Economic & Trade Information on Hong Kong

Economic and Trade Information on Hong Kong
1 February 2012

• Hong Kong’s economy registered a notable growth of 5% in 2011, after expanding by 7% in 2010. For 2012, the economy is forecast to grow at 1-3%.

• Consumer prices increased by 2.4% in 2010 and 5.3% in 2011.

• The unemployment rate was 3.2% for 2011, compared to 4.4% for 2010.

• The value of retail sales increased by 25% year-on-year in the first eleven months of 2011, after increasing by 18.3% in 2010.

• Total exports increased by 22.8% in 2010 and 10.1% in 2011.

• A total of 41.9 million visitors, or almost six times the size of local population, came to Hong Kong in 2011, representing a 16.4% increase from 2010. In 2011, mainland arrivals reached 28.1 million, up 23.9% from 2010.

• The Supplement VIII to CEPA was signed on 13 December 2011, providing for a total of 32 services liberalisation and trade and investment facilitation measures. Origin criteria under trade in goods, and the definition and related requirements of Hong Kong service suppliers will be relaxed. These measures will be effective from April 2012.

Major Economic Indicators

^a government forecast for 2012; ^b October-December 2011, seasonally adjusted

Merchandise Trade Performance

Service Trade Performance

Current Economic Situation

• The world's freest economy

• The world’s most competitive economy

• The world's most services-oriented economy (services sectors accounting for more than 90% of GDP)

• The world's second highest per capita holding of foreign exchange reserves

• The largest source of foreign direct investment (FDI) in Asia

• The second largest recipient of FDI in Asia

1. Latest Developments

The Hong Kong economy sustained strong momentum on entering 2011 but growth moderated since the second quarter amid slowdown in global demand. For 2011 as a whole, the economy still registered a notable 5% expansion, after a 7% growth in 2010. The domestic sector stayed resilient throughout the year, with private consumption growing strongly by 8.4%. Bolstered by the continued expansion in public building and large-scale construction works, as well as a notable rebound in private machinery and equipment acquisition, investment spending saw a robust growth of 7.3%. As for the external sector, exports of goods and services increased moderately by 3.6% and 6.3% respectively in real terms. While domestic demand remains strong, the level of uncertainty in the external environment has been increasing. Feeble economic and fiscal conditions in the US and the lingering European sovereign debt problem warrant concerns. The government forecast Hong Kong’s GDP growth for 2012 to be 1-3% in the latest round of forecast exercise in February.

Reflecting the strong local consumption demand as well as vibrant tourist spending, retail sales remained buoyant, growing by 25% year-on-year in the first eleven months of 2011, after increasing by 18.3% in 2010. The labour market conditions have also improved notably. The unemployment rate has come down to 3.3% for the three-month period ending December 2011, versus 4.4% for 2010. Meanwhile, consumer prices increased 5.3% year-on-year in 2011, after a 2.4% increase in 2010. Price pressures on both the external and domestic fronts are set to ease alongside the retreat of global food and commodity prices in recent months and a slowing local economy. The government forecasts inflation to be 3.5% for 2012.

In 2011, visitor arrivals reached 41.9 million, a 16.4% increase compared to 2010 with the Chinese mainland being the primary driver of growth. The number of visitor arrivals from the Chinese mainland climbed 23.9% year-on-year to 28.1 million, which accounted for 67% of the total. Total expenditure associated to inbound tourism for 2011 is estimated to exceed HK$253 billion, up 20.5% from 2010. Meanwhile, per capita spending is estimated to rise for both overnight visitors and same-day visitors, respectively by 9% to HK$7,333 and by 4% to HK$1,920. 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 (25.5% of GDP in terms of value-added in 2010), tourism (4.4%), financial services (15.4%), and professional services and other producer services (12.8%). On the other hand, the six industries which Hong Kong has clear advantages for further development are cultural and creative, medical services, education services, innovation and technology, testing and certification services and environmental industries. These six industries together accounted for 8.4% of GDP in terms of value-added in 2010.

