Increasing Economic Links beween the HKSAR
and the Mainland

Economic links between the HKSAR and the Mainland have grown from
strength to strength, since the Mainland adopted economic reform and
open-door policy in 1978. This has brought about substantial economic
benefits to both places.

Specifically, visible trade between Hong Kong and the Mainland has
grown at an average annual rate of 28 per cent since 1978. In 1997, the
two-way trade continued to grow, albeit only moderately, by 6 per cent.
Re-exports and domestic exports to the Mainland were up by 6 per cent
and 4 per cent respectively in 1997, while imports from the Mainland rose
by 7 per cent. The Mainland remained Hong Kong's largest trading partner
in 1997, accounting for 36 per cent of Hong Kong's total trade. The share
of the Mainland in Hong Kong's re-export trade was even higher, at 90 per
cent, making it both the largest market for and source of Hong Kong's
re-exports. Reciprocally, Hong Kong was the Mainland's second-largest
trading partner in 1997 (after Japan), accounting for 16 per cent of the
Mainland's total trade.

Over the past two decades, there has also been a substantial increase in
invisible trade and investment flows between Hong Kong and the
Mainland. Hong Kong is a major service centre for the Mainland generally
and South China in particular, providing a wide range of financial and
business support services like banking and finance, insurance,
accounting, transport, warehousing etc. It is also a principal gateway to
the Mainland for business and tourism. In 1997, Hong Kong residents
made 34 million trips to the Mainland, and foreign visitors to the Mainland
made another two million trips through Hong Kong. These represented
increases of 17 per cent and 2 per cent respectively over 1996.

Moreover, Hong Kong is the largest source of external direct investment
in the Mainland. At end-1997, the cumulative value of Hong Kong's
realised direct investment in the Mainland was estimated at US$121
billion, accounting for about 55 per cent of the total value. There has also
been a notable shift in the composition of Hong Kong's direct investment
in the Mainland in more recent years, from outward-processing industries
to other economic sectors such as hotels and tourist-related facilities, real
estate and infrastructure development. Hong Kong's economic links with
Guangdong are much more intimate than with other places in the
Mainland. At end-1997, the cumulative value of Hong Kong's realised
direct investment in Guangdong was estimated at US$48 billion,
accounting for almost four-fifths of the total foreign direct investment
there. More than five million Mainland workers are regularly employed
in the Province by Hong Kong industrial ventures. This is about 16 times
the size of Hong Kong's own manufacturing workforce.

In the opposite direction, there has been a sizeable flow of investment
capital from the Mainland to Hong Kong. By end-1995, the Mainland
invested a total of US$14 billion in the territory, making it the
second-largest external investor, just behind the UK. About 1 800
Mainland enterprises operate in Hong Kong. They maintain high
investment stakes in such traditional lines of business as import/export
trades, wholesale/retail trades, banking, transport and warehousing, and
there has recently been a growing diversification of such investment into
other spheres such as real estate, hotels, financial services, manufacturing
and infrastructure development.

Along with the surge in these cross-border trade, investment and people
flows, financial links between Hong Kong and the Mainland have also
been increasing rapidly. By end-November 1997, external liabilities of
Hong Kong authorised institutions to entities in the Mainland reached $300
billion, while their external claims on entities in the Mainland were even
larger, at $412 billion. These represented increases of 2 per cent and
17 per cent respectively over a year earlier. The Bank of China Group,
which has been established here for decades, is now the second-largest
banking group in Hong Kong after the Hongkong Bank Group. It started
issuing Hong Kong dollar banknotes in May 1994. The other three state
specialised banks - the People's Construction Bank of China, the
Agricultural Bank of China, and the Industrial and Commercial Bank of
China, were granted banking licences to operate in Hong Kong in 1995.
On the other hand, the Hongkong Bank group, together with the Bank of
East Asia and the Standard Chartered Bank, are among the
best-represented foreign banks in the Mainland.

Hong Kong has played an important role as the major funding centre for
the Mainland. As well as a direct source of funds, Hong Kong often
serves as a window through which foreign funds can be channelled
efficiently into the Mainland for financing the various development
projects there. So far, most of the Mainland's fund-raising activities in the
territory have taken the form of syndicated loans, but more recently an
increasing number of the Mainland-related banks and enterprises have
raised funds through issues of negotiable certificates of deposit, bonds
and shares. Since mid-1993, H shares have been listed in Hong Kong's
stock market by large state-owned enterprises in the Mainland. At
end-1997, 39 such enterprises were listed on the Hong Kong Stock
Exchange, raising a total equity capital of $59 billion.

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