1 economic dimension

The Hong Kong Polytechnic University 1

Economic Dimension – What is Economics?

• Economics is the study the production and distribution of goods and services, it is the study of human efforts to satisfy unlimited wants with limited resources

• It studies how agents allocate scarce resources amongst alternatives to meet unlimited human wants


Approaches to Economics

• Positive Economics:

- Examines how decisions are made and the consequences of such decisions

- Descriptive process exploring the process of decision making and its impacts

• Normative Economics:

- Examines how resources should be allocated

- Prescriptive process analyzing what should be done


Allocation of resources

• Process occurs at many levels– Consumers– Firms– Government– Market System

• Allocation decisions impact natural environment– Want decisions to be based upon incentives that reflect

“true” value to society– Unfortunately decision makers do not consider “true” value

in choices– Need for policy intervention to overcome such market

failure


Contemporary Economics

• Macroeconomics – Aggregated analysis

– John Maynard Keynes in 1936 and 1940

– Choices of government

• Monetary Policy - Federal Reserve

• Fiscal Policy – Taxes and Spending

– Macroeconomic targets

• Income Levels

• Inflation

• Employment


Contemporary Economics

• Microeconomics – Disaggregated analysis– Adam Smith’s Wealth of Nations in 1776– Choices of consumers (households) and producers (firms)– Two types of Markets

• Factor Markets – Consumers sell inputs used in production to firms

• Product Markets – Firms sell final output to consumers– Three types of analysis

• Partial Equilibrium – Focus on single factor or good• Multi-Market – Interrelationships amongst key

fundamental markets• General Equilibrium – Economy as a whole


Economic Theory of Value

• Value is reflected in prices determined through interaction of supply and demand

• Supply (demand) reflects trade-offs firms (consumers) make when producing (buying) goods and services– Abundance implies lower prices– Scarcity implies higher prices

• Conceptually market forces reflect “true” value to society, but there are reasons why markets may fail– Externalities– Public Goods– Property Rights


Keynesian Economics

• An economic theory stating that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.

Opportunities in China and Hong Kong

Discuss economic opportunities available to

HK, e.g. those provided through

• WTO

• PPRD development

• CEPA

• FDI

[Please refer to notes given].


WTO• Challenges for Hong Kong

Despite all the opportunities, a more open China market will not automatically benefit Hong Kong. Hong Kong businesses need to overcome the challenges that lie ahead.

For example, foreign banks must currently fulfill the asset requirement of US$20 billion and various other funding requirements for setting up a branch in China. To set up a joint venture commercial retail business in China, foreign enterprises need to have an annual turnover of more than US$2 billion and assets of no less than US$200 million. The asset requirement for joint venture wholesale business is as high as US$300 million.


WTOIncreased Competition

Market liberalization will bring in more outside players, and thus increase competition, not only from multinationals but also from the Mainland's own developing indigenous business sector.

Diminishing Gateway FunctionWith a more transparent trade regime in the Mainland, Hong Kong's gateway function will diminish gradually as more foreign companies may try to go to China directly, and as China itself catches up through, among other things, advancement in telecommunications and information technology. Hong Kong trading firms that match sellers and buyers without adding any significant value to the process will be faced with a trend toward more direct dealing between customers and manufacturers in the future.


WTO

Hong Kong's CompetitivenessBesides external factors, Hong Kong businesses are facing internal challenges and weaknesses as well.

A major factor that can erode Hong Kong's competitiveness is our high operating cost. High salaries and property prices are the two biggest cost items for many Hong Kong businesses -- the textiles sector being an obvious example. Costs for professional services are also high.

In addition, there are concerns over the inherent weakness of Hong Kong's education system.


WTO

What Hong Kong Businesses Can Do

Whether Hong Kong can remain competitive and take advantage of the liberalization in the Mainland will depend on how Hong Kong positions itself. Hong Kong businesses should rethink their role, and this will call for restructuring, diversification and upgrading. Although Hong Kong is now part of China, it is extremely important for the business community to maintain its international character. We must play up our role as the "Value-added, Two-way Bridge" to and from China.


