hong kong - international university of japan

Country Profile 2004
Hong Kong This Country Profile is a reference work, analysing the countrys history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Units Country Reports analyse current trends and provide a two-year forecast.
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Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004
Hong Kong 1
© The Economist Intelligence Unit Limited 2004 www.eiu.com Country Profile 2004
Contents
4 Politics 4 Political background 6 Recent political developments 9 Constitution, institutions and administration 10 Political forces 12 International relations and defence
14 Resources and infrastructure 14 Population 16 Education 17 Health 17 Natural resources and the environment 18 Transport, communications and the Internet 21 Energy provision
22 The economy 22 Economic structure 23 Economic policy 29 Economic performance
32 Economic sectors 32 Agriculture 32 Mining and semi-processing 33 Manufacturing 34 Construction 34 Financial services 36 Other services
38 The external sector 38 Trade in goods 39 Invisibles and the current account 40 Capital flows and foreign debt 41 Foreign reserves and the exchange rate
43 Regional overview 43 Membership of organisations
44 Appendices 44 Sources of information 44 Reference tables 44 Population 45 Labour force 45 Transport statistics 46 National energy statistics 46 Government finances
2 Hong Kong
47 Money supply 47 Interest rates 47 Gross domestic product 48 Gross domestic product by expenditure 48 Gross domestic product by sector 49 Prices 49 Wage indices 50 Manufacturing production 50 Miscellaneous manufacturing statistics (excl civil service) 50 Construction statistics 51 Banking statistics 51 Stockmarket indicators 52 Retail sales 52 Tourism statistics 52 Domestic exports by main commodity 53 Re-exports by end-use category 53 Imports by end-use category 53 Trade volume indices 53 Domestic exports by main destination 54 Re-exports 54 Imports by supplier 55 Trade in services 55 Trend of foreign trade 56 Balance of payments 56 External debt 57 Foreign-exchange reserves 57 Exchange rates
Hong Kong 3
Hong Kong
Basic data
1,098 sq km
Hong Kong Island 80 sq km Kowloon 47 sq km New Territories and outlying islands 971 sq km (Reclamation since 1851) 61 sq km
6,803,100 (mid-2003 government estimate)
Population in 000 (March 2001):
Hong Kong Island 1,335 Kowloon 2,024 New Territories 3,343 Marine 6
Sub-tropical
Hottest months, July and August, 26-31°C; coldest month, January, 15-19°C; driest month, January, 23 mm average rainfall; wettest month, August, 391 mm average rainfall (climatological norms)
English and Chinese (mainly Cantonese)
UK imperial system changing to metric system. Local measures are used including: 10 fan=1 tsun (Chinese inch)=0.037 metres; 10 tsun=1 chek (Chinese foot)=0.371 metres; 10 tsin=1 leung (tael)=37.8 g; 16 leung=1 kan (catty)=0.605 kg; 100 kan=1 tam (picul)=60.48 kg
1 Hong Kong dollar=100 cents. Annual average exchange rate in 2003: HK$7.787:US$1. Exchange rate on August 11th 2004: HK$7.799.
GMT plus eight hours
New Years Day, January 1st; Chinese New Year, January 22nd-24th; Monday after Ching Ming Festival, April 5th; Easter, April 9th-12th; International Labour Day, May 1st; Buddhas Birthday, May 26th; Dragon Boat Festival, June 22nd; Hong Kong Special Administrative Region Establishment Day, July 1st; Day after Mid-Autumn Festival, September 29th; Chinas National Day, October 1st; Chung Yeung Festival, October 22nd; Christmas, December 25th and 27th.
Land area
Languages
Measures
Currency
Time
Politics
On July 1st 1997 Hong Kong, which had been a UK colony since 1841, became a Special Administrative Region (SAR) of the Peoples Republic of China (PRC). Hong Kong is now ruled on the basis of a mini-constitution, the Basic Law, which guarantees the SAR its own legislature, legal and judicial system, and full economic autonomy, while giving the central government in Beijing responsibility for defence and foreign affairs. The SAR has an executive-led government, headed by the chief executive, Tung Chee-hwa, who was re-elected by an 800-member election committee in February 2002. The Legislative Council (Legco) election due on September 12th 2004 will see one- half of the body elected by universal suffrage for the first time.
Political background
Before it was seized from China by the British navy in January 1841 at the height of the first opium war (1839-43), Hong Kong Island was home to fewer than 6,000 Chinese. The territory grew rapidly thereafter as an entrepôt for trade between the Chinese empire, which Britain prised open with its gunboats, and the rest of the world. At the end of the second opium war, in 1860, Britain extended its territorial holdings to include Kowloon, situated on the mainland peninsula facing Hong Kong Island, and Stonecutters Island. In 1898 the UK forced China to cede the New Territories!the land north of Kowloon adjacent to Shenzhen across the border in China!on a 99-year lease to expire in June 1997. With the exception of the second world war, when the territory was occupied by Japan, Hong Kong remained a colony ruled directly by Britain through an appointed governor, until its retrocession to China on July 1st 1997.
In the late 1970s British officials began to think about the consequences of the 99-year lease as individual land leases in the New Territories that straddled 1997 came up for renewal. The UK government raised the subject with the Chinese government, hoping that a solution could be found that preserved the status quo. China initially refused to discuss the matter, but by late 1981 it became clear that the government in Beijing intended to resume sovereignty over all of Hong Kong in 1997. Retaining British sovereignty over the parts of Hong Kong unaffected by the lease was never really an option; the rest of Hong Kong would not have been viable without the New Territories, which accounted for 92% of the colonys land area. In any case, the Chinese government did not accept the validity of the documents under which the other parts of Hong Kong had been ceded to the British.
Following negotiations between the British and Chinese governments, an agreement was signed on December 19th 1984, the main document of which was the Joint Declaration. In this, the UK agreed to surrender Hong Kong to China on July 1st 1997. For its part, China agreed that Hong Kong would, under the guiding principle of one country, two systems, become an SAR of China,
Colonisation by Britain
Hong Kong 5
with its capitalist way of life guaranteed for the following 50 years by a mini-constitution, the Basic Law.
In July 1992 a former UK government minister and Conservative Party chairman, Chris Patten, was appointed as Hong Kongs last British governor. In his first annual policy address, in October 1992, Mr Patten announced that he intended to widen the franchise for elections to Hong Kongs three tiers of government. The most important of the governors proposed reforms affected the Legco, an election to which was due in 1995. The proposals included broadening the electorate for the functional constituency seats in Legco! originally intended to represent business and other interests!from 110,000 to 2.7m; and filling an election committee that was responsible for electing ten Legco members with directly elected members of district boards. Mr Patten pressed ahead with the reforms without agreement from China. In the subsequent poll held in September 1995 candidates seen as close to Beijing were trounced by the pro-democracy camp.
This result served to reinforce Chinas fears that the territory could become a centre for subversion that required tight control. China therefore decided to abolish the through train legislature upon the handover of the territory, replacing it with an appointed Provisional Legislative Council established in 1996. In the same year a 400-member election committee, chosen by a Beijing- appointed preparatory committee, appointed Tung Chee-hwa, a former shipping executive whose ailing family company had been rescued by China in 1985, as the first chief executive of the Hong Kong SAR. China did make some attempt to preserve continuity by allowing several top officials, including the chief secretary, Anson Chan, and the financial secretary, Donald Tsang, to continue in their roles after July 1st 1997.
The reduction in the number of Legco seats elected by universal franchise that was imposed following the 1997 handover reduced the prominence of pro- democracy forces. In the May 1998 Legco election, the pro-democracy parties won two-thirds of the popular vote but just one-third of the seats. In the September 2000 Legco election, the percentage of the direct vote won by the Democratic Party (DP) fell to 34.7% from the 43.7% won in the 1998 election. The DP won 12 of the 24 directly elected seats in 2000, with a further three members elected to represent functional constituencies. The pro-government Democratic Association for the Betterment of Hong Kong (DAB) took 29.7% of the popular vote, gaining seven directly elected members, four members elected by functionary constituencies and one selected by committee. The pro- business Liberal Party took only 1.9% of the vote, but won eight seats owing to support among the functional constituencies. The waning of the fortunes of the pro-democracy camp in the first few years following Hong Kongs reversion to China reflected not only structural changes to the electoral process, but also the democrats perceived inability to move on from the constitutional issues that had been so important in the boom years before 1997 to deal with the concrete problems of economic hardship that arose as Hong Kong fell into its worst recession in living memory in 1998.
