Hong Kong Macau€¦ · Donald Tsang will take over as chief secretary for administration on May...

COUNTRY REPORT

Hong Kong

Macau

March 2001

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2001-02

OVERVIEWDonald Tsang will take over as chief secretary for administration onMay 1st; he will be succeeded as financial secretary by Antony Leung.The first term in office of the chief executive, Tung Chee-hwa, comes toan end in 2002. He is likely to be appointed to a second term. Aftergrowing by 10.5% in 2000, real GDP is likely to expand by just 3%in 2001, and 3.9% in 2002. Consumer prices are likely to be broadlystable this year, but inflation will return in 2002. The current account islikely to remain in modest surplus this year and next, despite anexpanded merchandise trade deficit.

Key changes from last monthPolitical outlook• The government has continued to take a liberal stance towards the Falun

Gong movement. However, a major demonstration by the group duringthe visit of the Chinese president, Jiang Zemin, in May could force achange of tack.

Economic policy outlook• The 2001/02 budget, presented on March 7th, eschews radical solutions to

the forecast economic slowdown. The projected increase in governmentspending is modest, and tax cuts have generally been avoided.

Economic forecast• A continued contraction in consumer prices has led the EIU to lower

its forecast for consumer price inflation in 2001 (composite measure)to just 0.1%.

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ISSN 0269-6762

Symbols for tables“n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

1

EIU Country Report March 2001 © The Economist Intelligence Unit Limited 2001

Contents

3 Summary

Hong Kong

5 Political structure

6 Economic structure

6 Annual indicators

7 Quarterly indicators

8 Outlook for 2001-02

8 Political outlook

9 Economic policy outlook

9 Economic forecast

13 The political scene

17 Economic policy

19 The domestic economy

19 Output and demand

21 Employment, wages and prices

22 Financial indicators

26 Sectoral trends

27 Foreign trade and payments

Macau

31 Political structure

32 Economic structure

32 Annual indicators

33 Outlook for 2001-02

33 Political outlook

33 Economic forecast

34 The political scene

36 The domestic economy and economic policy

List of tables

10 Hong Kong: international assumptions summary

11 Hong Kong: gross domestic product by expenditure

12 Hong Kong: forecast summary

20 Hong Kong: gross domestic product estimates

20 Hong Kong: retail sales

21 Hong Kong: employment levels by sector

2

EIU Country Report 1st quarter 2001 © The Economist Intelligence Unit Limited 2001

22 Hong Kong: inflation indicators

23 Hong Kong: financial indicators

25 Hong Kong: customer deposits by currency and foreign-exchange reserves

28 Hong Kong: balance of trade, Jan-Dec

29 Hong Kong: merchandise imports, Jan-Dec

29 Hong Kong: domestic merchandise exports, Jan-Dec

30 Hong Kong: domestic merchandise re-exports, Jan-Dec

31 Hong Kong: balance of payments

36 Macau: tourism

38 Macau: merchandise trade account

38 Macau: domestic exports by main market

38 Macau: imports by main market

List of figures

13 Hong Kong: gross domestic product

13 Hong Kong: Hong Kong dollar real exchange rates

19 Hong Kong: quarterly gross domestic product

24 Hong Kong: inflation

28 Hong Kong: external trade, 2000

34 Macau: gross domestic product

34 Macau: pataca real exchange rates

3


Summary

March 2001

Hong Kong

Donald Tsang will become chief secretary for administration on May 1st. Therelationship between the SAR government and the central government willremain problematic. Tung Chee-hwa is likely to be selected for a secondterm in office. GDP growth will fall to 3% in 2001, before picking up to 3.9%in 2002. Consumer prices will be broadly stable in 2001, after two years ofdeflation. The current-account balance is likely to remain in small surplus overthe next two years.

Anson Chan’s early departure from her post as chief secretary provedunsettling, with a five week delay before Mr Tsang was appointed as hersuccessor. The new financial secretary, Antony Leung, is a banker with somepublic-service experience. The government has yet to act against Falun Gong,and is proceeding slowly on Article 23 requirements. There has been someaction on protecting the environment.

The 2001/02 budget is cautious, with a modest increase in public spending anda reduced forecast deficit. Some duties and fees have been raised. The newfinancial secretary is unlikely to implement major changes to financial policy,at least in the short term.

GDP growth slowed to 6.8% year on year in the fourth quarter of 2000,despite double-digit rates of expansion for both exports and investment.Growth in retail sales declined in late 2000. Although employment in themanufacturing sector continued to fall last year, overall numbers inemployment rose. The labour force has been growing too. The recruitment ofprofessionals from China has been recommended. The fall in consumerprices has slowed. Some of Hong Kong’s credit ratings have been upgraded.The debt market has been further developed with new issues. Stockmarketsentiment remains uncertain. More regulation has been proposed for banks’securities operations. The proposed Securities and Futures Bill has beencriticised from a number of angles. Privatisation of the KCRC has beendelayed until 2006. The government has capped flat and land sales. 3Gmobile licences will be auctioned for royalty fees. Container truck drivershave protested about a cargo-handling surcharge. A new recreation andtourist centre has been proposed.

The merchandise trade deficit expanded in December, as slowing US andEuropean demand trimmed export growth. There was broad-based export andimport growth in 2000 as a whole. The balance of payments situationremained healthy in the third quarter of 2000.

Outlook for 2001-02

The political scene

Economic policy

The economy

Foreign trade andpayments

4


Macau

Relations with the mainland are likely to be complicated by Falun Gong.Legislative Council elections are due in October this year. Any resurgence inviolent crime would affect the tourism industry and thereby economic growth.GDP growth is anyway likely to be pulled down by the US slowdown, and theabolition of multilateral fibre agreement (MFA) quotas will also pose problemsfor the SAR. Liberalisation of the gambling industry would bring gains, butposes risks too.

The chief executive, Edmund Ho, made his first official report to the Chineseauthorities in December, travelling to Beijing to do so. China’s president, JiangZemin, then travelled to Macau for the SAR’s first anniversary celebrations.Falun Gong demonstrations to mark his visit were broken up, and Mr Jiangreiterated that the SAR authorities must prevent the territory being used as abase for anti-Chinese activities. Macau’s autonomy remains an issue for the USand EU. The EU has agreed in principle to allow visa-free access to Macauresidents, and a new aviation agreement has been signed with Taiwan. Thekidnap and then release of a prominent lawyer suggests that the problem ofviolent crime has not entirely gone away.

Interest rates have been cut twice since the start of 2001. The number of touristarrivals increased by 21% in 2000 to reach 9m. The Sociedade de Tourismo eDiversões de Macau (STDM), which owns and runs the gambling franchise,increased its profits by 26.5% in the first three quarters of 2000. Morecompanies are being formed. eSun Holdings plans a “television city” andassociated tourist attraction. The merchandise trade surplus increased sharplyin 2000, but Macau remains overdependent on exports of textiles andgarments.

Editors: Graham Richardson (editor); Georgia Bush (consulting editor)Editorial closing date March 12th 2001

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

The political scene

Outlook for 2001-02

The economy

Hong Kong 5


Hong Kong

Political structure

The Hong Kong Special Administrative Region (SAR) of the People’s Republic of China

Special administrative region of China, with its own constitution (the Basic Law),guaranteeing a “high degree of autonomy” for the next 47 years. Headed by a chiefexecutive appointed by China

14-member Executive Council (Exco), serving in an advisory role to the chief executive

Jiang Zemin, president of the People’s Republic of China

Unicameral Legislative Council (Legco), comprising 20 directly elected members, 30members elected by functional constituencies and 10 elected by an election committeecomprising mostly delegates chosen by functional constituencies. Legco was temporarilyreplaced by the Provisional Legislative Council (PLC) from July 1997 to April 1998

The current two municipal councils (the Urban Council and the Regional Council), thesecond tier of government, were merged with the third tier, the district boards, in theNovember 2000 legislative elections. While nearly all seats to these bodies were electedin 1994 and 1995, 20% of the renamed district boards are now appointed by thegovernment

Based on English law, with foreign affairs and defence the responsibility of the centralgovernment in Beijing

The Provisional Legislative Council (PLC), which replaced the dissolved Legco on July1st 1997, was itself replaced when a new Legco was elected in May 1998. The mostrecent Legco elections were in November 2000. Next elections 2004.

The pro-democracy Democratic Party (DP, or Democrats) is the largest party in Legco.The second largest is the conservative Liberal Party (LP), which represents businessinterests, and the third is the pro-China Democratic Alliance for the Betterment of HongKong (DAB)

Chief executive Tung Chee-hwaChief secretary for administration Anson Chan (until May 1st)Financial secretary Donald Tsang (until May 1st)Secretary for justice Elsie Leung

Constitutional affairs Michael SuenEconomic services Sandra LeeEducation & manpower Fanny LawFinancial services Stephen IpTreasury Shum Man-toTrade & industry Chau Tak-hayHead of central policy unit Edgar Cheng

Joseph Yam

The executive

Head of state

Legislature

Local government

Legal system

Elections

Main political parties

Secretaries

Chief executive of the HongKong Monetary Authority

Official name

Form of state

6 Hong Kong


Economic structure

Annual indicators

1996 1997 1998 1999 2000

GDP at market prices (HK$ bn) 1,191.9 1,323.9 1,259.3 1,231.4 1,271.7

GDP (US$ bn) 154.1 171.0 162.6 158.7 163.2

Real GDP growth (%) 4.5 5.0 –5.3 3.0 10.5

Consumer price inflation (av; %) 6.3 5.8 2.8 –4.0 –3.7

Population (m) 6.3 6.6 6.6 6.7 6.8

Exports of goods fob (US$ m) 180,742.7 192,188.3 175,833.7 174,737.9 212,170.3a

Imports of goods fob (US$ m) 199,093.8 209,486.6 183,666.5 177,896.2 218,397.2a

Current-account balance (US$ m) –2,156.9 –6,158.8 2,901.6 9,284.8 9,438.3a

Foreign-exchange reserves excl gold (US$ m) 63,808.0 92,804.0 89,601.0 96,236.0 107,542.0

Total external debt (US$ bn) 38.1 40.4 48.7a 53.5a 55.3a

Debt-service ratio, paid (%) 2.0 1.5 2.5a 3.0a 2.7a

Exchange rate (av) HK$:US$ 7.73 7.74 7.75 7.76 7.79

March 6th 2001 HK$7.80:US$1

Origins of gross domestic product 1999 % of total Components of gross domestic product 2000 % of total

Primary industries 0.1 Private consumption 58.3

Manufacturing 5.7 Government consumption 9.6

Utilities 3.0 Gross fixed capital formation 25.8

Transport, storage & communications 9.6 Stockbuilding 1.7

Construction 5.8 Exports of goods & services 149.9

Wholesale & retail import & export trade 25.2 Imports of goods & services –145.2

Finance, insurance, real estate & business services 23.2 Total at current market prices 100.0

Total incl others at factor cost 100.0

Principal domestic exports fob 2000 US$ bn Principal imports cif 2000 US$ bn

Clothing 9.9 Electrical machinery & appliances 37.1

Electrical machinery & apparatus 3.7 Telecoms & sound equipment 20.7

Textiles yarn & fabric 1.2 Office machinery 18.3

Specialised scientific equipment 1.0 Clothing 16.5

Office machinery 0.9 Textiles yarn & fabric 13.7

Total incl others 23.2 Total 213.1

Main destinations of domestic exports 2000 % of total Main origins of imports 2000 % of total

US 30.0 China 43.1

China 29.9 Japan 12.0

UK 5.9 Taiwan 7.5

Germany 5.0 US 6.8

a EIU estimates.