2. Budget and Government Initiatives

In the 2012-13 Budget released on 1 February 2012, the Financial Secretary unveiled a raft of proposals, including a wide range of tax concessions as well as healthcare and education initiatives to support the community in the face of stiff economic headwinds. To help the business sector weather the anticipated economic downturn, the government will, for example, enhance the existing SME Financing Guarantee Scheme, introduce new policy terms under the Hong Kong Export Credit Insurance Corporation, waive business registration fees for 2012-13 and reduce profits tax for 2011-12 by 75% to a maximum of HK$12,000. Besides, a microfinance pilot scheme for business starters will be introduced. The loan amount would be capped at HK$100 million and the repayment period would be as long as five years. For 2012-13, the Financial Secretary expected government expenditure to reach HK$393.7 billion for improving people's livelihood, enhancing Hong Kong's competitiveness and supporting businesses amid uncertainty in the global economy.

The Chief Executive of Hong Kong SAR, Mr Donald Tsang, delivered the 2011-12 Policy Address – From Strength to Strength on 12 October 2011. Mr Tsang announced measures to tackle some of the pressing concerns for Hong Kong people such as providing affordable housing, helping the elderly, enhancing competitiveness and improving living standards. For example, Mr Tsang announced the resumption of the Home Ownership Scheme to help low-income families to buy a home. On ageing population, the government would continue to promote ageing at home, while ensuring adequate elderly care facilities and services. To further raise living standards, the government is exploring the feasibility of introducing standard working hours and providing paid paternity leave to promote family-friendly working practices.

Besides, Mr Tsang expressed concerns over the global economic prospects. He realised that the global economic landscape has been changing since the financial tsunami in 2008. The driving force for development has shifted to Asia and the BRICS (Brazil, Russia, India, China and South Africa). The government will unveil measures to increase Hong Kong’s competitiveness, and pay particular attention to the difficulties of SMEs and introduce necessary measures to tide them over. To name a few, the government will explore the possibility of joining the trade and economic co-operation arrangements with other economies, set up a dedicated fund of HK$1 billion to encourage Hong Kong enterprises to tap the mainland market, complement the National 12th Five-Year Plan, with emphasis on strengthening co-operation with Guangdong, promote Hong Kong's role as an offshore RMB business centre, support the six industries which Hong Kong has clear advantages by, for example, expanding the scope of the pilot scheme for Hong Kong testing organisations to undertake product testing for the China Compulsory Certification System and encouraging the local industry to develop advanced cloud computing technologies and applications. The government will also review the Research and Development Cash Rebate Scheme and the Small Entrepreneur Research Assistance Programme to better support the research and development efforts of SMEs.

On top of the provisions granted in earlier phases of the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA), the Supplement VIII to CEPA was signed on 13 December 2011, providing for a total of 32 services liberalisation and trade and investment facilitation measures, including 23 liberalisation measures in 16 service sectors, and strengthens co-operation in areas such as finance, tourism, innovation and technology. Both sides also agreed to enhance origin criteria under trade in goods, and relax the definition and related requirements of Hong Kong service suppliers. These measures will be effective from April 2012. 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. Also, service suppliers in Hong Kong enjoy preferential treatment when setting up business in 47 service sectors on the mainland. There are also agreements on trade and investment facilitation, and mutual recognition of professional qualifications between the mainland and Hong Kong. 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 2011, Hong Kong was the world's third largest recipient of Foreign Direct Investment (FDI) flows in 2010, attracting US$68.9 billion, a 31.5% increase over 2009. This marks the first time that Hong Kong has gained third place in the global rankings. For the 13th consecutive year, Hong Kong continued to be the second largest FDI recipient in Asia, after the Chinese mainland. On the other hand, Hong Kong has become the largest source of FDI in Asia, with FDI outflows amounting to US$76 billion in 2010.

According to a government survey, Hong Kong's total stock of inward direct investment was estimated at US$1,086 billion at the end of 2010, corresponding to 4.86 times of its 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, Netherlands and Bermuda accounted for 32.5%, 7.1% and 6.5% of the total stock of inward direct investment in 2010. Even including tax haven economies, the Chinese mainland was the most important source of direct investment in Hong Kong (accounting for 36.7% of the total). Other major destinations include the US (3.6%) and Japan (2.2%). The majority of the stock of investment was related to service industries including investment and holding, real estate, professional and business services; banking; and import/export, wholesale and retail trades.