1992-95: the Patten plan
The Democrats decline in prominence after 1997
6 Hong Kong
Recent political developments
Despite the pro-democracy parties continued focus on constitutional issues, these parties have survived owing to the unpopularity of the government and the series of crises that have buffeted the SAR government in recent years. Although the Hong Kong way of life is supposedly protected by the Basic Law, in 1999 the standing committee of Chinas National Peoples Congress (NPC, the Chinese legislature) intervened to interpret the Basic Law on a matter of immigration law. Critics have also been worried by the governments attitude to the Falun Gong spiritual movement. The group was outlawed in 1999 on the mainland as an evil cult, but has remained legal in Hong Kong. Some members of the SAR government do, however, appear uncomfortable with the groups activities, and in 2002 legal action was taken against Falun Gong, with 16 adherents being convicted in August of obstruction. Mr Tung, who was reselected as the SARs chief executive (by an 800-strong election committee) for a second five-year term in 2002, has attempted to answer demands for constitutional progress by introducing in July 2002 an accountability system. Under this system, the civil service run by bureaucrats was reorganised as one run by political appointees answerable to the chief executive. Mr Tung also brought the DAB and the pro-business Liberal Party into the Executive Council (Exco, the cabinet).
The attempt to introduce a measure of accountability into the political system has not been a success. Although government ministers are accountable to Mr Tung, he has in practice tended to defend his staff in the face of public criticism rather than remove them. In early 2003 the administration, perhaps unfairly, was blamed for the local outbreak of Severe Acute Respiratory Syndrome (SARS) and the financial secretary, Antony Leung, blundered by purchasing a luxury car just days before announcing an increase in vehicle registration taxes. Mr Tung responded by backing the secretary for health, welfare and food, Yeoh Eng-kiong, and Mr Leung. Finally, the governments insistence on introducing legislation outlawing treason, secession, sedition and subversion towards the Chinese state provoked popular outrage, leading to a political crisis in July 2003. More than half a million Hong Kong residents took to the streets on July 1st!a public holiday to commemorate the founding of the SAR!to protest against the proposed new laws. The decision of the Liberal Party leader, James Tien, to resign from the Exco provoked a political crisis and the government was eventually forced to withdraw the legislation. In the process, Mr Tung lost two ministers: Mr Leung and the secretary for security, Regina Ip, who had been charged with piloting the security laws on to the statute books. As a result of the security laws crisis, the pro-government DAB took a hammering in the November 23rd 2003 district council elections, winning 62 seats compared with the 95 taken by the DP. (In the 1999 district elections the DP had taken 86 seats to the DABs 83.) Tsang Yok-sing, the chairman of the DAB, resigned following the electoral defeat.
The focus of the political crisis has moved on from the issue of security laws to the wider question of political reform. On January 1st 2004 around 100,000 people marched in favour of universal suffrage, and on January 7th Mr Tung set
A series of crises in 2003 damage Mr Tung
Growing dissatisfaction with the government
China reinterprets Hong Kongs Basic Law
Hong Kong 7
up a task force to consult widely on constitutional reform. However, it was later made clear that the consultations with the Hong Kong public would take a back seat, and that attention would be focused primarily on consultations on the issue of political reform with the central government in Beijing.
The wording of the Basic Law had implied that political reform would be countenanced in 2007-08!any changes to the method of selecting the chief executive in 2007 would need to be approved by the NPCs standing committee, but changes to the method of electing Legco in 2008 would merely need to be reported to the NPC. On April 6th the NPC published an interpretation of the two annexes to Hong Kongs Basic Law that related to the mechanism for constitutional changes in 2007-08. According to the ruling, Hong Kongs chief executive is required to submit a report to the NPC standing committee when the need to amend voting procedures arises, giving the committee the opportunity to decide if changes are really required. Decisions on constitutional changes are therefore to be made by the NPC before discussion by Hong Kongs Legco. Finally, the NPCs interpretation stipulates that electoral reforms may be proposed in Legco only by the Hong Kong government.
As required by the interpretation, Mr Tung submitted a report on political reform to the NPC on April 15th. The report set out nine conditions, listed below, that would have to be met before political reform in Hong Kong could be contemplated.
• Proposals must pay heed to the views of the central government;
• changes to the political structure should not be contemplated lightly;
• no amendments can breach the substantive power of appointment of the chief executive by the central authorities;
• proposals must aim to consolidate the executive-led system;
• progress towards the ultimate aim of universal suffrage must proceed gradually in accordance with the actual situation in the territory;
• in considering the actual situation, public opinion is only one factor, which must be assessed alongside factors such as the level of understanding among the public of the one country, two systems arrangement whereby Hong Kong was returned to China in 1997, the maturity of political groups in Hong Kong and the relationship between the executive authorities and the legislature;
• proposed amendments must continue to allow different sectors of society to be politically represented (as under Hong Kongs current system, whereby 30 legislators chosen in September 2004 will represent functional groups);
• amendments should ensure that the interests of different sectors of society will be considered; and
• amendments must not adversely affect the economy and the public finances.
Substantive political reform is ruled out
8 Hong Kong
On April 26th the NPC standing committee accepted Mr Tungs report and concluded that elections of the chief executive in 2007 and of all members of Legco in 2008 on the basis of universal suffrage would not comply with Mr Tungs nine conditions. Constitutional change may take place, but no changes to the size of Legco or the election committee that selects the chief executive will be permitted. Finally, although some tinkering with the electoral rules that relate to the 30 functional constituencies may be allowed, the ratio of the seats elected by universal suffrage to the functional seats!which will increase to 50:50 in September 2004!must remain unchanged.
Important recent events
1999
In January the Court of Final Appeal (CFA) strikes down on constitutional grounds elements of immigration law passed by the Provisional Legislative Council (PLC) in July 1997. In May the local government refers the related provisions of the Basic Law to the standing committee of the National Peoples Congress (NPC, Chinas legislature) for interpretation. Pro-democracy legislators condemn the action, claiming that it damages the rule of law in Hong Kong. In December CFA judges rule that the NPCs interpretation was valid and binding.
2000
In the second post-handover Legco election pro-democracy parties lose ground in the popular vote as voter turnout drops.
2001
In January the chief secretary, Anson Chan, a popular government official who is widely viewed as a guardian of Hong Kongs autonomy from China, announces her early retirement. In May she is replaced by the then financial secretary, Donald Tsang. Mr Tsangs former post is filled by a banker, Antony Leung.
2002
In March Mr Tung is appointed unopposed for a second term as chief executive, beginning in July. Mr Tung introduces government reforms, reducing the number of government departments from 16 to 11, with each being headed by limited-tenure political appointees rather than job-for-life civil servants (although many of them were recruited from the ranks of the civil service).
2003
The governments response to the local outbreak of Severe Acute Respiratory Syndrome (SARS) is criticised. In the Cargate scandal, Mr Leungs purchase of a luxury car days before introducing an increase in the vehicle purchase tax is criticised. The attempt to introduce legislation against treason, secession, subversion and sedition brings half a million protesters on to the streets in July. The government is forced to back down as the legislation is shelved. Mr Leung and the secretary for security, Regina Ip, resign. Government-linked parties receive a drubbing in the November district council elections.
2004
A New Years Day rally for democracy is attended by around 100,000 people. On April 6th China reinterprets Hong Kongs Basic Law (mini-constitution), allowing
Hong Kong 9
the standing committee of Chinas NPC to decide when constitutional change is required. On April 26th the NPC rules that Hong Kong is not yet ready for substantive political reform. Organisers of the July 1st march for democracy report that 500,000 joined the march, although the police put the numbers closer to 200,000.
