Economic and Trade Information on Hong Kong
13 November 2009

• The Hong Kong economy has been hard hit by the global economic crisis since 2008, but clear signs of improvements have been observed since the second quarter of 2009. Taking the first three quarters of 2009 as a whole, the economy registered a year-on-year decline of 4.6% in real terms, after expanding by 2.4% in 2008.

• Consumer prices rose by 4.3% in 2008, but growth slowed to 0.2% in January-September 2009.

• The unemployment rate was 3.6% for 2008, and rose to 5.3% for July-September 2009.

• Retail sales grew strongly by 10.6% in 2008, but dropped by 4% in January-August 2009.

• Total exports grew by 5.1% in 2008, but dropped by 16.2% in the first nine months of 2009.

• A total of 29.5 million visitors, or more than four times the size of local population, came to Hong Kong in 2008, representing a 4.7% increase from a year earlier. In the first nine months of 2009, visitor arrivals declined by 2.8% to 21 million.

• In his Policy Address delivered on 14 October 2009, the Chief Executive set out strategies for Hong Kong to break new ground in economic development and sustainable growth.

Major Economic Indicators

Merchandise Trade Performance

Service Trade Performance

Current Economic Situation

• The world's freest 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 world's seventh largest foreign exchange reserves holding
• The second largest source of foreign direct investment (FDI) in Asia
• The second largest recipient of FDI in Asia

1. Latest Developments

The Hong Kong economy has been hard hit by the global economic crisis since 2008, but clear signs of improvements have been observed since the second quarter of 2009. Taking the first three quarters of 2009 as a whole, the economy registered a year-on-year decline of 4.6% in real terms, after expanding by 2.4% in 2008. Private consumption fell by 2.3% in real terms in the first three quarters of 2009, following a 1.5% growth in 2008. Fixed investment dropped by 8.7% in the first three quarters of 2009 after a slight decline of 0.5% in 2008. As for the external sector, exports of goods and services also declined by 15.9% and 4% respectively in real terms in the first three quarters of 2009, after growing by 1.9% and 5.7% respectively in 2008. The government forecasts the Hong Kong economy to contract by 3.3% in real terms for 2009 in the latest round of forecast exercise in November 2009.

After a strong growth of 10.5% in 2008, the value of retail sales dropped by 3.4% in the first nine months of 2009 amid poor economic condition. Both local and external price pressures receded after the outbreak of the global financial turmoil. Consumer prices rose by 0.2% in January-September 2009, compared to 4.3% in 2008. In the medium term, the upward pressure on consumer prices should remain subdued as the impact of the global synchronised downturn continues to play out and weigh on local economic activity. The unemployment rate has been on an uptrend since the third quarter of 2008, registering 5.3% for the three-month period ending September 2009, compared to 3.6% for 2008. Yet business conditions have gradually improved and the labour market has stabilised in recent months.

In 2008, visitor arrivals rose by 4.7% (arrivals from the Chinese mainland rose by 8.9% while non-mainland arrivals dropped by 0.3%). Arrivals from the Chinese mainland reached 16.9 million (57% of the total), of which 9.6 million travelled under the individual visitor scheme. In January-September 2009, visitor arrivals fell 2.8% to 21 million. 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 (25.8% of GDP in terms of value-added in 2007), tourism (3.4%), financial services (19.5%), and professional services and other producer services (11%).

2. Budget and Government Initiatives

In the 2009-10 Budget released on 25 February 2009, the Financial Secretary announced to adopt counter-cyclical strategies to boost the economy, with a forecast budget deficit of $40 billion, equivalent to some 2% of GDP, for the fiscal year 2009-10. The focus of the 2009-10 Budget is on preserving employment for the short term; promoting a more sustainable economic development by strengthening the fundamentals and developing new economic initiatives in the longer run; and developing a caring community and provide assistance to the disadvantaged. For example, the government would make a provision of $1.6 billion to create 62,000 jobs and internship opportunities in the next three years; earmark $300 million to support creative industries; enhance Hong Kong/Guangdong/Taiwan/Macao co-operation; promote conventions, exhibitions, tourism and wine industries; and promote bond market development by implementing a programme to issue government bonds.