PPRDHK can bridge PPRD, Asean

• Chief Executive Donald Tsang says Hong Kong possesses unparalleled strengths and unique features in bridging the Pan-Pearl River Delta and the Association of Southeast Asian Nations.

• Speaking with Asean business officials in Changsha, Hunan on June10, 2007, Mr Tsang said Hong Kong's extensive trade connections with the Mainland provinces and Asean countries have facilitated import and export trade between the two regions.

• As an international financial centre, Hong Kong provides Asean and PPRD enterprises with a diversified and effective market for raising funds, he added.


PPRD

• Noting the city has extensive global connections and can facilitate trade between Asean and PPRD, Mr Tsang said PPRD and Asean enterprises can effectively network with overseas enterprises by setting up offices in Hong Kong.


CEPA Update

• The Hong Kong Special Administrative Region Government and the Central People's Government on May 9, 2009 agreed on further services liberalisation and trade co-operation under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA).


CEPA

• The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) is the first free trade agreement ever concluded by the Mainland of China and Hong Kong. The main text of CEPA was signed on 29 June 2003.

• CEPA opens up huge markets for Hong Kong goods and services, greatly enhancing the already close economic cooperation and integration between the Mainland and Hong Kong.


CEPA

• For Hong Kong, CEPA provides a window of opportunity for Hong Kong businesses to gain greater access to the Mainland market. CEPA also benefits the Mainland as Hong Kong serves as a perfect "springboard" for Mainland enterprises to reach out to the global market and accelerating the Mainland's full integration with the world economy. Foreign investors are also welcome to establish businesses in Hong Kong to leverage on the CEPA benefits and join hands in tapping the vast opportunities of the Mainland market.


http://www.investhk.gov.hk/pages/1/72.html

CEPA ImplementationCEPA covers 3 broad areas: • Trade in goods - All goods of Hong Kong origin importing into the

Mainland enjoy tariff free treatment, upon applications by local manufacturers and upon the CEPA rules of origin (ROOs) being agreed and met.

• Trade in services - Hong Kong service suppliers enjoy preferential treatment in entering into the Mainland market in various service areas. Professional bodies of Hong Kong and the regulatory authorities in the Mainland have also signed a number of agreements or arrangements on mutual recognition of professional qualification.

• Trade and investment facilitation - Both sides agreed to enhance co-operation in various trade and investment facilitation areas to improve the overall business environment.


http://www.tid.gov.hk/english/cepa/tradegoods/trade_goods.html

http://www.tid.gov.hk/english/cepa/tradeservices/trade_services.html

http://www.tid.gov.hk/english/cepa/mutual/mutual.html

http://www.tid.gov.hk/english/cepa/facilitation/summary_invest.html

CEPA Update• Under Supplement VI to the CEPA, the Mainland will

introduce 29 liberalisation measures covering 20 service sectors, including two new sectors (research and development, and rail transport). Thus, the total number of service sectors covered by CEPA will be expanded from 40 to 42. Among them, the noteworthy liberalisation measures are:

• On tourism, Mainland travel agents authorised to operate group tours to Taiwan can organise group tours for Mainland residents, who hold a valid exit/entry permit for travelling to and from Taiwan and travel endorsement, to enter and remain in Hong Kong in transit. This measure aims to facilitate the travel trade in the Mainland and Hong Kong to develop multi-destination tour products.


CEPA Update• On telecommunications services, HK Service

Suppliers(HKSS) can distribute in Guangdong Province fixed/mobile telephone service cards which can only be used in Hong Kong.

• On audio-visual services, Hong Kong service suppliers (HKSS) can provide videos and sound recording (including motion picture products) distribution services on the Mainland in the form of wholly-owned operations.

• Regarding research and development services, which is also a newly added sector, HKSS can set up wholly-owned enterprises on the Mainland to provide research and experimental development services in the natural sciences and engineering.


CEPA Update• Regarding mutual recognition of professional

qualifications, Supplement VI to CEPA also includes a number of measures to encourage mutual recognition of professional qualifications as well as technical exchange work among professionals from the accounting, construction, real estate and printing sectors. On medical and dental services, Hong Kong pharmacists can sit for examination and register on the Mainland. These measures will provide greater business opportunities for the trade and facilitate the upgrading of the professional standards of the two places.