Constitution, institutions and administration
Under the Basic Law the SAR has its own legislature, legal and judicial system and full economic autonomy, but defence and foreign affairs are the responsibility of the central government in Beijing. Hong Kong is able to participate in international organisations and agreements where appropriate. It continues to function as an international financial centre, with no exchange controls, free convertibility of the Hong Kong dollar and free inward and outward movement of capital. The Basic Law guarantees existing freedoms, including free speech and assembly, press, religion, and the right to strike and travel. Business ownership, private property, the right of inheritance and foreign investment are also protected by law. The Basic Law may be interpreted or amended by Chinas NPC.
The chief executive, Tung Chee-hwa, was appointed for a second term in 2002 by an 800-member election committee. The Basic Law limits the tenure of any chief executive to two terms. Although the Basic Law states that the ultimate aim is for the selection of the chief executive by universal suffrage, the recent interpretation of the Basic Law by Chinas NPC rules out any change in time for the selection of the chief executive in 2007 and requires future reforms to be approved in advance by the NPC, before being placed before Legco. Reforms require the support of two-thirds of Legco and the endorsement of the chief executive.
The current Legco, elected in September 2000, has 60 members, of whom 24 were directly elected, six were appointed and 30 elected to represent functional constituencies. The Legco to be elected on September 12th 2004 will have 30 directly elected members and 30 members representing functional constituencies. Legcos powers are limited. Although Legcos approval is needed for legislation and policy changes, in practice the executive-led administration has almost invariably been able to gain Legco backing for legislative proposals! with the notable exception of the controversial national security laws that were shelved in July 2003. Legco votes of no-confidence are not legally binding.
Hong Kong has a competent bureaucracy, albeit one more skilled in policy execution than initiation. Senior officials appointed by the last UK administration, such as Donald Tsang, now the chief secretary, still hold influential positions in government. There is relatively little corruption, especially by the standards of other regional governments. The political system is reasonably open and transparent; opposition parties frequently speak out against the government, and major issues are vigorously!if not always decisively!debated in Legco. In 2002 Mr Tung tried to improve the popularity of his government by introducing a so-called accountability system, but when
The bureaucracy
tested in the SARS crisis Mr Tung proved reluctant to replace underperforming officials.
Since reforms in 2000, Hong Kong has had only one tier of local government, the district councils, which have only the power to advise the SAR government. The latest district council elections were held in November 2003. The 18 district councils have 529 members. Of these, 400 are directly elected, 27 are ex officio positions and 102 are appointed. The councils elected in 2003 will sit until December 31st 2007.
The power of final adjudication lies with the Court of Final Appeal (CFA). The chief justice of the CFA and the chief judge of the High Court must be Chinese citizens who are permanent residents of Hong Kong with no right of abode in any foreign country. Judges in the High Court, comprising the Court of Appeal and the Court of First Instance, are appointed by the chief executive on the recommendation of an independent commission composed of local judges, persons from the legal profession and other eminent persons. The basic principles of judicial independence and trial by jury are guaranteed by the Basic Law.
The Liaison Office of the Central Peoples Government conducts liaison activities with local groups and maintains information contacts. It also moni- tors the activities of mainland officials who have connections with Hong Kong. Other mainland government organisations represented in Hong Kong include the Ministry of Foreign Affairs and the Peoples Liberation Army (PLA). In addition, China has many non-governmental channels of influence in the SAR, including pro-China newspapers such as the Wen Hui Pao and Ta Kung Pao, as well as major corporate groups, including the Bank of China, China Resources and the China International Trust and Investment Corporation (Citic).
Political forces
Political parties!and recognisable politicians!began to appear after direct elections for some Legco seats were introduced in the early 1990s. However, lacking the power to do anything other than obstruct the administration, there is little incentive to develop meaningful policy platforms. The largest party is the Democratic Party (DP). However, the DP has been less popular in China, with the leadership in Beijing branding some of its members subversives. The DPs position as Hong Kongs most popular party had been slipping, until its fortunes were revived in mid-2003 by the governments bungled attempt to push through controversial security laws. The partys decline following the 1997 handover reflected its preference for debating broad constitutional questions rather than dealing with the economic issues that formed the focus of voter concern during the prolonged economic downturn. In the September 2000 Legco election, the percentage of the direct vote won by the DP fell to 34.7% from 43.7% in the 1998 election. However, the DP made a political recovery in the second half of 2003, and polled well in the November 2003 district elections.
Local government
The judiciary
The party that gained most from the DPs difficulties in the early years after the territorys reversion to China was the DAB. Its share of the direct vote in the 2000 election rose to 29.7% from 25.2%. Although broadly pro-China, the DAB has also advocated democratisation, although less vociferously than the DP. The party was brought into the government in 2002, but suffered from its association with the government in the November 2003 district elections.
The Liberal Party was established in 1993 to ensure stability and prosperity, in other words, to avoid upsetting China. The Liberal Party won only 1.9% of the popular vote in the 2000 election, but has nevertheless played a largely role in politics owing to the eight Liberal Party Legco members that were elected by functional constituencies. Leading members of the Liberal Party, including its leader, James Tien, will stand for directly elected seats in the September 12th Legco poll.
Main political figures
Tung Chee-hwa
The first chief executive of the Special Administrative Region (SAR), Mr Tungs low profile during the economic crises that hit the SAR in late 1997 and 1998 undermined his popularity. He responded by abandoning his original consensual approach to leadership in favour of a more decisive style, but he has remained unpopular. The bungled attempt to introduce controversial security legislation in mid-2003 further increased his unpopularity, but his continued tenure as chief executive depends more on the support of the government in Beijing than of the people of Hong Kong.
Donald Tsang
Appointed by Mr Tung to succeed Anson Chan as chief secretary (the most senior civil servant) on May 1st 2001. He is more deferential (in public, at least) to Mr Tung than his predecessor. In his former post, as financial secretary, he guarded the fixed link between the Hong Kong and US dollars with vigour.
Emily Lau
Member of Legco and leader of the Frontier party, Ms Lau is a vocal campaigner for greater democracy and human rights. In 2003 Ms Lau was accused by the Chinese government of seeking independence for Hong Kong, after speaking at a symposium in Taiwan organised by a pro-Taiwan independence group.
Henry Tang
Appointed financial secretary in August 2003 to replace Antony Leung, Mr Tang seems to have gone down well with the Hong Kong public. He has strongly supported the Hong Kong dollars peg against the US dollar.
Ma Lik
The chairman of the Democratic Alliance for the Betterment of Hong Kong (DAB) since the resignation of his predecessor, Tsang Yok-sing, following the partys poor showing in the November 2003 district council elections.
The Liberal Party
James Tien
As leader of the normally pro-government Liberal Party, Mr Tien precipitated the crisis in July 2003 when he called on the government to delay the introduction controversial security laws.
International relations and defence
Hong Kongs high degree of autonomy does not extend to security, defence and international relations, which after July 1st 1997 became the preserve of the central government in Beijing. Hong Kong is still allowed to maintain separate representation in many international bodies, such as the World Trade Organisation (WTO) and the IMF, under the title of Hong Kong, China.
As well as defending Hong Kong against potential external enemies, Chinas Peoples Liberation Army (PLA) is also available for emergency use in the unlikely event of turmoil that the local government is unable to control. Otherwise, the PLA does not have an official public order role. Defence-related costs are borne by Chinas national budget, not by Hong Kong. A law on troops stationed in the SAR defines their functions, powers, management and jurisdiction, and the relationship between the troops and the SAR. The troops have to respect Hong Kong laws and must not interfere with local affairs or engage in business activities. Troops also receive in-depth political education, military training and education on Hong Kongs basic social situation and existing laws. To date, PLA troops have been conspicuous by their absence from the streets of Hong Kong.
