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FY 1999: Hong Kong |
CHAPTER II. ECONOMIC TRENDS AND OUTLOOKA. Major Trends and Outlook
While Hong Kong's real GDP increased by 5.3% in real terms in 1997, to reach US$171 billion at current market prices, Hong Kong will likely experience negative GDP growth for 1998. GDP per capita reached US$26,302 last year, as the performance of the Hong Kong economy in 1997 showed continued improvement, recovering from a cyclical downturn begun in 1995. With increasing strength in stock and property markets, as well as recovered retail sales and declining unemployment, real GDP in 1997 grew by 5.9% in the first quarter, 6.8% in the second quarter, and 6.0% in the third quarter. Growth fell to 2.7% in the fourth quarter because of the Asian financial turmoil, and declined to -2% in the first quarter of 1998.
Labor market conditions tightened in the first three quarters in 1997, in line with the economic activity. However, labor supply surged in the fourth quarter of 1997 when Hong Kong's economy was hard hit by the Asian financial turmoil. Unemploy- ment fell to 2.2% in the third quarter, before rebounding to 2.5% in the fourth quarter. The overall unemployment rate for 1997 was 2.2%. As Hong Kong's economy continued to slacken in 1998, unemployment rose to 4.2% in May, and some analysts expect this rate to exceed 5% in 1998. The government has recently formed a task force to address the unemployment situation, to try to create more jobs.
Hong Kong's merchandise, or visible, trade deficit increased 15.6% in 1997 to US$20.4 billion. Exports of services dropped 0.9% in real terms in 1997 against the growth of 4.4% in real terms of services imports. Hong Kong's invisibles surplus, which shrank slightly in 1997 to US$14.5 billion, offset most of its merchandise trade deficit.
In 1997, Hong Kong's total exports (comprising re-exports and domestic exports) grew a bit faster than in 1996. In real terms, total exports in 1997 increased by 6%, as compared with a 5% increase in 1996. By value, total exports rose by 4% to US$187 billion in 1997. For the period January-May of 1998, however, total exports declined 2.1% compared to the year earlier period. Re-exports, which account for 86% of Hong Kong's total exports, increased by 5% in value terms in 1997. (Re-exports refer to goods made in foreign countries, princi- pally China, which officially enter Hong Kong's customs territory for shipment onward to other countries.) Re-exports declined 1.4% for the period January-May of 1998 compared to the year earlier period. Domestic exports increased by 2% in real terms in 1997, following a 8% drop in 1996, but declined 6.3% for the period January-May of 1998 compared to the year earlier period. China is Hong Kong's principal export market, taking approximately one third of total domestic merchandise exports. The United States is Hong Kong's second largest export market. Including re-exports from China, in 1997 Hong Kong's total exports to the U.S. were US$40.6 billion, according to Hong Kong Government statistics. Other principal export markets in order of importance are Japan, Germany and the U.K.
Total imports grew by 5% in value terms in 1997 to US$207 billion. The growth rate in real terms was 7%, following a 4% increase in 1996. Retained imports -- those not shipped onward to China or elsewhere -- rose by 8% in real terms to US$75.7 billion in 1997. The rise represented an expansion in production and consumption in 1997. For the period January-May of 1998, however, total imports have fallen 5.5% compared to the year earlier period. China is the largest supplier of imports with a 37% share, followed by Japan, Taiwan, and the United States. U.S. exports to Hong Kong totaled US$17.1 billion in 1997, up 4.7% from 1996. (Note: According to US Government statistics US exports to Hong Kong totaled USD 15.1 billion in 1997, up from USD 14 billion in 1996. For January-April 1998, US exports to Hong Kong are down 10% compared to the year earlier period.)
Since 1983, the Hong Kong dollar has been linked to the U.S. dollar at a rate of approximately HK$7.8 = US$1. The Hong Kong Government is steadfastly committed to the link and has pledged to maintain it. Currency notes are issued by three commercial banks, and are fully backed by U.S. dollars on deposit with the Exchange Fund. The link requires local interest rates to generally track those in the United States. The market exchange rate of the Hong Kong dollar against the US dollar remained on the strong side of the link during 1997, ranging from 7.725 to 7.751. During the Asian currency turmoil, the strength of the Hong Kong dollar has been maintained through the operations of its currency board mechanism, resulting in upward adjust- ments, at times quite sharp, of interest rates.
