Lecture 15 Economic Sustainability for HK The State of the HK Economy The Hong Kong economy staged a sharp rebound over the course of 1999, recovering robustly from the severe setback brought about by the earlier Asian financial turmoil. The recovery was strongly export-led. In consequence, there was a marked increase in the combined visible & invisible trade surplus over the year. The Gross Domestic Product (GDP) in real terms recorded in 1999 1st quarter 3.0 per cent 2nd quarter 1.1 per cent 3rd quarter 4.4 per cent 4th quarter 8.7 per cent For 1999 as a whole, GDP 2.9 per cent in real terms, in stark contrast to 5.1 per cent in 1998. The distinct turnaround in performance owed much to the inherent flexibility & adaptability of the local economy in the wake of the profound shocks to the region. The market slackened briefly in the 3rd quarter in the absence of any fresh news, but bounced back somewhat towards the end of the year, as sentiment was lifted by China’s accord with the US on its accession to the World Trade Organization, improved overall economic conditions & buoyancy in the local stock market. Structure & Development of the Economy With its strategic location at the doorway to the Mainland & on the international time zone that bridges the time gap between Asia & Europe, the Hong Kong Special Administrative Region (HKSAR) has been serving as a global centre for largest trading entity in the world. Hong Kong is widely regarded as amongst the freest & most competitive economies in the world. The World Economic Forum ranks Hong Kong as the third most competitive economy in the world. 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. Contributions of the Various Economic Sectors The relative importance of the various economic sectors can be gauged by their respective contributions to GDP & total employment. Owing to the absence of natural resources, primary production (agriculture & fisheries, mining & quarrying) is very small in terms of its contributions to both GDP & employment in Hong Kong. Secondary production (comprising manufacturing; construction; & supply of electricity, gas & water) The contribution to GDP fell significantly over the past two decades, from 24 per cent in 1980 to 18 per cent in 1990, & 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 & the ongoing relocation of the more labour-intensive manufacturing processes to the Mainland. The open-door policy & economic reforms in the Mainland have not only provided an enormous production hinterland & market outlet for local manufacturers, but have also generated massive business opportunities for development of a wide range of service activities (Tertiary production) in Hong Kong. These service activities specifically include freight transport, telecommunications, banking, real estate development & professional services such as legal, accounting & 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 & import/export trades, restaurants & hotels; transport, storage & communications; financing, insurance, real estate & business services; community, social & personal services; & ownership of premises) rose distinctly, from 67 per cent in 1980 to 74 per cent in 1990, & further to 85 per cent in 1998. The Manufacturing Sector The United States & 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), & 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 & Africa. Increasing Economic Links between HK & the Mainland Since the Mainland adopted its economic reform & open-door policy in 1978, economic links between Hong Kong & the Mainland have gone from strength to strength. This has brought about substantial economic benefits for both places. Specifically, visible trade between Hong Kong & the Mainland has grown strongly since 1978, at an average rate of 24 per cent in value terms. However, reflecting the increasing trend of direct shipment of goods into & out of the Mainland & also the enhanced port facilities & simplified customs procedures in 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 & 1998. In 1999, the Mainland was still Hong Kong’s largest trading partner, accounting for 39 per cent of Hong Kong’s total trade. Hong Kong has continued to be the largest source of external direct investment in the Mainland. Along with the surge in two-way trade, investment & people flows, financial links between Hong Kong & the Mainland have also been on a rapid increase over the past two decades. The Economy in 1999 External Trade Export performance staged a strong recovery over the course of 1999, reversing the downtrend in 1998. Exports of goods remained slack in overall terms in the first half of 1999, but exhibited a distinct upturn in the third quarter, & accelerated markedly in growth in the fourth quarter. Economic Integration of HK Though the ZD is the natural hinterland of HK, the framework of “one country, two systems” has imposed many restrictions on the form of economic integration between HK & its hinterland. Despite the reversion of HK to China in mid 1997, HK is for practical purposes & independent economic entity with its own currency & customs & immigration controls. There are still many barriers to the economic integration HK & the ZD, & some of these barriers will persist till 2047 or even beyond. ? For instance, it is virtually impossible for HK & the ZD (or Mainland as a whole) to form a formal trade bloc on the model of the European Union). Even the establishment of a boarder industrial park is fraught with