Security risk in Hong Kong
I. Armed conflict
The likelihood of armed conflict is remote. Hong Kong is not a sovereign state but a Special Administrative Region (SAR) of the Peoples Republic of China. Although Hong Kong enjoys considerable autonomy in most areas, foreign policy and defence remain the purview of the central government in Beijing. Any external conflict that might affect businesses operating in Hong Kong would probably have to originate in a larger international disturbance involving China. Even in the event of a conflict between China and another sovereign state, the prospect of armed intervention in Hong Kong!the autonomy of which is widely respected and supported internationally!is virtually non-existent. This would also hold true in the event of a military conflict between China and Taiwan!although the Economist Intelligence Unit does not expect a full-scale confrontation across the Taiwan Strait during the foreseeable future, the direct security spillover in Hong Kong in the event of such a conflict (as distinct from the economic, financial and social reaction) would be minimal. Within the SAR, there are no armed opposition groups or insurgencies. There are no domestic terrorist groups operating in or from Hong Kong, and the territory has not been subjected to terrorist attacks. Although the government is, in effect, appointed by the authorities in Beijing, and the current chief executive, Tung Chee-hwa, is fairly unpopular, opposition parties will continue to operate through normal political channels. Although concerns about the motives and practices of the Chinese
China handles foreign policy
Hong Kong 13
government continue in some quarters, armed opposition within Hong Kong is unlikely.
II. Unrest and demonstrations
Hong Kong is the scene of frequent demonstrations, although they are usually peaceful, and few protestors are ever arrested. The largest protests usually occur in June, when several thousand people generally attend a candle-lit vigil to remember the victims of the 1989 Beijing massacre, and on the July 1st anniversary of the founding of the SAR. In July 2003 more than half a million Hong Kong residents took to the streets to protest against the proposed introduction of laws against treason, secession, sedition and subversion against the Chinese state, and organisers claimed a similar attendance for the July 2004 democracy march. Most demonstrations are usually sparked by purely local issues!democracy, transport, health, students issues!and are generally restrained, and typically have little effect on foreign- operated businesses. It is likely that public demonstrations by low-skilled and unemployed workers will become more frequent over the next few years as the demand for skilled technology workers increases. It is also possible that, as a major corporate centre, and therefore an occasional host to international business gatherings, Hong Kong will in the future be the scene of larger protests associated with the anti-globalisation movement. Visits by senior Chinese officials are often the occasion for pro-democracy demonstrations. Hong Kong has also been a favourite site for well-behaved protests by followers of the Falun Gong spiritual movement. The group was outlawed in 1999 on the mainland as an evil cult, but has remained legal in Hong Kong. It is clear, though, that some members of the SAR government are uncomfortable with the groups activities, and in 2002 legal action was taken against Falun Gong activities, with 16 adherents being convicted in August 2002 of obstruction.
III. Violent crime
The incidence of both petty and violent crime in Hong Kong is low. The rate of arrests per 100,000 population in 2003 was just 617, up from 584 in 2002 but down from 944 in 1995, and more than respectable by international standards. The total number of crimes reported in 2003 was 88,377, 16.5% higher than the year before, raising the crime rate per 100,000 residents from around to 1,100 incidents to nearly 1,300. However, violent crime rose by only 2.8%, with most of the increase in overall crime accounted for by an increase in thefts. In 2003, 52 cases of murder or manslaughter were reported, down from 69 in 2002. In recent years there has therefore been either a levelling out or a reduction in most types of serious crime, but an increase in less serious property crimes. There is growing concern among residents that crime may increase as the border with China becomes more porous. Illegal immigrants have been blamed by the police for a number of high-profile robberies.
IV. Organised crime
Organised crime is a persistent problem, although it does not often affect major corporations and foreign firms. Local criminal organisations!secret societies known as triads!are commonplace, and tend to engage in drug-trafficking, prostitution, gambling, loan sharking and extortion. Many of the triads are little more than groups of young thugs. A few, like the Sun Yee On and the Wo Shing Wo, are syndicates of sophisticated criminals equivalent, in some ways, to the mafia. The government
14 Hong Kong
estimates that around 50 triad groups are functioning in the SAR at present; although they have a nominal combined membership of 100,000, relatively few members are active. Triads prey mostly on local businesses, especially restaurants, bars, entertainment outlets and street vendors; the film-making industry is also a target. Triads exist in China and Taiwan as well as Hong Kong, and they have been criss- crossing into each others territory. Reportedly, criminal gangs in southern China have been infiltrating Hong Kong since the 1997 handover of the SAR by the UK. The issue of the extradition of triad members arrested for serious crimes remains a thorny one for all three jurisdictions.
V. Kidnapping
Abductions have received more attention in recent years, although kidnappings typically centre on local business disputes. Although foreigners have not been targeted for abduction, high-profile Hong Kong residents, including a property magnate, Chan Kwai-hung, have. Executives who travel to Chinas Guangdong province are at greater risk.
Resources and infrastructure
Population
Hong Kong is one of the most densely populated places in the world. According to the governments most recent census (conducted in March 2001) Hong Kong has a population of 6.71m people living on a land area of about 1,100 sq km (the Census and Statistics Departments end-2003 population estimate is 6.81m). Since Hong Kong still has substantial areas of undeveloped land (about 40% of the territory is protected by country parks), the population density can vary greatly from the average for Hong Kong of about 6,250 people per sq km (official estimate for end-June 2001). In Kwun Tong, the most densely populated district, the density is nearly 50,000 people per sq km.
Population by nationality 1991 1996 2001
Chinese Place of domicileHong Kong 5,191,545 5,623,467 6,261,864 Place of domicileoutside Hong Kong 48,029 64,717 76,898 Filipino 64,658 120,730 143,662
Indonesian 7,905 22,057 54,629 British 68,502 175,395 25,418 Indian, Pakistani, Bangladeshi & Sri Lankan 14,329 20,955 28,642
Thai 11,787 15,993 14,791 Japanese 10,850 19,010 14,715
Nepalese n/a n/a 12,379 American 18,383 28,946 14,379
Canadian 15,135 32,515 11,862 Others 71,158 93,771 49,150 Total 5,522,281 6,217,556 6,708,389
Source: Census and Statistics Department, 2001 Population Census: Summary Results.
A population of almost 7m
Hong Kong 15
In 2000-02 the population grew by 0.9% a year, but the population growth rate fell to only 0.2% in 2003. The natural rate of increase has been slowing in recent years. The crude birth rate fell gradually from 9.9 per 1,000 in 1996 to 6.9 per 1,000 in 2003. The crude death rate, meanwhile, has remained at around five per 1,000 in recent years, and reached 5.4 per 1,000 in 2003.
The population has been boosted in recent years by immigration, particularly from mainland China. The number of lawful immigrants from China increased from around 27,000 a year in the late 1980s to 45,986 in 1995 and has been around 55,000 per year in recent years. The number fell back in 2002 to 45,234.
According to the 2001 census, 6.4m people, or 94.9% of Hong Kongs population, are ethnically Chinese. The next biggest groups are Filipinos and Indonesians, who together account for almost 3% of the population, and many of who have jobs as domestic workers. The number of British citizens in Hong Kong has, perhaps unsurprisingly, fallen sharply in recent years. In 2001 there were about 19,000 British people in Hong Kong, accounting for 0.3% of the total population, down from 175,395 people (2.8% of the population) in 1996. The number of Japanese, American and Canadian people living in Hong Kong has also dropped in recent years.
As in many developed economies, Hong Kongs population is ageing. According to census data the proportion of the population aged over 65 increased from 8.7% in 1991 to 11.1% in 2001. Based on government projections the proportion will rise further to 24% in 2031. In an attempt to begin to tackle the financial consequences of this development, the government implemented a Mandatory Provident Fund (MPF) in December 2000. This scheme requires both employers and employees to make contributions of 5% of salary into a pension fund. Private firms that have been approved by the governments MPF Schemes Authority manage the funds.
