owned but editorially independent broadcaster with a remit to provide quality programmes for broadcast on free-to-air and pay television channels. Numerous other channels are also available through cable and satellite services. Hong Kong has 13 radio channels, operated by three broadcasters"Hong Kong Commercial Radio Broadcast, RTHK and Metro Broadcast. Commercial Radio and RTHK are the dominant networks, with Commercial Radio having better ratings than those of RTHK. RTHK broadcasts in English, Cantonese and Mandarin, and relays the BBC World Service 24 hours a day on RTHK Radio 6. Mandarin, Filipino, Hindi and Indonesian broadcasts are offered on Metro Broadcast�s Metro Plus channel.

The South China Morning Post is Hong Kong�s highest-selling English-language newspaper. The Oriental Daily and the Apple Daily are popular Chinese newspapers, but they are frequently accused of sensationalising news. A number of newspapers, including Wen Wei Po and Ta Kung Po are controlled by the Chinese government. Altogether Hong Kong has 21 Chinese-language dailies, 13 English-language dailies (including one in Braille and one published as an Internet edition), seven bilingual dailies and five Japanese-language dailies. At the end of 2004 a total of 799 periodicals were being published in Hong Kong.

Energy provision

Hong Kong has no indigenous fuel supplies and imports all its hydrocarbons. The rate for energy consumption per head is one of the highest in Asia. Electricity consumption posted increases of up to 10% in some years in the late 1980s, but since 1990 the rate of increase has slowed. As most of the territory�s manufacturing enterprises have been moved to China, consumption by commercial users has increased rapidly: it rose by 13.6% between 2000 and 2004, whereas consumption by industrial users dropped by 13.2% during the same period. Electricity consumption rose by 5.9% between 2000 and 2004, and in 2005 it increased by 2.1% to 144,171 terajoules. Domestic, commercial and industrial use accounted respectively for 25%, 65% and 10% of total consumption.

The availability and reliability of electrical power in Hong Kong is good. Electricity production in Hong Kong totalled 160,363 terajoules in 2005, an increase of 5.3% year on year. Exports of electricity to China amounted to 16,192 terajoules. Two private companies, Hongkong Electric (HEC) and CLP Power Hong Kong (CLP Power, formerly known as China Light & Power), supply

The media are lively

The energy supply system remains good

All fuels are imported

22 Hong Kong


electricity in the territory. Each has a de facto monopoly in its appointed area"HEC supplies consumers on Hong Kong Island and the nearby islands of Ap Lei Chau and Lamma, whereas CLP Power supplies consumers in Kowloon and the New Territories. HEC supplies power from a power station on Lamma. CLP Power�s electricity supplies are sourced from three power stations in Hong Kong, at Castle Peak, Black Point and Penny�s Bay, as well as from Conghua in Guangzhou and the Daya Bay nuclear power station in Shenzhen (a joint venture between the mainland China state-owned Guangdong Nuclear Investment Company and the Hong Kong Nuclear Investment Company, a wholly owned subsidiary of CLP Power).

HEC and CLP Power supply electricity subject to scheme of control (SOC) agreements with the government. These contracts, the latest of which took effect in 1993, restrict the companies� rate of return on capital to an agreed limit, over a fixed period of time, and subject corporate investment plans to government review. The SOC agreements are supposed to prevent companies from using their monopoly power to earn excess profits. The contracts do seem to have prevented electricity prices from rising too rapidly. However, the pro-vision for government oversight has not prevented both HEC and CLP Power from attempting to raise overall profits by investing in excess capacity. Thus, according to a consultancy study commissioned by the government in 1998, reserve margins (excess capacity over peak demand) in the HEC and CLP system were around 25-30%, compared with an international standard of 15%. The government is expected to change the regulatory regime and introduce greater competition when the current SOC agreements expire in 2008.

Total gas consumption increased from 27,137 terajoules in 2004 to 27,261 terajoules in 2005, a rise of 0.5%. In 2005 domestic users accounted for about 57% of total gas consumption, followed by commercial users (40% of total consumption) and industrial users (3.3% of the total). Two types of gas are available. The Hong Kong and China Gas Company (Towngas) supplies man-made town gas to Hong Kong Island, Kowloon and the New Territories. Town gas, which is produced from naphtha at Ma Tau Kok and Tai Po, was used by 1.52m households in 2004.

The other type of gas used is liquefied petroleum gas (LPG), supplied by companies such as Shell, Mobil, Esso, Caltex and China Resources. According to a Housing Authority directive adopted in 1987, LPG should be used only if town gas is not available. The directive banned the installation of gas mains for LPG, and LPG is therefore either supplied to households in 15-kg cylinders or piped from bulk storage and vaporiser installations. Retained imports of LPG and natural gas together amounted to 2.31m tonnes in 2005.

The economy

Economic structure

Hong Kong is first and foremost a trading centre. It has virtually no natural resource base and is therefore dependent on imports for raw materials, food

Hong Kong�s economy depends on trade

Gas consumption increases

Hong Kong 23


and fuel. Domestic demand, although increasingly important, is limited by the size of the population. In 2005 total exports and imports of goods and services (national-accounts terms) amounted to US$352bn and US$330bn respectively, or a combined 383% of current-price GDP.

Main economic indicators, 2005 Real GDP growth (%) 7.3Consumer price inflation (av; %)a 0.9

Current-account balance (US$ bn) 20.3Exchange rate (av; HK$:US$) 7.8Population (mid-year; m) 6.97

Foreign debt (year-end; US$ bn)b 72.0

a Composite consumer price index. b Estimate.

Source: Economist Intelligence Unit.

Hong Kong, Singapore, Taiwan and South Korea all started out as low-cost, labour-intensive manufacturing bases, but, whereas Singapore, Taiwan and South Korea have all developed high-technology industries, Hong Kong has become a services centre, in particular for companies (foreign as well as those from Hong Kong) doing business in China. The structure of the economy has therefore changed dramatically over the past decade: the manufacturing sector contributed just 3.5% of GDP in 2004 (according to the latest available figures), compared with 9.6% in 1993. The manufacturing sector has been replaced by a rapidly expanded services sector. In 1993 the tertiary sector generated 76.2% of GDP, but by 2004 it accounted for 90% of current-price GDP.

Owing to the government�s aversion to regulation, Hong Kong has traditionally lacked the legislative and institutional measures used elsewhere to encourage competition. Partly because of this, there has been criticism that the domestic economy is monopolised by a few powerful local conglomerates. For instance, just two chains"Wellcome and Park �n Shop"dominate the supermarket industry. These two firms are in turn owned by conglomerates, Jardine Matheson and Hutchison Whampoa, respectively, which have a range of other interests in Hong Kong, owning, for example, major land developers. The government has taken some steps to increase competition in recent years, although its efforts have so far been limited largely to those areas over which it exerts a direct influence.

Comparative economic indicators, 2005 Hong Kong Singapore China Taiwan JapanGDP (US$ bn) 177.2 116.8 2,263.6 346.4 4,560.2

GDP per head (US$) 25,759 26,870 1,731 15,356 35,777GDP per head (US$ at PPP) 33,144 34,223 6,337 29,320 30,620Consumer price inflation (av; %) 0.9 0.5 1.8 2.3 -0.3

Current-account balance (US$ bn) 20.3 33.0 160.8 16.1 165.8Current-account balance (% of GDP) 11.4 28.2 7.1 4.7 3.6

Exports of goods fob (US$ bn) 288.7 232.0 762.5 193.1 567.6Imports of goods fob (US$ bn) -296.3 -195.5 -628.3 -175.1 -473.6

Source: Economist Intelligence Unit, CountryData.

Services replace manufacturing

24 Hong Kong


Economic policy

Economic policy in British-ruled Hong Kong was based on the principle of �positive non-interventionism�. This involved keeping taxes low and limiting government expenditure to the provision of essential support services such as housing, education and healthcare. Regulation was also limited. Major utilities, which in many other places in the world were originally state monopolies, have largely been in private hands in Hong Kong. Unlike the governments of the other �Asian tiger� economies"Singapore, South Korea and Taiwan"that of Hong Kong, while under British sovereignty, generally refrained from promoting specific industries.

Economic policy in post-handover Hong Kong is supposed to be little different. The mini-constitution of the Hong Kong Special Administrative Region (SAR), the Basic Law, guarantees that Hong Kong will retain its free-trade, free enterprise, low-tax environment for at least 50 years. Specific provisions stipulate that:

• the Hong Kong SAR has independent finances; the SAR government keeps its revenue and does not remit any of it to the central government in Beijing; the central government does not levy taxes in Hong Kong;

• the government aims to keep spending within the limits of revenue, and deficits should be avoided;

• the Hong Kong dollar has been retained and continues to be backed by a 100% reserve fund (the Basic Law does not mention any particular exchange-rate regime, such as a fixed link to the US dollar);

• the Hong Kong dollar remains convertible and exchange controls may not be imposed; the free flow of capital into and out of the SAR is safeguarded; and

• Hong Kong remains a free port, pursuing a free-trade policy, although tariffs may be imposed in unspecified circumstances.

These provisions have not limited the government�s room for manoeuvre so much that it cannot make controversial decisions. In August 1998 it spent HK$118.1bn (US$15.2bn) buying shares on the local stockmarket. The government claimed that this intervention was made necessary by �exceptional� circumstances, namely intense attacks on the fixed link between the Hong Kong and US dollars coupled with a concerted effort to drive the stockmarket down (the so-called Double Play). Officials insisted that the government�s intervention on the stockmarket was an exercise that it was not keen to repeat, and soon afterwards listed a tracker fund (TraHK) on the stockmarket as a vehicle to dispose of the shares acquired (the TraHK tracks the performance of the benchmark Hang Seng Index).

Intervention on the scale of the share buying of 1998 remains exceptional in Hong Kong. At the same time, however, the government since the handover of sovereignty by the UK does seem to have taken a more active role in economic development than was the case with British colonial administrations. In 1999, for example, in an apparent attempt to encourage the development of

Positive non-interventionism is the guiding principle

The government buys shares

Hong Kong 25


information-technology (IT) businesses in Hong Kong, the government initiated a �Cyberport� project (critics, however, attacked the project for being more like an old-fashioned property development than a high-technology park). Later in the same year the government established an inward investment agency, InvestHK. This marked a change in the tone of official policy; previously Hong Kong�s government had adopted a relatively passive attitude to the issue of foreign investment, believing that the territory�s advantages"a reputation for economic stability, the firm rule of law, its free-market economic policies and geographic proximity to mainland China"were enough to attract investors.

InvestHK was heavily involved in the government�s decision to agree to invest HK$22.5bn to lure The Walt Disney Company, the US-based entertainment giant, to establish a theme park in Hong Kong; the government�s large investment secured it 57% ownership of the project. (Following the opening of Disneyland on September 12th 2005, the government has said that it may eventually sell its stake in the venture.) In 2002 the then financial secretary, Antony Leung, appeared to confirm the shift away from positive non-interventionism when he described the government�s economic role as that of a �proactive market enabler�. Mr Leung identified four industries that he believed to be particularly important to Hong Kong: financial services, logistics, tourism, and producer and professional services.