Hong Kong 7


Quarterly indicators

1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

General government finance (HK$ bn)Revenue 69.49 2468 14.70 45.21 77.53 27.03 22.02 n/aExpenditure 60.23 49.89 42.96 49.94 48.50 45.13 46.64 n/aBalance 9.26 –25.21 –28.27 –4.73 29.03 –18.10 –24.62 n/a

OutputGDP at constant 1990 prices (HK$ bn) 183.3 192.5 212.6 221.0 209.3 213.6 234.8 n/a % change, year on year –2.9 1.1 4.4 9.2 14.2 10.9 10.4 n/aManufacturing index (1986=100) 91 104 110 108 90 103 110 107 % change, year on year –9.9 –7.1 –6.0 –2.7 –1.1 –1.0 0.0 –0.9

Employment and pricesEmployment (end-period;'000) Internal tradea 976.8 966.2 997.5 1,002.3 1,027.9 1,036.4 1,053.3 n/a Financial servicesb 397.9 409.2 406.9 415.3 414.8 429.3 437.0 n/a Manufacturing 248.6 253.5 244.5 244.7 233.7 238.8 229.4 n/aUnemployment rate (% of the labour force; seasonally adjusted) 6.0 6.2 6.1 6.1 5.6 5.2 4.9 4.6Consumer prices(1994/95=100) CPI (A)c 115.3 113.9 112.0 111.7 110.6 110.0 109.7 109.9 % change, year on year –1.5 –3.5 –5.0 –3.0 –4.1 –3.4 –2.1 –1.6 Composite CPI 115.5 114.3 111.8 111.3 109.6 109.2 108.6 108.9 % change, year on year –0.9 –4.0 –5.9 –4.1 –5.1 –4.5 –2.9 –2.2

Financial indicatorsExchange rate HK$:US$ (av) 7.75 7.75 7.76 7.77 7.78 7.79 7.80 7.80 HK$:US$ (end-period) 7.75 7.76 7.77 7.77 7.79 7.79 7.80 7.80Interest rates (av; %) Prime lending 8.75 8.33 8.42 8.50 8.75 9.33 9.50 9.50 Money market 5.90 5.11 5.42 5.94 5.69 6.04 5.90 6.17M2, HK$ (end-period; HK$ bn) 1,791.6 1,817.5 1,827.9 1,882.6 1,864.7 1,894.7 1,947.6 1,980.5 % change, year on year 9.3 10.4 5.2 5.5 4.1 4.2 6.6 5.2Hang Seng stockmarket index (end-period; Jul 31st 1967=100) 10,942.2 13,532.1 12,733.2 16,962.1 17,406.5 16,155.8 15,649.0 15,095.5 % change, year on year –5.0 58.4 61.5 68.8 59.1 19.4 22.9 –11.0

Sectoral trendsBuilding work completed (private; usable floor area; ‘000 sq m) Total 492 767 498 822 355 408 234 n/aPassenger arrivals ('000) 15,251 15,865 16,389 17,056 16,729 17,924 18,793 n/aRetail sales (1994/95=100) (Value; % change, year on year) –13.7 –7.8 –7.3 –3.0 7.5 4.9 2.0 0.7 (Volume; % change, year on year) –10.2 –1.6 1.7 4.7 14.2 10.4 5.8 2.4

Foreign trade (HK$ bn)Exports fob 283.1 325.7 368.0 373.8 339.9 382.1 432.6 420.0 Re-exports fob 246.8 284.0 321.1 328.0 298.3 337.7 382.2 375.2Imports cif –296.0 –337.9 –374.4 –385.5 –363.6 –406.8 –449.4 440.2Trade balance –12.9 –12.2 –6.5 –11.7 –23.7 –24.7 –16.8 –20.3

Foreign reserves (US$ bn)Reserves excl gold (end-period) 89.51 88.52 90.52 96.24 93.81 97.08 101.48 107.54

a Wholesale, retail and import/export trades, restaurants, hotels. b Financing, insurance, real estate, business services. c Low income group.Sources: Census and Statistics Department; IMF, International Financial Statistics.

8 Hong Kong


Outlook for 2001-02

Political outlook

The financial secretary, Donald Tsang, will become chief secretary foradministration on May 1st. He will replace Anson Chan, who announced inJanuary this year that she would retire early. Mr Tsang’s position has, in turn,been filled by a banker, Antony Leung. The term of the chief executive, TungChee-hwa, expires in 2002 but it is highly likely that he will be selected for asecond term of office. The big question now is whether Mr Tsang, who isdeferential (in public at least) to Mr Tung, will defend Hong Kong’s presentfreedoms more or less effectively than Ms Chan. It is expected that Mr Tsangwill take a less confrontational stance in private towards Mr Tung and thecentral government, but that he will continue to defend Hong Kong’sautonomy and the democratic values that he has always propounded.

The appointment of Mr Tsang, a career civil servant who has held his presentpost since before 1997, proved reassuring to those who feared that Mr Tungmight take the opportunity to appoint a lightweight figure to lead the civilservice. Mr Tsang immediately proclaimed that he would maintain the pro-fessionalism of the civil service and that he would not compromise on thequestion of freedom, human rights and the rule of law. The new financialsecretary, the 49-year-old Mr Leung, is not a civil servant, and is the firstoutsider appointed to his job since the early 1980s. Some argue thatprofessional civil servants should be simply implementers of policy, and thatheads of departments should be politically appointed policy makers.

Over the next two years, the new leadership will need to address severaldifficult issues in addition to the management of government finances. Theeconomy is still in transition from one based on manufacturing, which beganto wane in the 1980s when industries shifted wholesale to the Chinesemainland, to a knowledge economy. Managing this shift will require greatchanges in education and training.

Hong Kong’s relationship with the central government in Beijing will alsoremain problematic. On the political front, China will continue to expect theSpecial Administrative Region (SAR) to rein in protests against the centralgovernment like those by the Falun Gong. This issue may well come to a headin May, when China’s president and general secretary, Jiang Zemin, is due toarrive in Hong Kong to participate in an economic conference. Mr Jiang has agreat personal dislike of Falun Gong. Were he to be confronted by Falun Gongprotesters he might well insist that the Hong Kong government take actionagainst the organisation, prompting debate within the government about howto respond to such a call.

Mr Tung will end his first five-year term of office in 2002. He is, apparently,still much appreciated by the central government, who see him as havingmaintained a stable political environment since the handover to Chinese ruleon July 1st 1997. The people of Hong Kong, however, seem less enthusiastic,

Domestic politics

Chief executive watch

Hong Kong 9


and Mr Tung has also been criticised on occasion by business and professionalgroups. When his term comes to an end in 2002, the chief executive will onceagain be chosen by an electoral college (albeit double the size of the last one)selected by China. It is highly likely that Mr Tung will then be selected for asecond term of office, ensuring that progress towards a fully elected legislature,and towards an executive accountable to that legislature, will be minimal.

Economic policy outlook

Mr Tsang’s swansong, the 2001/02 budget, eschewed any large extra fiscalstimulus, despite the certainty that growth will slow this year. The economicagenda of the new financial secretary, Mr Leung, has not yet been set out buttax reform will inevitably be at or near the top, as he indicated in his openingstatement, in which he promised to attach great importance to the prudentmanagement of public finances. With the Hong Kong dollar remaining fixed tothe US dollar throughout the forecast period, monetary policy will remaininoperative in 2001-02. Local nominal interest rates will continue to move inline with those in the US.

The 2001/02 budget was presented by Mr Tsang on March 7th. The realincrease in spending in 2001/02 is forecast to be just 2.5%, rather below the 4%GDP growth officially forecast for 2001. This modest rate of increase is owing,in part, to fears that growth will undershoot the official target in 2001. Butthere are also worries that budget deficits may now be structural rather thancyclical, something which the Basic Law does not permit. The operatingdeficit for 2000/01 is estimated at HK$19.2bn (US$2.5bn), and while thisdeficit will be steadily reduced in the coming years, a surplus is not forecastuntil 2004/05. In the longer term, the government wants to introduce someform of a consumption tax, to diversify revenue sources away from thehighly volatile property sector.

The government has no control over interest rates, as one of the mainmechanisms by which the fixed exchange rate of the Hong Kong dollar againstthe US dollar is sustained is the close relationship between Hong Kong and USinterest rates. The Hong Kong dollar risk premium—the differential betweenthe London interbank offered rate (Libor) and its Hong Kong equivalent(Hibor) for three-month funds—shot up in 1997-98, returned to zero at theend of 1999, and stayed there during 2000. Provided there are no major shocksto the economy, Hong Kong rates can be expected to be no higher than thosein the US. Further deregulation of interest rates is planned and by July 1st 2001all interest rate restrictions will have been removed.

Economic forecast

The EIU’s forecast for the global economy has deteriorated markedly since ourlast report, owing largely to a significant downgrade in our forecast for the US.We now expect economic growth in the US—Hong Kong’s largest exportmarket—to grow by just 1.4% in 2001 (down from a previous forecast for

Policy trends

Fiscal policy

Monetary policy

International assumptions

10 Hong Kong


growth of 2.5%) and by 2.9% in 2002. Growth in world trade will also slowsubstantially, from 12.3% last year to just 5.9% in 2001. As China is also amajor exporter to the US, export growth will slow there as well. We are,however, still forecasting GDP growth of around 7% in China in 2001, where,as the slowdown becomes more apparent, the government will seek tostimulate the economy by other means. Owing to political influences, China’seconomic data must, in any case, be considered unreliable. World oil prices willalso decline this year owing to reduced demand.

Hong Kong: international assumptions summary(% unless otherwise indicated)

1999 2000 2001 2002

Real GDP growthWorld 3.5 4.8 3.3 3.9OECD 3.0 4.0 1.9 2.7EU 2.4 3.3 2.6 2.6

Exchange rates (av)¥:US$ 113.9 107.8 119.5 120.0US$:€ 1.07 0.92 1.00 1.09SDR:US$ 0.731 0.758 0.755 0.731

Financial indicators¥ 2-month private bill rate 0.27 0.24 0.50 0.50US$ 3-month commercial paper rate 5.18 6.32 4.89 5.39

Commodity pricesOil (Brent; US$/b) 17.9 28.4 23.9 23.0Gold (US$/troy oz) 278.8 279.3 258.8 255.0Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.2 9.0 16.1Industrial raw materials (% change in US$ terms) –4.2 14.6 0.7 12.6

Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP)exchange rates.

Full-year GDP data, released on March 7th, put GDP growth in 2000 at 10.5%.However, the sharp slowdown in the US—which accounts for the majority ofHong Kong’s exports—means that real GDP growth in 2001 is likely to slowto 3%, rising to 3.9% in 2002 as a gradual recovery in the US, together withlower interest rates, helps to boost exports and domestic demand.

The rapid rate of GDP growth achieved in 2000 resulted from a 16.7% rise inexports of goods and services (in real, national-accounts terms) as a result ofrapid growth in US demand for most of the year, the continuing recovery ofpreviously crisis-hit economies in Asia and faster growth in Chinese exports. Asthe fourth-quarter GDP figures make clear, growth was already beginning toflag slightly by the end of last year and this deceleration will continue in 2001.A further indication of weaker prospects for domestic exports was that orders-on-hand for manufacturing were 3% lower at the end of the year than at theend of 1999. (The industrial production index for the fourth quarter of 2000has still not been published.) The rate of growth of retail sales has also declinedsince the first half of 2000—in January retail sales were up by only 1.1% invalue and 2.5% in volume year on year.