Population by age group (%)
1991 1996 2001 0-14 20.9 18.5 16.5 15-24 15.2 14.0 13.7
25-34 21.4 19.1 16.5 35-44 16.1 19.0 20.3
45-54 8.8 11.0 14.3 55-64 8.9 8.3 7.5
65+ 8.7 10.1 11.1 Total 100.0 100.0 100.0
Source: Census and Statistics Department, 2001 Population Census: Summary Results.
In order to cope with the growing population, Hong Kong has developed nine new towns since 1973. The new towns are aimed at allowing people to move away from the overcrowded central urban areas to less-populated areas in the New Territories. According to the 2001 population census, the proportion of the population living in the New Territories and outlying islands increased from 41.9% in 1991 to 49.8% in 2001. Hong Kong people are starting to move even further north, into mainland China itself. This migration is likely to accelerate as
Immigration boosts the population
The population is ageing
16 Hong Kong
crossing points are opened 24 hours a day!the first 24-hour checkpoint was opened in January 2003!and smart cards are issued, allowing quicker immigration clearance. These developments, together with the establishment of better north-south transport links, will make it easier for Hong Kong people to take advantage of the cheaper land available in the mainland while retaining their jobs in Hong Kong.
Education
According to the 2001 population census, 100% of children aged six to 11 were attending schools, with the enrolment ratio dropping to 97.5% for children aged 12- 16 and 71% of those aged 17-18. The three types of curriculum available!grammar, technical and prevocational!are all five-year courses leading to the Hong Kong Certificate of Education Examination (HKCEE). Students staying at school after completion of the HKCEE enrol on a two-year course to study for the Hong Kong Advanced Level Examination, which is the standard entry test for the SARs tertiary-level institutions. Since 1997 there has been a reduction in the use of English in secondary schools, leading to concern in the business community that Hong Kong is losing a competitive advantage. Under the governments mother- tongue teaching policy, many schools have dropped English-medium instruction, although a number of English-medium schools with a high achievement record have been permitted to continue.
Hong Kong now has 11 degree-awarding higher education institutions. Seven of these are self-accrediting, degree-awarding universities!the City University of Hong Kong; Hong Kong Baptist University; Lingnan University; the Chinese University of Hong Kong (HKCU); Hong Kong Polytechnic University; the Hong Kong University of Science and Technology (HKUST); and the University of Hong Kong (HKU). These seven institutions, together with the Hong Kong Institute of Education, are funded through the University Grants Committee (UGC), and in 2002 boasted a total of 49,170 undergraduate and 15,392 postgraduate students. The other three degree-awarding institutions are the Hong Kong Academy for Performing Arts and the self-financed Open University of Hong Kong and the Hong Kong Shue Yan College. In addition, educational institutions in Hong Kong have been offering a large variety of degree programmes in collaboration with universities abroad. These are degree programmes offered by foreign universities with courses taught mainly in Hong Kong. The Hong Kong education system has also branched out on to the mainland, with its universities setting up joint programmes with top mainland universities. Higher education in Hong Kong is mainly conducted in English.
The official policy of the Hong Kong government is to promote biliteracy and trilingualism, whereby people are encouraged to acquire a basic knowledge of written Chinese and English, as well as becoming fluent in spoken Cantonese, Mandarin Chinese and English. However, achieving widespread trilingualism is still a distant objective, and complaints about inadequate English-language ability are frequently heard.
Enrolment ratios are high
Higher education is expanding
Health
The standard of healthcare in Hong Kong is generally high. At the end of 2002, Hong Kong had 35,159 hospital beds, or 5.2 beds per 1,000 people, which compares favourably with ratios of 4.2 per 1,000 in the UK (1998), 3.9 in the US (1997) and 3.7 in Singapore (1999). However, Hong Kong had only 10,731 registered doctors in 2002, or 1.6 doctors per 1,000 people, which is slightly below ratios in the UK (1.8 per 1,000 in 1999), the US (2.9 in 1999), Japan (two in 1998) and Singapore (1.7 in 1999).
The Hospital Authority (HA), funded through government subvention, is an independent body responsible for the management of all of Hong Kongs 39 public hospitals. HA institutions provide 84% of hospital beds in Hong Kong. The remainder are supplied by 12 nursing homes and private hospitals. The HA also runs 52 specialist outpatient clinics. A network of 62 general outpatient clinics is maintained by another public body, the Department of Health (DH). The DH also operates 50 maternal and child health centres.
Healthcare in government hospitals is not free, but is subsidised, and costs can be waived. Treatment at public-sector outpatient clinics costs around HK$37 (US$4.70) per visit, and patients in the general wards of public hospitals are charged around HK$68 a day. These low user-costs have not led to an explosion in government health expenditure, which remained low at around 15% of recurrent public-sector expenditure in 2002/03. Outside experts have suggested, however, that upward pressure on health expenditure will grow over time. A government-commissioned report concluded in April 1999 that, without changes, spending on health would rise to 21-23% of public spending by 2016. The team suggested that the government should establish a health insurance scheme to be paid for by contributions from wages. The commission also recommended a rise in user costs.
The government has not implemented these proposals. Officials did propose in December 2000 that workers between the ages of 40 and 64 contribute 1-2% of their wages to a medical savings scheme. The government has since backed away from this proposal, but it has been reviewing hospital charges, and may revisit the issue of a health tax in the coming years. At the end of November 2002 the government began levying a HK$100 (US$13) fee for accident and emergency services, previously free of charge.
Natural resources and the environment
Hong Kong is small and hilly, with several high peaks; consequently agricultural land!or indeed any flat land!is scarce. Land has therefore been extensively reclaimed from the sea for housing, offices, factories and major infrastructure projects such as the old Kai Tak airport and the new Hong Kong International Airport. Despite high rainfall, Hong Kong is unable to meet its own domestic and industrial water requirements, so supplies are piped in from the neighbouring Chinese province of Guangdong.
High standards in healthcare
Land is scarce
18 Hong Kong
About 40% of the territory is protected by country parks, one of the highest proportions in the world, but the very high overall population density puts pressure on the environment. Air, sea and noise pollution has risen fast over the past decade, contributing to a rise in respiratory diseases (including lung cancer). These problems, combined with the rising expectations of a more affluent society, have resulted in greater concern about the environment among the general population. These environmental problems have also started to worry the government, with officials becoming concerned that worsening pollution will harm Hong Kongs tourism business and reduce the territorys attractiveness to foreign investors and professionals.
In recent years the government has implemented a range of reforms aimed at improving the quality of the natural environment, introducing, for example, the requirement that all government bureaux and departments publish annual environmental reports, and ruling that newly licensed taxis run on liquefied petroleum gas rather than diesel fuel. Critics still argue that the government has not gone far enough. This may be true, but it is also clear that Hong Kong cannot solve the pollution problem single-handed. A good proportion of the territorys environmental problems are, after all, caused by emissions originating in mainland China. The government has started to work with its mainland counterparts to tackle crossborder pollution problems and the first product of this co-operation, a plan to reduce air pollution, was released in April 2002.
Transport, communications and the Internet
Hong Kongs transport and communications networks are among the best in the region, and are undergoing constant improvement. Businesses established in the region can expect workers to have ready and reliable access to air, sea and rail transport. The public transport system in Hong Kong, which includes two high-capacity railway systems, trams, buses, minibuses, taxis and ferries, handles nearly 11m passenger journeys every day.
Public transport facilities, especially rail, are excellent. The mainly underground Mass Transit Railway Corporation (MTRC) has 49 stations covering 80 km of track, and carries 2.3m passengers a day, making it one of the most heavily used mass transit systems in the world. The Airport Express covers the 35-km distance between Chek Lap Kok airport and Central in 23 minutes. The Kowloon-Canton Railway Corporation (KCRC) runs an East Rail line that runs from the Kowloon peninsula (at Hung Hom) to the Chinese border (at Lo Wu), with 13 stations and a 34-km long route. The KCR also operates a light rail system, an East Rail feeder bus, and provides intercity train services from Kowloon to the mainland cities of Guangzhou, Zhaoqing, Shanghai and Beijing.