B. Principal Growth Sectors
Services dominate Hong Kong's economy, accounting for 84.4% of GDP and employing 82% of the work force in 1996. Between 1986 and 1996, exports of services grew at an average annual rate of 7.2% in real terms, while services imports increased at 8.6%. Major sectors include the trade and travel related sector (wholesale trade, retail trade, import/export, restaurants and hotels), which accounted for 25.4% of GDP in 1996; and financing, insurance, real estate and business services, which contributed 25% of GDP in 1996, up from 20% in 1990. See Section VII (I) for a discussion of the banking/financial services sector.
Manufacturing as a percentage of GDP has declined steadily as companies have shifted production facilities to lower cost locations in China and elsewhere. Manufacturing in 1996 accounted for only about 7.2% of GDP and 13.7% of the work force, down from 17.6% and 28% respectively in 1990. The textile and clothing/apparel industries remain the back- bone of Hong Kong's manufacturing sector. These industries employed 34% of the manufacturing work force and accounted for 34%, or US$9.3 billion, of Hong Kong's 1997 domestic exports. Other principal industries include electronics, watches and clocks, and chemical and industrial machinery. Manufacturers continue to shift production facilities out of Hong Kong, primarily to China, to take advantage of lower labor and land costs.
1. Tourism and Retail Sales
Tourism is Hong Kong's largest earner of foreign exchange after the textile and apparel industries. Tourism provided revenues of US$9.2 billion in 1997, down by 14.7% from 1996 due to a decline in Japanese tourism, the contagion effect of the regional currency turmoil, and bird flu in Hong Kong. Visitor arrivals numbered some 10.4 million in 1997, down by 11% from 1996. The numbers have continued to fall in 1998: for the period January-May, tourist arrivals are down 23.4% compared to the same period in 1997, and tourism re- ceipts are expected to decline 6% in 1998 compared to 1997. Visitors from China accounted for 22% of Hong Kong's total arrivals last year, followed by Taiwan with 17%, Southeast Asia with 14%, Japan with 13%, and the U.S. with 8%. The volume of visitors from the U.S. in 1997 increased to 800,539 from 1996's 751,275. Hotel room occupancy rates fell to 76% in 1997 as compared with 88% in 1996.
Retail sales volume rose by 1.1% in 1997, compared to a 1.6% increase in 1996, reflecting a gradual pick-up in consumer spending that continued in 1997. However, depart- ment stores, supermarkets, and clothing and footwear registered a decrease of 9%, 0.3%, and 8% respectively in volume in 1997. Other retail segments showed a slight increase in volume in 1997, including consumer durable goods other than motor vehicles (up 5.2% in volume); food, alcoholic drinks and tobacco (up 1.7% in volume); motor vehicles (up 26% in volume) and jewelry, watches and clocks, and valuable gifts (up 6% in volume). For the period January-April, 1998, retail sales have fallen 14.9% compared to the same period in 1997
2. Property
The office rental market was buoyant in the first half of 1997, before softening in the second half as demand for office space declined because of the economic slowdown, coupled with the addition of more completed buildings to the supply. In 1997, average monthly rental prices for Grade A (the highest grade) office space in Central, Hong Kong's premier district, rose 9.7% because of tight supply, while Grade A space in Wan Chai North, another popular commercial district for multinational companies on Hong Kong Island, dropped by 5.6%. By the middle of 1998, however, office rentals had dropped significantly, with space in Central renting for as low as US$4.00 per square foot per month, 30-40% lower than a year before. Several new office buildings will be completed in the second half of 1998, putting further downward pressure on rental prices.
Similarly, the residential property market was robust in the first half of 1997, reaching record high levels, with sales prices 41% higher than 1996 on average. The market began to slip in the third quarter of the year when Chief Executive C.H. Tung announced in October his plan to build 85,000 new flats a year, targeting 70% home ownership by 2007. In the fourth quarter, the market plunged as a result of the Asian financial turmoil and high interest rates. The Peak, Wan Chai/Mid-levels, and the South Side of Hong Kong Island are the most popular living areas for expatriates. In May 1998, rental prices in these areas, the "luxury" segment, had fallen some 20% from last summer's peak, with average rents of US$3.8 to $4.4 per square foot for the Peak, US$3.5 to $4.5 for Wan Chai/Mid-levels, and $3.8-$4.9 for the South Side.
3. Infrastructure (Construction, Telecommunications, Environment)
See Section II.E below for a discussion of these sectors.
C. Government Role in the Economy
The Hong Kong Special Administrative Region Government continues to pursue a generally non-interventionist approach to economic policy that stresses the predominant role of the private sector, just as it did prior to the transition to Chinese sovereignty in July 1997. Economic policy is based primarily on minimal interference with market forces. However, the government plays a significant role in infrastructure development, health care, public housing, and land sales. In recent years, the government has also become more proactive in support of high technology development. It has introduced various schemes to encourage applied research and development and has plans to develop a science park. In the spring of 1998, the government, responding to public pressure, put forward a US$5.7 billion economic relief package, a package which will result in a budget deficit for 1998.