CEPA Update

• On the whole, the new measures can help enhance HKSS' competitiveness in the Mainland. Such measures will not only help enterprises overcome the current financial crisis, but will also promote the long-term economic development of both sides.

• Details on CEPA including the newly agreed liberalisation and co-operation measures will be uploaded to the Trade and Industry Department's CEPA website: www.tid.gov.hk/english/cepa/index.html


http://www.tid.gov.hk/english/cepa/index.html

FDI• Foreign direct investment (FDI) in its classic form is

defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.

• The FDI relationship consists of a parent enterprise and a foreign affiliate which together form an international business or a multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.


http://en.wikipedia.org/wiki/International_business

http://en.wikipedia.org/wiki/Multinational_corporation

http://en.wikipedia.org/wiki/Investment

FDI

Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods:– by incorporating a wholly owned subsidiary or company – by acquiring shares in an associated enterprise – through a merger or an acquisition of an unrelated enterprise – participating in an equity joint venture with another investor or

enterprise


http://en.wikipedia.org/wiki/Subsidiary

http://en.wikipedia.org/wiki/Company

FDIIn a recent research(Zámborský, 2006), the impact of inward foreign direct investment on the host country using industry-level data for 11 OECD economies in 1987-2003 was found.It was noted that:

(1) FDI had a significant positive effect on productivity and notably on capital’s contribution to productivity in technologically advanced (“high-tech”) industries (such as automotive, electrical engineering and chemicals);

(2) FDI had a bigger, positive effect on productivity in large than in small OECD countries.

[OECD details can be found from: http://www.oecd.org/document/58/0,3343,en_2649_201185_1889402_1_1_1_1,00.html


FDI

The first result offers a more nuanced view of FDI’s impact on “high-tech” industries compared to other studies. They generally found support for a significant positive impact of FDI on total factor productivity in technologically more intensive sectors but did not stress capital’s contribution to productivity.

The second result contradicts the findings of other researchers, who found more support for FDI spillovers in small than in large countries.


Chinese Macro-economic Profile 2008Facing the strong impact of the international financial crisis and the drastically worsening world's economic environment, Chinese economy still maintained a relatively high growth of 9% in 2008.

As far as industries are concerned, the added value of the primary industry amounted to RMB3.4t, up by 5.5%; that of the secondary industry RMB14.6183t, up by 9.3%; and that of the tertiary industry RMB12.0487t, up by 9.5%, with the growth of GDP hitting a new record low in the past 7 years while the increase of CPI hitting a new record high in the past 12 years.

• New progress had been made in the work including structural adjustment and energy conservation and emission reduction while the stable and fast development of economy was maintained.


Chinese Macro-economic Profile 2008The growth of industrial production slowed down, with profits of enterprises declining quickly. The added value of industries above designed size increased by 12.9% from the previous year, with the growth rate falling by 5.6 percentage points from the previous year.

The growth speed of investment and industries in central and western regions was faster than that in east China , with regional structure being built and concurrently optimized.

In 2008, energy consumption of GDP per RMB10,000 dropped by 4.21% year-on-year, and what's more, positive progress has also been made in the energy conservation and emission reduction and the building of a resource-saving and environment friendly society.


Economic Dimension (1)

The market mechanism is commonly seen as the key institution underpinning Western economic society. “Free market” is advocated as the means by which efficiency and material abundance are generated.

In respect of this statement, try to answer the questions in the next slide:

Economic Dimension (2)

• Evaluate the opportunities available to HK via China’s entry to the World Trade Organization (WTO), recent Pan Pearl River Delta(PPRD) development, Closer Economic Partnership arrangement (CEPA) and Foreign Direct Investments(FDI) in China.

After-class Reading

Information relevant to this lecture may be

found from following sites:• http://www.chamber.org.hk/wto/report/

wto_summary.asp• http://www.news.gov.hk/en/category/

businessandfinance/070610/html/070610en03002.htm#

• http://www.fdi.gov.cn/pub/FDI_EN/default.htm


1 economic dimension

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