The Closer Economic Partnership Agreement

The Closer Economic Partnership Agreement (CEPA) covers areas of commerce between Hong Kong and the mainland, including trade in goods, trade in services and investment facilitation. The government claims that 29,000 jobs were created in Hong Kong as a consequence of CEPA in 2004-05. These figures are, however, debatable, with many critics claiming that the true value of CEPA has been mainly symbolic, since most of its market-opening measures have given Hong Kong companies only a brief head-start before the extension of the measures to all trading partners and investors under the terms of China�s accession to the World Trade Organisation. Since CEPA I came into effect in 2004, for example, goods worth only HK$4.8bn (US$615m) have qualified for duty-free access to the mainland market.

Goods

Under the original CEPA that came into force in January 2004, 273 classes of goods originating in Hong Kong qualified for zero import tariffs when entering the mainland. The scheme was expanded in CEPA II, which came into force in January 2005, to cover 1,108 classes of Hong Kong-made goods. Under a further expansion (CEPA III) agreed in mid-October, from January 2006 all categories of goods of Hong Kong origin will receive zero-tariff treatment on the mainland, with the only exceptions being prohibited articles (such as used or waste electrical machinery and medical/surgical products, municipal waste and rhinoceros horn). Although the production cost differential between Hong Kong and the mainland is likely to prevent manufacturing industry from returning to Hong Kong, there may be exceptions, particularly in the manufacture of high-value products. Rules of origin are being relaxed from 2006 in the case of Hong Kong brand-name wristwatches; these will no longer have to show 30% value addition in Hong Kong in order to quality for zero-tariff treatment under CEPA.

The government is to be a proactive market enabler

26 Hong Kong


Services

CEPA I liberalised access for Hong Kong companies providing 18 classes of commercial services on the mainland. A further eight services sectors were covered by CEPA II. A further expansion in 2006 under CEPA III brings the number of services sectors included to 27. These include management consulting, the organisation of conventions, advertising, accounting, construction and real-estate services, medical and dental services, distribution, logistics, freight forwarding, storage and warehousing, transport, tourism, audio-visual services, legal services, banking, securities, insurance and telecommunications. A number of further liberalisations have been agreed, including allowing wholly owned Hong Kong companies to open cinema chains on the mainland, lowering the threshold for setting up travel agencies on the mainland and allowing Hong Kong lawyers employed by law firms based outside of the mainland to practise law in China.

Customs clearance

The agreement that came into force in 2004 provided for simplified procedures and strengthened co-operation between Hong Kong and the mainland with regard to customs clearance, quarantine and inspection, quality assurance and food safety, the development of small and medium-sized enterprises, the development of Chinese medicine and medical products, e-commerce, trade and investment promotion, and transparency in law and regulations.

Financial sector

Since early 2004 banks in Hong Kong have been allowed to offer products and services based on the Chinese renminbi. Local banks now offer deposit-taking, remittance, foreign-exchange and credit-card services denominated in the yuan. The asset threshold for banks entering the mainland was dropped from US$20bn to US$6bn at the beginning of 2004. Hong Kong insurance firms were also permitted to own up to 25% of mainland insurance companies from the beginning of 2004.

More recently, the conclusion of a Closer Economic Partnership Agreement (CEPA) with mainland China has seen China itself become a proactive enabler of the Hong Kong market. Under the agreement signed on June 29th 2003 (supplemented by six annexes in September), from January 2004 China allowed duty-free access to 273 categories of goods manufactured in Hong Kong and liberalised access to 18 services sectors for Hong Kong companies. CEPA has been extended three times since. The first extension came in January 2005 to include more goods and services sectors; a second extension"CEPA III"was agreed on October 18th 2005, coming into force in January 2006; and a third extension"CEPA IV"will come into effect in January 2007.

The most eagerly awaited market-opening measure, however, was postponed. Under the current proposals, CEPA IV will allow Hong Kong importers to settle accounts in renminbi for imports to the territory, covering about US$3bn annually. However, the relaxations do not apply to the much larger re-export trade, which accounts for US$200bn of mainland goods annually that pass through Hong Kong on their way to international markets.

The central government has also taken steps to liberalise tourism to Hong Kong, resulting in a tourist boom in the territory from mid-2003, when residents of a number of mainland cities were permitted to visit Hong Kong on an individual

Integration with China under CEPA

Hong Kong 27


basis instead of in tour groups. The number of cities included in the scheme has been gradually extended. In late 2005 residents of 38 mainland cities, including all 21 cities of Guangdong province, were covered by the individual visit scheme.

Since 1983 the Hong Kong dollar has been tied to the US dollar through a currency board. In such a system, the issuance of all local notes and coins has to be backed by foreign-exchange reserves. As a result, monetary policy in Hong Kong is in effect determined by the US Federal Reserve (the US central bank). This was one of the main factors that pushed Hong Kong into recession during the Asian financial crisis of 1997-98, when nominal interest rates remained high as the US economy continued to boom. Consumer prices started to fall in late 1998, and continued to fall on a year-on-year basis until mid-2004, when positive consumer price inflation returned. However, a sharp fall in US interest rates brought down real interest rates in Hong Kong in 2001-04. By 2004 real interest rates were running at very low levels, thus helping to fuel the economic recovery currently under way in the territory. The preceding five consecutive years of falling prices were a natural consequence of the currency board system, and helped Hong Kong to regain price competitiveness. This adjustment process, which would elsewhere have taken place through a rather quicker change in the nominal exchange rate, was clearly painful for the domestic economy, and the virtues of maintaining the fixed exchange rate were widely debated during the downturn.

In late 2004 and early 2005, despite the currency peg, commercial interest rates in Hong Kong started to diverge from those in the US. Official interest rates in Hong Kong continued to track US rates, which began to rise from mid-2004. However, owing to abnormal levels of liquidity in the Hong Kong banking system as measured by the aggregate balance (settlement accounts held by banks with the Hong Kong Monetary Authority, or HKMA), local interbank interest rates remained close to zero and commercial lending rates stable. The Hong Kong dollar also came under upward pressure, ending 2004 at HK$7.774:US$1. This prompted concern within the HKMA that the Hong Kong dollar was being used as a proxy for speculation over a revaluation of China�s renminbi and thus keeping interest rates in the territory artificially low and raising the risk of a sharp rise in interest rates on a sudden reversal of liquidity flows out of Hong Kong.

On May 18th 2005 the HKMA announced a change to the operation of the linked exchange-rate system. Previously, the HKMA was committed to selling US dollars to licensed banks at the pegged rate, but was not obliged to intervene when the Hong Kong dollar strengthened beyond this rate, as it did in late 2003 and once again in late 2004. Under the changes made on May 18th, the HKMA is now committed to buying US dollars from licensed banks at a rate of HK$7.75:US$1, thus removing uncertainty over the extent to which the currency would be allowed to appreciate. The weak-side convertibility undertaking to sell US dollars at HK$7.80:US$1 has been shifted to a rate of HK$7.85:US$1, creating symmetrical convertibility undertakings around the

The fixed link to the US dollar

The currency link is refined

28 Hong Kong


linked rate of HK$7.80:US$1. The HKMA has since reaffirmed its commitment to the Hong Kong dollar peg.

Important policy events

2001

The then financial secretary, Donald Tsang, presents a cautious budget for 2001/02, once again eschewing tax reform, but also refraining from remarkable expenditure. Infrastructure and economic services receive the largest increases in funding, whereas housing spending is cut by 28% compared with the previous fiscal year.

2002

The new financial secretary, Anthony Leung, describes the government�s economic role as that of a �proactive market enabler�. Mr Leung said that Hong Kong needed to focus on high value-added economic activities, naming financial services, logistics, tourism, and producer and professional services as being of particular importance. In July the Legislative Council approves a cut in civil service salaries. The government suspends land auctions until the end of 2003 in order to support property prices.

2003

In the budget for 2003/04, Mr Leung announces a range of tax rises in order to balance the budget by 2006/07, a target that is later abandoned by Mr Leung�s successor, Henry Tang, in August. In April the local outbreak of Severe Acute Respiratory Syndrome (SARS) forces the government to unveil an HK$11.8bn (US$1.5bn) package of economic relief measures. In June the Closer Economic Partnership Agreement (CEPA) is signed with China.

2004

CEPA comes into force on January 1st. Land sales are resumed on May 26th for the first time since they were frozen in November 2002. In April the government sells HK$6bn of securitised bonds backed by tunnel and bridge revenue. In July the government sells HK$20bn in sovereign bonds to promote the development of a local debt market.

2005

An expanded CEPA (CEPA II) comes into force in January. The budget plans to abolish estate duty are announced. The Hong Kong dollar�s exchange-rate mechanism is tweaked in order to deal better with financial inflows associated with speculation over a revaluation of China�s renminbi. A further expansion of CEPA is agreed, to come into force in January 2006.

2006

The government outlines a further expansion of the CEPA (CEPA IV), which will come into operation in January 2007. In July the government began a nine-month consultation on the possible introduction of a 5% goods and services tax (GST). A GST is, however, a very unpopular idea, and is unlikely to be introduced.

Property prices play a significant role in the management of the economy. Rising real interest rates and the 1997-98 Asian financial crisis, caused property prices to fall by 44% between their peak in October 1997 and October 1998, contributing to a big fall in consumer spending and government revenue. This

Property policy is crucial

Hong Kong 29


led to a nine-month moratorium on land sales, and since then the government has been much more cautious in the amount of land it puts up for sale. Despite this, the Hong Kong property market remained depressed until late 2003, when a pick-up in the real-estate market began.

A reduction in its role in the residential property market is being sought by the government. There have been a series of moratoriums on sales of Housing Ownership Scheme (HOS) flats, which are mainly built by the government for sale at below-market prices. In June 2002 the government announced that sales of HOS flats would on not exceed 9,000 a year until 2005/06, when the ceiling was lowered to 2,000 flats a year. This marked a significant change"more than 10,000 new HOS flats had been sold in every year in 1996/97-2000/01, with more than 30,000 being sold in 1997/98 alone. In announcing this reform, officials said the government was still committed to providing 50,000 �housing opportunities� each year, but that in the future this would be achieved through the provision of loans, rather than the building of flats.

The fall in property prices in 1997-2003 did not just affect the companies that develop property and the individuals that buy it. As the monopoly supplier, Hong Kong�s government derives a significant proportion of its revenue from land sales, and these sales have proved to be very volatile, making it difficult for the government to plan ahead. The government�s other major sources of revenue are corporate tax and the salaries tax. In a reflection of Hong Kong�s low marginal rates of personal income tax and high personal allowances, however, revenue from the salaries tax was only HK$29.7bn in 2002/03, around 2% of GDP.

The size of non-property-related income streams, such as the salaries tax, is dependent on the health of the economy. However, along with the collapse in property prices in 1997-2003, Hong Kong�s economy suffered from three recessions, and total government revenue consequently fell from a peak of HK$281bn in 1997/98 to HK$176bn in 2001/02, before recovering to HK$264bn in 2004/05"which was still below the 1997/98 level. At the same time, public expenditure rose. This is partly owing to the work of �automatic stabilisers�, such as public social welfare spending, but new policy initiatives also pushed up government spending. As a result, public expenditure rose from HK$194bn in 1997/98 to HK$242bn in 2004/05.

Faced with a large fiscal deficit, in his 2002/03 budget speech Mr Leung said that he would seek to bring the government�s finances back into balance within a five-year period. In fact, this was achieved much earlier than anticipated, with the government achieving a budget surplus in 2004/05 of HK$21bn. The surplus was achieved in large part as a result of strong revenue growth, mostly owing to a pick-up in the economy, and by keeping a tight rein on public spending.