Hong Kong has consistently supported an open multilateral trading system. The government is an active member of the World Trade Organization (WTO) and the Asia Pacific Economic Cooperation Forum. Hong Kong maintains no anti- dumping laws, countervailing duty laws, import quotas or tariffs. (There are consumption taxes on a few items which apply equally to imports and local products.) It urges similar open trade policies for its neighbors and trading partners. Since July 1, 1997, Hong Kong has continued to enjoy a high degree of autonomy as a separate customs territory.
The tax system in Hong Kong is simple and tax rates are low. No one pays more than 15% of their income in salaries tax. As a result of generous allowances under the law, 61% of the work force pay no salary tax at all. The business profit tax is 16% and is payable only on net profits arising in Hong Kong or derived from business performed in Hong Kong. There are no taxes on capital gains, dividends, or interest. Other revenue sources include stamp duty on property and stock market transactions, betting duties, estate duty and hotel accommodation tax. The Hong Kong Government's low taxes and prudent fiscal policy have enabled it, generally, to achieve surpluses on its consolidated account over the past decade. Under the Sino-British Joint Declaration and China's Basic Law on Hong Kong, Beijing cannot tax Hong Kong or otherwise extract revenue from the HKSAR Government.
Hong Kong Government-funded core projects, including those related to the Chek Lap Kok Airport and environmental pro- tection, have further fueled the development of Hong Kong's economy. In Fiscal Year 1997 (FY97), which ended March 31, 1998, government expenditure accounted for about 18.3% of GDP. Government expenditure has never exceeded 20% of GDP. Prudent fiscal management and strong reserves have obviated the need for the Hong Kong Government (HKG) to incur debt to finance expenditures. The Hong Kong Monetary Authority (Hong Kong's de facto central bank) had a total of US$13 billion in Exchange Fund bills and notes outstanding at year-end 1997. The bills and notes are used as instruments of monetary policy and are a principal means by which the HKG has worked to develop a local debt market. They are not used to finance expenditures.
D. Balance of Payments Situation
Hong Kong will begin releasing official Balance of Payments (BoP) data in 1999. In the meantime, the Hong Kong Monetary Authority has, in February 1997, made an interim estimate of the BoP for 1993-1995. There was an overall surplus in the BoP (excluding reserves) in 1993, 1994 and 1995. In 1996, the merchandise trade deficit of US$18.2 billion (9.2% of total imports) exceeded the surplus in services trade of US$16.6 billion, leaving an overall trade deficit of US$1.6 billion.
According to the findings of the surveys on external investments conducted by the Industry Department and the Census and Statistics Department, at year-end 1996, total inward direct investment stood at US$78.1 billion, based on original cost. At year-end 1997, settled foreign currency reserves (excluding forward transactions) totaled US$92.8 billion (including the Land Fund), and by mid-year 1998 this had risen to US$96.2 billion.
E. Infrastructure Situation
Hong Kong's modern and efficient infrastructure has supported Hong Kong's role as a trade entrepot and regional financial and services center. However, rapid growth has placed severe demands on that infrastructure, particularly on transportation and shipping facilities. Hong Kong's new airport and airport railway opened on July 6, 1998. All the related roads, bridges and tunnels were completed in advance of the opening. The conclusion of the Airport Core Program, however, is not in any way an end to Hong Kong's commitment to an efficient infrastructure. On the contrary, Hong Kong has plans to invest US$18 billion over the next five years to further enhance its com- petitiveness as a regional center. Significant projects include a planned expansion of container terminal facilities, additional roadway and railway networks, sewage and telecommunications facilities.
Airport Core Program
Hong Kong's old airport, Kai Tak, ranked sixth in the world in terms of cargo handled and fifteenth in terms of passengers. A total of 30 million passengers passed through the terminal in 1997, an increase of 1% over the 29.6 million in the previous year. Over 1.62 million tons of cargo were handled in 1997. The new Chek Lap Kok airport became operational on July 6, 1998. Surprisingly, given Hong Kong's reputation for doing things right, serious start-up problems plagued the first few weeks of operations, particularly for cargo shipments. Besides the airport, the Airport Core Program (ACP) included nine additional integrated projects, including a railway link, the world's longest twin-deck suspension bridge, a third cross-harbor tunnel, new roads, land reclamation, and a new town. The new airport is capable of handling 35 million passengers initially, as well as 3 million tons of air cargo annually. A second runway, scheduled for completion by the end of 1998, will boost annual capacity eventually to 87 million passengers and nine million tons of air cargo.