Economic growth

Hong Kong 11


Hong Kong: gross domestic product by expenditure(HK$ m at constant 1990 prices; % change year on year in brackets unless otherwise indicated)

1999a 2000a 2001b 2002b

Private consumption 467,027.0 492,461.0 507,234.8 532,596.6(0.7) (5.4) (3.0) (5.0)

Public consumption 64,203 65,534 67,172 68,852(3.3) (2.1) (2.5) (2.5)

Gross fixed investment 232,534 253,006 268,186 289,641(–17.4) (8.8) (6.0) (8.0)

Final domestic demand 763,764 811,001 842,594 891,089(–5.4) (6.2) (3.9) (5.8)

Stockbuilding –10,874 16,760 5,000 5,000(0.5)c (3.4)c (–1.3)c (0.0)c

Total domestic demand 752,890 827,761 847,594 896,089(–5.0) (9.9) (2.4) (5.7)

Exports of goods & services 1,623,316 1,894,572 2,002,563 2,144,745(4.2) (16.7) (5.7) (7.1)

Imports of goods & services –1,567,342 –1,828,683 –1,929,261 –2,083,601(0.1) (16.7) (5.5) (8.0)

Foreign balance 55,974 65,889 73,302 61,143(8.1)c (1.2)c (0.8)c (–1.3)c

GDP 808,864 893,650 920,896 957,233(3.0) (10.5) (3.0) (3.9)

a Actual. b EIU forecasts. c Contribution to real GDP growth.

The slowdown in export growth in the last quarter of 2000, and particularly inDecember, corresponds neatly with the slowdown in US import demand. Withthe US entering recession in the first quarter of 2001 and only recovering topositive growth in the second half of the year, the outlook for Hong Kong isone of slower growth of exports and, therefore, also of private consumption—as exports of goods and services constitute around 150% of current-price GDPand provide employment for a high proportion of the workforce. Withproperty prices unlikely to rise much in 2001 the property sector will remainweak, and consequently fixed investment will be sustained by further privateinvestment in new technology and continuing government infrastructureinvestment. A further cut in US interest rates is likely during the year, andHong Kong will almost certainly follow suit. As deflation ends, real interestrates will therefore fall faster than nominal rates, providing the basis forrecovery in both domestic consumer markets and private capital investmentin 2002, when external demand conditions will also improve. After fallingto 3% in 2001, GDP growth is therefore expected to edge up to 3.9% in 2002.

After falling by 4% in 1999, consumer prices (composite index) fell by a further3.6% in 2000, despite rapid real GDP growth. Producer prices in manufacturingstarted to increase in year-on-year terms in the second quarter of 2000 afterhaving fallen steadily since the third quarter of 1997. Since bottoming out inAugust 1999, deflation has gradually eased, narrowing to 1% year on year inJanuary 2001. Prices are expected to start rising very gently in 2001, withconsumer price inflation averaging just 0.1% for the whole of 2001 and 1.5%in 2002, held down by the relatively depressed state of domestic demand,

Inflation

12 Hong Kong


which will partially offset the expected recovery in consumer prices in China,the source of 40% of Hong Kong’s imports.

Hong Kong: forecast summary(% unless otherwise indicated)

1999a 2000a 2001b 2002b

Real GDP growth 3.0 10.5 3.0 3.9

Gross fixed investment growth –17.4 8.8 6.0 8.0

Unemployment rate (av) 6.1 5.1 4.1 3.5

Consumer price inflation Average –4.0 –3.6 0.1 1.5 Year-end –2.9 –1.1 1.0 2.0

Short-term interbank rate 9.0 8.5 7.2 7.6

Government balance (% of GDP) –4.0 –0.9c –0.5 –0.3

Exports of goods fob (US$ bn) 174.7 212.2c 230.1 255.7

Imports of goods fob (US$ bn) 177.9 218.4c 241.5 268.5

Current-account balance (US$ bn) 9.3 9.4 c 5.1 4.4 % of GDP 5.8 5.8c 3.1 2.5

External debt (year-end; US$ bn) 53.5 55.3c 58.8 64.3

Exchange rates HK$:US$ (av) 7.76 7.79 7.80 7.80 HK$:¥100 (av) 6.81 7.23 6.53 6.50 HK$:€ (year-end) 7.81 7.32 8.19 8.81 HK$:SDR (year-end) 10.67 10.16 10.51 10.83

a Actual. b EIU forecasts. c EIU estimates.

Although growth prospects look more shaky, another regional financial crisisleading to renewed attacks on the Hong Kong dollar is not forecast. Even ifsuch an onslaught were to recur, the authorities are now better prepared for itthan they were in 1997-98 and would doubtless be able to fight it offsuccessfully. With the need for stability in the business environment the mainpriority of the authorities, the pre-crisis discussion on optimal exchange rateregimes will continue to be shelved, along with proposals for alternatives suchas dollarisation or pegging the Hong Kong dollar to a trade-weighted basket ofcurrencies. The Hong Kong dollar will therefore remain linked to the US dollarat the rate of HK$7.8:US$1 in 2001-02 and well beyond.

The slowdown in exports will not have a huge impact on the current-accountbalance, which is expected to maintain a small surplus over the next two years.If the account does dip into deficit, it will only be to the tune of a few billionHong Kong dollars, representing a negligible percentage of GDP. The reason isthat a high proportion of exports are import-dependent, since re-exports ofgoods imported from elsewhere account for the overwhelming majority(88.5% by value in 2000) of Hong Kong’s exports. Therefore, a slowdown inexports necessarily entails a corresponding slowdown in imports of a similarmagnitude. This effect is reinforced by the dependence of domestic incomes onexports. As income growth slows, so does growth in retail sales, and thereforeimports, since practically all items in the shops are imported. Both exports andimports of merchandise will grow less than half as fast in 2001 as in 2000, and

Exchange rates

External sector

Hong Kong 13


the recovery of total trade in 2002 will be gradual. Services imports will alsogrow more slowly as a result of slower merchandise trade growth, helping tokeep the current account in small surplus.

The political scene

The unexpected announcement on January 11th by the chief secretary foradministration, Anson Chan, that she would retire 14 months early (onApril 30th 2001, rather than June 30th 2002) sparked a wave of speculationabout the real reasons for her early departure, her future and who wouldreplace her. The most senior member of the civil service, Ms Chan had initiallybeen appointed by the last British governor, Chris Patten, but was kept in placeby the chief executive, Tung Chee-hwa, although apparently with somereluctance on his part. Rumours of strife between the chief executive and thechief secretary for administration had been circulating since China resumedsovereignty over the territory in July 1997. During a news conference shementioned, without naming them, trouble “stirrers” who had createddifficulties between her and the Beijing-anointed Mr Tung, but cited, ratherunconvincingly, personal reasons for her retirement.

Her departure raised renewed concerns both for human rights and thedevelopment of democracy in the territory. Ms Chan had argued for “early”discussion of election arrangements, which must be reviewed between 2004,the last election in which the proportions of directly-elected and functionally-elected legislators are fixed—at 30 seats each in the 60-seat Legislative Council(Legco)—and 2008 when the next election takes place. A change in theelection arrangements would require the support of 40 out of the 60 Legcomembers and approval by the chief executive. Local non-governmentalorganisations (NGOs) and political parties want the 2002 chief executiveelection and the 2004 Legco elections to be in effect referendums on proposedarrangements, but Mr Tung has stated a preference not to begin discussions onmoves toward full direct elections until 2007, when the government wouldintroduce an election bill for 2008 and call for public “consultations” on its

The unsettling departure ofAnson Chan

14 Hong Kong


proposals. It is possible that Mr Tung reacted strongly and negatively to MsChan’s call for early constitutional discussions, which she saw as necessary tomaintain public order and support.

Ms Chan has denied that early retirement meant that she planned to stand forelection as chief executive (the election, by an 800-strong election committeewill take place between March and June 2002). Mr Tung remains the clearfront-runner in this context, but recent indications suggest that he may haveto work hard to get the 401 votes (or a majority of those present) necessary towin. A number of business and professional groups (which provide the lion'sshare of the votes) have criticised Mr Tung. Beijing has also fought shy ofopenly endorsing Mr Tung for re-election, at least until he can improve hispublic opinion ratings.

The five-week delay in the announcement of Ms Chan’s replacement led tospeculation about a disagreement between Mr Tung and the Chinesegovernment over who it should be. When Mr Tung announced Donald Tsangas his choice for the post, suspicions about the cause of the delay turned toMr Tsang’s well-known devoutness as a Roman Catholic. Given that theVatican continues to recognise the Taiwan authorities as the legitimate rulers ofChina, and that the Catholic Church in China has been forced to renounce itsallegiance to the Vatican, the loyalty of Mr Tsang, who attends mass everymorning, may have been called into question.

Of all the senior officials inherited from the colonial administration, Mr Tsangis the most deferential (in public at least) to Mr Tung, in contrast to Ms Chan’soutspokenness on human rights and insistence on civil service procedures.Mr Tsang has also been criticised for authorising the August 1998 stockmarketintervention by the Hong Kong government, and overseeing the awarding ofthe Cyberport project with no competitive bidding and massive governmentinvestment, although recent strong growth in Hong Kong has helped restorehis credibility.

Mr Tsang’s replacement as financial secretary, Antony Leung, is the first personappointed from outside the ranks of the civil service to occupy the positionsince the early 1980s. As an Exco member, he successfully piloted through anambitious educational reform package against strong resistance and earlier, ashead of the University Grants Committee, oversaw part of a massive expansionand upgrading of the university system. A banker by profession, hisappointment was generally welcomed in the business community. Mr Leungwill forego an estimated HK$40-60m in income during his three years in thegovernment post, and his contract runs beyond Mr Tung’s own term as chiefexecutive, which has prompted questions in the Legco. Many suspect that MrLeung is being brought in to take on the difficult reform of the tax system.

Mr Leung’s appointment may also reflect a growing belief that Hong Kong’scurrent system, where career civil servants become major political figures, is inneed of reform. It has been argued that the implementers of policy should beprofessional civil servants, while the policy makers heading up thedepartments and bureaux should be political appointees.

Donald Tsang is appointedas chief secretary

The new financial secretaryis not a civil servant

Hong Kong 15


With no ruling majority in the Legco, a majority has to be assembled issue-by-issue, and as no party is responsible for policy or accountable for policyimplementation, the parties have at times taken inconsistent stances. Giventhe stockmarket intervention by the administration in 1998, its continuedstrong resistance to a comprehensive competition law, and massivegovernment subsidy or control of medical care, hospitals, education andhousing, the parties may be falling into a compensation culture that demandsgovernment handouts from all comers.

The government owns all land and changed its leasing program in February toa reserve-list system whereby a property listed as available for developmentstays off the market until a developer expresses an interest in bidding for it.This in effect reduces land supply, thus raising its price. The spectacle ofgovernment intervention in the housing sector encourages calls, both bybusiness and social activists, for it to intervene elsewhere. Aside from thesetting up of a Mandatory Provident Fund (MPF) in mid-December, little hasbeen done to move away from government subsidies in healthcare, propertyand education. However, the arrival of Mr Leung as financial secretary onMay 1st could mark a new determination to reform government-dominatedsectors of the economy.

On January 18th the government asked the Court of Final Appeal to refer twoupcoming right of abode cases to China’s National People’s Congress (NCP)Standing Committee, before arriving at its own judgment. The court isrequired, under Basic Law Article 158, to refer issues concerning relationsbetween the central government and the SAR (arguably including right ofabode) for clarification before rendering judgement. A previous judgement onright of abode was overturned by the NPC Standing Committee in June 1999.