The rail network is constantly being extended and upgraded. A five-station extension of the MTR system opened in 2002, and the company is to build a further line to connect its Tung Chung line to Pennys Bay, where a Disneyland theme park is being constructed. The line will be completed by 2005. KCRs 30.5-km West Rail line opened on December 20th 2003, connecting West Kowloon with the furthest points in the north-western New Territories. KRC is
Pollution is a concern
also building three extensions to East Rail, including the Hung Hom-Tsim Sha Tsui extension (which is due to open by end-2004), and in June 2002 won the government contract to establish a 17.1-km line connecting Central with Sha Tin by 2008-09.
Bus services, run by five franchise holders, are also very efficient. The three largest companies, Kowloon Motor Bus (KMB), New World First Bus and Citybus, operate nearly 600 bus routes in Hong Kong Island, the Kowloon Peninsula and the New Territories, including about 120 cross-harbour routes and 16 airport routes. The two other operators, Long Win Bus and New Lantao Bus, are smaller companies that service Lantau Island. These services are supplemented by public and private light minibus services, and by minibuses used mainly on contract for carrying tourists, factory workers, schoolchildren and commuters.
Hong Kong also has an extensive network of ferry services. The Star Ferry Company (SFC) operates four cross-harbour passenger services, and provided 27.3m passenger journeys in 2003!almost twice the 14.1m journeys provided by the other main operator, New World First Ferry Company. There is 30 km of tramway track along the north side of Hong Kong Island (which provided 81.7m passenger journeys in 2003); one tramway running to the peak from Central (3.1m passenger journeys in 2003); and around 18,100 taxis operating in Hong Kong (477.2m passenger journeys in 2003). In addition, a system of covered escalators and walkways connecting the business district of Central to the upscale residential area of Mid-levels was opened in 1993 to ease rush-hour traffic.
Hong Kong has 11 road tunnels, including three cross-harbour tunnels. The Tsing Ma bridge system was opened in 1997 to connect Lantau Island with the Kowloon Peninsula to facilitate airport transport needs. The vehicle density on Hong Kongs roads is among the highest in the world. In 2003, according to data released in March 2004, there were 524,253 licensed motor vehicles (including 338,930 licensed private cars) in Hong Kong, competing for space on 1,928 km of roads. The government has attempted to discourage car use by imposing high registration taxes for private cars and compulsory car inspections for vehicles over six years old.
Passenger and freight traffic to and from China has increased rapidly in recent years. In an attempt to resolve the congestion at the boundary crossing that has become a major problem, the government has been working to improve transport links with the mainland. KCRs new Sheung Shui to Lok Ma Chau Spur line, which is being fast-tracked for completion by 2007, will provide much-needed relief at the Lo Wu boundary crossing. A new road link with Guangdong province!the Shenzhen to Hong Kong Western Corridor!is scheduled for completion by 2005. In February 2002 the government approved the construction of the HK$22bn (US$2.8bn) Route 10 superhighway to connect a planned bridge to Shenzhen with Lantau Island through tunnels in Lam Tei and Tai Lam.
Hong Kong has the busiest container ports in the world, handling 19.1m TEUs in 2002. Most throughput is handled by the Kwai Chung container port, with
Bus services
the remainder passing through mid-stream and other wharves. Kwai Chung is currently being expanded, with the 2.6m-TEU capacity Container Terminal 9 (CT9) due to be fully operational by 2005. The efficiency of the port is well- regarded, with the average turnabout time for container vessels being around ten hours. User costs are, however, high, and Hong Kong faces keen competition from other operators, particularly cheaper ports in mainland China.
The Hong Kong international airport at Chek Lap Kok, in the north of Lantau Island, opened in 1998, and is generally regarded as one of the best in the world. A second runway at Chek Lap Kok was opened in May 1999. The airport, designed to cope with up to 45m passengers a year, handled 9.5m arrivals and 9.4m departures in 2003. This was down on the 11.8m arrivals and 11.7m departures in 2002, owing to the regional outbreak of Severe Acute Respiratory Syndrome (SARS), which limited travel to the territory in the middle of 2003.
Hong Kongs telecommunications infrastructure is excellent. Telecoms policy in recent years has been aimed at increasing competition in both the fixed-line and mobile-phone markets. In the mobile-phone market these policies have been extremely successful. Price competition among the six mobile operators has been intense: in May 2004, according to the Office of the Telecom- munications Authority (OFTA), there were 7.5m mobile-phone service subscribers, representing a penetration rate of 110%. Competition in the market for fixed-line services has been slower to develop. Although three new operators entered the market in July 1995, the former monopoly, now named PCCW, still had a market share of 73% at end-2003. The government has had more success in opening the market for international services, where the market share enjoyed by PCCW fell from 65% in early 1998 to 30% in November 2001. Computer use is high; Internet access is mainly via personal computers. Broadband service is available in prime office locations and also increasingly in residential developments. There were 1.23m broadband Internet access customer accounts in 2003, according to the OFTA, up from 989,115 in 2002 and 623,302 in 2001.
Hong Kongs television industry is dominated by two free-to-air broadcasters, Television Broadcasts (TVB) and Asia Television (ATV). Both companies provide English and Chinese channels, with TVB having prime-time ratings three times those of ATV. Numerous other channels are also available through cable and satellite services. Hong Kong has 13 radio channels, operated by three broadcasters!Hong Kong Commercial Radio Broadcast, the governments Radio and Television Hong Kong (RTHK), and Metro Broadcast. Commercial Radio and RTHK are the dominant networks, with Commercial Radio having better ratings than those of RTHK. The South China Morning Post is Hong Kongs highest-selling English-language newspaper. The Oriental Daily and the Apple Daily are the most popular Chinese newspapers, but they are frequently accused of sensationalising news.
The airport
Telecommunications thrive
Energy provision
Hong Kong has no indigenous fuel supplies and imports all its hydrocarbons. The rate for energy consumption per head is one of the highest in Asia. Electricity consumption posted increases of up to 10% in some years in the late 1980s, but since 1990 the rate of increase has slowed. As most of the territorys manufacturing enterprises have been moved to China, consumption by commercial users has increased rapidly: it rose by 16.8% between 1999 and 2003, whereas consumption by industrial users dropped by 15.4% during the same period. Domestic electricity consumption rose by 9.4% between 1999 and 2003. In 2003 electricity consumption increased by 1% compared with 2002 to 138,435 terajoules. Domestic, commercial and industrial use accounted respectively for 24.8%, 64.2% and 10.7% of total consumption.
The availability and reliability of electrical power in Hong Kong is good. Electricity production in Hong Kong in 2003 totalled 127,822 terajoules, an increase of 3.5% year on year. Exports of electricity to China amounted to 10,827 terajoules. Two private companies, Hong Kong Electric (HEC) and CLP Power Hong Kong (CLP Power, formerly known as China Light & Power), supply electricity in the territory. Each has a de facto monopoly in its appointed area! HEC supplies consumers on Hong Kong Island and the nearby islands of Ap Lei Chau and Lamma, whereas CLP Power supplies consumers in Kowloon and the New Territories through its three associated generating companies, Pepco, Kesco and Capco. HEC supplies power from a power station on Lamma. CLP Powers electricity supplies are sourced from three power stations in Hong Kong, at Castle Peak, Black Point and Pennys Bay, as well as from Conghua in Guangzhou and the Daya Bay nuclear power station in Shenzhen (a joint venture between the mainland China state-owned Guangdong Nuclear Investment Company and the Hong Kong Nuclear Investment Company, a wholly owned subsidiary of CLP Power).