Despite the faster than expected improvement in Hong Kong!s budget position, the government remains keen to introduce a goods and service tax (GST) as a means of addressing the current over-dependence on volatile income streams, which remain vulnerable to a downturn in the economy. However, despite the government!s launch of a nine-month consultation period over the introduction

Government revenue relies on land sales

30 Hong Kong


of a GST in July, such a tax would be very unpopular, and as a result is unlikely to be introduced any time soon.

Summary of recurrent public expenditure (HK$ m unless otherwise indicated; fiscal years Apr-Mar) 2005/06a 2006/07 b % real change

Community & external relations 6,715 6,995 2.2

Economic 7,578 7,988 0.4

Education 44,678 47,856 -2.8

Environment & food 7,425 8,565 8.5Health 29,315 29,950 1.7Housing 165 149 -27.2Infrastructure 11,092 11,336 1.0Security 22,720 23,496 1.3Social welfare 32,288 34,584 1.9Support 27,135 29,012 -2.4Total recurrent expenditure 189,111 199,931 0.1a Revised estimates. b Estimates.

Source: Hong Kong government, 2005/06 budget.

Economic performance

A sharp slowdown in China in 1989-90 and the negative impact on local confidence of the June 1989 Beijing massacre trimmed Hong Kong�s growth rate in those years, but the economy recovered thereafter, averaging real GDP growth of 5.3% a year in 1991-97. After a slowdown in growth in 1995-96 as the Hong Kong dollar strengthened along with the US dollar, a bubble in property prices saw strong growth up to the third quarter of 1997. This boom was brought to an abrupt halt in October 1997, when speculative attacks against the fixed link between the Hong Kong and US dollars produced a sharp rise in interest rates.

Continued high real interest rates and a collapse in regional demand caused Hong Kong�s economy to contract by 5% in 1998, the most severe recession in a generation. The contraction in GDP bottomed out in the third quarter of 1998 and the economy then recovered strongly, expanding by 3.4% in 1999 and by 12.4% in 2000. The recovery was, however, short-lived. Hit by the US-led global economic downturn of 2001, Hong Kong�s economy grew by just 0.6% in 2001, contracting year on year in the final two quarters of the year, and again in the first three months of 2002. A gradual recovery in the remainder of 2002 allowed GDP growth to rise to 1.8% for the year. GDP growth in 2003 was depressed by the local outbreak of Severe Acute Respiratory Syndrome (SARS), which led to a sharp decline in visitor arrivals to the territory, especially in the second quarter, and pushed down retail sales. However, a recovery set in during the second half of the year, aided by rising tourist arrivals from the Chinese mainland, which lifted retail sales. As a result, GDP grew by 3.2% in 2003 as a whole.

The continuing economic recovery saw GDP growth reach 8.6% in 2004, aided by a 40.4% increase in tourist arrivals and the extraordinary boom in mainland China�s external trade. Although the 2004 GDP growth rate reflected the one-off

Highly variable rates of economic growth

Hong Kong 31


effects of China�s decision to allow residents of many mainland cities to visit Hong Kong on an individual basis and the base effect created by the SARS-hit second quarter of 2003, economic growth remained very strong in 2005, when the economy grew by 7.3%. The recovery continued in the first half of 2006, when growth reached 6.6% year on year. The Hong Kong economy remains highly dependent on developments in mainland China"a sharp slowdown in China would take a huge toll on Hong Kong"but for the moment the territory is reaping the dividends of integration with the mainland. China�s policy of boosting growth in the territory to ward off political tensions is continuing.

Gross domestic product (% real change)

Annual average 2005 2001-05GDP 7.3 4.3Private consumption 3.7 2.2Government consumption -3.0 1.6

Gross fixed investment 3.9 1.2Exports of goods & services 10.7 9.4

Imports of goods & services 8.1 8.0

Source: Economist Intelligence Unit.

Although some domestic industries, notably electronics, have continued to expand over the past decade, since the early 1980s a large share of Hong Kong�s manufacturing capacity has been shifted over the border into China in order to take advantage of lower operating costs there. The relative decline in Hong Kong�s manufacturing sector has been accompanied by the rapid development of its services industries, such as finance, business and catering, but particularly those relating to trade. These have been facilitated by the continuous upgrading and expansion of Hong Kong�s container port.

Although this development has led to rapid growth of services exports, it has not led to a collapse in merchandise exports. This is because, although they manufacture goods in the mainland, Hong Kong companies have continued to make use of the territory�s efficient logistics network to ship the finished products out to the rest of the world. As a result, domestic export growth at first slowed and then started to contract, but this was more than offset by the growth of re-exports. In 1995-2005 re-exports grew by an average of 7.9% a year in Hong Kong dollar terms; domestic exports, by contrast, fell by an average of 4% a year. In late 2005 Hong Kong�s domestic exports began to grow rapidly, reflecting a switch of textiles to manufacturing to the territory following controls imposed by the US and the EU on the mainland�s textile exports. This is a temporary factor, as controls on China�s textile exports will be lifted at the end of 2008. There are concerns, however, about the increasing sophistication of China�s own transport network, which is making it less necessary for exporters to ship goods out through Hong Kong�s more efficient but relatively more expensive ports.

Private consumption, which accounted for 58% of GDP in 2005, is highly vulnerable to shifts in confidence. In 1998 private consumption contracted by 6.7%, as asset prices collapsed and unemployment rose to record highs. Real

The structure of the economy is changing

The economy is vulnerable to crises of confidence

32 Hong Kong


private consumption growth hit a post-Asian financial crisis peak of 10.1% in 2000, but fell to sluggish levels, contracting in 2002-03, as the recovery in GDP growth in 2000 petered out owing to the slowdown in the US. The economic recovery that set in during the second half of 2003 has once again boosted private consumption spending, which grew by 7.3% in 2004, before slowing slightly to 3.4% in 2005. The private component of gross fixed capital formation is affected strongly by the general climate of business confidence. Consequently, the government habitually initiates large infrastructure projects, partly as an attempt to boost confidence in the territory.

Inflation in Hong Kong has traditionally been very volatile. In 1992-96, as measured by the composite consumer price index, prices rose by an average of 8.5% a year. Inflation was pulled up partly by increases in wages, but the fixed link between the Hong Kong and US dollars also had an important effect on prices. The negative real interest rates caused by the fixed link in the early to mid-1990s led to rapid increases in property prices, adding to the costs of services in particular. Following 1997, the situation was reversed, and in 1999-2004 consumer prices fell by 14.3%. Although prices fell by 0.4% in 2004 as a whole, monthly data show that positive year-on-year inflation was restored from July onwards. Inflation picked up only slightly in 2005, rising by an average of 0.9% for the whole year. In 2006, inflation has accelerated, with the year-on-year rate reaching 2.1% in September, and averaging 2% for the first nine months of the year. Although painful for consumers and businesses in Hong Kong, the prolonged period of deflation in 1999-2004 was a natural consequence of the external environment and the fixed link between the US and Hong Kong dollars. With the currency fixed at HK$7.8:US$1, the economy adjusts to external shocks through changes in the domestic price level rather than a depreciation of the nominal exchange rate.

Prices (% change)

Annual average 2005 2001-05Consumer price inflationa 0.9 -1.3

a Composite consumer price index.

Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Until the mid-1990s the economy was often at or near full employment, so wage growth was high, with pay for skilled workers increasing particularly quickly. Following the severe recession of 1998, nominal wages fell back, with annual growth in nominal wages averaging only 0.1% in 1999-2004. Owing to the strong economic recovery that began in 2004, as well as the end of deflation the previous year, nominal wage growth did experience a strong pick-up in 2005, increasing by 3.5%. This recovery continued into 2006, when nominal wages grew by 1.8% year on year in the first half of the year.

Prices are affected by the US dollar peg

Wage growth has been sluggish

Hong Kong 33


Hourly earnings in manufacturing, 2004 US$ % changea % changeb

Hong Kong 5.51 0.6 0.3

Taiwan 5.97 4.8 0.9

Singapore 7.45 3.8 0.9

South Korea 11.52 14.9 8.7

a Percentage change, 2004 compared with 2003. b Annual average percentage change, 2000-04.

Source: US Department of Labour, International Comparisons of Hourly Compensation Costs for Production Workers in

Manufacturing.

Economic sectors

Agriculture

Agriculture is a marginal industry in Hong Kong, with the sector accounting for just 0.1% of the economy in 2004. According to the Agriculture, Fisheries and Conservation Department, in 2005 Hong Kong had 2,100 farms directly employing 5,300 people. The industry produced output worth HK$1.2bn (US$154m) in 2005. Livestock is the largest sector, with an output value of HK$554m (US$71m) in 2005. Crop production accounted for a further HK$264m of output in that year, with the commonly cultivated crops being leafy vegetables and high-value cut flowers. The value of poultry production was HK$360m. According to the government, local production in 2005 accounted for 4% of fresh vegetables, 52% of live poultry and 18% of live pigs consumed in Hong Kong. Most of the remainder of locally consumed food is imported from China.

In 2005 the output of the capture fisheries industry amounted to around 162,000 tonnes, with a market value of HK$1.6bn. Around 90% of the total catch originates in waters outside Hong Kong, mainly the continental shelf of the East China Sea. The industry consists of around 4,150 fishing vessels worked by 9,200 fishermen. The output of the aquaculture industry, which includes pond fish culture, marine fish culture and oyster culture, amounted to 3,700 tonnes in 2004, valued at HK$120m.

Mining and semi-processing

Hong Kong has virtually no mineral resources. Mining and quarrying activities together accounted for less than 0.01% of GDP in 2004. Government figures show that quarry production reached 9.3m tonnes in 2004 (representing a rise of 12.8% year on year), whereas cement production totalled 1.04m tonnes (down by 12.5% year on year).

Fisheries

Most food is imported

Hong Kong has no mineral resources

34 Hong Kong


Manufacturing Manufacturing sector End-2005Production (2000=100) 82.6

Establishments (no.) 15,198Employment (no.) 167,367


A lack of space and an absence of mineral resources have prevented Hong Kong from developing either land-intensive or heavy industry. In the 1950s and 1960s Hong Kong did, however, become a major centre for the manufacture of labour-intensive consumer products"clothing and textiles, fabricated metal products, printed products, and food and beverages. As wages started to rise in the 1980s, and as China opened its doors to foreign investment, much of this manufacturing capacity, in order to cut costs, moved to the neighbouring Chinese province of Guangdong. The manufacturing sector in Hong Kong accounted for just 3.2% of GDP in 2004 (the latest data available). The migration of manufacturing production northwards has not harmed Hong Kong�s economy, because goods produced in China have been marketed, financed and shipped through the territory. The Closer Economic Partnership Agreement (CEPA) with mainland China that came into force on January 1st 2004 provides zero-tariff access to the mainland market for Hong Kong manufactures, but the large labour-cost difference between Hong Kong and China means that a revival of the manufacturing sector in Hong Kong is unlikely. The mid-2005 increase in textile production in the territory, following international restrictions on mainland China�s textile exports, is likely to prove only a temporary exception.