It remains unclear, however, who has the right to lodge an appeal with theNPC against a Court of Final Appeal ruling. In December the court overturnedthe privileges granted under British rule to indigenous villagers in the NewTerritories and granted non-indigenous villagers voting rights, despite the factthat the Basic Law supposedly protected these “traditional” customs andpractices. The two UN human rights covenants ratified by China in March, andwhich form part of the Basic Law, were held to conflict with “traditional”practices such as male primogeniture and, apparently, exclusion of other citizensfrom representation based on ancestral origins. Rural Committee members havethreatened to refer this decision to the NPC Standing Committee.

In response to widespread local and international concern about theimplications for the rule of law in the territory, the government has promisedto abide by any Court of Final Appeal decision to refer or not, regardless of theoutcome of the case. The High Court’s upholding of the government’s decisionto scrap the Urban and Regional Councils in 1999 has, so far, encouraged thegovernment to believe it has the authority to make representative arrangementsbelow the legislative level as it sees fit. An NPC decision to uphold RuralCommittee rights is thought unlikely as it might undercut the government’sauthority to scrap the municipal councils. Nevertheless, the NPC’s very entertainingof such an appeal would undermine the overall authority of the court.

Legco may be falling into acompensation culture

Court of Final Appeal maybe challenged

16 Hong Kong


The Falun Gong movement has also unsettled relations with centralauthorities. Banned on the mainland, the group held an internationalconference with some 800 delegates in Hong Kong City Hall in January.(Ironically, the abolition of the Urban Council made it more difficult for thegovernment to prevent the gathering, as the functions of the council havebeen delegated to civil servants who approved the meeting in a public venuewithout the debate and vote that would previously have been required.)

The central government was criticised at the meeting for its crackdown on themovement and for numerous alleged human rights abuses, prompting atorrent of criticism from pro-Beijing partisans and Chinese officials based inthe territory, both against the group and against Mr Tung’s administration forits “inaction” against this “threat” to the Chinese Communist Party (CCP).Mr Tung pledged in February to monitor the Falun Gong group for any illegalor harmful actions, but indicated that he would take no action against it, eitherby speeding up the introduction of so-called Article 23 laws or by attemptingto de-register the group. (Article 23 is that part of the Basic Law permitting theSAR to institute its own laws to deal with sedition and related issues.)Upcoming events in May which will see the Chinese president, Jiang Zemin,and the former US president, Bill Clinton, in Hong Kong have prompted callsfrom all sides for the Falun Gong to act prudently and not to “embarrass”Mr Jiang during his visit.

Article 23 requirements for outlawing sedition, subversion, secession, treasonand theft of state secrets are complex to implement, with repercussions forbusiness intelligence and legal matters such as due diligence research, as wellfor human rights. Furthermore, the stance of the courts on upholding anyresulting prosecutions remains questionable, so that few believe thegovernment will act soon on the matter, and then only after extensiveconsultation with affected parties. The award of permanent right of abode tothe exiled mainland dissident unionist, Han Dongfang, by Hong Kongauthorities in mid-January (Han hosts a Radio Free Asia programme, broadcastto the mainland), indicated that the mainland is willing to accept some formsof mainland-oriented dissent based in Hong Kong. However, the Legcoreapproved in late December the Public Order Ordinance which requires sevendays notice and approval by police of any demonstration of over 30 people.Offenders face steep fines and up to five years in jail. However, a strike by lorrydrivers outside Kwai Ching port terminals in February, which resulted inmassive traffic tie-ups and major financial losses, resulted in no prosecutionsfor breaching the ordinance.

Revisions to the strategic sewage disposal scheme may save the government alarge amount of money and please environmentalists. A judge has blockedplans to develop the Sha Lo Tung valley, which includes several sites of specialscientific interest and represents one of the few remaining undisturbedhighland valleys in Hong Kong. The blocking of plans by the Kowloon-CantonRailway (KCR) to build a rail spur through a wetlands area, and moves to haltdumping of toxic mud into mainland waters, have also marked a string ofvictories by local environmentalists. Implementation of ultra-low-sulphur

The government has yet toact against Falun Gong

Some action on theenvironment

The government goesslowly on Article 23

Hong Kong 17


diesel fuels and the use of particulate traps on all diesel vehicles have resultedin visible improvements in air quality. The government plans to beginimplementing pedestrianisation of several heavily congested central districtsphase-by-phase over the next few years. It has also introduced new proposals toencourage “green buildings” with public gardens and larger balconies notcounted against the developer’s allotted land-use building ratios. Most recently,in his 2001/02 budget, Mr Tsang said that in addition to offering “carrots” tofirms and individuals to reduce pollution, the government needed to “wieldthe stick as well”. The interest in the environment and actions to improvequality of life mark a substantial change over the past two years, and look setto continue and accelerate over the forecast period.

Economic policy

The financial secretary, Donald Tsang, presented the 2001/02 budget onMarch 7th. The budget is based on an official forecast of 4% GDP growthin 2001 and zero consumer price inflation. Public expenditure will increase inall areas except housing, in which the budget will decrease by 27.6% comparedwith the last fiscal year. The biggest increases in public expenditure are ininfrastructure development (24.1%), economic services (19.4%) and supportservices (21.5%). The increase in support services is largely owing to the one-offVoluntary Retirement and Voluntary Departure Schemes for civil serviceemployees, which cost the government HK$1.3bn last fiscal year and will costthe government another HK$5.7bn in 2001/02.

The budget revised upwards the expected deficit for 2000/01 from HK$6.2bnto HK$11.4bn and forecast a deficit of $3bn for 2001/02. Mr Tsang has,however, indicated his concerns that budget deficits could become structural innature, rather than temporary phenomena.

On the revenue side, the budget shows a windfall of HK$5.1bn in profits taxfor 2000/01, which is inadequate to offset a shortfall of HK$13.3bn in landrevenue and a HK$8.7bn decrease in investment returns. The proceeds fromthe partial privatisation of the Mass Transit Railway Corporation (MTRC) wereHK$5bn below expectations. The budget proposes to increase the maximumself-education expense deduction from HK$30,000 to HK$40,000 and to reducestamp duty on stock transactions from 0.225% to 0.2%. These changes areaimed at improving the quality of human capital and strengthening HongKong’s securities market.

There will be no change to earnings and profits taxes. However, thegovernment will try to improve its fiscal position by increasing tobacco dutyby 5%, duty on alcoholic beverages (except wines and strong spirits) by 33%,driving and vehicle licence fees (except commercial vehicles) by 10%, maximumon-street parking meter charges by 50% and airport departure tax by 60%.

In his budget presentation Mr Tsang placed emphasis on the importance ofboosting public-sector productivity. The size of the civil service is expected tobe trimmed back to below 1994/95 levels, although the freeze on civil service

The 2001/02 budget iscautious

Continued emphasis on aleaner civil service

18 Hong Kong


recruitment was lifted in the budget. The continuation of privatisation ofgovernment services was indicated in the budget, with the public-ownedtunnels seemingly the next most likely target. The Kowloon-Canton RailwayCorporation (KCRC) and the Airport Authority are unlikely to be privatised inthe near future. The budget also indicated that the accrual basis of accounting,commonly used in the private sector, will be adopted by the government in2002-03 in order to increase the transparency of public accounting and publicfinances.

The announcement on February 15th of Mr Tsang’s replacement as HongKong’s financial secretary by Antony Leung was greeted by the businesscommunity with cautious optimism, but it has raised questions over Mr Leung’sclose friendship with the chief executive, Tung Chee-hwa. Mr Leung’sbackground in banking and finance has also caused concern over whether hewill be as attentive to social issues as he is to economic ones. Additionally,Mr Leung may well encounter problems gaining acceptance from other topcivil servants since he was not promoted through the ranks of the civil service.Being considered a friend of Mr Tung will not help him either, as the chiefexecutive himself is unpopular among the civil service.

Shortly after his appointment, Mr Leung promised to continue the prudentmanagement of public finances. He said that the key to economic growthwas to further exploit Hong Kong’s pool of expertise by encouraging theinflow of capital and talent. Mr Leung, who as chairman of the EducationCommission was considered the architect of some important reforms,indicated an urgent need to further reform education in order to produceworkers with multiple skills. Stressing his agreement with Mr Tsang, theformer chief executive, that the rule of law, a level playing field forbusinesses, a free flow of information and clean government are essential forattracting foreign investment, he also emphasised the importance of having agood regulatory environment and an effective, open but small government.Although Mr Leung has previously defended the deficit-spending policy andstockmarket intervention introduced by Mr Tsang, he was noncommittalabout introducing a consumption tax and a land and sea departure tax,indicating that they needed to be studied further.

A government plan to cut the budget for Hong Kong’s eight tertiaryeducation institutions by 3.9% to HK$36.2bn for the next three years, waswithdrawn on February 9th in response to widespread opposition frommembers of the Legislative Council (Legco). The budget cut could have led tolay-offs, bigger class sizes and a lower quality of education. Legislators hadcriticised the government for contradicting its own vision of moving towards aknowledge-based society.

The Legco was warned on February 8th by the commissioner for narcotics,Clarie Lo Ku Ka-lee, that Hong Kong could be blacklisted by anti-money-laundering agencies and might face sanctions unless laws against moneylaundering were strengthened. In the last four years almost 3,000investigations into money laundering had resulted in just 49 convictions,

Tertiary education budgetcut halted

Money laundering becomesa major concern

Antony Leung’s likelypriorities

Hong Kong 19


because of ineffective laws. Financial institutions, accountants and lawyerswere also accused of not adequately reporting suspicious transactions by thecommissioner, who urged the Legco to make money laundering an offencebased on reasonable grounds for suspicion that it was taking place. A convictionwould carry a maximum penalty of five years in jail and a HK$1m fine.

The Companies (Amendment) Bill, a controversial corporate rescue plan, is tobe re-introduced for legislative debate after it was withdrawn from the Legco’sagenda last year following heavy criticism. The bill, first published forconsultation in 1996 and similar to the Chapter 11 bankruptcy protection lawin the US, would allow breathing space for ailing firms to restructure andsurvive. The bill includes a 30-day moratorium barring creditors from filingwinding-up petitions. The proposed bill has drawn criticism from variouscircles, including the Law Society, for being inconsistent, ambiguous andinadequate. A controversial provision in the bill requires firms to settle alloutstanding arrears to workers before rescue action can take place. Critics haveargued that this provision would make the bill unworkable, since banks wouldbecome more reluctant to assist ailing firms.

The domestic economy

Output and demand

Hong Kong’s GDP grew by 6.8% year on year in the fourth quarter of 2000 andby 10.5% for the year as a whole. Quarter on quarter, GDP declined by 0.1% inthe fourth quarter, compared with a 2.1% increase in the third quarter. Exportsof goods and services recorded double-digit year-on-year growth in the fourthquarter, up by 13.3% and 10.4% respectively. Imports of goods and serviceshad also increased in the fourth quarter, by 23.4% and 3.3% respectively,compared with the same period last year. Government consumption, however,fell slightly in the fourth quarter, by 0.6% year on year. Gross domestic fixedcapital formation underwent double-digit year-on-year growth of 12.2% inthe 4th quarter, despite a 3.9% year-on-year fall in expenditure on buildingand construction.

