Economic & Trade Information on Hong Kong (hktdc.com)

^a 2008, ^b government forecast for 2008; ^c year-on-year change in first three quarters of 2008; ^d year-on-year change in January-September 2008; ^e July-September 2008

-	2006		2007		January-September 2008
-	US$ billion	Growth %	US$ billion	Growth %	US$ billion	Growth %
Total Exports	315.5	+9.4	344.6	+9.2	270.6	+7.8
Domestic Exports	17.2	-1.1	14.0	-18.9	9.0	-11.5
Re-exports	298.3	+10.0	330.6	+10.8	261.6	+8.6
Imports	333.3	+11.6	367.7	+10.3	292.1	+9.1
Total Trade	648.8	+10.5	712.2	+9.8	562.7	+8.4
Trade Balance	-17.8	N/A	-23.1	N/A	-21.4	N/A

-	2006		2007		January-September 2008
-	US$ billion	Growth %	US$ billion	Growth %	US$ billion	Growth %
Exports	72.4	+14.1	83.6	+15.4	67.5	+12.2
Imports	36.9	+9.0	41.2	+11.7	33.2	+9.9
Total Trade	109.4	+12.3	124.8	+14.1	100.7	+11.4
Trade Balance	35.5	N/A	42.3	N/A	34.4	N/A

1. Latest Developments

The Hong Kong economy expanded by 4.3% in the first three quarters of 2008, after growing by 6.3% in 2007. The global downturn triggered by intensifying financial market turbulence has started to affect the Hong Kong economy. Domestic demand has slowed after a long period of exceptionally strong performance. Following a 7.8% growth in 2007, private consumption growth slowed significantly to 3.7% in real terms in the first three quarters of 2008. Fixed investment grew modestly by 4.2% in 2007 and 5.3% in the first three quarters of 2008. As for the external sector, growth of exports of goods and services also slowed to 4.5% and 7.8% respectively in real terms in the first three quarters of 2008, after growing by 7.0% and 12.5% respectively in 2007. The government forecast a GDP growth of 3-3.5% in real terms for 2008 in the latest round of forecast exercise in November 2008.

Retail sales grew by 12.8% in 2007 and another 14.1% in the first nine months of 2008, amid upbeat consumer sentiment and low unemployment during the period. However, the recent stock market corrections and dimmer global economic prospects are likely to dent consumer sentiment. Consumer prices, for their part, have gradually edged up, rising by 2.0% in 2007 as a whole, and quickened to 4.6% year-on-year in the first nine months of 2008 on the surge in food and energy prices. However, the retreat of food and energy prices, the recent strength of the US dollar, and weaker demand conditions amidst the global financial tsunami should lead to a slower inflation in the coming months. Meanwhile, the labour market conditions stayed firm. The unemployment rate was 3.4% for the three-month period ending September 2008, down visibly from 4.8% in 2006 and 4.0% in 2007, although unemployment is likely to rise in the near term amid business contraction triggered by the global economic crisis.

In 2007, visitor arrivals rose by 11.6% (visitors from the Chinese mainland and the rest of the world rose by 13.9% and 8.8% respectively). Arrivals from the Chinese mainland reached 15.5 million (55% of the total), of which 8.6 million travelled under the individual visitor scheme. In the first nine months of 2008, visitor arrivals reached 21.8 million, up 6.9% year-on-year. As for the flow of goods, please refer to the section on Latest Trade Performance and Issues below.

The four pillar economic sectors of Hong Kong are: trading and logistics (27.4% of GDP in terms of value-added in 2006), tourism (3.2%), financial services (15.9%), and professional services and other producer services (10.5%).

2. Budget and Government Initiatives

Thanks to increased tax revenue owing to continued economic upturn and government's restrained spending, Hong Kong's consolidated fiscal surplus hit a record HK$124 billion for the fiscal year 2007/08. With a strong fiscal position, the focus of the 2008-09 Budget is on promoting long-term economic development, supporting the disadvantaged and reducing the burden on the public. To name a few, the Financial Secretary has proposed to exempt the duties on wine, beer and all other alcoholic beverages except spirits to support the development of wine trading and distribution business in Hong Kong; earmark an additional HK$150 million to step up overseas promotion to enhance the appeal of Hong Kong as an international convention, exhibitions and tourism capital; fund 800 places for postgraduate research programmes to support the development of human capital; earmark HK$1 billion to pay for one-month's rent for low income families living in public housing estates; and lower the standard rate of salaries and profit tax by one percentage point.