In terms of employment and gross output value, the largest manufacturing subsector in Hong Kong is the textile and clothing industry, which employed 39,471 people in March 2006. The sector has been able to survive partly because of quota restrictions imposed by OECD governments on imports from individual countries. These were phased out at the beginning of 2005. Although in mid-2005 a sharp rise in Hong Kong�s own textile exports pointed to the return of some clothing manufacturing to the territory, owing to restrictions on Chinese exports following the export surge that took place upon the lifting of global quotas at the beginning of 2005, in the longer term the phasing out of quotas will prompt the further migration of Hong Kong�s apparel industry to China. The second-largest manufacturing subsector is printing, publishing and allied industries, employing 36,831 people. The food-processing and electronics manufacturing industries employed 21,082 and 7,882 people, respectively, in March 2006.

The electronics industry has advanced rapidly from the assembly of radios to a wide range of sophisticated products, including semiconductors, computer systems, television and video equipment, and telecommunications equipment. However, Hong Kong�s electronics industry remains small-scale and low-tech compared with those of Taiwan, Singapore and South Korea. Supporters of the industry often blame its relative immaturity on the lack of government support compared with that available in other countries. The current government is

Manufacturing migrates northwards

Key manufacturing subsectors include clothing and printing

Hong Kong 35


taking a more active interest in high-technology activities than previous administrations. Sensibly though, officials seem to be aiming at developing Hong Kong�s potential as a software and information-technology support centre, rather than as a base for the manufacture of high-tech hardware.

Owing to the high cost of property in Hong Kong, the average manufacturing establishment tends to be small, typically housed on one or two floors of a high-rise building (such establishments are known as �flatted factories�). In March 2006 more than 80% of the total of 15,332 manufacturing establishments employed fewer than ten people (these firms accounted for only 35,798 workers or 22% of overall manufacturing employment). The small average size of manufacturing enterprises, coupled with the absence of legislation protecting jobs or wages, enhances the ability of local exporters to respond flexibly to fluctuations in the business cycle and changes in taste.

Construction

The construction industry is an important part of Hong Kong�s economy, accounting for 4.2% of GDP in 2003. In June 2006 the industry employed 52,273 manual labourers on 886 sites. The construction sector has been through a series of booms and slumps since the early 1980s.

Property prices first began falling in 1998, following the start of the Asian financial crisis, and a decision by the government to release a massive amount of new commercial space as a result of the construction of the new Hong Kong International Airport and related railway project. The property market remained depressed until early 2003, but a combination of low local interest rates and a robust economic recovery ensured a strong recovery in both 2004 and 2005. However, a sharp increase in local interest rates since mid-2005 has led to a fairly static property price market in the first six months of 2006. Moreover, despite the recovery in property prices in 2004 and 2005, prices remain well below the peak reached before the Asian financial crisis in 1997-98.

Financial services

Over the past two decades Hong Kong has developed into an important global financial centre, spurring the growth of the domestic economy. Employment in the financing, insurance, real-estate and business services industry totalled 475,932 people in June 2006, accounting for 20.1% of total employment (not including civil service employees). The financial sector accounted for 22.3% of GDP in 2005.

Hong Kong has no central bank, but in 1993 the government set up the Hong Kong Monetary Authority (HKMA) by merging the Office of the Exchange Fund and the Office of the Commissioner of Banking. The HKMA has assumed some of the functions of a central bank, such as monetary management and supervision of the banking sector, but it does not issue banknotes. Notes are instead issued by HSBC"which owns Hongkong Bank and Hang Seng Bank"

A major financial centre

The HKMA

Small establishments predominate

Construction has experienced booms and slumps

36 Hong Kong


the London-based Standard Chartered Bank and, since 1994, the mainland-based Bank of China.

At the end of September 2005 there were 131 licensed banks, 36 restricted licence banks and 35 "deposit-taking companies" in business. Until recently, licensed banks did not have the power to set interest rates freely. They instead had to abide by the decisions of the Hong Kong Banking Association (HKBA), which had control over �interest rates paid by licensed banks to customers on deposits of less than HK$500,000 and with a maturity of less than 15 months�. Through these so-called interest rate rules (IRRs), the HKBA essentially enforced a government-mandated pricing cartel in the banking sector. The government has been moving to liberalise the sector, and the last IRRs were dropped in July 2001. This has led to an increase in price competition in the sector.

The Stock Exchange of Hong Kong (SEHK) was formed in 1986 through the merger of four previously existing exchanges. In March 2000 SEHK merged with the Hong Kong Futures Exchange to form Hong Kong Exchanges and Clearing (HKEx), which is itself a listed company. The main board of the SEHK is one of the largest stockmarkets in Asia. Between end-1992 and end-September 2006 market capitalisation grew from HK$1.3trn (US$170.8bn) to HK$10.6trn.

The growth of the market partly reflects the absence of restrictions on foreign ownership of shares. The market has also benefited from Hong Kong�s close links with mainland China. In 1993 the Hong Kong market was opened up to fundraising by China-incorporated companies, listings known as H-shares. In addition to H-shares, �red chips�, or companies controlled by the Chinese state incorporated in Hong Kong, are also traded on the SEHK. In recent years several large China-backed companies have listed in Hong Kong, for example, the Bank of China (Hong Kong), which in July 2002 undertook a US$2.8bn initial public offering in Hong Kong. In October 2005, the China Construction Bank (CCB, one of the so-called Big Four mainland banks) raised US$8bn. This was overshadowed, however, by the listing of the Industrial and Commercial Bank of China in October 2006, which raised US$19bn, making it the world!s largest ever initial public offering (IPO).

In an effort to jump on the then fast-moving global information-technology bandwagon, the SEHK in November 1999 launched a second board, the Growth Enterprise Market (GEM). As the name suggests, the GEM is aimed at com-panies with strong growth potential, particularly high-technology and high value-added industrial companies. The criteria for companies wishing to list on the GEM are less stringent than those required for firms wishing to issue shares on the SEHK�s main board. At end-September 2005 the GEM had a capitalisation of HK$77.8bn.

Retail investors are important in Hong Kong�s stockmarket, and so share price movements are often driven as much by rumour and fad as by fundamentals. This tends to make the prices of favoured stocks volatile. During the �red chip fever� of 1997, the prices of many China-related stocks were bid up to multiples almost double the Hang Seng Index (HSI) average, only to crash later. In the late 1990s a similar cycle occurred with shares of firms professing to be high-tech.

The equities market is developing

China-related shares are listed

Hong Kong 37


Critics argue that this volatility has been encouraged by inadequate standards of regulation and supervision. The immaturity of the market was for many illustrated in 1987 when, in response to the sharp falls in share prices that occurred throughout the world, the SEHK closed for three days (the benchmark Hang Seng Index had fallen by 12%). Since then the authorities have made efforts to improve the quality of supervision. A Securities and Futures Commission (SFC) was established in 1989 to oversee the clean-up and modernisation of the stock exchange. A further round of regulatory reforms followed the financial market volatility of 1997-98. Most recently, on March 14th 2002, after ten years of debate, the Securities and Futures Bill was passed, replacing ten securities and futures ordinances and bringing Hong Kong�s regulation into line with international practice.

That these innovations have not prevented problems from arising is not entirely the fault of the Hong Kong authorities"accountancy and transparency standards are not strong north of the boundary, so it is perhaps not surprising that some of the Chinese firms listed in Hong Kong have suffered financial scandals. Critics have also attacked the government for allowing HKEx to retain powers related to the regulatory oversight of listed companies. A government-appointed committee in 2003 recommended reform of this regulatory regime, but officials have been dragging their feet over implementing the proposals.

HKEx offers six derivative products based on local stockmarket indices and foreign-exchange futures, as well as individual stock and interest-rate derivative products. Despite the number of products offered, however, the exchange is dominated by Hang Seng Index (HSI) futures and options trading. HSI futures contracts were first offered in May 1986, with HSI options contracts being added in March 1993. The products are all traded on the Hong Kong Futures Automated Trading System (HKATS). In the second quarter of 2006 a total of 6.4m futures and options contracts were traded in Hong Kong, 68% more than the same period of 2005.

Although at the time recording a budget surplus, the government in 1990 started to issue debt in Hong Kong, with the aim both of assisting the government�s monetary management and helping to develop a debt market yield curve. The HKMA now issues 91-, 182- and 364-day Exchange Fund Bills, and two-, three-, five-, seven- and ten-year Exchange Fund Notes. By end-September 2006 a total of HK$130bn in Exchange Fund Bills and Notes were outstanding, up from HK$7.5bn at the end of 1990. In April 2004 the government securitised (issued bonds secured on) revenue from five government-owned tunnels and a bridge, raising HK$6bn. In a further move designed to encourage the development of a local bond market, at end-July 2004 the government sold HK$20bn of sovereign bonds.

Other services

The trade- and tourism-related sector (wholesale, retail and import/export trade, restaurants and hotels) is a major source of employment in Hong Kong. There were 177,659 establishments in the sector in March 2005, employing just over

The futures market is small

Regulatory standards are criticised

The debt market

Services provide many jobs

38 Hong Kong


1m people. The community, social and personal services sector employed 434,350 people in March 2005.

The retail sector offers every type of store and item imaginable, including inter-national department store chains such as Sogo and Mitsukoshi of Japan as well as domestic retail chains such as Lane Crawford and Giordano. Shops are open seven days a week and many do not close until 10 pm. In recent years Hong Kong Island and the main shopping area of Kowloon, Tsim Sha Tsui, have wit-nessed the emergence of several large shopping malls containing multi-screen cinemas, department stores, shops selling designer clothes and international retail chain stores, as well as smaller specialist shops and restaurants.

The retail sector was hit hard by the recessions of 1998, 2001-02 and 2003. Retail sales plunged sharply in April and May 2003 on a year-on-year basis as a consequence of the regional outbreak of Severe Acute Respiratory Syndrome (SARS), before recovering later in the summer as the impact of SARS faded and the territory experienced a tourist boom as a consequence of arrivals from the Chinese mainland. In 2003 as a whole the volume of retail sales fell by 0.6%. The economic recovery, fuelled by the mainland tourist boom, saw the volume of retail sales rise by 9.1% in 2004. Retail sales remain fairly buoyant in 2005, with total volumes growing by 6.1%. Growth in retail sales, however, slowed during the first eight months of 2006, increasing by 5.3% year of year.

The tourism industry is important, but slumped in 1998, as a consequence of the regional financial crisis, which lowered incomes and diverted tourists to cheaper destinations elsewhere in Asia. The number of visitor arrivals began to rise again in 1999, and by 2002 annual visitor arrivals reached 16.6m compared with 9.6m in 1998. The regional outbreak of SARS cut visitor arrivals to 15.5m in 2003. In 2004 a 40.4% increase in tourist arrivals to 21.8m was recorded, owing to a recovery in the sector as tourism numbers recovered from the SARS outbreak the previous year, but also a decision by the Chinese government to make it easier for mainland residents to visit Hong Kong. The strong growth in tourism numbers in 2004 reflected a number of one-off factors that boosted mainland travel to Hong Kong. Consequently, tourist arrivals have grown much slower since. In 2005, tourism arrivals grew by 7.1% to reach 23.4m. In the first eight months of 2006, visitor arrivals numbers grew by 10.4% year on year.