Corporate rescue plancriticised

Growth slows in the fourthquarter

20 Hong Kong


Hong Kong: gross domestic product(% change, year on year)

1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 2000

Private consumption –5.1 1.0 2.8 4.4 0.8 8.7 5.1 5.6 2.8 5.4

Government consumption 4.1 3.5 0.3 5.5 3.3 3.7 2.7 2.5 –0.6 2.1

Gross domestic fixed capital formation –21.0 –25.6 –10.8 –10.0 –17.3 4.8 4.9 13.0 12.2 8.8

GoodsExports –4.8 –2.0 8.1 12.3 3.7 20.7 17.7 17.7 13.3 17.1Imports –10.3 –7.9 6.8 11.9 0.1 22.9 18.8 18.4 13.4 18.1

Services Exports 0.9 3.8 12.3 13.0 7.8 15.3 18.3 12.6 10.4 14.3Imports –0.8 0.4 2.0 –0.9 0.2 –0.2 3.8 3.2 3.3 2.6

GDP –2.9 1.1 4.4 9.2 3.1 14.1 10.8 10.8 6.8 10.5

Source: Census and Statistics Department .

The value of retail sales in December 2000, estimated at HK$16.7bn, showedan increase of 0.9% year on year. After discounting the effects of price changesover the period, the volume of retail sales increased year on year by 2.7%. Salesof motor vehicles and parts recorded the greatest increase in volume terms,growing by 23%, followed by: footwear, allied products and other clothingaccessories (21%); other consumer durable goods (16%); furniture and fixtures(12%); food, alcohol drinks and tobacco (8%); clothing (2%); and commoditiesin supermarkets, excluding department stores (2%). On the other hand, sales offuels suffered a year-on-year decrease of 13%, with sales of jewellery, watchesand clocks, and valuable gifts falling (7%), as did commodities sold throughdepartment stores (3%).

Hong Kong: retail sales(% change, year on year)

2000 Value Volume

Jan 12.6 20.6

Feb 0.3 5.9

Mar 8.9 15.5

Apr 8.3 14.4

May 3.9 10.1

Jun 2.6 7.1

July –0.2 4.1

Aug 1.2 5.5

Sep 5.1 8.1

Oct 1.4 3.4

Nova 0.3 1.2

Decb 0.9 2.7

a Revised. b Provisional.

Source: Census and Statistics Department.

Despite the year-on-year increases, however, growth in sales has slowed. This isnoticeable when comparing December’s figures with those from September

Growth in retail sales slows

Hong Kong 21


showing year-on-year increases of 5.1% in sales value and 8.1% in salesvolume. This easing is attributable to a slowdown in growth of both localconsumer demand and inbound tourism spending. The introduction of amandatory provident fund (MPF) in December 2000 is expected to slow retailsales even further as a result of the reduction in purchasing power, and thepsychological effects on consumption behaviour of the compulsorycontributions which must now be made to the fund.

Employment, wages and prices

As a result of the economic recovery that Hong Kong has been experiencing,employment figures grew in 2000, apart from in manufacturing. Employmentin the manufacturing sector continued to shrink and registered a year-on-yeardecline of 6.2% in September. By contrast, manual construction workunderwent a 17.5% year-on-year increase in employment, the highest amongany sector. This was followed by financing, insurance, real estate and businessservices, which registered a 7.4% year-on-year increase. Wholesale, retail,import/export trades, restaurants and hotels remained the largest source ofemployment and recorded a 5.6% year-on-year increase.

The size of Hong Kong’s labour force grew from 3.406m in October-Decemberto a provisional figure of 3.421m by the end of January 2001. The number ofemployed persons grew from 3.255m to a provisional 3.277m during the sameperiod, slightly outpacing the growth in the labor force. This was reflected inthe seasonally-adjusted unemployment rate, which dropped from 4.4% to aprovisional 4.3%. The number of expatriates given work visas increased by 22%last year amid rising demand for hi-tech professionals.

Hong Kong: employment levels by sectora

1999 2000 % Mar Jun Sep Dec Mar Jun Sep changea

Manufacturing 248,600 253,500 244,500 244,700 233,700 238,800 229,400 –6.2

Construction (manual workers only) 71,900 71,400 68,700 71,800 74,500 79,300 80,700 17.5

Wholesale, retail & import/export trades, hotels & restaurants 976,800 966,200 997,500 1,002,300 1,027,900 1,036,400 1,053,300 5.6

Transport, storage & communications 175,200 175,900 175,600 172,000 175,800 180,600 183,300 4.4

Finance, insurance, property & business services 397,900 409,200 406,900 415,300 414,800 429,300 437,000 7.4

Community, social & personal services 335,700 339,200 340,000 336,500 345,000 346,200 348,900 2.6

a September 1999/September 2000.


A report released on February 16th by the Advisory Committee on HumanResources Development in the Financial Services Sector—and picked up on bythe 2001/02 budget, released in March—suggested that Hong Kong shouldrecruit more people from China to meet staffing shortages in the financial

Economic recovery boostsemployment growth

Recruiting professionalsfrom China recommended

22 Hong Kong


sector. The report also recommended increasing the number of exchangeprogrammes and corporate internships for undergraduates. The committee’schairman, Peter Clarke, a former chairman of Merrill Lynch Asia Pacific, saidthat employers were having increasing difficulty recruiting the right peoplebecause Hong Kong residents performed less well in jobs that requiredlanguage skills and creativity, although they had strong technical ability andwillingness to work. He indicated that importing talent from China was oneoption for finding staff of the right calibre and that this was particularimportant for companies planning to expand in China. The report was a resultof surveying 49 firms in the financial services industry, including majormultinational as well as local companies.

In spite of the economic recovery, consumer prices have continued to fall,albeit at a slower rate. Overall consumer prices, as shown in the CompositeConsumer Price Index (CCPI), decreased by 1.2% in January. This was a smallerdecrease compared with drops of 4-5% recorded in the first two quarters of lastyear. The smaller decrease is attributable in part to a slowing in the rate ofdecline of private housing rentals and overall food prices, and in part toupward adjustments in the charges for package tours and the prices of certainfood items prior to the Lunar New Year, which more than offset the effect of anenlarged drop in the price of clothing caused by retail price discounts.

Hong Kong: inflation indicators(Oct1994-Sep 1995=100; % change, year on year)

2000 2001Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

CPI(A) –4.0 –3.4 –3.4 –3.5 –2.2 –1.8 –2.1 –2.1 –1.3 –1.4 –1.0

CPI(B) –5.3 –4.6 –4.6 –4.5 –3.3 –2.7 –2.5 –2.8 –2.1 –1.8 –1.3

CPI (C)a –5.7 –5.2 –5.6 –5.7 –4.3 –3.6 –3.3 –3.5 –2.7 –2.3 –1.3

Composite CPI –5.0 –4.4 –4.5 –4.5 –3.2 –2.7 –2.6 –2.7 –2.0 –1.8 –1.2

a Previously called the Hang Seng CPISource: Census and Statistics Department.

Financial indicators

The credit rating agency, Moody’s, upgraded its outlook for Hong Kong’sforeign currency account rating from stable to positive in mid-February. Moodyalso upgraded the outlook for Mass Transit Railway Corporation (MTRC),Kowloon-Canton Railway Corporation (KCRC), HSBC, Hang Seng Bank, CLPPower, CLP Holdings and Sun Hung Kai Properties from stable to positive. OnFebruary 9th Standard and Poor’s also indicated that it would raise HongKong’s long-term foreign currency sovereign rating one place to A-plus. At thesame time, long- and short-term local currency sovereign ratings were alsoraised, from A-plus and A1 to AA-minus and A1-plus respectively, the highestratings ever assigned to Hong Kong. Normally, a sovereign rating is applied tothe government of a country. However, lobbyists in Hong Kong have beenpressuring ratings agencies to lift Hong Kong’s territorial ratings further and de-couple them from the mainland.

The fall in prices slows

Hong Kong’s credit ratingsare upgraded

Hong Kong 23


On February 9th the Airport Authority issued a HK$2.5bn (US$0.3bn) floatingrate note (FRN) issue, setting a benchmark for the developing debt market. Thiswas the first real large liquid deal in the capital markets offered by a quasi-sovereign borrower. The Airport Authority had the same AA-minus rating fromStandard and Poor’s as the Hong Kong government. The issue was distributedlike bonds with the booking closing within 24 hours, rather than following thenormal distribution procedure with booking generally open for up to threeweeks while buyers wait for credit lines to be approved, as is the case withsyndicated loans. According to Thomson Financial Securities Data, the marketfor Hong Kong dollar bonds grew by 22% to HK$72.86bn in 2000, with HSBChandling 46% of the deals. Hong Kong’s other sovereign issuers, including MTRCand KCRC, were benchmarks for Hong Kong’s US-dollar-denominated credits.

Hutchison Whampoa launched a US$2.5bn convertible bond issue in HongKong on January 8th. The bonds are convertible into Vodafone shares at a 28%premium of HK$3.1 each. In September last year, the company launched asimilar bond issue of US$3bn. The two issues reduced the company’s stake inVodafone from 3.47% to 1.5%. Hutchison Whampoa also announced onFebruary 2nd that it would issue another US$1.5bn worth of bonds unrelatedto Vodafone. This move, announced shortly after interest rate cuts in the US,will allow Hutchison Whampoa to take advantage of the improved marketsentiment and help to refinance maturing loans of US$1.48bn. In anotherdevelopment in late February, Hutchison Whampoa bought an additional 25%of Hutichison Telecom from Motorola for US$120m, raising its stake to 81%.

Uncertainty over the US economy, continuing doubt about hi-tech start-upsand telecommunications shares, and index fluctuations in other marketscaused the Hang Seng Index (HSI) to remain volatile in the fourth quarter oflast year. This largely reflected the trouble investors were having in trying toweigh up the effect of interest rate cuts on one hand and rapidly slowing globaleconomic growth on the other in making their investment decisions.

Hong Kong: financial indicators(end-period)

Hang Seng Index 3-month HIBOR

Jan 30th 2000 15,532.3 6.02

Feb 29th 2000 17,169.4 6.13

Mar 31st 2000 17,406.5 6.11

Apr 28th 2000 15,519.3 6.64

May 31st 2000 14,713.9 7.00

Jun 30th 2000 16,155.8 6.49

Jul 31st 2000 16,841.0 6.18

Aug 31st 2000 17,097.5 6.39

Sep 29th 2000 15,649.0 6.34

Oct 31st 2000 14,895.3 6.15

Nov 30th 2000 13,948.4 5.98

Dec 29th 2000 15,095.5 5.93

Jan 31st 2001 16,102.4 5.26

Source: Bloomberg.

Debt market developedwith new issues

Hutchison launches bondissues

Stockmarket sentimentremains uncertain

24 Hong Kong


In a briefing to the Legco on February 16th, the deputy chief executive of theHong Kong Monetary Authority (HKMA), David Carse, indicated that as morebanks were moving into retail broking, control over their securities operationswould have to be tightened. He said that 53 banks were offering retail securitytrading services last year. In the second half of 2000 these banks earned aroundHK$1bn in commission from trading securities on behalf of their bankingcustomers. At present banks are exempted from Securities and FuturesCommission (SFC) rules but are instead regulated by the HKMA, which haslittle power over their securities operations. Legislative changes have beenincluded in the amended Banking Ordinance and the Securities and FuturesBill, pending Legco approval, which will empower the HKMA to better regulatebanks’ retail securities businesses. The HKMA is expected to adopt the samebroking regulatory standards as those of the SFC.

The Hong Kong Exchanges and Clearing Limited (HKEx) revealed on February 7ththat it had so far taken no action on 7,800 cases of suspicious share-pricemovements investigated in 2000, after the Democratic Party legislator, MartinLi, asked the government to seek ways of strengthening information disclosurerules. The HKEx also confirmed that only two firms were publicly censured forimproperly disclosing price-sensitive information in 1998-99. According tolisting rules, any information which might be expected to affect a share priceshould be released immediately to ensure market transparency. However, therehad been frequent unusual price movements in the stockmarket, leading to thesuspicion that the managements of some companies might have selectivelyleaked price-sensitive information before formally releasing it.

