Hong Kong Annual Report 1999

With its strategic location at the doorway to the Mainland and on the international time zone that bridges the time gap between Asia and Europe, the Hong Kong Special Administrative Region (HKSAR) has been serving as a global centre for trade, finance, business and communications. Hong Kong is now ranked the ninth largest trading entity in the world. It operates the busiest container port in the world in terms of throughput, and also one of the busiest airports both in terms of the number of passengers and volume of international cargoes handled. It is the world's ninth largest banking centre in terms of external banking transactions, and the seventh largest foreign exchange market in terms of turnover. Its stock market is Asia's second largest in terms of market capitalisation.

Hong Kong is characterised by its high degree of internationalisation, business-friendly environment, rule of law, free trade and free flow of information, open and fair competition, well-established and comprehensive financial network, superb network of transport and communications infrastructure, sophisticated support services, and a well-educated workforce complemented by a pool of efficient and enterprising entrepreneurs. Added to these is the substantial amount of fiscal reserves and foreign exchange reserves, a fully convertible and stable currency, and a simple tax system with low tax rate. On these virtues, Hong Kong is widely regarded as amongst the freest and most competitive economies in the world. The US Heritage Foundation ranks Hong Kong as the world's freest economy for the sixth year in a row in 1999. The Cato Institute in the United States, in conjunction with 53 independent research institutes in other countries, also ranks Hong Kong as the freest economy world-wide. The World Economic Forum ranks Hong Kong as the third most competitive economy in the world.

Over the past two decades, the Hong Kong economy has almost tripled, with GDP growing at an average annual rate of about 5 per cent in real terms. This outperformed the growth of the world economy as well as that of the Organisation for Economic Co-operation and Development (OECD) economies. Per capita GDP in Hong Kong has more than doubled in real terms, equivalent to an average annual growth rate of about 4 per cent in real terms. In 1999, it reached US$23,200 at current market prices. The latest comparison showed that per capita GDP in Hong Kong was amongst the highest in Asia, next only to Japan.

Trade in goods and services expanded by about nine times and four times respectively over the past two decades. Reflecting the highly externally-oriented nature of the Hong Kong economy, the total value of visible trade (comprising re-exports, domestic exports and imports), at $2,745 billion in 1999, amounted to 223 per cent of the GDP. This was higher than the corresponding ratios of 143 per cent in 1970, 148 per cent in 1980, and 221 per cent in 1990. If the value of exports and imports of services is also taken into account, the ratio is even higher, at 260 per cent in 1999, as compared to 181 per cent in both 1970 and 1980, and 260 per cent in 1990.

In 1998, the Gross National Product (GNP), comprising GDP and net external factor income flows, contracted by 3.3 per cent in value terms to $1,290 billion, upon the repercussions of the regional financial turmoil. Yet this was smaller than the concurrent decline of 4.3 per cent in GDP in value terms, due to a net factor income inflow to Hong Kong equivalent to about 1.9 per cent of GDP in that year. Reflecting the high degree of external orientation of the Hong Kong economy, both inflows and outflows of external factor income were very substantial, estimated at $383 billion and $360 billion respectively, amounting to 30 per cent and 28 per cent of GNP.

The relative importance of the various economic sectors can be gauged by their respective contributions to GDP and total employment. Owing to the absence of natural resources, primary production (agriculture and fisheries, mining and quarrying) is very small in terms of its contributions to both GDP and employment in Hong Kong.

Within secondary production (comprising manufacturing; construction; and supply of electricity, gas and water), the contribution of the manufacturing sector to GDP fell significantly over the past two decades, from 24 per cent in 1980 to 18 per cent in 1990, and further to only 6 per cent in 1998. This was mainly due to the combined influence of a fast expansion in the services sector in Hong Kong and the ongoing relocation of the more labour-intensive manufacturing processes to the Mainland. On the other hand, the share of the construction sector in GDP, having declined from 7 per cent in 1980 to 5 per cent in 1990, rose back to 6 per cent in 1998. As to the supply of electricity, gas and water, the respective share in 1998, at 3 per cent, was broadly similar to the average of 2-3 per cent recorded over the past 10 years.

The open-door policy and economic reforms in the Mainland have not only provided an enormous production hinterland and market outlet for local manufacturers, but have also generated massive business opportunities for development of a wide range of service activities in Hong Kong. These service activities specifically include freight transport, telecommunications, banking, real estate development, and professional services such as legal, accounting and insurance services. In consequence, the economy has become increasingly service-oriented since the mid-1980s.

Reflecting this, the contribution to GDP of the tertiary services sector (comprising the wholesale, retail and import/export trades, restaurants and hotels; transport, storage and communications; financing, insurance, real estate and business services; community, social and personal services; and ownership of premises) rose distinctly, from 67 per cent in 1980 to 74 per cent in 1990, and further to 85 per cent in 1998.