In his Policy Address delivered on 15 October 2008, the Chief Executive responded to Hong Kong's new challenges, including the global financial crisis and environmental pollution. He said the government would use the economic crisis as an opportunity to reinforce Hong Kong's position as a global financial centre, which includes enhanced banking supervision, tightened regulation of fund managers, and increased efforts to broaden the scope of stock exchange listings. To further economic and trade development, the government will put forward the large-scale infrastructure projects; step up cooperation with Guangdong, with a focus on service industries; reinforce Hong Kong's intermediary role in technological cooperation between the mainland and the rest of the world; foster closer links with Taiwan in areas such as trade, investment and tourism; promote the development of creative industries and wine trading and distribution businesses; and examine the feasibility of increasing the exhibition area in Hong Kong.

On top of the provisions granted in earlier phases of the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA), further liberalisation measures were announced on 29 July 2008, covering 17 services sectors, bringing the total number of services areas covered by CEPA to 40. These measures, to be effective from January 2009, will further expand the business scope allowable in China for Hong Kong companies and lower the thresholds for them to set up business or provide services there. Hong Kong and Guangdong will also implement a package of liberalisation and facilitation measures on an early and pilot basis to enhance mutual economic and trade co-operation. CEPA was firstly concluded in June 2003, and supplemented with further liberalisation measures in subsequent years. At present, all products of Hong Kong origin, except for a few prohibited articles, can be imported into the mainland tariff free under CEPA. Details and new developments about CEPA, including our analysis of its impacts on Hong Kong, can be found in http://cepa.hktdc.com/.

3. Investment Flows

Hong Kong is a highly attractive market for foreign direct investment. According to the UNCTAD World Investment Report 2008, Hong Kong was ranked the second in Asia and sixth in the world in 2007, with FDI inflows surging by 33% to US$60 billion. In terms of FDI outflows, Hong Kong was the second largest source of FDI in Asia, with FDI outflows increasing by 18% to US$52 billion.

According to a recent government survey, Hong Kong's total stock of inward direct investment was estimated at US$740 billion at the end of 2006, corresponding to 391% of GDP in that year. One distinct feature of such direct investment was the indirect channelling of capitals from non-operating companies in tax haven economies. Against this background, British Virgin Islands, Bermuda and Cayman Islands accounted for 33.8%, 6.1% and 1.8% of the total stock of inward direct investment in 2006. Excluding tax haven economies, the Chinese mainland was the most important source of direct investment in Hong Kong (accounting for 35.1% of the total), followed by the Netherlands (6.8%), the US (4.8%) and Japan (2.6%). The majority of the stock of investment was related to service industries including investment holding, real estate and business services; wholesale, retail and trading; banking, finance and insurance; and transport and communications.

For more information and assistance in establishing an operation in Hong Kong, contact InvestHK (http://www.InvestHK.gov.hk).

After expanding by 9.2% in 2007, total exports moderated to a 7.8% year-on-year growth in the first nine months of 2008. Hong Kong's major export markets are the Chinese mainland, the EU, the US and Japan, which respectively made up 49%, 14%, 13% and 4% of Hong Kong's total exports in the first nine months of 2008. During the period, exports to the Chinese mainland and the EU surged by 7.3% and 8.8%, respectively, while sales to the US fell by 1% and those to Japan levelled off. Hong Kong's trade performance is in part fuelled by outward processing activities in Guangdong where the majority of Hong Kong companies have extended their manufacturing base. In the first half of 2008, 35% of Hong Kong's total exports to the Chinese mainland were related to outward processing activities; the figure was 40% for domestic exports and 35% for re-exports.