The Hong Kong Society of Accountants (Hksa), in a submission to the Legco’sbills committee, criticised the proposed Securities and Futures Bill (debated inthe Legislature in early February) for protecting the HKEx at the expense ofindividual investors in the event of a broker going bankrupt. The proposedbill puts the HKEx in a position similar to that of a secured creditor. TheHKEx and the SFC are in a better position than individual investors toidentify whether a broker is likely to default, and are therefore in a betterposition to take steps to protect themselves. They also have the benefit ofrecovery procedures under recognised default rules. Consequently, the Hksaadvocates that the bill should be amended to give more protection toindividual investors, especially in light of the need to promote investorconfidence. The Law Society also criticised the bill, but for the extensivepowers levied to the SFC, saying that it went “well beyond current rule-making powers” of the regulator.

Robert Jones, head of the training and consultancy firm Financial Control, alsocriticised the proposed Securities and Futures Bill, for not providing minorityshareholders with the same level of protection as their US counterparts. Hisview is consistent with that of Larry Lang, professor of finance at the ChineseUniversity of Hong Kong, who has also openly criticised the bill. Unlike inthe US, Hong Kong’s legal system does not permit class-action lawsuits orcontingency legal fees (legal fees are paid only if the action is successful). He

More controls proposed forsecurities operations

Greater disclosure is urged

Greater protectionproposed for investors

Hong Kong 25


said that investment bank salespeople had been putting too much pressure onresearch staff to provide glowing reports which were misleading to investors.

International investment banks have argued, however, that the proposedSecurities and Futures Bill goes too far. The Composite Securities and FuturesBill, first drafted in 1992, has gone through a number of controversialconsultations with “safe harbour” rules (whereby illegal conduct may bedeemed legal) extended. A number of other changes were made toaccommodate broker demands, including shifting the burden of proof formisconduct from defendants to the SFC in criminal cases. The shifting of theburden of proof and the exemption status of banks drew heavy criticism whenthe bill was debated in the Legco in early February.

Kowloon-Canton Railway Corporation (KCRC), named by the outgoingfinancial secretary, Donald Tsang, as a potential candidate for stockmarketlisting following the successful partial privatisation of the Mass Transit RailwayCorporation (MTRC), is unlikely to be listed before 2006. According to KCRCchief executive, Yeung Kai-yin, a float in the next five years would beimpossible as KCRC is entering into a period of investment and expansion,including the new West Rail line, and extensions to its East Rail and Light Railnetworks. These new projects will put the corporation in a position of highdebt and low returns, making it difficult to pay dividends to shareholders.There may not be any other part-privatisations before the second offering ofMTRC shares, expected either later this year or early next year, in which anestimated HK$15bn will be raised.

Both customer deposits and foreign-currency reserves increased slightly in thefourth quarter of last year. Overall, however, there was no significant change intheir relative share of customer deposits, with Hong Kong dollar depositsaccounted for 53% of all deposits, while foreign currency assets wereequivalent to 18.3 months of retained merchandise imports.

Hong Kong: customer deposits by currency and foreign-exchange reserves(HK$ bn unless otherwise indicated)

1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Customer deposits with all authorised institutionsHK$a 1,683.5 1,706.8 1,712.5 1,760.7 1,743.7 1,777.6 1,812.9 1,847.8Foreign currencyb 1,269.2 1,286.2 1,384.8 1,417.3 1,446.7 1,516.9 1,567.0 1,634.4Total 2,952.7 2,993.0 3,097.3 3,178.0 3,190.4 3,294.4 3,379.9 3,482.3 HK $ as % of total 57.0 57.0 55.3 55.4 54.7 54.0 53.6 53.1

Foreign-exchange reservesTotal (US$ bn) 89.53 88.54 90.54 96.26 93.83 97.10 101.50 107.55Import cover (no.)c 17.5 18.6 19.1 19.8 18.3 17.9 17.8 18.3Ratio to currency in circulation 7.0 7.2 7.1 6.0 7.1 7.4 7.7 8.0

Note. The definition of HK$ and foreign-currency deposits have been changed by the HKMA, altering historic data in this table.a Adjusted to include foreign-currency swap deposits. b Adjusted to exclude foreign-currency swap deposits. c Ratio to monthly retained imports.

Source: Hong Kong Monetary Authority.

Privatisation of KCRCdelayed until 2006

Deposits and reservesincrease slightly

26 Hong Kong


Sectoral trends

At the end of January the government announced that the sale of flats underthe home-ownership scheme would be capped at 20,000 units in 2001/02,at least 7,000 less than the target set in November last year. This was followedon February 12th by a government announcement that it would release amaximum of 93 hectares of land in the next fiscal year, down 20% fromthe 116.5 hectares for the current year. The biggest drop will be in the privatehousing sector, with a maximum of 38 hectares being offered, comparedwith 90 hectares for the current year. Only five hectares of private housingland have been listed for definite sale next year, compared with 16 hectares forthis year. The government is to grant another 13 hectares of housing landthrough private negotiation with individual developers. Another 20 hectareswill be place on the application list, meaning that they will not go on sale untildevelopers express an interest in buying them.

The reduction in land supply has been seen as a move by the government tobolster the lacklustre property market. But it may have the effect of benefitingonly the cash-rich big developers at the expense of their smaller rivals.

In addition to reducing land supply, housing secretary, Dominic Wong Shing-wah, announced on February 16th that the balloting requirement for pre-saleof unfinished private flats—an anti-speculation measure that had been inplace for more than ten years—had been lifted for a trial period of six months.The government is also allowing developers to reserve 30%, rather than thecurrent 20%, of a project’s units for internal sale. The measures introduced bythe government caused spirited bidding for the two residential lots in February,which were the last to be released in the 2000/01 fiscal year.

Analysts have been urging property giant Cheung Kong (Holdings),controlled by Li Ka-shing, to diversify into new business areas. CKTechnology Laboratory was registered in September last year at theCompanies Registry with the same address as Cheung Kong before movinginto the Tai Po Industrial Estate last December. Although no one fromCheung Kong was willing to comment on the new company, documents atthe Companies Registry indicated that CK Technology’s registered capital hadincreased from less than HK$10m last December to HK$100m in earlyFebruary. The company had started initial research in fertilisers andenvironmentally-friendly energy. It was expected that the company wouldventure into lucrative research in the biotechnology sector. In mid-FebruaryCheung Kong revealed that it would take a HK$150m stake in the mainland’sRNA Holdings, associate Can Do Holdings and their parent Tem Fat HingFung (Holdings), in order to gain access to China’s tightly controlled gold-bullion market.

The Office of the Telecommunications Authority (OFTA) have chosen toauction 3G mobile licences on the basis of royalty fees in order to avoid theimpact of otherwise huge up-front cash payments on interested operators. Theproposed framework, subject to Legco approval and expected to be ready in

Government caps sales offlats and land

Property giant diversifies

New auction basis for 3Gmobile licences

Rule relaxation encouragesproperty bidding

Hong Kong 27


April, would require the winning bidders to pay a flat annual fee for the firstyear and a percentage of their 3G network turnover for the next ten years. Thescheme will favour small and new operators. The cash-rich Hutchison Telecom,whose parent Hutchison Whampoa won three of its four 3G licences in Europevia auctions, criticised the scheme for being too complicated. The companyalso opposed OFTA’s plan to open up at least 30% of the 3G network to mobilevirtual network operators and indicated that the company would reconsider itsintention of bidding for Hong Kong’s 3G mobile licences in the currentbusiness environment.

Drivers of container trucks, who had been involved in a row for severalmonths over a HK$40 cargo-handling surcharge with six mid-stream operators(firms that load and unload containers), intensified their protest in February byusing more than 200 trucks to block entrances to the depots of five cargo-handling companies at the Kwai Chung container terminal. However, onFebruary 13th the truck drivers called off their blockade after a meeting withthe secretary for the economic service, Sandra Lee Suk-yee, in which assuranceswere given that they would not have to shoulder the surcharge. Instead, a newcollection system, to be agreed by mid-stream operators and shippers, willbe put in place. The blockade lasted five days and caused an estimated lossof HK$200m a day to the port.

The South-East New Territories Development Strategy Review, announced bythe government in January, is a draft plan for turning Sai Kung in the NewTerritories into a major recreation and tourism area. Following a briefing on theproposals, Legco members indicated that they would support the plan becauseit balanced both developmental and environmental concerns. Under theproposed plan, golf courses, resort hotels, heritage trails and water sport centreswould be developed and more than 500 hectares of country parks and 2,800hectares of marine parks would be created. The government estimates thatby 2016 the area would be visited by 200,000 tourists a year, comparedwith 60,000 now. The proposal is still under public consultation and thegovernment will report to the Legco again in the middle of the year.

Foreign trade and payments

Slowing demand from the US and Europe trimmed Hong Kong’s exportgrowth in December, bringing with it a larger year-on-year visible trade deficitof HK$12.5bn, up from HK$9.9bn a year earlier. While the total value ofexported goods in December increased 4.6%, to HK$129.4bn, the rate ofincrease slowed considerably from the 15.1% year-on-year rise recorded forDecember 1999. For 2000 as a whole, exports increased by 16.6%, butinsufficiently to offset the 19.1% increase in imports, resulting in a HK$65bnvisible trade deficit, a hefty increase compared with the deficit of HK$43bnrecorded in 1999.

Dispute over fees interruptsshipments

New recreation andtourism centre proposed

A larger trade deficit asglobal demand slows

28 Hong Kong


Hong Kong: balance of trade, Jan-Dec(HK$ m unless otherwise indicated)

1999 2000 % change

Exports 1,350,494 1,574,528 16.6

Domestic exports 170,797 181,176 6.1 % of total exports 12.6 11.5 –

Re-exports 1,179,697 1,393,352 18.1 % of total exports 87.4 88.5 –

Imports –1,393,838 –1,660,081 19.1

Visible trade balance –43,344 –65,214 50.5


Imports showed increases from all sources and in all commodities in 2000.China remained by far the largest supplier, followed by Japan, Taiwan andthe US. All suppliers witnessed increases of more than 10% from 1999. In termsof commodities the largest increases were in imports of electrical machineryand appliances (35.9%), telecommunications and sound equipment (35.5%),office machinery (32%) and primary plastics (29.5%).

China and the US continued by a wide margin to be the major destinations ofdomestic exports and re-exports from Hong Kong. Domestic exports toSingapore had the biggest increase (28.1%) in comparison to 1999, followed byTaiwan (19.7%), Germany (8.8%), China (7.4%), and the US (6%), whiledomestic exports to France (-11.4%), Japan (-6.9%) and the Netherlands (-5.1%)all decreased. In terms of commodity type, significant increases from 1999were experienced in exports of specialised scientific instruments (34.1%);electrical machinery and appliances (19.9%); miscellaneous articles (15.6%);primary plastics (13.9%) and telecommunications and sound equipment (10.8%).By contrast decreases were seen in exports of photographic and opticalequipment (-31.6%); office machinery (-11.5%) and textiles and yarn (-3.4%).None of the re-export commodities or destinations registered a decreasefrom 1999. Significant increases were shown in most of the destinations for re-exports, in particular South Korea (36.3%), China (22.5%), Japan (21.5%) andTaiwan (21%). In terms of commodity type, re-exports of electrical machineryand appliances (41%), telecommunications and sound equipment (30%), officemachinery (22.8%) and primary plastics (20.1%) had the biggest increases.