Shipping and Port Activities
Hong Kong enjoys perhaps the best natural deep-water port on the Chinese coast. With continued high economic growth and industrialization in China, the development of deep water ports at Yantian and Gaolan in south China should complement Hong Kong's facilities over the medium term. Over the longer term, increased competition should generate greater efficiencies in service.
Hong Kong's container port is one of the world's busiest. In 1997, Hong Kong's eight privately operated container terminals and mid-stream operators handled 14.5 million twenty foot equivalent units (TEUs) of cargo, an 8.2% increase over 1996. The Port Development Board expects container throughput to reach 33 million by the year 2016.
Given the long-term growth, Hong Kong projects that it will require additional container terminals. There are currently eight terminals with 19 berths. The construction of Hong Kong's ninth container terminal (CT 9) will begin in early 1999. The first of this five-berth, 2.6 million TEU capacity container terminal could be in operation as early as 2001. The Hong Kong Government has also made provisions for port facilities (CT 10 & 11) on reclaimed land on Lantau Island, though declining through-put may forestall the need for these facilities. Also, responding to the increased container traffic from the Pearl River waterways, Hong Kong's first river trade terminal will come on line in the latter part of 1998.
Roads and Railroads
Hong Kong's roads have one of the highest vehicle densities in the world. In September 1997, there were over 480,000 licensed vehicles and about 1823 kilometers of roads, or 263 vehicles per kilometer of road. This high vehicle density, combined with difficult terrain and high density building development, poses a constant challenge to transport planning, road construction and maintenance. To cope with worsening traffic congestion, largely due to the rapid growth in the number of private cars, the Highways Department has launched an extensive road construction program. Roughly 35 road projects are under way and 50 more are planned. The department's budget for the financial year ended March 1998 totaled US$748 million.
Hong Kong is serviced by three major railway systems: the Mass Transit Railway Corporation (MTRC) operates a three- line metro system; the Kowloon-Canton Railway Corporation (KCRC) provides a 34-km line to service the new towns in the northeastern New Territories and freight service into China; and the KCRC also operates a Light Rail Transit System in the northwestern New Territories. MTRC's Airport Railway opened in July 1998, in conjunction with the Chek Lap Kok Airport.
Hong Kong is planning a massive expansion of its rail system. The investment in Hong Kong's domestic and cross- boundary rail networks in the next decade is expected to exceed in scale the US$ 20 billion spent on the Airport Core Program. Three major domestic passenger rail projects are already at various stages of implementation. Of these, KCRC is moving rapidly with West Rail Phase I and gearing up for extensions of its existing East Rail. In parallel, MTRC is pressing ahead with an existing rail line extension (Tseung Kwan O Extension) to service a new town in East Kowloon. A second cross-border passenger service and a second cross-harbor rail link are also high on Hong Kong Government's railway network development priority list.
Telecommunications
Telecommunications ranks as one of Hong Kong's most dynamic and technologically advanced industries, having for many years played an integral role in Hong Kong's economic prosperity and development as an international business center. Whether it is in mobile services, which introduced the newest generation Personal Communication System (PCS) networks in early 1997, or fixed line services, where Hong Kong boasts a fully digitalized system opened a few years ago to three new network operators, Hong Kong's telecommuni- cations sector has been a regional leader in terms of both technical innovation and market liberalization. Mirroring the global expansion in the Internet, over 100 Internet service providers (ISPs) have established operations in Hong Kong, operating within a free market system subject to limited regulatory control. Many American telecommunications and information technology firms have already established strong positions throughout the local telecommunications market, where they offer a wide range of service and equip- ment for both the mobile and fixed line networks.
A recent agreement reached between the Hong Kong Government and Hong Kong Telecom brings an early end to Hong Kong Telecom's monopoly on international voice telecommunications services, which originally was to extend to the year 2006. The agreement will enable an as yet undetermined number of companies to offer external telecommunications services (such as International Simple Resale of voice services), beginning on January 1, 1999. Additionally, the market for the provision of facilities-based services will be opened to at least three Hong Kong fixed-line operators, and possibly to foreign companies, from January 1, 2000. Even before the early termination of this monopoly, the Office of Telecommunications Authority (OFTA) had been interpreting the terms of Hong Kong Telecom's exclusive license on international voice traffic quite liberally, allowing for a proliferation of call-back services in Hong Kong. Moreover, the liberalization of regulations permitting international value-added network services (IVANS) has greatly expanded the market opportunities available in the international service sector, such as the opening up of the Inter- national Simple Fax Resale Services and Virtual Private Networks markets.
