On July 1,1997, Hong Kong Special Administrative Region, or HKSAR, reverted to Chinese control as a special administrative region of the People's Republic of China. This special status allows Hong Kong to continue its policy of minimal government intervention in the economy, manage its own financial affairs, use its own monetary system, and participate freely in world economic organizations. Indeed, HKSAR remains very open to trade under this "One Country, Two Systems" plan and enjoys the continuation of the colonial era heritage of no import tariffs or customs duties. Because of this enviable status, HKSAR continues to serve an important function as a gateway and financial and trade services center for the mainland economy.
Under British rule, manufacturing cheap toys and electronics served as the backbone of HKSAR's economy. But, by the time control reverted back to China in 1997, manufacturers had tapped the motherland for a source of cheaper labor, and HKSAR had evolved into a world-class service economy in which services account for approximately 85 percent of GDP. HKSAR is second only to Tokyo as Asia's largest financial hub. Long a truly globalized economy, HKSAR contains nearly 380 foreign banking institutions and hosts to more than 800 international regional headquarters.
HKSAR's free market policies leave it vulnerable to international market fluctuations. Like China PRC, HKSAR maintains a peg of its currency (the Hong Kong dollar) to the US dollar. However, in contrast to the mainland, HKSAR's monetary policy is based on a currency board, which limits creation of Hong Kong dollars to reserves of US dollars held, and, perhaps more significantly, HKSAR is open to free movement of international capital. As a result, the Asian financial crisis hammered the HKSAR economy while having a minor impact on the mainland's. While HKSAR's regional competitors sharply depreciated their currencies during and after the crisis, HKSAR held its HK$7.8/US$ peg and doing business in HKSAR became relatively much more expensive. As a result, the economy contracted sharply and, with the exchange rate fixed, local prices and asset values had to make all the downward price adjustments to reduced demand. Speculators who had routed other currencies in the region made a run at the Hong Kong dollar as well, but were forcefully rebuffed by the monetary authority's steadfast maintenance of the currency board regime, backed by more than US$90 billion in reserves.
In 1998, HKSAR suffered a sharp 5.3 percent contraction in GDP, but the economy recovered in 1999 and 2000 as Hong Kong benefited from rapidly rising export activity during the IT investment boom of the late 1990s. Growth reached 10.5 percent in 2000, but in 2001, the economy barely grew at all-about .1 percent on an annual basis-as exports fell while other elements of aggregate demand rose. Given that export and import volumes for HKSAR are about twice the size of GDP, small percentage changes in export and import growth rates have large effects on the GDP growth rate. Deflation continued in 2001, but at a much slower rate (about .5 percent) than the five to six percent deflation rates of 1999 and 2000. Unemployment averaged 5.1 percent in 2001, up slightly from the 4.9 percent rate of 2000.
The accession of mainland China into the World Trade Organization will, according to many analysts, bring both challenges and opportunities to HKSAR. Although Hong Kong is a special administrative region of China, it does not enjoy any preferential trade treatment from the mainland. Hong Kong's role as an intermediary between the mainland and the rest of the world will come under challenge as it may add less value as foreign operations increasingly move into the mainland itself and HKSAR's role in facilitating trade with the mainland becomes less necessary. The benefits of China's WTO membership will be in terms of the volume of both goods and services trade. It is estimated that by 2010, HKSAR's exports involving the mainland will rise by an additional 15 percent and its GDP by an extra 5.5 percent.
Involvement in China's services market could well usher in the next wave of Hong Kong investment into the mainland. However, HKSAR may well need to redefine its role as a facilitator of trade with mainland China.
Hong Kong and mainland China enjoy a mutually beneficial relationship. Hong Kong's interests in China make up 52 percent of China's foreign direct investment, and 40 percent of Hong Kong's total trade. Lacking natural resources, Hong Kong depends heavily on China for food and raw materials. The two economies have become increasingly integrated over the years, with HKSAR becoming a platform for mainland exports and a supplier of financial services. Manufacturing facilities formerly located in Hong Kong have shifted SAR to the mainland. The share of manufacturing dropped from 25 percent of GDP in 1984 to six percent of GDP in 1999. Because of these changes, HKSAR's role has been transformed largely into intermediating international trade and capital flows. In recent years domestic trade has given way to re-exports. The mainland dominates HKSAR's re-export trade; about 40 percent of Mainland trade is intermediated by Hong Kong SAR.