In his Policy Address delivered on 14 October 2009, the Chief Executive set out strategies for Hong Kong to break new ground in economic development and sustainable growth. The Chief Executive highlighted the need for closer regional co-operation, better use of land resources, strengthening of the four existing economic pillar industries and the development of six industries where Hong Kong has an edge, namely educational services, medical services, testing and certification, environmental industry, innovation and technology, and cultural and creative industries. Hong Kong would strengthen co-operation with Guangdong Province under the Outline of the Plan for the Reform and Development of the Pearl River Delta announced in January 2009. To promote Hong Kong-Taiwan co-operation, greater emphasis would be placed on developing relations through the establishment of a Hong Kong-Taiwan Economic and Cultural Co-operation and Promotion Council and the setting up of a multi-functional office in Taiwan.

On strengthening of the four existing economic pillar industries, the Chief Executive set out a series of objectives for Hong Kong's financial services sector, which include reinforcing Hong Kong's role as a testing ground for renminbi products and the internationalisation of the mainland currency, and as a preferred capital raising centre for mainland enterprises. To strengthen the tourism industry, the government was discussing with central authorities measures to facilitate more mainland travellers visiting Hong Kong as well as simplifying entry arrangements and developing emerging markets. On logistics, the government aims at maintaining Hong Kong's leading position in the global supply chain. To give added stimulus to professional services, the government will continue to explore further liberalisation measures under the CEPA framework to open up new markets and expand existing ones on the mainland.

The Chief Executive said that more than 1,000 old industrial buildings could be converted or redeveloped to facilitate the development of the six industries. He proposed lowering the compulsory sale threshold for redevelopment; considering tailor-made lease conditions; and allowing payment of additional premiums exceeding $20 million by installments over five years at a fixed interest rate. Other industry-specific measures, include, for instance, allowing renowned Chinese medicine practitioners from the mainland to join clinical teaching and research programmes in Hong Kong so as to make Hong Kong a stage for promoting Chinese medicine to the world. On education, the government will consider further relaxing the relevant requirements by, for example, allowing mainland students to pursue studies in non-local programmes at degree level or above in Hong Kong. To encourage enterprises to invest in high technology and scientific research, the government will allow eligible enterprises to enjoy a cash rebate equivalent to 10% of their research and development investments.

On top of the provisions granted in earlier phases of the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA), 29 liberalisation measures were announced on 9 May 2009, covering 20 service sectors, bringing the total number of services areas covered by CEPA to 42. Apart from service liberalisation, the two sides have also agreed to enhance financial co-operation and take forward the work on mutual recognition of professional qualifications. These measures, effective from October 2009, can help enhance Hong Kong’s service suppliers’ competitiveness on the mainland and promote the long-term economic development of both sides. 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 2009, Hong Kong continues to be Asia's second largest, after the Chinese Mainland, and is the world's seventh largest FDI recipient, attracting US$63 billion inward investment in 2008. This amount represented a 16% increase year-on-year in spite of the global financial and economic crisis that has reduced FDI inflows to some developed economies by half. On the other hand, Hong Kong was the second largest source of FDI in Asia, trailing Japan, with FDI outflows amounting to US$60 billion in 2008.

According to a recent government survey, Hong Kong's total stock of inward direct investment was estimated at US$1,178 billion at the end of 2007, corresponding to 5.7 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, Bermuda and Cayman Islands accounted for 36.6%, 4.2% and 1.2% of the total stock of inward direct investment in 2007. Excluding tax haven economies, the Chinese mainland was the most important source of direct investment in Hong Kong (accounting for 40.7% of the total), followed by the Netherlands (5.8%), the US (3%) and Japan (1.8%). 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).

Latest Trade Performance

• The world's 13th largest trading economy
• The world's 12th largest exporter of commercial services

After expanding by 5.1% in 2008, total exports contracted by 16.2% in the first nine months of 2009, amid the global economic downturn. Hong Kong's major export markets are the Chinese mainland, the EU, the US, ASEAN and Japan, which respectively made up 51%, 13%, 12%, 6% and 4% of Hong Kong's total exports in January-September 2009. During the same period, exports to the above markets dropped by 12%, 22%, 22%, 22% and 13%, respectively. 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 the first half of 2009, some 33% of Hong Kong's total exports to the Chinese mainland were related to outward processing activities; the figure was 30% for domestic exports and 33% for re-exports.