In the early 1990s Japan and Taiwan provided a large proportion of visitor arrivals in Hong Kong"37% in 1992. (Direct travel across the Taiwan Strait is still banned, so most people wishing to go from Taiwan to China first pass through Hong Kong.) Although large numbers of people from Japan and Taiwan continue to visit Hong Kong, visitors from the mainland have become the mainstay of the territory�s tourism industry. Tourists from mainland China are also the highest-spending visitors, spending HK$6,018 (US$772) per head in 2003 (the latest data available), ahead of the HK$5,477 per head spent by visitors from the Americas. The government hopes that the further development of Hong Kong�s tourism infrastructure, in particular the opening of the Disneyland theme park in September 2005, will encourage more people to visit the territory.

The retail sector is highly developed

Tourism

Hong Kong 39


Hong Kong has benefited from its role as a gateway to China. According to the 2006 "Annual Survey of Companies in Hong Kong", 1,228 companies had their regional headquarters in Hong Kong, compared with 855 in mid-2000. According to the same report, the number of regional offices (defined as regional co-ordinating offices with frequent referrals to regional headquarters or to a parent company outside Hong Kong) was 2,631, up from 2,146 in mid-2000.

The external sector

Trade in goods Merchandise trade, 2005 (HK$ bn)

Exports fob 2,250 Domestic 136 Re-exports 2,114Imports cif -2,329

Trade balance -79.3Memorandum items Balance with China 37Balance with US -241Balance with Japan 139Balance with Taiwan 125


Trade is Hong Kong�s raison d�être and its lifeline. A self-proclaimed bastion of free enterprise and free trade, Hong Kong imposes minimal restrictions on exports and imports. In stark contrast to Japan and other industrialised Asian economies, Hong Kong has refrained from protecting and subsidising its industries in order to accumulate trade surpluses. In April 1986 Hong Kong was admitted in its own right as the 91st contracting party to the General Agreement on Tariffs and Trades (GATT) and thus continues to enjoy membership in its own right of the World Trade Organisation (WTO), which replaced the GATT in 1995.

Hong Kong�s economic development was the product of the domestic manufacture of mainly low value-added manufactured goods, such as clothing and textiles and toys, for export to OECD markets. Many of these goods are no longer produced in Hong Kong itself. Since the 1980s Hong Kong companies have been moving basic manufacturing processes to take advantage of cheaper costs in China. However, many of these goods continue to be shipped out through Hong Kong. As a result, although the value of domestic exports fell by 38.7% between 1994 and 2005, the value of re-exports rose by 123.1% over the same period. Textiles and clothing constitute the largest category of Hong Kong�s domestic merchandise exports by value. The largest categories of re-exports are electrical machinery and telecommunications equipment, mainly bound for mainland China.

As a small territory with no natural resources, Hong Kong has traditionally been reliant on imports of raw materials and semi-finished goods as inputs to

Foreign-owned regional headquarters increase

A bastion of free trade

Hong Kong runs trade deficits

Hong Kong moves from domestic exports to re-exports

40 Hong Kong


its industries, and to meet domestic demand for consumer goods, capital goods, food and fuel. Imports have been further driven up by the rapid growth in re-exports recorded in recent years"re-exports by definition have to be imported first. As a result, despite spectacular growth in total exports, Hong Kong has since the 1980s tended to run trade deficits. These deficits have usually been only moderate relative to the size of the economy. During the mid-1990s, however, driven by strong domestic demand growth and the buying from abroad of goods needed to construct Hong Kong�s new international airport, the trade deficit rose to more than 10% of GDP. With the downturn in the economy from 1998, the deficit narrowed sharply to 5.4% of GDP in 2003. Strong private consumption growth in 2004 saw the trade deficit widen once again to US$12bn (according to customs figures), equivalent to around 9.3% of GDP. The deficit in 2005 shrank slightly to US$10.5bn (5.9% of GDP), owing to a slowdown in private consumption, and hence imports. For the first eight months of 2006, the trade deficit was US$11.6bn, compared with US$7bn for the same period of 2005.

During the past 20 years the direction of Hong Kong�s trade flows have shifted to become much more focused on mainland China. By 2005, 45.8% of Hong Kong�s re-exports by value were destined for China, which also supplied 45% of the territory�s imports. China takes 33% of Hong Kong!s (much smaller) domestic exports, with the US taking 27%. OECD markets have declined as a proportion of Hong Kong�s external trade. These markets nevertheless remain important, as it is their interaction with China that has driven the growth in Hong Kong�s trade with the mainland. However, re-exports to the US accounted for only 15.3% of the total in 2005. At the beginning of the 1980s Japan was Hong Kong�s main source of imports, supplying around 23% of the total, but by 2005 only 11% of Hong Kong�s merchandise imports were sourced from Japan.

Invisibles and the current account

Hong Kong began to publish balance-of-payments figures only in April 1999, and a full breakdown of the current-account balance is available only as far back as 1998. These data confirm that Hong Kong�s trade balance has consist-ently been in deficit in recent years. The trade deficit has, however, been more than offset by a large and growing services surplus, and a smaller but consistent income surplus. As a result, the overall current-account surplus increased from US$4.4bn (2.7% of GDP) in 1998 to US$20.3bn (11.4% of GDP) in 2005.

Hong Kong�s services sector has grown rapidly in recent years in response to surging demand from mainland China in areas including logistics, business, legal and financial services. Exports of financial services increased from HK$24.3bn (US$3.1bn) in 1993 to HK$43.9bn in 2005. The surplus on the income balance reflects the fact that Hong Kong companies are active in investing overseas, both in China and in OECD markets.

China becomes the main trade partner

A current-account surplus

Hong Kong 41


Current account, 2005 (HK$ m unless otherwise indicated)

Merchandise trade balance -59,347

Services balance 231,623Income balance 2,463

Current transfers balance -17,047Current-account balance 157,693 % of GDP 11.4

Source: Hong Kong, Census and Statistics Department.

Capital flows and foreign debt

According to the Census and Statistics Department, Hong Kong�s accumulated outward foreign direct investment (FDI) at the end of 2005 was US$470bn and accumulated inward FDI was US$532bn; these figures were up by 17% each compared with 2004, reflecting changes in the market value of investments both abroad and in Hong Kong. Outward investment has been artificially boosted by �round-tripping�, whereby mainland Chinese entities have taken money offshore"often to Hong Kong"only to reinvest it in China to gain the tax advantages granted to foreign investors. Hong Kong-based investors have also invested heavily on the mainland. It seems likely that a proportion of the remaining outward investment is related to other types of complex financial flows rather than to simple overseas investment by Hong Kong companies. This is suggested by the source and nature of inward investment.

In terms of the stock of external assets and liabilities, Hong Kong is a net creditor, with net assets amounting to HK$3.3trn at end-2004, equivalent to 259% of GDP. Total financial assets amounted to HK$10.75trn, and liabilities to HK$7.4trn. Net assets increased by 93.4% between end-2000 and end-2004.

Hong Kong entities have tapped the international capital markets for increasing amounts of funds in recent years. According to the World Bank, inflows of medium- and long-term debt surged from US$1.1bn in 1994 to US$10.2bn in 1997. Debt inflows fell in 1998 in response to both supply and demand factors. Debt financing problems across East Asia (including China) caused foreign creditor sentiment towards these economies to sour. Demand for new debt also fell as domestic investment growth weakened. Debt inflows picked up in 2000 to around US$8.5bn, but fell off again to only US$3.6bn in 2001. Total external debt remains small. OECD figures show that Hong Kong�s total external debt stock reached US$51.4bn at end-2002 (the latest available data), or around 32% of gross national income. Hong Kong has no history of debt default, and, given low external debt and large international reserves, the risk of default in future is virtually non-existent.

The OECD and World Bank series for Hong Kong�s external debt are no longer published. The government�s own figures show gross external debt of HK$3.24trn (US$415bn) at end-June 2005. However, much of this reflects the international role of Hong Kong�s banking sector, which accounts for HK$2.16trn of the total. Excluding the banking sector, Hong Kong�s external debt comprises

There are large inward and outward FDI flows

External debt remains small

External assets are huge

42 Hong Kong


HK$12.5bn in general government debt, HK$6.2bn in Hong Kong Monetary Authority debt, HK$269.4bn in non-banking sector debt and HK$785.4bn in debt connected with inter-company lending by foreign investors.

The nature of Hong Kong�s overall balance of payments is a reflection of the territory�s combination of a relatively small domestic economy with a large international financial centre. (The government imposes no restrictions on the free flow of direct investment and portfolio capital, and the capital account therefore is fully convertible.) Thus, although large net inflows of portfolio investment were recorded in 1999-2000, large net outflows were recorded in 2001-04. The overall balance of payments has tended to be in surplus in recent years. In 2003 there was a small deficit on the balance of payments, totalling US$2.4bn. The balance swung back into surplus in 2004, at US$994m. A surplus of US$3.3bn was recorded in 2005.

Balance of payments, 2005 (HK$ m)

Current-account balance 157,693Direct investment balance 25,845

Portfolio investment balance -168,101Financial derivatives balance 13,754Other investment balance -16,465

Capital-account balance -160,881Overall balancea 10,679

a Including net errors & omissions.

Source: IMF, International Financial Statistics.

Foreign reserves and the exchange rate

Hong Kong has abundant foreign-exchange reserves, totalling US$127.4bn at end-July 2006 according to the Hong Kong Monetary Authority (HKMA, which fulfils some of the functions of a central bank), up from US$121.9bn on the year-earlier period. Hong Kong�s reserves are the seventh-largest in Asia after those of Japan, China, Taiwan, Singapore and South Korea. The reserves, which are mostly US-dollar-denominated securities, are held mainly in the Exchange Fund.

The Hong Kong dollar was pegged against the US dollar at a rate of HK$7.8:US$1 in October 1983 (although during much of the 1990s the currency traded nearer to HK$7.7:US$1). Since then Hong Kong has gone through a number of crises, including the temporary panic induced by the Beijing massacre of June 1989, the 1991 Gulf war and extensive short-selling by speculators and locals in 1997-98. The fixed link has survived these events, although the authorities have sometimes had to protect it using unorthodox means"most notably the HK$118bn (US$15.1bn) intervention in the stockmarket in August 1998. The authorities continued to proclaim publicly their support for the peg, despite speculation in recent years over a devaluation of the Hong Kong dollar as the economy remained in the doldrums. Support for the peg strengthened in the latter part of 2003, as a strong economic recovery set in mainland China, with a positive knock-on effect in Hong Kong itself. As a consequence, the currency

The balance of payments is generally in surplus

Abundant foreign-exchange reserves

The Hong Kong dollar peg

Hong Kong 43


firmed to HK$7.705:US$1 on September 22nd 2003, and continued to trade above the pegged rate until May 2004.

In late 2004 the Hong Kong dollar firmed once again amid speculation of a revaluation of China�s yuan. The Hong Kong dollar ended the year at HK$7.774:US$1. Inflows of liquidity in both late 2004 and early 2005 kept local interest rates artificially low, leading to concern at the HKMA that the impending revaluation of the Chinese currency would lead to a sudden catch-up in interest rates as excess liquidity fell off. Consequently, the HKMA moved on May 18th 2005 to reduce the use of the Hong Kong dollar as a proxy for speculation against the renminbi by clarifying the extent to which it would allow a firming of the Hong Kong dollar. Whereas previously the HKMA had been committed only to selling US dollars to licensed banks at the pegged rate, but was not obliged to intervene when the Hong Kong dollar strengthened beyond this rate, the HKMA now committed itself to buying US dollars from licensed banks at a rate of HK$7.75:US$1. The weak-side convertibility undertaking to sell US dollars at HK$7.80:US$1 was shifted to a rate of HK$7.85:US$1, creating symmetrical convertibility undertakings around the linked rate of HK$7.80:US$1.