HEC and CLP Power supply electricity subject to schemes of control (SOC) agreed with the government. These contracts, the latest of which took effect in 1993, restrict the companies rate of return on capital to an agreed limit, over a fixed period of time, and subject corporate investment plans to government review. The SOC are supposed to prevent companies from using their monopoly power to earn excess profits. The contracts do seem to have prevented electricity prices from rising too rapidly. However, the provision for government oversight has not prevented both HEC and CLP Power from attempting to raise overall profits by investing in excess capacity. Thus, according to a consultancy study commissioned by the government in 1998, reserve margins (excess capacity over peak demand) in the HEC and CLP system were around 25-30%, compared with an international standard of around 15%. The government is expected to change the regulatory regime and introduce greater competition when the current SOCs expire in 2008.
Total gas consumption increased from 26,641 terajoules in 2002 to 27,002 terajoules in 2003, a rise of 1.4%. In 2003 domestic users accounted for about 57.2% of total gas consumption, followed by commercial users (39% of total
All fuels are imported
consumption) and industrial users (3.8% of the total). Two types of gas are available. The Hong Kong and China Gas Company supplies man-made town gas to Hong Kong Island, Kowloon and the New Territories. Town gas, which is produced from naphtha at Ma Tau Kok and Tai Po, was used by more than 1.5m households in 2002.
The other type of gas used is liquefied petroleum gas (LPG), supplied by companies such as Shell, Mobil, Esso, Caltex and China Resources. According to a Housing Authority directive adopted in 1987, LPG should be used only if town gas is not available. The directive banned the installation of gas mains for LPG, and LPG is therefore either supplied to households in 15-kg cylinders or piped from bulk storage and vaporiser installations. Retained imports of LPG and natural gas together amounted to 1.7m tonnes in 2003, down from 2.4m tonnes in 2002.
The economy
Economic structure
Hong Kong is first and foremost a trading centre. It has virtually no natural resource base and is therefore dependent on imports for raw materials, food and fuel. Domestic demand, although increasingly important, is limited by the size of the population. In 2003 total exports and imports of goods and services (national-accounts terms) amounted to HK$2.1trn (US$270bn) and HK$1.99trn respectively, or a combined 335% of current-price GDP.
Main economic indicators, 2003 Real GDP growth (%) 3.2 Consumer price inflation (av; %)a -2.6
Current-account balance (US$ bn) 17.4 Exchange rate (av; HK$:US$) 7.8 Population (year-end; m) 6.8
Foreign debt (year-end; US$ bn)b 59.3
a Composite consumer price index. b Estimate.
Source: Economist Intelligence Unit.
Hong Kong, Singapore, Taiwan and South Korea all started out as low-cost, labour-intensive manufacturing bases, but, whereas Singapore, Taiwan and South Korea have all developed high-technology industries, Hong Kong has become a services centre, in particular for companies (foreign as well as those from Hong Kong) doing business in China. The structure of the economy has therefore changed dramatically over the past decade: the manufacturing sector contributed just 4.4% of GDP in 2002 (the latest available figures), compared with 14.4% in 1991, and in 2002 it employed only 7.5% of the labour force (excluding the civil service). The manufacturing sector has been replaced by a rapidly expanded services sector. In 1991 the tertiary sector generated 72.3% of GDP, but by 2002 it accounted for 84.6% of current-price GDP. Wholesale, retail and import/export trades was one of Hong Kongs two largest service subsectors in 2002; the other was community, social and personal services.
Hong Kongs economy depends on trade
Services replace manufacturing
Hong Kong 23
Owing to the governments aversion to regulation, Hong Kong has traditionally lacked the legislative and institutional measures used elsewhere to encourage competition. Partly because of this, there has been criticism that the domestic economy is monopolised by a few powerful local conglomerates. For instance, just two chains!Wellcome and Park n Shop!dominate the supermarket industry. These two firms are in turn owned by conglomerates, Jardine Matheson and Hutchison Whampoa respectively, which have a range of other interests in Hong Kong, owning, for example, major land developers. The government has taken some steps to increase competition in recent years, although its efforts have so far been limited largely to those areas over which it exerts a direct influence. However, although the economy is not as competitive as the government tends to claim, it is not as monopolised as critics allege either. According to an IMF working report issued in August 2000, Hong Kongs economy is neither significantly more nor significantly less competitive than the average OECD country.
Comparative economic indicators, 2003
Hong Kong Singapore Taiwan South Korea Japan GDP (US$ bn) 156.7 91.3 286.1 605.0 4,296.5 GDP per head (US$ on an exchange-rate basis) 22,730 21,790 12,650 12,620 33,774 Consumer price inflation (av; %) -2.6 0.5 -0.3 3.5 -0.3
Current-account balance (US$ bn) 17.4 26.4 29.2 12.3 136.2 Current-account balance (% of GDP) 11.1 28.8 10.2 2.0 3.2
Exports of goods fob (US$ bn) 224.7 148.2 143.4 197.6 449.1 Imports of goods fob (US$ bn) 230.4 123.7 118.5 175.5 342.7
Source: Economist Intelligence Unit.
Economic policy
Economic policy in British-ruled Hong Kong was based on the principle of positive non-interventionism. This involved keeping taxes low and limiting government expenditure to the provision of essential support services such as housing, education and healthcare. Regulation was also limited. Major utilities, which in many other places in the world were originally state monopolies, have largely been in private hands in Hong Kong. Unlike the governments of the other Asian tiger economies!Singapore, South Korea and Taiwan!that of Hong Kong, while under British sovereignty, generally refrained from promoting specific industries.
Economic policy in post-handover Hong Kong is supposed to be little different. The mini-constitution of the Hong Kong Special Administrative Region (SAR), the Basic Law, guarantees that Hong Kong will retain its free-trade, free enterprise, low-tax environment for at least 50 years. Specific provisions stipulate that:
• the Hong Kong SAR has independent finances; the SAR government keeps its revenue and does not remit any of it to the central government in Beijing; the central government does not levy taxes in Hong Kong;
• the government aims to keep spending within the limits of revenue, and deficits should be avoided;
Positive non-interventionism is the guiding principle
24 Hong Kong
• the Hong Kong dollar has been retained and continues to be backed by a 100% reserve fund (the Basic Law does not mention any particular exchange-rate regime, such as a fixed link to the US dollar);
• the Hong Kong dollar remains convertible and exchange controls may not be imposed; the free flow of capital into and out of the SAR is safeguarded; and
• Hong Kong remains a free port, pursuing a free-trade policy, although tariffs may be imposed in unspecified circumstances.
These provisions have not limited the governments room for manoeuvre so much that it cannot make controversial decisions. In August 1998 it spent HK$118.1bn (US$15.2bn) buying shares on the local stockmarket. The government claimed that this intervention was made necessary by exceptional circumstances, namely intense attacks on the fixed link between the Hong Kong and US dollars coupled with a concerted effort to drive the stockmarket down (the so-called Double Play). Officials insisted that the governments intervention on the stockmarket was an exercise that it was not keen to repeat, and soon afterwards listed a tracker fund (TraHK) on the stockmarket as a vehicle to dispose of the shares acquired (the TraHK tracks the performance of the benchmark Hang Seng Index). By mid-October 2002 HK$140.4bn (US$18bn) of TraHK shares had been sold.
Intervention on the scale of the share buying of 1998 remains exceptional in Hong Kong. At the same time, however, the government since the handover of sovereignty by the UK does seem to have taken a more active role in economic development than was the case with British colonial administrations. In 1999, for example, in an apparent attempt to encourage the development of information-technology businesses in Hong Kong, the government initiated a Cyberport project (critics, however, attacked the project for being more like an old-fashioned property development than a high-technology park). Later in the same year the government established an inward investment agency, InvestHK. This marked a change in the tone of official policy; previously Hong Kongs government had adopted a relatively passive attitude to the issue of foreign investment, believing that the territorys advantages!a reputation for economic stability, the firm rule of law, its free-market economic policies and geographic proximity to mainland China!were enough to attract investors.
InvestHK was heavily involved in the governments decision to agree to invest HK$22.5bn to lure Walt Disney to establish a theme park in Hong Kong; the governments large investment secured it majority ownership of the project. (The Disneyland theme park is due to open in 2005.) In 2002 the former financial secretary, Antony Leung, appeared to confirm the shift away from positive non- interventionism when he described the governments economic role as that of a proactive market enabler. Mr Leung identified four industries that he believed to be particularly important to Hong Kong: financial services, logistics, tourism, and producer and professional services.