Since the fourth quarter of 2008, the external environment has become challenging. The slowdown of the world economy and the lingering effect of financial turbulence are putting a curb on external demand, although Hong Kong’s exports have shown some improvement in recent months. On the supply side, Hong Kong exporters have been confronted with high production costs on the mainland amid sustained wages, rising social security benefits, as well as the introduction of the new Labour Contract Law effective from January 2008 and more stringent overseas safety requirements. However, the Chinese government has 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 dropped by 15.7% in January-September 2009, after a 5.5% growth in 2008. A visible trade deficit of almost US$19.3 billion, equivalent to 7.8% of the value of imports of goods, was recorded in the first nine months of 2009, compared to 6.6% in 2008.

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 second largest source of external investment

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 2008, 63% of re-exports were of China origin and 49% 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 8% of its total trade in 2008.

Hong Kong is the largest source of overseas direct investment in the Chinese mainland. By the end of 2008 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$350 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$479 billion or 41% of Hong Kong’s total stock of inward direct investment at the end of 2007.

As of October 2009, there were seven licensed banks and six 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 December 2008, 465 mainland companies were listed in Hong Kong, comprising H-share, red-chip and private companies with total market capitalization of US$790 billion, 60% of the market total. For the past 10 years, mainland companies have raised more than $1.4 trillion (US$180 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 2009, there were 3,580 regional headquarters (RHQs) and regional offices (ROs) in Hong Kong representing their parent companies located outside Hong Kong, a 44% increase from a decade ago. Of these companies, 83% 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 (23%), followed by Japan (19%), the UK (9%) and the mainland (6%). Most of the RHQs/ROs in Hong Kong were in I/E trade, wholesale and retail (51%). Others are in professional and business services (17%), finance and banking (11%), and transportation, storage and courier Services (9%).

Hong Kong is an important banking and financial centre in the Asia Pacific. As at end-2008, there were 200 authorised banks and 71 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$24 billion and US$70 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 forex transactions reaching US$175 billion in 2007.

As of August 2009, Hong Kong's stock market ranked the third largest in Asia and the seventh largest in the world in terms of market capitalisation. There were 1,280 companies listed on the stock exchange, including 171 companies on the Growth Enterprise Market (GEM). The total market capitalisation of Hong Kong's stock market reached US$1.93 trillion. Hong Kong is also the largest venture capital centre in Asia, managing about 27% of the total capital pool in the region as at mid-2007.

Hong Kong is a leading telecommunications hub for the Asia-Pacific region. As at end-2008, there were 3.71 million telephone lines and 319,000 fax lines in Hong Kong. There were 11.4 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 10 billion minutes between 2003 and 2008.

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

The governments of the Hong Kong SAR, Guangdong and Macao SAR are working together to implement the Hong Kong-Zhuhai-Macao Bridge (HZMB) project. The HZMB main bridge will be a 29.6km dual three-lane carriageway in the form of a bridge-cum-tunnel structure comprising an immersed tunnel of about 6.7km. It will run within mainland waters from the artificial island off Gongbei, Zhuhai, to the eastern artificial island for the tunnel section just west of the HKSAR boundary. The funding issue for the main body of the HZMB has been fully resolved. Construction will start in 2010 and be completed in 2015-6.

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 Futian in Shenzhen with no intermediate station. The XRL will link Hong Kong to the National High Speed Rail Network. 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. Subject to the endorsement of the funding arrangement by the Legislative Council and the Finance Committee, the construction work for the Express Rail Link will be commenced by end of 2009 and completed in 2015.

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 has commenced the detailed design of the South Island Line East (SILE) and is proceeding with the environmental impact assessment. The construction work for the SILE is expected to commence in 2011 for commissioning in 2015 while the construction work of the West Island Line has commenced for completion in 2014. 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 2010 for completion in 2015 (Tai Wai to Hung Hom Section) and 2019 (Hung Hom to Admiralty Section). 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. 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, AA has invested $300 million to build 10 new cargo stands, bringing the total number to 34. AA and the government are working closely to maximise the two existing runways' capacity. Hourly air traffic movements will see an increase from 55 to 68 in 2015. AA has also launched a study on the construction of a third runway in 2008.

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 and is studying the environmental impact of the proposed Container Terminal 10 in Tsing Yi. 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.