The May 18th changes seemed to be an attempt to prepare Hong Kong�s financial sector for the expected revaluation of China�s renminbi, which was implemented in late July. Following the changes, a number of interest rate increases have been implemented in Hong Kong, and speculation continues over further changes to the value of the renminbi. Consequently, the Hong Kong dollar has since been trading above the pegged rate, although it remains within the new HK$7.75-7.85:US$1 limits. On October 24th the currency was trading at HK$7.78:US$1.

44 Hong Kong


Regional overview

Membership of organisations

APEC started life as a forum for informal discussion between six members of the Association of South-East Asian Nations (ASEAN), Brunei, Indonesia, Malaysia, the Philippines, Thailand and Singapore, and their six dialogue partners in the Pacific, Australia, Canada, Japan, New Zealand, South Korea and the US. In 1991 China, Hong Kong and Taiwan became members, followed by Mexico and Papua New Guinea in 1993 and Chile in 1994. Peru, Russia and Vietnam joined in 1998. APEC describes itself as �the primary vehicle for promoting open trade and practical economic co-operation� in the region, with the goal of advancing �Asia-Pacific economic dynamism and sense of community�.

APEC has had a permanent secretariat since 1992, and also runs four permanent committees"on budget and managerial issues, on trade and investment, on economic trends generally, and on economic and technical co-operation. In addition, there are 11 working groups"on agricultural technical co-operation, energy, fisheries, human resources, industrial science and technology, marine resource co-operation, small and medium-sized enterprises, telecommunications, tourism, trade promotion and transport. There is also an APEC business advisory council (ABAC), which includes up to three senior private-sector representatives from each member country. APEC as a whole has its headquarters in Singapore, while ABAC is based in the Philippines. APEC�s main business is done at annual meetings of member states� ministers of foreign affairs and economic affairs, which are followed by informal gatherings of members� heads of state. Every other ministerial meeting is held in a South-east Asian country. The chairmanship of APEC rotates on a yearly basis.

APEC!s high point was probably reached in 1994, when members agreed a timetable for the liberalisation of trade across the region: the ambitious aim was to eliminate all trade barriers by 2020, and then to extend reciprocal concessions to non-members. Since then APEC has appeared to lose momentum and effectiveness. Its response to the Asian regional financial crisis in 1997-98 lacked substance, and subsequent meetings provided other distractions from the trade liberalisation theme: the East Timor crisis in 1999, information technology in 2000 and security issues in 2001.

Discussion returned to trade relations in 2002-05, but the latest APEC ministerial meeting, held in Busan, South Korea, in November 2005, was marred by demonstrations by South Korean workers and farmers against the liberalisation of global trade, particularly that in agricultural goods. The meeting itself also highlighted the deep divisions between member states on the issue of trade liberalisation. APEC!s main problem is that it has no enforcement mechanism and cannot compel its members to take action, meaning that many of the statements issued following meetings are arguably of academic interest only. The conclusion to be drawn from recent meetings is that APEC is now more an informal talking shop than a serious regional reformer.

Asia-Pacific Economic Co-operation (APEC) forum

Hong Kong 45


Appendices

Sources of information

Government Secretariat, Budget Papers (annual)

Hong Kong Census and Statistics Department, Hong Kong Annual Digest of Statistics

Hong Kong Census and Statistics Department, Hong Kong Monthly Digest of Statistics

IMF, International Financial Statistics (monthly)

Select bibliography and websites

Census and Statistics Department: www.info.gov.hk/censtatd/eng/hkstat

Central Policy Unit: www.info.gov.hk/cpu/

Financial Services and Treasury Bureau: www.fstb.gov.hk

Hong Kong government information website: www.info.gov.hk

Hong Kong Monetary Authority: www.info.gov.hk/hkma/

Kui-Wai Li, The Hong Kong Economy: Recovery and Restructuring, McGrawHill, Hong Kong, 2005

Legislative Council: www.legco.gov.hk

South China Morning Post: www.scmp.com

The Standard: www.thestandard.com.hk

Trade Development Council: www.tdctrade.com

Reference tables

Population (m unless otherwise indicated)

2001 2002 2003 2004 2005Total (mid-year) 6.725 6.787 6.803 6.883 6.966 % change, year on year 0.9 0.9 0.2 1.2 1.2Crude birth rate (per 1,000) 7.2 7.1 6.9 7.2 8.2

Crude death rate (per 1,000) 5.0 5.0 5.4 5.4 5.6Infant mortality rate (per 1,000) 2.6 2.3 2.3 2.5 2.3

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

National statistical sources

International statistical sources

46 Hong Kong


Labour force (% unless otherwise indicated)

2001 2002 2003 2004 2005Labour force (�000) 3,427.1 3,487.1 3,496.2 3,551.0 3,584.6Participation rates Men 72.9 72.5 72.0 71.7 71.1 Women 50.7 51.9 51.7 51.8 51.8No. unemployed (�000) 174.4 255.5 277.2 242.5 200.6

Unemployment rate 5.1 7.3 7.9 6.8 5.6Share of employment excl civil serviceConstruction 3.4 2.9 2.9 2.7 2.3 No. (�000) 76.6 66.4 65.1 61.2 54.5Manufacturing 8.9 8.2 7.5 7.2 7.2 No. (�000) 203.0 184.5 168.3 165.3 167.4Financial services 19.0 19.5 19.0 19.4 19.8 No. (�000) 433.9 441.3 423.8 447.4 464.6Trade, restaurants & hotels 43.6 43.5 43.7 43.6 43.7 No. (�000) 997.0 983.0 973.9 1,003.5 1,023.7Logistics & communications 8.0 7.8 7.8 7.9 7.9 No. (�000) 181.7 175.7 174.3 181.3 183.8Community, social & personal services 16.8 17.8 18.7 18.9 19.1 No. (�000) 385.0 402.6 416.5 435.2 446.8

Sources: Census and Statistics Department, website; Hong Kong Annual Digest of Statistics; Hong Kong Monthly Digest of Statistics.

Transport statistics 2001 2002 2003 2004 2005Road (no.)a Motorcycles 27,116 28,350 30,266 32,735 34,025Private cars 340,568 340,855 338,930 344,713 350,753Taxis 18,045 18,040 18,114 18,043 18,010Goods vehicles 112,585 111,025 109,777 110,477 110,989Rail Passenger train departures (no.) 3,001 3,080 3,503 4,534 4,733Cargo loaded (�000 tonnes) 97 102 76 64 49Air Passenger arrivals (�000) 11,533 11,841 9,486 12,366 13,265Cargo loaded (�000 tonnes) 1,180 1,475 1,607 1,925 2,156Aircraft landings (no.) 98,423 103,357 93,749 118,662 131,760

Sea Vessel departures (�000) 37 35 35 35 39Vessel departures (�000 NRT)b 272,015 288,331 290,671 304,920 326,028Outward cargo handled (�000 tonnes) 42,170 44,857 49,255 54,006 54,772Inward cargo handled (�000 tonnes) 88,506 93,444 99,363 104,612 106,695

a Licensed vehicles. b Net registered tonnage.


Hong Kong 47


National energy statistics (terajoules unless otherwise indicated)

2001 2002 2003 2004 2005Electricity consumption 134,139 137,112 138,434 141,201 144,171 Domestic 32,799 33,394 34,365 34,134 35,811 % of total 24.5 24.4 24.8 24.2 24.8 Commercial 84,214 87,241 88,834 91,255 93,341 % of total 62.8 63.6 64.2 64.6 64.7 Industrial 16,759 16,112 14,851 15,430 14,636 % of total 12.5 11.8 10.7 10.9 10.2 Street lighting 367 365 384 383 383 % of total 0.3 0.3 0.3 0.3 0.3

Gas consumption 26,564 26,641 27,002 27,137 27,261 Domestic 14,493 14,794 15,446 15,237 15,444 % of total 54.6 55.5 57.2 56.2 56.7 Commercial 11,060 10,860 10,542 10,945 10,919 % of total 41.6 40.8 39.0 40.3 40.1 Industrial 1,011 987 1,015 955 898 % of total 3.8 3.7 3.8 3.5 3.3


Government financesa (HK$ m unless otherwise indicated; fiscal years Apr-Mar)

2000/01 2001/02 2002/03 2003/04 2004/05

Total government revenue 225,060 175,559 177,489 207,338 263,591

Operating revenue 171,320 151,405 153,336 174,611 188,004

Direct taxes: earnings & profits tax 73,870 77,749 73,028 80,474 96,709

Indirect taxes 50,814 45,342 39,243 45,780 52,941

Other revenue 46,636 28,314 41,065 48,357 38,354

Capital revenue 53,740 24,154 24,153 32,727 75,587

Total government expenditure 232,893 238,890 239,177 247,466 242,235

Operating expenditure 186,686 198,743 200,310 203,234 196,906

Recurrent expenditure 108,283 115,372 117,121 117,327 115,944

Subventions 76,239 80,220 80,883 79,964 76,351

Education 23,860 25,137 25,894 25,798 25,488

Health 28,221 29,546 29,553 29,112 28,057

Social welfare 6,453 6,960 6,818 6,922 6,532

Universities & polytechnics 13,131 13,258 13,189 12,904 11,872

Vocational training council 2,039 2,067 2,005 1,926 1,766

Miscellaneous 2,535 3,252 3,424 3,302 2,636

Other non-recurrent 2,164 3,151 2,306 5,943 4,611

Capital expenditure & equity investments 46,207 40,147 38,867 44,232 45,329

Budget balance -7,833 -63,331 -61,688 -40,128 21,346

a Includes revenue generated by sales of land by public auction and tender, private treat grants, the modification of existing leases, exchangesand extensions, and fees received in respect of short-term waivers.

Sources: Census and Statistics Department, Hong Kong Annual Digest of Statistics; Government of the Hong Kong Special Administrative Region (SAR) estimates.

48 Hong Kong


Money supply (HK$ m where series are indicated; otherwise % change year on year; end-period)

2001 2002 2003 2004 2005Notes & coins 113,488 124,618 140,765 153,379 156,259 7.6 9.8 13.0 9.0 1.9M1 258,056 295,650 413,423 484,494 434,684 5.8 14.6 39.8 17.2 -10.0M2 3,550,060 3,518,326 3,813,442 4,166,706 4,379,062 -2.7 -0.9 8.4 9.3 5.1M3 3,594,130 3,561,852 3,858,044 4,189,544 4,407,193 -2.7 -0.9 8.3 8.6 5.2


Interest rates (%; end-period)

2001 2002 2003 2004 2005Interbank offered rate (3-month) 1.88 1.41 0.07 0.28 4.16Prime lending rate 5.1 5.0 5.0 5.0 5.75

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; IMF, International Financial Statistics.