Over the next few years, two of the most important technological developments that are likely to have a signifi- cant impact upon the telecommunications market will be the increasing use of smart cards, not only in telecommunications but in nearly all facets of commerce in Hong Kong, and the gradual introduction of video-on-demand services over the area's telecommunications lines. These two technologies, which are already undergoing trials in the Hong Kong market, are forecast to gain wider acceptance and usage throughout the community, allowing Hong Kong to maintain its competitive edge in the region in the telecommunications and information technology fields. And as telecommunications and broadcasting technologies continue to converge, the demand and opportunities for TV programming will also increase.
Environment
After decades of paying little regard to the environment, the last ten years have seen dramatic changes in the Hong Kong environmental market. The Hong Kong Government has developed sweeping environmental regulations and guidelines for industry and the public, and has commenced broad-reaching environmental infrastructure projects to improve both the quality of life and the environment in Hong Kong. In support of this commitment, the Hong Kong Government is slated to continue to spend about two percent per year of Hong Kong's GDP cleaning up the environment.
In 1987, the Hong Kong Government started identifying many of its long-term environmental problems (i.e. solid waste, water, wastewater and air), and developed projects to begin to remedy these problems. The Government started the construction phase of many of these projects in the early 1990's and is working to complete a majority of the projects by the end of this decade.
In addressing Hong Kong's environmental infrastructure require- ments, over US$ 1.2 billion of environmental infrastructure project awards are being made between 1998 and 2000. Projects that offer the greatest opportunities for US companies include a US$ 150 million livestock slaughterhouse, US$ 130 million for four refuse transfer stations, and a US$300 million waste-to- energy incinerator, for which the feasibility study was awarded in September 1997. This 18 months study will likely be followed by a design-build-operate contract for the facility. The HKSAR Government expects to need several incinerators over the next decade.
The largest of all the environmental infrastructure projects currently being undertaken is the Strategic Sewage Disposal Scheme (SSDS), at a cost of US$ 2-3 billion. The development of the second phase - including disinfection, sludge minimi- zation and deep oceanic outfall - will be sourced in 1999-2000. Some of the construction work of the third and the fourth phases will be implemented concurrently with the second phase. Opportunities for US participation in this project, other municipal sewage systems and related equipment valued at US$300 million, are good.
Additional niche markets exist in Hong Kong for the following types of environmental technologies:
Vehicular air pollution control technologies -- The Hong Kong Government is advocating the use of alternative fuels and advanced technologies to control the growing problem of respirable suspended particulate.
Energy efficient building technologies -- The Hong Kong Government has projected that the population will increase to 8.1 million by 2010 versus 6.5 million in present. The Government has a plan to build 85,000 new housing units per year during the next ten years to meet the growing pressure of housing need. This plan to build more housing units requires energy efficient materials and construction technology. The best estimate is in the range of US$ 100-200 million.
Hong Kong's Efforts to Address the Year 2000 Problem
The Information Technology Services Department (ITSD), the government department responsible for planning and imple- menting the government IT program, has been aware of the Y2K problem since the early 1990's. ITSD is tackling the issue on several fronts. For the past few years, the department has required all new software procured or developed in-house to be Y2K-compliant. It has also conducted a high-level assessment to determine how the year 2000 will affect its systems. In addition, ITSD launched a Y2K awareness campaign in 1996 to inform its staff and client departments about the Y2K issue, and has requested funding this year to cover the overall Y2K program management. Although an internal assessment revealed that 20 per cent of all ITSD- maintained applications need to be rectified for the year 2000, ITSD is optimistic that it will meet the year 2000 deadline.
The Industry Department also funded a project in early 1997 to help small to medium-sized businesses overcome Y2K problems, including an in-depth study to determine public awareness and to evaluate the Y2K impact on Hong Kong. The Department has also produced guidelines on how and where to get Y2K solutions. The Industry Department project was supplemented by a number of Y2K awareness seminars and a symposium involving Y2K consultants and vendors.
The Hong Kong Monetary Authority is working with the financial sector on Y2K issue, and has stated that 90% of the financial institutions and 70% of the insurance companies in Hong Kong will be Y2K compliant by the end of 1998. In short, the government and most large or multinational companies in Hong Kong are aware of the Y2K problem and have begun rectifying their systems for it. However, small to medium-sized companies are still at the awareness stage. Currently, the Hong Kong Productivity Council (a semi- government organization) is also taking a proactive stance by creating greater awareness among Hong Kong's general public with a view to helping Hong Kong's small to medium-sized businesses. According to the Hong Kong Productivity Council, Hong Kong is lagging about 12 months behind the US and Australia in meeting the Year 2000 deadline.
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Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.