The real GDP increased only .1 percent in 2001 compared to 10.5 percent in 2000 and 3.0 percent in 1999. The economy experienced sharp deflation in 1999 and 2000 (the GDP deflator declined by 5.2 and 6.6 percent respectively), but prices leveled off in 2001, falling just .5 percent. Consumer prices also fell during this period, but by smaller amounts (4.0, 3.8 and 1.6 percent respectively). The unemployment rate rose to 5.1 percent in 2001 from 4.9 percent in 2000.
The global slowdown affected the 2001 growth rate. While domestic demand continued to grow, the huge export sector of the HKSAR economy contracted and given the size of exports from Hong Kong relative to its GDP, that reduction was enough to essentially stop growth in the SAR during the year.
World Bank Group Data
|
|
1997 |
2000 |
2001 |
|
164.5 billion |
176.2 billion |
.. |
|
|
25,290.0 |
25,920.0 |
.. |
|
|
171.0 billion |
162.6 billion |
.. |
|
|
5.0 |
10.5 |
1.0 |
|
|
5.8 |
-6.6 |
-1.0 |
|
|
0.1 |
.. |
.. |
|
|
14.7 |
.. |
.. |
|
|
85.2 |
.. |
.. |
|
|
132.5 |
150.0 |
.. |
|
|
135.9 |
145.3 |
.. |
|
|
34.5 |
27.6 |
.. |
|
|
.. |
.. |
.. |
|
|
.. |
.. |
.. |
Export values fell in 1998 and grew in 1999. However, in 2000 they were expected to grow by about 17 percent, driven by higher mainland re-exports. Deflation helped unwind the real exchange rate appreciation that occurred during the Asian financial crisis and helped boost export performance. Strong services income from tourism, trade and financial services is expected to raise the current account surplus to seven percent of GDP in 2001.
The slowdown in the global demand continued to dampen Hong Kong's exports. In August 2001 total exports of goods fell by 9.1 percent over a year earlier to HKD133.6 billion whereas imports also declined by 9.3 percent to HKD136.4 billion. As a result, the trade deficit was widened to HKD68.3 billion in the first eight months of this year, 13.8 percent higher than that in the same period last year.
*See China Investor Information.
|
|
1997 |
2000 |
2001 |
|
234.8 |
256.2 |
.. |
|
|
1,136.6 |
.. |
.. |
|
|
20.9 |
23.3 |
.. |
|
|
102.0 |
.. |
.. |
|
|
Foreign direct investment, net inflows in reporting country (current US$) |
.. |
.. |
.. |
|
.. |
.. |
.. |
|
|
.. |
.. |
.. |
|
|
.. |
.. |
.. |
|
|
1.3 |
0.6 |
.. |
|
Exports: |
$191 billion f.o.b., including re-exports (2001 est.) |
|
Exports - commodities: |
Clothing, textiles, footwear, electrical appliances, watches and clocks, toys, plastics, precious stones |
|
Exports - partners: |
China 34%, US 23%, Japan 6%, Germany 4%, UK 4%, Taiwan 3%, Singapore 2% (2000) |
|
Imports: |
$203 billion (2001 est.) |
|
Imports - commodities: |
Foodstuffs, transport equipment, raw materials, semi-manufactures, petroleum, plastics, machinery, electrical equipment; a large share is re-exported |
|
Imports - partners: |
China 43%, Japan 12%, Taiwan 8%, US 7%, South Korea 5%, Singapore 3% (2000) |
*See China Investor Information.
*see China Investor Information
*see China Investor Information
http://webserv1.discoverhongkong.com
*see China Investor Information
Sources: Country Watch, Central Intelligence Agency: http://www.cia.gov
International Monetary Fund: http://www.imf.org
World Bank: http://www.worldbank.org