Trade breakdown for 2000reveals broad-based growth

Hong Kong 29


Hong Kong: merchandise imports, Jan-Dec(HK$ bn)

1999 2000 % change

Imports by major sourceChina 607.6 715.0 17.7Japan 162.7 199.0 22.3Taiwan 100.4 124.2 23.6US 98.6 112.8 14.4South Korea 65.4 80.6 23.2Singapore 60.0 75.0 25.0Malaysia 30.0 37.9 26.3Germany 28.1 32.2 14.6UK 27.0 30.8 14.2Thailand 22.8 28.0 22.8

Principal importsElectrical machinery & appliances 212.5 289.0 35.9Telecoms & sound equipment 119.3 161.6 35.5Office machinery 108.3 142.9 32.0Miscellaneous articles (baby carriages toys, games, sporting goods) 112.7 128.5 14.0Apparel & clothing 114.5 124.7 9.0Textiles yarn & fabrics 97.5 106.9 9.7Photo & optical equipment 54.1 59.9 10.6Non-metallic mineral manufactures 40.6 49.1 20.9Primary plastics 34.3 44.4 29.5Footwear 41.3 44.1 6.9


Hong Kong: domestic merchandise exports, Jan-Dec(HK$ bn)

1999 2000 % change

Domestic exports by main destinationUS 51.4 54.4 6.0China 50.4 54.2 7.4UK 10.4 10.7 2.8Germany 8.5 9.3 8.8Taiwan 5.1 6.1 19.7Japan 5.5 5.1 –6.9Singapore 3.7 4.7 28.0Netherlands 4.1 3.9 –5.1Canada 3.2 3.2 1.9France 3.1 2.7 –11.4

Domestic exports by main commodityApparel & clothing 74.3 77.4 4.3Electrical equipment & machinery 23.8 28.5 19.9Miscellaneous articles (mostly jewellery) 14.2 16.4 15.6Textiles & yarn 9.5 9.2 –3.4Specialised scientific instruments 5.8 7.8 34.1Office machinery 8.3 7.3 –11.5Photo & optical equipment 8.4 5.7 –31.6Telecommunication, sound equipment 3.8 4.2 10.8Primary plastics 2.5 2.8 13.9Non-ferrous metals 2.1 2.3 9.1


30 Hong Kong


Hong Kong: merchandise re-exports, Jan-Dec(HK$ bn)

1999 2000 % change

Re-exports by main destinationChina 399.2 488.8 22.5US 269.4 311.0 15.4Japan 67.5 82.1 21.5UK 45.5 52.4 15.0Germany 44.1 50.6 14.7Taiwan 27.9 33.7 21.0Singapore 28.7 32.0 11.5South Korea 19.8 27.0 36.3France 22.8 25.2 10.4Canada 18.7 21.2 13.3

Re-exports by main commodityElectrical machinery & appliances 156.5 220.6 41.0Miscellaneous articles (baby carriages, toys, games, sporting goods) 161.9 179.6 10.9Telecoms & sound equipment 114.3 148.7 30.0Office machinery 98.1 120.5 22.8Apparel & clothing 99.3 111.3 12.0Textiles & yarn 85.7 95.6 11.5Photo & optical equipment 59.8 69.6 16.4Footwear 47.8 50.5 5.6Travel goods & handbags 35.1 36.7 4.7Primary plastics 29.4 35.3 20.1


Following a surplus of HK$25.4bn in the second quarter of 2000, Hong Kongimproved its balance of payments to HK$39bn in the third quarter, equivalentto 11.9% of GDP. The improvement was attributed to an increase in reserveassets. The current-account surplus increased to HK$20.8bn in the third quarter,from HK$12.2bn in the second quarter. The increase was mainly owing to areduction in the commodity trade deficit in the third quarter and an improvedservice trade surplus. A net inflow of financial non-reserve assets of HK$16.2bnwas recorded in the third quarter, up from HK$13bn in the second quarter.

Hong Kong: balance of payments(HK$ m unless otherwise indicated)

1999 20003 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Current-account balance 30,154 27,982 10,289 12,152 20,798 Goods –1,068 –7,241 –19,344 –19,329 –10,487 Services 24,423 32,170 23,754 28,172 31,506 Factor income 9,716 6,021 9,226 6,378 2,901 Current transfers –2,917 –2,968 –3,347 –3,069 –3,122

Capital & financial account balance –33,980 –14,001 –3,863 –16,019 –26,531 Capital transfers –3,123 –4,533 –1,938 –3,641 –3,716 Financial non-reserve assets (net change) –18,132 42,653 –20,100 12,990 16,154 Direct investment –9,323 45,296 –1,440 58,667 21,947 Portfolio investment 115,213 96,986 87,045 5,476 1,996 Financial derivatives –25,998 43,855 –41,504 15,644 –1,088 Other investment –98,024 –143,484 –64,201 –66,797 –6,701 Reserve assets (net change) –12,725 –52,121 18,175 –25,368 –38,969

Net errors & omissions 3,826 –13,982 –6,426 3,867 5,733

Overall balance of payments 12,725 52,121 –18,175 25,368 38,969Source: Census and Statistics Department.

Balance of payments lookshealthy

Macau 31


Macau

Political structure

Macau

Formerly a Portuguese territory, Macau has been a Special Administrative Region (SAR) ofthe People’s Republic of China from December 20th 1999. A post-handover mini-constitution, the Basic Law, is designed to ensure that many of the political, economicand social structures established during the 442-year rule of the Portuguese remainunchanged for at least 50 years

The chief executive, appointed by a selection committee, head the government. Thechief executive appoints a cabinet, the Executive Council, of between seven and 11members.

Jiang Zemin, president of the People’s Republic of China

The Legislative Council has 23 members: 8 directly elected, 8 indirectly elected and 7appointed. The current members took office in September 1996. A new council will beestablished in October 2001, comprising 27 members: 10 directly elected, 10 indirectlyelected and 7 appointed.

The legal system is based largely on Portuguese law. The territory has its ownindependent judicial system, with a high court. Judges are selected by a committee andappointed by the chief executive. Foreign judges may serve on the courts.

September 1996 (Legislative Assembly); next election scheduled for October2001(Legislative Council)

Political parties do not exist in the normal sense, although a number of civic associationsoperate: Electoral Union (UNE); Pro-Macao and Flower of Friendship and Developmentof Macao (Fadem); Associação para a Defesa dos Interesses de Macao (Adim); CentroDemocrático de Macao (CDM); Grupo Independente de Macao (Gima); Macau EconomicPromotion Association; Progress Promotion Union; Development Union

Chief executive Edmund Ho Hau Wa

Administration and justice Florinda da Rosa Silva ChanEconomy and finance Francis Tam Pak YuenSecurity Cheong Kuoc VaSocial affairs & culture Fernando Chui Sai OnTransport and public works Ao Man Long

Commissioner against corruption Cheong IuCommissioner of Audit Fatima Choi Mei LeiPresident of the Legislative Council Susana ChouPresident of the Court of Final Appeal Sam Hou Fai

Official name

Form of state

The executive

Head of state

National legislature

Legal system

National elections

Main political organisations

Secretaries

Others

32 Macau


Economic structure

Annual indicators

1996 1997 1998 1999 2000a

Real GDP growth (%) –0.4 –0.3 –4.6 –2.9 4.0

Population (year-end) (‘000) 415.9 422.0 430.5 437.5 437.6

Consumer price inflation (av; %) 4.8 3.5 0.2 –3.2 –1.6

Exports fob (US$ m) 1,995.6 2,142.6 2,135.7 2,197.5 2,547.6

Imports cif (US$ m) 1,999.7 2,076.8 1,949.8 2,037.5 2,262.2

Trade balance (US$ m) –4.1 65.8 185.9 160.0 285.4

Exchange rate (av; MPtc:US$) 8.0 8.0 8.0 8.0 8.0

March 6th 2001 MPtc8:US$1

Origins of gross domestic product 1998 % of total Components of gross domestic product 1999 % of total

Manufacturing 9.3 Private consumption 41.7

Administration, personal services (inc. gambling) 46.8 Government consumption 13.1

Construction 3.7 Gross fixed capital formation 17.2

Trade, hotels & restaurants 9.9 Stockbuilding 0.2

Finance, real estate etc. 26.8 Exports of goods & services 79.4

Total incl others 100.0 Imports of goods & services –51.6

Total 100.0

Principal exports 1999 US$ m Principal imports cif 1999 US$ m

Clothing & textiles 1,841.0 Raw materials & semi-manufactured goods 1,097.6

Footwear 62.9 Consumer goods incl foodstuffs, beverages & tobacco 542.6

Electronics 18.1 Capital goods 270.8

Toys 4.4 Mineral fuels & oils 126.5

Total incl others 2,197.5 Total 2,037.5

Main destinations of exports 2000 % of total Main origins of imports 2000 % of total

US 48.3 China 41.0

EU 28.4 Hong Kong 15.2

China 10.2 EU 9.6

Hong Kong 6.5 Taiwan 9.5

a EIU estimates.

Macau 33


Outlook for 2001-02

Political outlook

The first anniversary of the setting up of the Special Administrative Region(SAR) of Macau was marked on December 20th last year by a visit from theChinese president, Jiang Zemin. While commending Macao’s chief executive,Edmund Ho Hau Wah, for the way he had administered the territory since thehandover from Portugal in 1999, Mr Jiang also emphasised that the “onecountry, two systems” policy required the SAR authorities to prevent theterritory from being used as a base for anti-Chinese activities. The anniversarycelebrations coincided with a wave of arrests of supporters of Falun Gong, anorganisation that has been outlawed on the mainland. The government’sapproach to Falun Gong has the potential not only to complicate relationsbetween Macau and Beijing, but also between Macau and the US and EU, whowill continue to query the degree of autonomy the SAR really enjoys.

Another potential problem is violent crime. So far, the SAR governmentappears to have done a good job in tackling crime—homicides and abductionswere down by 72% and 66% respectively in 2000. This is attributed by many tothe presence of Chinese troops in Macau, and to cross-border co-operation oncrime with the authorities in the neighbouring province of Guangdong.However, the kidnap and then release of the prominent lawyer, Neto Valente,in late February/early March indicates the problem has not entirely gone away.

The partly-elected Legislative Assembly that has governed since 1996 will bereplaced in October this year. Voter registration for elections to the LegislativeCouncil that will replace it began in January. Like its predecessor, theLegislative Council will also be made up of directly-elected, indirectly-electedand appointed components. It is most unlikely to take a radical line.

Economic forecast

Macau faces considerable economic challenges over the next few years. Mostimmediately, the recent economic downturn in the US poses an immediatethreat to Macau’s exports to that country (accounting for 48% of total exportsin 2000). The knock-on effects of the slowdown on countries in Asia, are also likelyto adversely affect Macau, with receipts from tourism and gambling suffering.

The imminent entry of China into the World Trade Organisation (WTO) andthe phasing out of multilateral fibre agreement (MFA) quotas over the next fewyears, will both pose problems for the territory. The danger is that the ongoingrelocation of manufacturing from Macau to the Chinese province ofGuangdong will extend to textiles and garment production as China’s entryinto the WTO enables increased access into international markets alongsidethe already cheaper sourcing and wage costs afforded by the mainland. Whenthe MFA is phased out, removing the virtual guarantee of export markets for

Domestic politics

34 Macau


Macau’s textile manufacturers, opportunities for manufacture could dry upfurther, leaving the enclave to fall back even more heavily on its principalremaining sources of income, tourism and gambling.