difficulties. Though “old-style” integration based on discriminatory preferences on trade in goods is impractical, the reversion of HK presents opportunities of “new style” integration through policy coordination. The reversion of HK, the AFC (Asian Financial Crisis), & China’s impending entry into the WTO have promoted such coordination. Despite HK’s reversion to China, there is very little hope than HK & the Mainland can form some kind of trade bloc such as a Customs Union, or a Common Market. A Customs Union is out of the question as it requires that HK & the Mainland levy the same external tariff, which is zero as HK is a free port. Both the 1984 Sino-British Declaration & the Basic Law have specified that HK would be a free port. A Common Market is even more problematic as it requires free migration within the bloc & this runs against HK’s very strict immigration controls against the Mainland. Even a traditional Free Trade Area (FTA), which is the trade bloc with the lowest degree of formal economic integration, is impractical because the mainland would lose tariff revenue & there would be no offsetting gains in mainland exports as HK is already a free port. Shenzhen has built a ‘second line’ separating itself from the rest of China & Shenzhen aspires to become a free trade zone. Even if Shenzhen becomes a free trade zone, HK & Shenzhen will still be separate entities in trade. ? But HK’s freedom in external economic affairs is guaranteed by both the Sino-British agreement & the Basic Law, & HK is a member of the WTO. For example: HK has the largest clothing quota in the world & HK does not want to share its quotas with anyone else. HK & Shenzhen have different import prohibitions. For example, Shenzhen cannot afford the free importation of political or religious literature from HK. There is a possibility of a new-style integration through policy coordinations. HK’s reversion to China in 1997, the AFC, & China’s prospective entry into the WTO have promoted policy coordination between China & HK. Since 1997, policy coordination has moved forward seven areas. These areas are namely Border area issues, Regional infrastructure, Tourism, Technology policy, Financial markets, Coordination to stabilize the exchange rate & Coordination on China’s WTO entry. Border Area Issues Border area issues involve border checkpoints, environmental protection, & coordination of cross-border infrastructure. To facilitate this, A HK/Guangdong Co-operation Joint Conference was established in March 1998, headed by HK’s Chief Secretary & Guangdong Vice Governor. They reach agreements on Environmental protection, Minor extensions of working hours of border checkpoints & Measures to boost cross border tourism. Although the conference is supposed to meet twice, they have not met since September 1998 due to lack of items to discuss. Some of the border area issues include: environmental protection; border checkpoints & border tourism. Environmental protection: to protect the environment, the two sides agreed to subject all large scale public works in the border areas to environmental evaluation & mutual consultation. (SEA). Border checkpoints: There have long been proposals to allow 24-hour operation of the major passenger checkpoints since HK’s reversion to China, but in September 1998, the land crossings were only extended by one to two hours. Border tourism: HK & Guangdong reached an agreement on five measures to boost cross border tourism in the Joint Conference of September 1998. Besides facilitating mainlanders visiting HK, the measures also increased the attraction of HK to overseas visitors as they can visit more places in Guangdong without a visa. Regional Infrastructure There are too many seaports & airports in the ZD. Within a couple of years after after the visit of Deng in 1992, Beijing has approved the construction of three deep water ports adjacent to HK, namely, Yantian in Shenzhen, the Huizhou port in Daya Bay, & Gaolan port in Zhuhai. This is in addition to the existing Guangzhou port & Shekou port in Shenzhen. HK has been the busiest container in the world for sometime, handling 16.2 million containers in 1999. A minimum freight volume of 1.5 million containers a year is needed for the efficient operation of a container port. All the Chinese ports near HK have quite a long way to go to reach the threshold of 1.5 million containers a year, excepting Yantian, which handled over a million containers in 1998. Here is the need to underline: Co-ordination & Competition; Co-ordination of infrastructural development after 1997. Tourism HK’s tourist industry was severely hit by the Asian Financial Crisis. At the end of May 1998, the Government announced a package of seven measures to stimulate the sagging economy. One of the measures include a 30% increase in the quota allocated to Mainlanders joining the Group Tour Scheme to visit HK. Another measure was to simplify visa formalities for Taiwanese tourists who tour HK on their way to Mainland. Finally here, HK Disneyland, scheduled to open in 2005, is projected to attract 3.4 million overseas tourists. By 2020, the park will reach full capacity, attracting 7.5 million overseas tourists. Technology Policy HK is uniquely positioned to utilize the research & engineering capability of the Mainland. It also has the advantage & close links with the Mainland’s vast internal market. Indeed, the importation of skilled professionals from the Mainland without quota started in early 2000.