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

Latest Trade Performance

• The world's 10th largest trading economy

• The world's 11th largest exporter of commercial services

Amid the global economic recovery and vibrant intra-regional trade, Hong Kong’s merchandise exports demonstrated a commendable increase of 22.8% in 2010; yet growth moderated to 10.1% in 2011. Hong Kong's major export markets are the Chinese mainland, the EU, the US, ASEAN and Japan, which respectively making up 52%, 11%, 10%, 7% and 4% of Hong Kong's total exports in 2011. During the period, changes in exports to the above markets were +9.3%, +6%, -0.4%, +18% and +5.9%, respectively. Imports also rebounded by 25% in 2010 and 11.9% in 2011. A visible trade deficit of US$54.8 billion, equivalent to 11.4% of the value of imports of goods, was recorded in 2011, compared to 9.9% in 2010. Hong Kong's trade performance is in part affected by outward processing activities in Guangdong where the majority of Hong Kong companies have extended their manufacturing base. In 2010, 32.5% of Hong Kong's total exports to the Chinese mainland were related to outward processing activities; the figure was 18.6% for domestic exports and 32.8% for re-exports.

Hong Kong’s export growth has slowed since the second quarter of 2011, which is due to, initially the disruptions to global supply chains caused by the Japanese earthquake in March, and increasingly the slower global demand amid the mild US economic recovery and the ongoing European debt crisis. Overseas consumers are expected to continue trading down and saving more in the course of deleveraging. On the supply side, Hong Kong exporters have to live with a challenging production environment, especially in the PRD. While facing rising labour shortages and surging labour costs, their profit margins are further sliced as the renminbi appreciates against the US dollar. Also, the difficulties and costs of producing are increasing as the Chinese government has resumed its efforts to promote industry upgrade.

Economic Relations with the Chinese Mainland

• The most important entrepôt for the Chinese mainland

• The largest foreign investment source of the Chinese mainland

• The key offshore capital-raising centre for Chinese enterprises

• The Chinese mainland as Hong Kong's largest source of external investment

Hong Kong is so far the most important entrepôt of the Chinese mainland. If re-exports to and from the Chinese mainland are included, about 15% of the mainland's foreign trade was handled via Hong Kong in 2010. 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 2010, 62% of re-exports were of China origin and 53% were destined for the Chinese mainland. According to China's Customs statistics, Hong Kong is the third largest trading partner of the Chinese mainland after the US and Japan, accounting for 7.8% of its total trade in 2010.

Hong Kong is the largest source of overseas direct investment in the Chinese mainland. By the end of 2010, among all the overseas-funded projects approved in the Chinese Mainland, 45.4% were tied to Hong Kong interests. Cumulative utilized capital inflow from Hong Kong amounted to US$456.3 billion, accounting for 42.3% of the national total.

The Chinese mainland, on the other hand, is the leading investor in Hong Kong. According to the HKSAR Census and Statistics Department, the mainland's cumulative direct investment in Hong Kong was US$401 billion or 36.7% of Hong Kong’s total stock of inward direct investment at the end of 2010.

As of December 2011, there were eight licensed banks and five 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 Bank of Beijing have representative offices in Hong Kong.

Hong Kong is also a key offshore capital-raising centre for Chinese enterprises. As of December 2011, 640 mainland companies were listed in Hong Kong, comprising H-share, red-chip and private companies with total market capitalization of US$1.2 trillion, or 55.5% of the market total. For the past 10 years, mainland companies have raised some US$240 billion via stock offerings in Hong Kong.

Hong Kong as a Regional Centre

• A popular venue for hosting regional headquarters or representative offices

• A leading telecommunications hub for the Asia-Pacific region

• The world's busiest airport for international cargoes

• The world's third busiest container port

• The largest venture capital centre in Asia

• The third largest stock market in Asia, the seventh largest in the world

• The third largest foreign exchange market in Asia, the sixth in the world

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 of June 2011, there were 3,752 regional headquarters (RHQs) and regional offices (ROs) in Hong Kong representing their parent companies located outside Hong Kong, increased 3.1% from the previous year. Of these companies, 81% 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 (22%), followed by Japan (17%), the UK (9%) and the mainland (7%). Most of the RHQs/ROs in Hong Kong were in I/E trade, wholesale and retail (50%). Others are in professional, business and education services (19%), finance and banking (11%), and transportation, storage and courier services (8%).