This structural change in the economy was accompanied by a distinct shift in the sectoral distribution of employment. The share of the services sector in total employment surged from 48 per cent in 1980 to 63 per cent in 1990, and further to about 82 per cent in 1999. On the other hand, the share of the manufacturing sector in total employment shrank visibly, from 42 per cent in 1980 to 28 per cent in 1990, and further to only about 8 per cent in 1999.

Over the past two decades, the services sector has not only flourished but also diversified in various types of activities, along with the structural transformation of the economy. Amongst the various service industries, finance and business services, including banking, insurance, real estate and a wide range of related professional services, have shown particularly robust growth. So has telecommunications especially in the more recent years, amidst increased liberalisation of services and facilities in the sector.

Between 1989 and 1999, exports of services grew by an annual average of 5 per cent in real terms, and imports of services by an annual average of 6 per cent in real terms. Civil aviation, shipping, travel and tourism, trade-related services, and various financial and banking services were the main components of trade in services. In 1998, transportation services constituted 35 per cent of the total value of exports of services and 19 per cent of the total value of imports of services. The corresponding shares for travel and tourism were 21 per cent and 59 per cent. As to trade-related services, offshore trading and purchasing/merchandising services took up 28 per cent of the total value of exports of services and 7 per cent of the total value of imports of services. The respective shares for financial and banking services were 6 per cent and 3 per cent.

Between 1988 and 1998, the net output or value-added of the services sector grew strongly, by an annual average of 12 per cent in value terms. Amongst the major constituent sectors, financing, insurance, real estate and business services, and community, social and personal services had the fastest growth in net output (both by an annual average of 14 per cent in value terms). This was followed by transport, storage and communications (11 per cent), and the wholesale, retail and import/export trades, restaurants and hotels (10 per cent).

In 1998, financing, insurance, real estate and business services were still the largest contributor to GDP, accounting for 26 per cent of the total value. This was followed by the wholesale, retail and import/export trades, restaurants and hotels (with a contribution of 24 per cent to GDP), community, social and personal services (20 per cent), and transport, storage and communications (9 per cent).

Yet in terms of employment, the wholesale, retail and import/export trades, restaurants and hotels were the largest contributor, accounting for 32 per cent of the total employment in 1999. This was followed by community, social and personal services (with a share of 24 per cent), financing, insurance, real estate and business services (15 per cent), and transport, storage and communications (12 per cent).

Manufacturing firms in Hong Kong are renowned for their versatility. The existence of many small establishments, connected under an extensive local sub-contracting network, has greatly facilitated producers to cope with variations in demand in the overseas markets. Furthermore, the increasing use of outward processing facilities in the Mainland has enabled Hong Kong's productive capacity to expand by multiples even amidst the local capacity constraint, and hence helped maintain the price competitiveness of Hong Kong's products. A predominant proportion of Hong Kong's manufacturing output is destined for export.

Apart from relocating the more labour-intensive processes to the Mainland, local manufacturers have also been striving hard to diversify their products and markets, in the light of the globalisation of trade and keener competition from other export producers. Moreover, productive efficiency and product quality have been continuously upgraded by incorporating better technologies, in a move to uphold competitiveness.

Within the local manufacturing sector, textiles and clothing remain the most important industries, notwithstanding a decline in their relative significance over the past years. Other major industries include toys and electronics, printing and publishing, machinery and equipment, fabricated metal products, plastic products, jewellery, and watches and clocks. Generally speaking, those manufacturing operations still left in Hong Kong are more knowledge-based and with a higher value-added content, along with continued mechanisation and wider application of computer-aided technologies in the production process.

Between 1989 and 1999, labour productivity in the local manufacturing sector, as measured by the ratio of industrial production index to the manufacturing employment index, increased by an average of around 10 per cent per annum. This was notwithstanding the markedly decelerated growth in 1999, attributable to a contraction in manufacturing output signifying reduced capacity utilisation, as well as a marked shrinkage in investment in industrial machinery along with the economic downturn.

The United States and the Mainland were the two largest markets for Hong Kong's domestic exports, each accounting for about 30 per cent of the total value in 1999. The other major markets were the United Kingdom (with a share of 6 per cent), Germany (5 per cent), Japan (3 per cent), and Taiwan (also 3 per cent). In the more recent years, new markets were developed for Hong Kong's exports, including markets in the Middle East, Eastern Europe, Latin America and Africa.

Since the Mainland adopted its economic reform and open-door policy in 1978, economic links between Hong Kong and the Mainland have gone from strength to strength. This has brought about substantial economic benefits for both places.