Gross domestic product (HK$ unless otherwise indicated)

2001 2002 2003 2004 2005Total (US$ m) At current prices 166,521 163,694 158,474 165,825 177,186

Total (HK$ m) At current prices 1,298,813 1,276,757 1,233,983 1,291,568 1,382,052At constant (2000) prices 1,323,167 1,347,495 1,390,610 1,510,182 1,619,983 % change, year on year 0.6 1.8 3.2 8.6 7.3Per head (HK$) At current prices 193,135 188,118 181,385 187,657 199,261At constant (2000) prices 196,756 198,541 204,288 218,543 233,854 % change, year on year -0.3 0.9 2.9 7.0 7.0

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; Quarterly Estimates of Gross Domestic Product; IMF, International Financial Statistics.

Hong Kong 49


Gross domestic product by expenditure (HK$ m at constant 2000 prices where series are indicated; otherwise % change year on year)

2001 2002 2003 2004 2005

Private consumption 790,288 782,580 775,219 831,828 859,830

2.1 -1.0 -0.9 7.3 3.4

Government consumption 127,441 130,603 133,055 133,973 129,799

6.0 2.5 1.9 0.7 -3.1

Gross fixed investment 356,572 340,354 343,418 353,855 368,394

2.6 -4.5 0.9 3.0 4.1

Stockbuilding -4,889 6,884 10,354 7,318 -5,409

-1.5a 0.9a 0.3a -0.5a -0.3a

Exports of goods & services 1,855,392 2,023,529 2,287,824 2,648,569 2,932,442

-1.7 9.1 13.1 15.8 10.7

Imports of goods & services 1,801,637 1,936,455 2,159,257 2,465,361 2,665,073

-1.5 7.5 11.5 14.2 8.1

GDP 1,323,167 1,347,495 1,390,610 1,510,182 1,619,983

0.6 1.8 3.2 8.6 7.3

a Change as a percentage of GDP in the previous year.

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; Quarterly Estimates of Gross Domestic Product.

Gross domestic product by sector (HK$ m at current prices unless otherwise indicated)

2000 2001 2002 2003 2004Agriculture & fishing 920 1,003 1,002 824 886 % change, year on year 0.1 0.1 0.1 0.1 0.1Industry 166,858 155,058 142,675 128,268 124,629 % change, year on year 13.3 12.5 11.6 10.7 9.9 Mining & quarrying 241 174 136 116 72 Manufacturing 67,646 59,760 51,396 44,403 44,455 Electricity, gas & water 36,917 37,957 39,609 38,839 39,726 Construction 62,054 57,167 51,534 44,910 40,376Services 1,087,570 1,088,211 1,091,272 1,073,942 1,130,301 % change, year on year 86.6 87.5 88.4 89.3 90.0 Wholesale, retail, trade, hotels & restaurants 308,600 309,926 310,500 308,872 345,092 Transport, storage & communications 118,974 117,526 121,766 117,420 126,820 Financing, insurance & real estate 268,399 251,495 247,045 251,085 266,834 Community, social & personal services 249,997 262,960 265,746 261,917 263,756 Ownership of premises 141,600 146,304 146,214 134,648 127,799GDP at factor cost 1,255,348 1,244,271 1,234,949 1,203,034 1,255,816

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; Quarterly Estimates of Gross Domestic Product.

50 Hong Kong


Prices 2001 2002 2003 2004 2005Consumer prices (Oct 2004-Sep 2005=100) Consumer price index (A)a 104.8 101.4 99.3 99.3 100.3 % change -1.7 -3.2 -2.1 0 1.1Consumer price index (B)b 105.9 102.6 99.8 99.4 100.4 % change -1.6 -3.1 -2.7 -0.5 1Consumer price index (C)c 106.3 103.3 100.3 99.6 100.3 % change -1.5 -2.8 -2.9 -0.9 0.8Composite consumer price index 105.7 102.4 99.8 99.4 100.3 % change -1.6 -3 -2.6 -0.4 0.9

Foreign trade prices (2000=100) Domestic export unit value index 95.3 92.2 92.4 93.8 96.5 % change -4.7 -3.3 0.2 1.5 4.2Re-export unit value index 98 95.4 94 95 96 % change -2 -2.7 -1.5 1.1 3.8Total export unit value index 97.7 95.1 93.7 94.8 96.1 % change -2.3 -2.7 -1.5 1.2 3.9Import price index 96.9 93.1 92.8 95.5 94.2 % change -3.1 -3.9 -0.3 2.9 1.9

Terms of trade 100.9 102.1 101 99.3 97.9% change 0.9 1.2 -1.1 -1.7 -1.4

a Households spending between HK$4,000 and HK$15,499 per month. b Households spending between HK$15,500 and HK$27,499 per month. c Households spending between HK$27,500 and HK$59,999 per month.

Sources: Census and Statistics Department, Hong Kong Annual Digest of Statistics; Hong Kong Monthly Digest of Statistics.

Wage indices (Sep 1992=100 unless otherwise indicated)

2001 2002 2003 2004 2005Nominal terms All industries 150.6 149.3 147.0 145.1 147.2 % change -0.3 -0.9 -1.5 -1.3 1.4Manufacturing 148.6 146.4 141.8 140.8 144.3 % change -1.4 -1.5 -3.1 -0.7 2.5Wholesale, retail, trade, hotels & restaurants 151.2 149.1 146.0 143.5 145.7 % change -0.8 -1.4 -2.1 -1.7 1.5Financing, insurance, real estate & business services 154.7 155.1 156.1 153.9 156.7 % change 2.5 0.3 0.6 -1.4 1.9Real terms All industries 120.3 118.0 117.7 115.7 115.6 % change -6.9 -1.9 -0.3 -1.7 -0.1Manufacturing 118.7 115.8 114.7 112.2 113.4 % change -8.1 -2.4 -0.9 -2.2 1.1Wholesale, retail, trade, hotels & restaurants 120.8 117.8 116.9 114.4 114.5 % change -7.6 -2.5 -0.8 -2.1 0.1Financing, insurance, real estate & business services 123.5 122.6 125.0 122.6 123.1 % change -4.0 -0.7 2.0 -1.9 0.4


Hong Kong 51


Manufacturing production (volume indices; 2000=100)

2001 2002 2003 2004 2005Food, beverages & tobacco 98.4 106.4 94.1 99.4 100.5Clothing excl footwear 99.9 93.3 95.1 94.7 84.2

Textiles 99.7 92.5 82.6 79.1 82.5Paper products & printing 98.8 98.6 98.2 95.9 95.9Chemical, rubber & plastic products 92.2 76.3 77.3 76.0 77.3 Plastic products 84.8 75.7 69.6 68.1 69.3Basic metals & metal products 84.6 64.5 60.3 65.4 71.1

Electrical products, etc 92.1 71.7 56.4 63.0 69.7 Consumer electronics 100.0 76.4 65.9 61.1 64.4 Machinery, equipment, etc 91.5 76.1 58.9 68.4 77.3

Miscellaneous 94.9 98.5 91.8 95.9 102.6Total manufacturing output 95.6 86.2 78.3 80.6 82.6


Miscellaneous manufacturing statistics (excl civil service) (no.; Dec of year stated)

2001 2002 2003 2004 2005Establishments 19,977 19,106 16,272 15,748 15,198Total manufacturing employment 202,984 184,503 168,348 165,268 167,367

Workers per establishment 10 10 10 10 11Work stoppages 1 0 1 2 0Working days lost 780 0 150 351 100


Construction statisticsa 2001 2002 2003 2004 2005Buildings completed (no.) 434 1,104 777 640 778 Residential 184 870 543 364 402 Residential/commercial 56 71 79 51 35 Commercial 14 26 18 19 7 Industrial 27 18 6 3 1 Other 153 119 131 203 333Usable floor area (�000 sq metres) 1,354 1,909 1,587 1,720 1,226 Residential 963 1,361 999 1,032 709 Non-residential 391 548 588 688 517Value of construction work by building & civil engineers (HK$ m) 113,986 106,000 99,032 93,171 90,851

a Private sector only.


52 Hong Kong


Banking statistics (HK$ m unless otherwise indicated)

2001 2002 2003 2004 2005Authorised institutions (no.) 250 224 215 208 199Licensed banks 147 133 134 133 133Restricted-licence banks 49 46 42 40 33Deposit-taking companies 54 45 39 35 33Assets of all authorised institutions (HK$ bn) 6,154 5,999 6,491 7,137 7,248 Foreign currency 3,436 3,312 3,708 4,195 4,202Loans to customers 2,185 2,076 2,035 2,156 2,312 Inside Hong Konga 1,879 1,834 1,809 1,922 2,072 Outside Hong Kong 306 243 226 233 240Interbank lending 2,628 2,315 2,614 3,024 2,891 Inside Hong Kong 468 395 472 475 410 Outside Hong Kong 2,160 1,919 2,142 2,548 2,481Negotiable certificates of deposit (NCDs) 128 134 144 121 97Negotiable debt instruments, other than NCDs 908 1,109 1,197 1,328 1,370Other assets 306 365 501 508 578Liabilities of all authorised institutions (HK$ bn) 6,154 5,999 6,491 7,137 7,248 Foreign currency 3,239 3,145 3,504 3,947 3,950Deposits from customersb 3,407 3,318 3,567 3,866 4,068Interbank borrowing 1,929 1,788 1,918 2,150 1,965 Inside Hong Kong 470 394 470 499 414 Outside Hong Kong 1,459 1,394 1,448 1,651 1,551Negotiable certificates of deposit 172 211 242 256 263Other liabilities 646 683 764 865 952

a Includes trade-financing loans but excludes loans to finance trade not touching Hong Kong. b Including swap deposits.

Sources: Hong Kong Monetary Authority, Monthly Statistical Bulletin; Annual Report 2005.

Stockmarket indicatorsa (year-end)

2001 2002 2003 2004 2005Hang Seng Index (Jul 31st 1964=100) 11,397 9,321 12,576 14,230 14,876 Finance 19,498 18,231 26,264 28,238 26,614 Utilities 20,499 21,971 24,879 30,773 31,866 Properties 15,555 11,104 14,779 18,178 17,978 Commerce & industry 5,509 4,044 5,272 6,077 7,139Stockmarket turnover (HK$ bn) 1,950 1,599 2,546 3,948 4,498Market capitalisation (HK$ bn) 3,885 3,559 5,478 6,629 8,113

a Main board.


Hong Kong 53


Retail sales (monthly averages; Oct 2004-Sep 2005=100 unless otherwise indicated)

2001 2002 2003 2004 2005Total value of retail sales (HK$ bn) 184.4 176.9 172.9 191.6 204.6Value index 99.0 94.9 85.6 94.9 101.3 % change -1.2 -4.1 -9.8 10.9 6.7Consumer durable goods 91.3 87.5 85.7 97.2 99.6 Motor vehicles & parts 98.5 93.2 82.3 99.1 98.2 Supermarkets 102.9 103.7 93.3 96.1 101.7Volume index 102.0 99.3 87.5 95.5 101.3 % change 1.2 -2.6 -11.9 9.1 6.1Consumer durable goods 110.0 111.3 79.3 94.4 100.9 Motor vehicles & parts 104.8 110.1 80.4 100.2 98.0Supermarkets 101.8 102.1 93.4 96.1 101.9

Sources: Census and Statistics Department, Hong Kong Annual Digest of Statistics; Hong Kong Monthly Digest of Statistics.