Gambling remains a central element of the Macau economy, accounting foraround 30% of GDP and contributing more than half of all governmentrevenue and foreign-exchange earnings. The Macau authorities haveannounced their desire to liberalise the gambling industry and break the six-decade monopoly of the industry enjoyed by a syndicate, the Sociedade deTourismo e Diversões de Macau (STDM), run by Hong Kong-based businessman,Stanley Ho. But the desire to limit both the possibility for any return of gang-related violence, and disruption to its major source of revenue, could ultimatelyleave the government reluctant to introduce any radical change to the existingset-up. However, one hopeful sign that liberalisation is imminent has been thegovernment’s appointment of the international consultancy firm Accenture(formerly Andersen Consulting) to study how best to reform the industry.

Reform of other sectors of the economy may continue to prove elusive. It isunclear just how keen foreign firms will be to establish a presence in Macau,particularly considering the attractiveness of mainland China for direct investmentgiven its imminent entry into the WTO. The importance of Macau as a bridge toChina for investors keen to establish a presence on the mainland looks set todiminish as China continues its steady economic growth, moves towards a moreliberal economic environment and becomes more accessible to foreign investors.Given the economic and structural challenges it faces, it is likely that Macau willpost only a marginal rate of growth in 2001, before picking up slightly in 2002as more positive global and regional economic conditions return.

The political scene

A year after Portugal handed over Macau to China, the chief executive of thespecial administrative region (SAR), Edmund Ho, made his first official reportto the Chinese authorities in a visit to Beijing on December 18th. 2000.

Jiang lays down the limitsof autonomy

Macau 35


Mr Ho’s visit to Beijing was followed by a visit from China’s president, JiangZemin, to Macau for celebrations surrounding the first anniversary of theestablishment of the SAR. Jiang’s speech on December 20th affirmed acommitment on the part of China to respect the autonomy of Macau, butset out the parameters within which the Chinese leadership expects Macauto exercise its autonomy. According to Mr Jiang, it is incumbent uponMacau to take measures to defend the national interests and authority ofthe central government and not to allow minority groups within the SAR tothreaten stability.

The Falun Gong religious group, which is banned in China itself, but notwithin Macau, had applied for, and been refused, permission to stage ademonstration on December 20th to coincide with Jiang’s visit. Falun Gongactivists from Hong Kong and elsewhere were stopped at the border and deniedentry to Macau, while dozens of Falun Gong supporters were arrested whenthey attempted to protest during the presidential visit. A mainland ChineseFalun Gong member who published information about the movement on theInternet was arrested in Macau in February and charged with “inciting thesubversion of national sovereignty”. While some activists claim that the “onecountry, two systems” rule has been violated in these incidents, the democraticopposition within Macau is much less prominent than in Hong Kong, andChina’s stance on the Falun Gong has some support within Macau itself.

China’s willingness to implement fully the promised autonomy in Macauremains an issue in Sino-American bilateral relations. China has made vigorousprotests against the United States-Macau Policy Act that was passed by the USCongress in December, permitting the US president to terminate the applicationof a US law or international agreement if he deems that Macau is “notsufficiently autonomous to justify treatment different from that accorded thePeople’s Republic of China”. Similarly, the European Parliament recently calledupon the European Commission to publish its first annual report on EU relationswith Macau, emphasising Europe’s interest in safeguarding Macau’s autonomy,and urged the speedy appointment of an EU representative in the territory.

The European Union has agreed in principle to allow visa-free access to Macauresidents, subject to negotiations with the Hong Kong and Macau authoritieson the repatriation of illegal immigrants from the territories. So far, 64countries have recognised the Macau passport, with nine of those grantingMacau residents visa-free entry.

A new aviation agreement with Taiwan was signed on November 24th whichwill increase passenger capacity on the Taipei-Macau route by 8,000 a week,with cargo loads also being increased. Taiwan visitors do not need visas toenter Macau, and their maximum length of stay has been increased from 20days to 30 days. More than 1.2m Taiwan visitors are expected to visit, or stopover in, Macau this year.

On February 28th, a high-profile Macau resident, the Portuguese lawyer andbusinessman, Neto Valente, was kidnapped whilst driving home. A majorsearch resulted, with the (much trumpeted) help of police from across the

Autonomy is an issue forthe US and EU

Developments on EU andTaiwan travel

A high-profile kidnap isswiftly resolved

36 Macau


border in Guangdong. By early on March 5th the police had arrested onesuspect, and on the basis of his confession had identified where Mr Valentewas being held. The police then stormed this apartment, rescuing Mr Valente,and capturing two other kidnappers—with one kidnapper falling to his death,apparently while trying to escape.

The official spin on the incident has been to highlight the close co-operationbetween Macau and mainland police officials. More worryingly, however, itsuggests that such criminal activity—which blighted the society and economyof Macau in 1998—has not completely been eradicated.

The domestic economy and economicpolicy

On February 5th the Macau Association of Banks cut deposit interest rates byone-half of a percentage point to 3.5%, down from 4%. This represented thesecond interest rate cut in the space of a month—rates were previously cut byone-half of a percentage point on January 8th. The cuts come in the wake ofrecent interest rate cuts in the US and Hong Kong. Macau’s monetary policylargely follows that of Hong Kong (the pataca is indirectly linked to the USdollar through its direct peg to the Hong Kong dollar) with changes to interestrates mirroring those in Hong Kong, usually within the space of 24 hours.

GDP growth is officially estimated at 4% in 2000, after several years ofeconomic contraction. The recovery followed a surge in tourist arrivals toMacau to an estimated 9m in 2000, an increase of 21% on the year before andeasily surpassing the previous record of 8.15m visitors set in 1996. Tourism is avital element of the Macau economy, accounting for 42% of its GDP,employing one-third of the workforce and drawing almost 20 times the SAR’spopulation in tourist numbers a year. The highest rates of growth were amongvisitors from Macau’s immediate neighbours, with those coming from theChinese mainland and Hong Kong increasing by 49% and 27% respectively,while large increases were also seen in arrivals from Taiwan and South Korea.

Macau: tourism

1997 1998 1999 2000

Visitor arrivals 7,000,370 6,948,535 7,443,924 9,162,212Main origin of which: Hong Kong 4,702,475 4,721,762 4,229,833 4,954,619 China 529,829 816,816 1,645,193 2,274,713 Taiwan 908,907 816,640 984,820 1,311,035

Hotel occupancy rate 52.1 53.1 55.4 59.2

Average length of stay (nights) 1.34 1.43 1.43 1.33

Source: Direccao dos Servicos de Estatica e Censos.

Tourism has benefited from the reduction in violent crime, continuedeconomic growth in China and the recovery in Hong Kong’s economy.However, despite efforts to attract tourists for longer stays, the authorities in

Growth in 2000 was causedby tourism

Tourist perceptions provestubborn

Two interest rate cuts inJanuary and March

Macau 37


Macau continue to face difficulties in changing perceptions of the territory as agambling centre, a good place to eat out for weekenders from Hong Kong, or asa destination that can be explored in a day. The average length of stay forvisitors to Macau is only 1.3 days, and although the growth in visitor numbershelped Macau to achieve one of its best hotel occupancy rates in recent years,owing to the unsustainably rapid growth in construction and consequentdoubling of hotel capacity in the first half of the 1990s, the provision of hotelaccommodation still exceeds demand by around 40%. In addition, the strongregional focus of tourist arrivals, with the overwhelming majority coming fromneighbouring countries, leaves Macau vulnerable to the current economicslowdown being experienced throughout Asia, and could lead to a sharp fall-off in numbers in 2001-02.

One means by which Macau hopes to encourage visitors to extend the lengthof their stay is through the opening up of the casino industry. Linked in withtourism, the gambling sector forms the bedrock of the Macau economy, and isbooming. The company that currently owns and runs the gambling franchise,the Sociedade de Tourismo e Diversões de Macau (STDM), reported an increaseof 26.5% in its income in the first three quarters of 2000 over the same periodin 1999. The STDM’s ten casinos—it also has stakes in greyhound and horseracing, lotteries, property, the new international airport and Air Macau—generated MPtc3.5bn (US$442m) in monopoly franchise taxes in the first eightmonths of last year, accounting for 65% of the total revenue of the Macaugovernment. The STDM currently pays 31.8% of its gross takings as taxation tothe government. In December this year the STDM franchise expires (seeEconomic forecast) and the Macau authorities hope that whatever system ischosen to replace it will result in new companies able to contribute new ideasand new means of attracting tourists.

At the same time, figures emanating from the Statistics and Census Serviceof Macau show that a total of 716 new companies were created in the SARin 2000, an increase of 63% compared with 1999. Over the same period a totalof 111 companies were closed. Although these figures reflect the improvementin economic conditions in Macau that have taken place over the past year, it isunclear how significant a contribution to the longer-term development of theeconomy they represent. Analysis shows that the majority of such newbusinesses are in wholesale and retail sales, and tend to be quite smalloperations. Only a very small number are in either manufacturing orinformation-related services. Macau acknowledges the need for it to developindustries in the area of information technology if it is to compete in themodern world economy and even within Asia, but it is starting from a lowtechnology base, with a lack of resources for technical education. For instance,although the ratio of telephones in Macau is relatively high at 686 for every1,000 inhabitants, only 63 in every 1,000 people have access to the Internet.

Encouraging news for Macau has, however, come with the announcement byeSun Holdings (owned by Lai Sun Development) that it is to invest MPtc 300min developing a television studio complex in the territory. The complex willconsist of a “television city” (East-TV City) and an associated tourist attraction.

Most new companies are inwholesale or retail sales

A new television studioproject is planned

Gambling reform presentsnew opportunities

38 Macau


East-TV City will include nine production studios, location filming and post-production facilities, and will focus on providing programmes for the globalChinese audience. For tourists there will be studio tours, restaurants and shops.The studio will be capable of producing 5,000 hours of programmes a year andis forecast to be able attract around 300,000 tourists a year. The chairman of LaiSun, Peter Lam, said that Macau had been chosen for the development becauseit was cheaper than Hong Kong and easier to hire people. The complex shouldcreate around 2,000 jobs when it opens in early 2003.

The latest official statistics show that Macau recorded a sharp rise in its tradesurplus in 2000, of MPtc2.3bn (US$287.5m), up by 78% on that recordedin 1999. Export growth of 15.9% helped underpin the surplus, while importsrose by just 11%. However, the leading export item, textiles and garments,making up 82.5% of the total of MPtc20.4bn of exports, shows Macau’scontinued over-reliance on this sector of manufacturing. Moreover, whileexports to the US and Europe accounted for 48.3% and 28.4% respectively andcombined imports from the two countries for only 14.1% of total imports,Macau continues to run a heavy trade deficit with its immediate neighbours.In 2000 exports to mainland China and Hong Kong were just 16.7% of thetotal, while imports from the two were a hefty 56.2% of total imports.

Macau: merchandise trade account(MPtc m)

1999 2000 % change

Exports 17,580 20,380 15.9

Imports 16,300 18,098 11.0

Trade balance 1,280 2,282 n/a


Macau: domestic exports by main market(MPtc m)


US 1,870 1,793 2,460 3,040 2,423

EU 1,454 1,292 1,481 1,595 1,372

Mainland China 27 29 38 32 26

Hong Kong 106 111 38 32 26

Taiwan 48 32 28 42 39


Macau: imports by main market(MPtc m)


Mainland China 1,584 1,338 2,018 2,000 2,074

Hong Kong 747 601 802 661 695

Taiwan 340 314 588 425 393

EU 441 355 378 514 492


Export growth concealssome structural problems

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