Hong Kong is an important banking and financial centre in the Asia Pacific. As of December 2011, there were 198 authorised institutions and 61 representative offices in Hong Kong. Total loans provided by the authorised institutions to finance international trade and other loans for use outside Hong Kong totalled US$46.7 billion and US$166 billion respectively as at end-November 2011. 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 forex transactions reaching US$237.6 billion in 2010.

As at end-2010, Hong Kong's stock market ranked the third largest in Asia and the seventh largest in the world in terms of market capitalisation. As at end-2011, there were 1,496 companies listed on the stock exchange, including 170 companies on the Growth Enterprise Market (GEM) and the total market capitalisation of Hong Kong's stock market reached US$2.2 trillion. Hong Kong is also the largest venture capital centre in Asia, managing about 22% of the total capital pool in the region as at end-2010.

Hong Kong is a leading telecommunications hub for the Asia-Pacific region. As of October 2011, household fixed line and household broadband penetration rates reached 102% and 86% respectively. There were 14.4 million mobile subscribers in Hong Kong, of which more than 50% were 2.5G and 3G mobile subscribers, even outnumbering Hong Kong's total population. There are now over 9,000 public Wi-Fi access points.

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, in December 2005, Hong Kong hosted the sixth session of the WTO ministerial conference where a Hong Kong declaration was concluded. In December 2008, Hong Kong played host to the first Clinton Global Initiative international meeting outside the US.

Infrastructure Developments

Construction for the Hong Kong-Zhuhai-Macao Bridge (HZMB) started in December 2009 and the whole project is expected to complete in 2016. The bridge consists of three parts, including the main bridge, boundary crossing facilities of Hong Kong, Zhuhai and Macao, and link roads of the three places. The HZMB is of special strategic value in further enhancing the economic development of Hong Kong, Macao and the Western Pearl River Delta region (Western PRD). It will significantly reduce the cost and time for travellers and for the flow of goods between Hong Kong and the Western PRD, accelerate the economic integration of the PRD and its neighbouring provinces, and increase its competitiveness.

Meanwhile, the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link (XRL) will be 26-km long, running from the terminus in West Kowloon to Shenzhen, Dongguan and Guangzhou with significantly reduced journey time. More importantly, it will become part of the 16,000 km national high-speed rail network now being developed in full steam, fostering closer economic ties between Hong Kong and the mainland. Upon completion of the railway, the travelling time from Hong Kong to Beijing and Shanghai will be shortened to about 10 and eight hours respectively. Construction of the project has commenced for completion in 2015.

Besides the cross-boundary endeavours, the government has undertaken other large-scale infrastructure projects for the next few 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 has commenced the construction of the West Island Line and the South Island Line East for completion in 2014 and 2015 respectively. Further study on the alignment and preliminary design of the Shatin to Central Link (SCL), a strategic railway line that runs through multiple districts in Hong Kong, has been carried out. The construction work is expected to commence in 2012. As for the Kai Tak Development, works of the first stage, including public housing, cruise terminal and associated supporting infrastructure, are in progress. The first berth of the cruise terminal commenced construction for operation in 2013. The second berth is expected to come into operation in 2014.

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. In 2008, HKIA and Shenzhen International Airport (SZIA) jointly launched the Hong Kong-Shenzhen Airports Link, a service that enables passengers at HKIA or SZIA to check in and obtain boarding passes for connecting flights at either airport. Besides, as part of the Hong Kong International Airport Master Plan 2030, AA recommended that the government build an additional runway as the two existing runways are forecast to reach capacity by 2020. The Government would study the economic, environmental and social aspects of developing a third runway and make a decision in the first quarter of 2012.

Turning to the port, it is projected that the total container throughput will have modest and steady growth over the next few years, and Hong Kong will need the first new container berth by 2015. The HKSAR government has expedited the study on the feasibility of developing Container Terminal 10 at Southwest Tsing Yi and the Study on the Strategic Development Plan for Hong Kong Port 2030. Both studies are scheduled for completion by the end of 2012.

* 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.