Specifically, visible trade between Hong Kong and the Mainland has grown strongly since 1978, at an average annual rate of 24 per cent in value terms. However, reflecting the increasing trend of direct shipment of goods into and out of the Mainland and also the enhanced port facilities and simplified customs procedures in the Mainland, the value of two-way trade grew at a more moderate pace in the more recent years, at an annual average of 7 per cent between 1993 and 1998. Growth slowed down further in 1999, to only 1 per cent, with an increase of 5 per cent in imports from the Mainland being offset by decreases of 2 per cent and 10 per cent respectively in re-exports and domestic exports to the Mainland. In 1999, the Mainland was still Hong Kong's largest trading partner, accounting for 39 per cent of Hong Kong's total trade. 90 per cent of Hong Kong's re-export trade was related to the Mainland, making it the largest market for as well as the largest source of Hong Kong's re-exports. Reciprocally, Hong Kong was the Mainland's third largest trading partner in 1999 (just behind Japan and the United States), accounting for 12 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. At present, Hong Kong is a major service centre for the Mainland generally and South China in particular, providing a wide range of financial and other support business services such as banking and finance, insurance, transport, accounting and sales promotion. It is also a principal gateway to the Mainland for business and tourism. In 1999, 45 million trips were made by Hong Kong residents to the Mainland, representing an increase of 15 per cent over 1998. The number of trips made by foreign visitors to the Mainland through Hong Kong also went up, by 14 per cent to 2.5 million.

Hong Kong has continued to be the largest source of external direct investment in the Mainland. According to an official data source from the Mainland, the cumulative value of Hong Kong's realised direct investment there amounted to US$151 billion at end-September 1999, accounting for about 51 per cent of the total value of its inward direct investment. There has been a notable shift in the composition of Hong Kong's direct investment in the Mainland in the more recent years, from industrial processing to a wider spectrum of business ventures such as hotels and tourist-related facilities, real estate and infrastructure development. Relative to other places in the Mainland, Hong Kong's economic links with Guangdong are much more intimate. At end-1998, the cumulative value of Hong Kong's realised direct investment in Guangdong was estimated at US$56 billion, accounting for about 76 per cent of the total for the province. Currently, over five million Chinese workers are said to be employed in the province by industrial ventures with Hong Kong interests. This is about 20 times the size of Hong Kong's own manufacturing workforce.

In the opposite direction, there has likewise been a sizeable flow of investment capital from the Mainland to Hong Kong over the past years. At end-1998, the Mainland had invested a total of US$28 billion in Hong Kong, making it amongst the largest external investors in the SAR. More than 1 800 Mainland enterprises operate in Hong Kong. While these enterprises maintain high investment stakes in such traditional lines of business as import/export trade, wholesale/retail trades, banking, transport and warehousing, there has been a growing diversification of their investment into other spheres such as real estate, hotels, financial services, manufacturing and infrastructure development.

Along with the surge in two-way trade, investment and people flows, financial links between Hong Kong and the Mainland have also been on a rapid increase over the past two decades. Yet in 1998 and 1999, the growth momentum slowed down considerably upon the impact of the regional financial turmoil. By end-December 1999, external liabilities of Hong Kong's authorised institutions to entities in the Mainland amounted to HK$262 billion, while their external claims on entities in the Mainland amounted to HK$246 billion. These represented decreases of 10 per cent and 24 per cent respectively over a year earlier. The Bank of China Group, which has been established in Hong Kong for decades, is now the second largest banking group in the SAR after the HSBC Group. It started issuing Hong Kong dollar banknotes in May 1994. The other three state-owned commercial banks, namely the China Construction Bank, the Agricultural Bank of China, and the Industrial and Commercial Bank of China, were granted banking licences to operate in Hong Kong in 1995. Meanwhile, the HSBC Group, together with the Bank of East Asia and the Standard Chartered Bank, are among the best-represented foreign banks in the Mainland.

Moreover, Hong Kong has been serving as a major funding centre for the Mainland. Apart from being a direct source of funds, Hong Kong also serves as a window through which foreign funds can be channelled efficiently into the Mainland for financing development projects there. So far, most of the Mainland's fund-raising activities in Hong Kong have taken the form of syndicated loans. But more recently, an increasing number of Mainland-related banks and enterprises have raised funds through issuance of negotiable certificates of deposit, bonds and shares. Since mid-1993, H shares have been listed on Hong Kong's stock exchange by an increasing number of large state-owned enterprises in the Mainland. At end-1999, a total of 44 such enterprises were so listed, raising a total equity capital of $65 billion. Of these 44 enterprises, three were listed in 1999, raising HK$4.3 billion. With the ongoing restructuring of the Mainland's financial sector, and the Mainland's continuing economic liberalisation on a wider front, more foreign investment can be expected to flow there. The role of Hong Kong as a major funding centre for the Mainland will thus be sustained in the years to come.