Tourism statistics 2003 2004 2005Total visitor arrivals (�000) 15,537 21,811 23,359 % change -6.2 40.4 7.1Visiting from: China 8,467 12,246 12,541 Taiwan 1,852 2,075 2,130 South & South-east Asia 1,360 2,078 2,413 Europe, Africa & the Middle East 946 1,380 1,726 US 926 1,380 1,400

Hotel rooms (no.) 42,936 44,362 48,891Occupancy rate (av; %) 70 88 86Spending per head (HK$) 5,041 4,478 4,663

Average stay (no. of days) 4.1 3.7 3.7

Source: Census and Statistics Department, Hong Kong Annual Digest of Statistics.

Domestic exports by main commodity (HK$ m; fob) 2001 2002 2003 2004 2005Apparel & clothing 72,240 65,039 63,880 63,392 56,240Electrical equipment & machinery 20,322 15,564 10,235 13,115 18,839

Textile yarn & fabric 8,193 7,645 5,898 5,325 4,695Office machinery & data-processing equipment 4,705 2,870 2,133 2,127 2,040

Watches & clocks 2,354 1,164 850 763 700Jewellery, goldsmiths & silverware 4,736 5,155 5,379 5,880 6,642Printed matter 4,034 3,883 3,707 3,344 3,087

Telecommunications equipment 3,486 1,098 597 274 702Plastic articles 1,140 1,005 947 805 782

Baby carriages, toys, games & sporting goods 560 363 257 225 213Total incl others 153,520 130,926 121,687 125,982 136,030


54 Hong Kong


Re-exports by end-use category (HK$ m; fob) 2001 2002 2003 2004 2005Foodstuffs 17,412 16,209 14,693 12,392 11,938

Consumer goods 570,152 580,445 617,317 679,070 734,459Raw materials & semi-manufactures 395,966 448,252 533,207 662,256 721,889

Fuels 1,892 1,673 2,017 2,690 3,681Capital goods 342,045 383,012 453,515 536,725 642,177Total 1,327,467 1,429,590 1,620,749 1,893,133 2,114,144


Imports by end-use category (HK$ m; cif) 2001 2002 2003 2004 2005Foodstuffs 60,353 59,145 58,339 60,097 61,315

Consumer goods 537,967 543,203 575,811 631,841 677,929Raw materials & semi-manufactures 511,367 558,088 654,389 805,188 869,163

Fuels 30,362 31,288 35,395 48,629 60,461Capital goods 428,147 427,695 481,837 565,369 660,601

Total 1,568,194 1,619,419 1,805,770 2,111,124 2,329,469


Trade volume indices (2000=100 where series are indicated; otherwise % change year on year)

2001 2002 2003 2004 2005Domestic exports 89.8 79.7 73.8 75.6 81.3 -10.2 -11.2 -7.4 2.4 7.5

Re-exports 97.6 108.2 125.6 146.1 163.1 -2.4 10.9 16.1 16.3 11.6Total exports 96.7 104.9 119.6 138.0 153.7 -3.3 8.5 14.0 15.4 11.4Imports 98.0 105.7 119.1 135.9 147.5 -2.0 7.9 12.7 14.1 8.5

Source: Census and Statistics Department, Hong Kong Annual Digest of Statistics.

Domestic exports by main destination (HK$ m; fob) 2001 2002 2003 2004 2005US 47,589 41,908 39,130 38,636 37,767

China 49,547 41,374 36,757 37,898 44,643UK 8,578 7,588 7,762 8,190 7,304

Germany 5,818 4,273 4,853 4,985 4,353Taiwan 5,346 4,388 3,653 4,664 5,142

Singapore 2,650 2,161 2,237 3,149 4,076Japan 4,060 2,969 2,848 2,812 4,320Netherlands 4,619 3,470 2,473 2,616 5,386

Philippines 1,846 1,717 1,894 2,132 1,771Canada 3,093 2,411 2,237 1,976 1,268


Hong Kong 55


Re-exports (HK$ m) 2001 2002 2003 2004 2005By origin China 808,370 863,967 967,104 1,135,469 1,313,211Japan 125,649 135,793 161,231 194,247 186,065Taiwan 80,321 94,275 107,144 133,874 152,496South Korea 39,775 47,218 57,000 64,358 75,030US 65,193 62,900 63,158 61,771 64,304Malaysia 27,170 27,412 33,933 42,571 49,008Germany 20,322 21,890 26,583 27,369 28,554Singapore 14,650 16,676 23,479 25,379 27,313Thailand 13,297 16,352 21,368 24,737 27,587Philippines 8,273 13,210 19,873 21,102 22,893By destination China 496,574 571,870 705,787 850,645 967,923US 282,189 291,043 285,084 302,964 322,872Japan 83,551 80,743 91,154 104,733 114,258Germany 45,774 44,567 51,369 57,915 68,3670UK 46,764 46,644 49,625 57,663 61,944Taiwan 30,021 30,193 38,616 44,447 45,285South Korea 24,640 29,264 34,336 42,673 46,591Singapore 26,929 29,424 33,468 40,428 42,465Netherlands 20,693 22,775 25,498 30,524 37,252France 21,516 19,243 20,676 24,964 30,341


Imports by supplier (HK$ m) 2001 2002 2003 2004 2005China 681,980 717,074 785,625 918,275 1,049,335Japan 176,599 182,569 213,995 256,141 256,501

Taiwan 107,929 115,906 125,203 153,812 168,227US 104,941 91,478 98,730 111,994 119,252Singapore 72,898 75,740 90,570 110,986 135,190

South Korea 70,791 75,955 87,340 100,467 103,035Malaysia 39,200 39,729 44,637 51,941 57,153

Germany 33,309 32,997 41,222 39,999 41,054Thailand 27,370 29,556 33,194 37,782 46,455Philippines 15,408 21,135 29,227 33,735 38,278


56 Hong Kong


Trade in services (HK$ m)

2001 2002 2003 2004 2005Exports of services 320,800 347,836 362,420 429,563 483,455 Transportation 93,675 103,751 107,688 135,188 152,147 Travel 46,362 58,134 55,575 70,084 79,994 Trade-related services 106,447 115,996 130,183 146,527 163,498 Other services � � 68,975 77,764 87,816Imports of services 194,180 202,494 203,400 242,507 251,832 Transportation 50,916 48,518 52,305 67,657 73,067 Travel 96,057 96,846 89,133 103,347 103,492 Trade-related services 11,802 14,660 16,008 16,517 18,211 Other services � � 45,965 54,986 57,062Services balance 126,620 145,342 159,020 187,056 231,623

Sources: Census and Statistics Department, Trade in Services Statistics; Monthly Digest of Statistics.

Trend of foreign trade (HK$ bn)

2001 2002 2003 2004 2005Exports fob 1,481.0 1,560.5 1,742.4 2,019.1 2,250.2 Domestic 153.5 130.9 121.7 126.0 136.0 Re-exports 1,327.5 1,429.6 1,620.7 1,893.1 2,114.1Imports cif -1,568.2 -1,619.4 -1,805.8 -2,111.1 -2,329.5Trade balance -87.2 -58.9 -63.3 -92.0 -79.3


Hong Kong 57


Balance of payments, IMF series (US$ m)

2001 2002 2003 2004 2005Goods: exports fob 190,926.0 200,299.0 224,657.0 260,262.0 289,580.0Goods: imports fob -199,257.0 -205,353.0 -230,435.0 -269,575.0 -297,206.0

Trade balance -8,331.0 -5,052.0 -5,779.0 -9,311.0 -7,626.0Services: credit 41,135.0 44,601.0 46,555.0 55,157.0 62,174.0Services: debit -24,900.0 -25,964.0 -26,126.0 -31,136.0 -32,384.0

Income: credit 48,058.0 41,513.0 43,181.0 52,003.0 64,730.0Income: debit -44,398.0 -40,787.0 -39,525.0 -48,997.0 -64,419.0

Current transfers: credit 606.0 778.0 528.0 626.0 743.0Current transfers: debit -2,384.0 -2,672.0 -2,365.0 -2,611.0 -2,933.0Current-account balance 9,786.0 12,411.0 16,469.0 15,728.0 20,284.0Direct investment in Hong Kong 23,776.0 9,682.0 13,624.0 34,032.0 35,897.0Direct investment abroad -11,345.0 -17,463.0 -5,492.0 -45,715.0 -32,560.0

Inward portfolio investment (incl bonds) -1,161.0 -1,084.0 1,386.0 3,882.0 9,076.0

Outward portfolio investment -40,133.0 -37,702.0 -35,386.0 -43,214.0 -30,648.0Other investment assets 59,137.0 46,617.0 -28,671.0 -32,609.0 -7,628.0

Other investment liabilities -41,985.0 -26,412.0 23,539.0 57,838.0 5,452.0Financial balance -6,626.0 -19,751.0 -20,953.0 -20,094.0 -18,643.0Capital account nie credit 41.0 31.0 132.0 1,152.0 952.0Capital account nie debit -1,215.0 -2,042.0 -1,197.0 -1,480.0 -1,624.0Capital account nie balance -1,174.0 -2,011.0 -1,065.0 -328.0 -672.0Net errors & omissions 2,699.0 6,973.0 6,542.0 7,980.0 409.0Overall balance 4,684.0 -2,377.0 994.0 3,286.0 1,378.0Financing (� indicates inflow) Movement of reserves -3,613.4 -745.3 -6,469.0 -5,181.3 -709.0Use of IMF credit & loans 0.0 0.0 0.0 0.0 0.0

Source: IMF, International Financial Statistics.

External debt (US$ m unless otherwise indicated)

1999 2000 2001 2002Official multilateral debt 0 0 0 0Official bilateral debt 0 0 2 0

Export credits (official & officially guaranteed) 3,711 3,270 2,876 3,263 Non-bank 1,749 1,468 1,506 1,792 Bank 1,963 1,802 1,370 1,472Other credits 34,483 38,724 54,246 48,176 Bank claims 17,105 18,151 25,870 19,335 Bonds 17,378 20,574 28,376 28,841Total debt outstanding 38,195 41,994 57,124 51,440 % of GDP 24 25 35 32 Medium- & long-term debt 22,489 25,062 36,778 33,124Short-term debt 15,706 16,932 20,346 18,316 Banks 12,296 12,514 16,424 12,245 Export credits 1,643 1,353 1,113 1,559

Source: OECD, External Debt Statistics.

58 Hong Kong


Exchange rates (HK$ per unit of currency unless otherwise indicated; annual averages)

2001 2002 2003 2004 2005US$ 7.80 7.80 7.75 7.79 7.78£ 11.23 11.69 12.65 14.26 14.14

� 6.98 7.37 8.77 9.69 9.68NT$ 0.23 0.23 0.23 0.23 0.24Rmb 0.94 0.94 0.94 0.94 0.95

¥ 0.06 0.06 0.07 0.07 0.07

Source: Hong Kong Census and Statistics

Foreign reserves (US$ m; end-period)

2001 2002 2003 2004 2005Total reserves incl gold 111,174 111,919 118,388 123,569 124,278

Total international reserves excl gold 111,155 111,896 118,360 123,540 124,244Gold, national valuation 19 23 28 29 34

Source: IMF, International Financial Statistics

Editors: Gareth Leather (editor); Gerard Walsh (consulting editor) Editorial closing date: October 25th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

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