However, Hong Kong's exports are expected to slow for the rest of the year as the external environment has become increasingly challenging. The slowdown of the world economy, and the lingering effect of financial turbulence are putting a curb on external demand. On the supply side, Hong Kong exporters are confronted with high production costs on the mainland amid continued RMB appreciation, sustained wages, rising social security benefits, as well as the introduction of the new Labour Contract Law effective from January 2008 and more stringent safety requirements. However, the Chinese government has recently announced some relief measures such as raising the VAT rebate rates for certain exports, which may help ease the pain of Hong Kong exporters producing on the mainland.

Imports rose by 9.1% in January-September 2008, after a 10.3% increase in 2007. In the first nine months of 2008, trade deficit amounted to US$21.4 billion, equivalent to 7.3% of the value of imports of goods, compared to US$23.1 billion, or 6.3% of the value of imports of goods, in 2007.

Hong Kong is so far the most important entrepot of the Chinese mainland. If re-exports to and from the Chinese mainland are included, about 17% of the mainland's foreign trade was handled via Hong Kong. The figure will be higher if transhipment of goods to and from the mainland via Hong Kong is also included. According to the HKSAR government statistics, in 2007, 62% of re-exports were of China origin and 49% were destined for the Chinese mainland. According to China's Customs statistics, Hong Kong ranked the third largest trading partner of the Chinese mainland after Japan and the US, accounting for 9% of its total trade in 2007.

Hong Kong is the largest source of overseas direct investment in the Chinese mainland. By the end of 2007, among all the overseas-funded projects registered in the Chinese mainland, 45% were tied to Hong Kong interests. Utilized capital inflow from Hong Kong amounted to US$308 billion, accounting for 40% of the national total.

The Chinese mainland is one of the leading investors in Hong Kong. According to the HKSAR Census and Statistics Department, the mainland's cumulative direct investment in Hong Kong was US$260 billion or 35% of Hong Kong's total stock of inward direct investment at the end of 2006. It is estimated that there are over 2,000 mainland-backed enterprises registered in Hong Kong, with total asset exceeding US$220 billion.

As of October 2008, there were six banks and eight representative offices, incorporated in Chinese mainland, operating in Hong Kong. Big lenders including the Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank have opened their branch operations in Hong Kong. Some other mainland commercial banks such as the Shenzhen Development Bank, China Everbright Bank and Shanghai Pudong Development Bank have representative offices in Hong Kong.

Hong Kong is also a key offshore capital-raising centre for Chinese enterprises. As of October 2008, 453 mainland companies were listed in Hong Kong, comprising H-share, red-chip and private companies with total market capitalization of US$670 billion, 55% of the market total. For the past 10 years, mainland companies have raised more than HK$1 trillion (US$130 billion) in Hong Kong.

Hong Kong is a popular venue for hosting regional headquarters or representative offices for multinational companies to manage their businesses in the Asia Pacific, particularly the Chinese mainland. Based on a government survey, as at 2 June 2008, there were 3,882 regional headquarters (RHQs) and regional offices (ROs) in Hong Kong representing their parent companies located outside Hong Kong, a 21% increase from five years ago. Of these companies, 84% were responsible for business in the Chinese mainland, confirming Hong Kong's role as a gateway to the mainland. These companies came from diverse countries and sectors. The US had the largest number of RHQs/ROs in Hong Kong (24%), followed by Japan (19%), the UK (9%) and the mainland (6%). Half of the RHQs/ROs in Hong Kong were in wholesale, retail and I/E trades. Others are in business service (18%), finance and banking (10%), and transports (9%).

Hong Kong is an important banking and financial centre in the Asia Pacific. As at September 2008, there were 203 authorised banks and 74 representative offices in Hong Kong, and the total loans provided by the authorised banks to finance international trade, and other loans for use outside Hong Kong totalled US$28.5 billion and US$74.4 billion respectively. According to the Bank for International Settlements, Hong Kong is the third largest foreign exchange market in Asia and the sixth largest in the world, with the net daily turnover of foreign exchange transactions reaching US$175 billion in 2007.

As at June 2008, Hong Kong's stock market ranked the third largest in Asia and the eighth largest in the world in terms of market capitalisation. There were 1,254 companies listed on the stock exchange, including 189 companies on the growth enterprise market (GEM). The total market capitalisation of Hong Kong's stock market reached US$2 trillion. Hong Kong is also the largest venture capital centre in Asia, managing about 29% of the total capital pool in the region as at mid-2006.

Hong Kong is a leading telecommunications hub for the Asia-Pacific region. As at August 2008, there were 3.72 million telephone lines and 334,000 fax lines in Hong Kong. There were 11.2 million mobile phone subscribers, even outnumbering Hong Kong's total population. The penetration rate of broadband internet exceeded 77% among household. International Direct Dialing services are available to most countries and regions in the world, with the total international telephone traffic growing at an annualised rate of 11% to 9.5 billion minutes between 2003 and 2007.

Hong Kong is a favourite place in the world to do business and host major conferences. Over 300 international conventions and exhibitions are held in Hong Kong each year. To name a few, Hong Kong hosted the 2001 Fortune Global Forum in May 2001, the 16th World Congress of Accountants in November 2002, and "Luxury 2004: The Lure of Asia" Conference organised by the International Herald Tribune in December 2004. On 13-18 December 2005, Hong Kong hosted the sixth session of the WTO ministerial conference where a Hong Kong declaration was concluded.

Infrastructure Developments

The governments of Hong Kong, Guangdong and Macau have agreed funding arrangements for construction of the 29.6km-long Hong Kong-Zhuhai-Macau Bridge. The next step is for the formulation of a formal agreement and institutional set-up for the project. Hong Kong will tender the bridge's design work after securing endorsement from its Legislative Council's finance committee. Construction is to start by 2010.

The Executive Council has invited the MTR Corporation Limited to proceed with further planning and design of the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link (XRL). Construction is expected to start in 2009 and be completed in 2014 or 2015. The Hong Kong section of the XRL will be 26-km long, running from the terminus in West Kowloon to the boundary at Huanggang, where it will connect with the XRL Mainland section. With the XRL, the journey time between Hong Kong and Guangzhou will be reduced from about 100 minutes as at present to about 50 minutes.

Besides the cross-boundary endeavours, the government has undertaken other large-scale infrastructure projects for the next five years to improve the local transportation system, promote long-term development of arts and culture, and provide quality living space to citizens. The MTR Corporation Limited is working on the detailed design of the West Island Line, and has started the preliminary planning and design of the eastern section of the South Island Line. The Executive Council has approved the further planning of the Shatin to Central Link (SCL) also by the MTR Corporation Limited. The 17-kilometer SCL will have nine stations, serving a residential population of 300,000 and working population of 280,000, connecting the Northeast New Territories and Hong Kong Island via South East Kowloon. The Kai Tak Development, with its funding approval recently, has entered the construction stage.

To enhance the competitiveness of the Hong Kong International Airport (HKIA), the Airport Authority (AA) keeps upgrading the airport's infrastructure to increase its passenger and cargo handling capacities and strengthen transport links between the airport and the Pearl River Delta. It is expected that the study on a rail link HKIA and Shenzhen Airport will be completed by the end of this year. Besides, the government will increase the capacity of the two existing runways progressively from 54 movements per hour to 58 movements per hour in 2009, and gradually increased to 68 movements per hour by 2015. The AA is preparing to start, within this year, the engineering and environmental feasibility studies for a third runway.

Turning to the port, the latest forecast shows that container throughput will continue to increase in the future after reaching a handling capacity of 24 million twenty-foot equivalent units (TEUs) of containers in 2007. The government has been identifying suitable locations for the development of Container Terminal 10 to meet this demand. Although the site at Southwest Tsing Yi will require the relocation of the existing oil depot, it can achieve synergy with the container terminals in Kwai Chung and Tsing Yi.

^* ^{In this economic profile, Hong Kong's trade performance is analysed in a narrow context that does not take into account of offshore trade. The latter makes up a significant share of the export business managed by Hong Kong companies but it is not being captured by ordinary trade statistics.}

Economic & Trade Information on Hong Kong

Total Exports