The government is to be a proactive market enabler
The government buys shares
The Closer Economic Partnership Agreement
Goods
The Closer Economic Partnership Agreement (CEPA) covers areas of commerce between Hong Kong and the mainland, including trade in goods, trade in services and investment facilitation. Under CEPA, 273 classes of goods originating in Hong Kong have since January 2004 qualified for zero import tariffs when entering the mainland. These include electrical and electronic products, plastic and paper articles, textiles and clothing, chemical products, pharmaceuticals, clocks and watches, jewellery, cosmetics and metal products. It is estimated that CEPA will provide annual tariff savings of HK$750m (US$96m) to Hong Kong exporters.
Services
The free-trade agreement has also liberalised access for Hong Kong companies providing 18 classes of commercial services on the mainland. These include management consulting, the organisation of conventions, advertising, accounting, construction and real-estate services, medical and dental services, distribution, logistics, freight forwarding, storage and warehousing, transport, tourism, audio- visual services, legal services, banking, securities, insurance and telecommunications.
Customs clearance
The agreement provides for simplified procedures and strengthened co-operation between Hong Kong and the mainland with regard to customs clearance, quarantine and inspection, quality assurance and food safety, the development of small and medium-sized enterprises, the development of Chinese medicine and medical products, e-commerce, trade and investment promotion, and transparency in law and regulations.
Financial sector
Banks in Hong Kong have been allowed to offer products and services based on the Chinese renminbi. Local banks have begun to offer deposit-taking, remittance, foreign-exchange and credit-card services denominated in the yuan. The asset threshold for banks entering the mainland has been dropped from US$20bn to US$6bn. Hong Kong insurance firms are also permitted to own up to 25% of mainland insurance companies.
More recently, the conclusion of a Closer Economic Partnership Agreement (CEPA) with mainland China has seen China itself become a proactive enabler of the Hong Kong market. Under the agreement signed on June 29th 2003 (supplemented by six annexes in September), from January 2004 China has allowed duty-free access to 273 categories of goods manufactured in Hong Kong and access to 18 services sectors has been liberalised for Hong Kong companies. The central government has also taken steps to liberalise tourism to Hong Kong, resulting in a tourist boom in the territory from mid-2003, and the central government has intervened to ensure that the construction of a bridge between Hong Kong, Macau and Zhuhai in Guangdong province goes ahead.
Since 1983 the Hong Kong dollar has been tied to the US dollar through a currency board. In such a system, all local notes and coins have to be backed by foreign-exchange reserves at the pegged rate of HK$7.8:US$1. Notes and coins
Integration with China under CEPA
The fixed link to the US dollar
26 Hong Kong
are issued only when there is sufficient foreign exchange to back them. However, as a result of the fixed link the floor for interest rates in Hong Kong is determined by US rates. Consequently, as the economy fell into recession during the Asian financial crisis of 1997-98, nominal interest rates remained high as the US economy continued to boom. Real rates were higher still! consumer prices started to fall in late 1998, and were still falling on a year-on- year basis in mid-2004. However, the rate of deflation had fallen to only 0.2% year on year by June 2004. This, coupled with a sharp fall in US interest rates, brought down real interest rates in Hong Kong in 2001-04. By 2004 real interest rates were running at very low levels, thus helping to fuel the economic recovery currently under way in the territory.
The five consecutive years of falling prices were a natural consequence of the currency board system, and helped Hong Kong to regain price-competitiveness. This adjustment process, which would elsewhere have taken place through a rather quicker change in the nominal exchange rate, was clearly painful for the domestic economy, and the virtues of maintaining the fixed exchange rate were widely debated during the downturn. However, officials generally believe that the stability provided by the currency board system over the past 20 years has served Hong Kong well.
Important policy events
1999
The government awards the right to develop a HK$12.5bn (US$1.6bn) Cyberport to Richard Li, the son of Hong Kongs most prominent tycoon, Li Ka-shing. The government announces that it will cut its holdings of Hong Kong equities by about two-thirds, a process that begins in October. On October 31st the government reaches an agreement with Walt Disney, allowing the US company to establish a theme park in Hong Kong. The government agrees to invest a total of HK$22.5bn, gaining 57% of the project management company.
2000
In his budget for fiscal year 2000/01 (April-March) the financial secretary, Donald Tsang, shies away from reforming Hong Kongs tax regime. He does, however, announce the establishment of two committees, one to monitor the relationship between recurrent revenue and GDP growth, and the other to investigate the suitability of introducing a new broad-based tax in Hong Kong.
2001
Mr Tsang presents a cautious budget for 2001/02, once again eschewing tax reform, but also refraining from remarkable expenditure. Infrastructure and economic services receive the largest increases in funding, whereas housing spending is cut by 28% compared with the previous fiscal year.
2002
The new financial secretary, Anthony Leung, describes the governments economic role as that of a proactive market enabler. Mr Leung said that Hong Kong needed to focus on high value-added economic activities, naming financial services, logistics, tourism, and producer and professional services as being of particular importance. In
Hong Kong 27
July the Legislative Council approves a cut in civil service salaries. The government suspends land auctions until the end of 2003 in order to support property prices.
2003
In the budget for 2003/04, Mr Leung announces a range of tax rises in order to balance the budget by 2006/07, a target that is later abandoned by Mr Leungs successor, Henry Tang, in August. In April the local outbreak of Severe Acute Respiratory Syndrome (SARS) forces the government to unveil an HK$11.8bn (US$1.5bn) package of economic relief measures. In June the Closer Economic Partnership Agreement (CEPA) is signed with China.
2004
CEPA comes into force on January 1st. Land sales are resumed on May 26th for the first time since they were frozen in November 2002. In April the government sells HK$6bn of securitised bonds backed by tunnel and bridge revenue. In July the government sells HK$20bn in sovereign bonds to promote the development of a local debt market.
Rapid asset price inflation in the run-up to 1997 was not just because of low interest rates. It also reflected the last departing colonial administrations decision to avoid accusations of asset-stripping Hong Kong by limiting land sales. The first government following the handover undertook to build at least 85,000 (public and private) residential housing units a year from fiscal year 1999/2000 (April-March). At the same time a huge amount of commercial space related to the airport railway project came on to the market. These pressures, combined with rising real interest rates and the 1997-98 Asian financial crisis, caused property prices to fall by 44% between their peak in October 1997 and October 1998.
In June 1998 officials declared a nine-month moratorium on land sales. The government began to sell land again thereafter, but according to new rules. As before, officials would state at the beginning of each year the plots that would be made available during the following twelve months. A reserve list of plots was, however, also established, with this land being auctioned as well if developers expressed a prior interest. However, this system did not create much more buoyancy in the property market; after rising briefly at the end of 1998, prices fell once again. The Hong Kong property market remained depressed until late 2003, when a pick-up in the real-estate market began to set in.
A reduction in its role in the residential property market is being sought by the government, which had to abandon the promise of providing 85,000 residential properties a year. There have been a series of moratoriums on sales of Housing Ownership Scheme (HOS) flats, which are mainly built by the government for sale at below-market prices. In June 2002 the government announced that sales of HOS flats would on not exceed 9,000 a year until 2005/06, when the ceiling would be lowered to 2,000 flats a year. This marked a significant change!more than 10,000 new HOS flats had been sold in every year in 1996/97-2000/01, with more than 30,000 being sold in 1997/98 alone. In announcing this reform, officials said the government was still committed to providing 50,000 housing opportunities each year, but that in
Property policy is crucial
the future this would be achieved through the provision of loans, rather than the building of flats.
The fall in property prices in 1997-2003 did not just affect the companies that develop property and the individuals that buy it. As the monopoly supplier, Hong Kongs government has derived a significant proportion of its revenue from land sales. Government revenue from land premiums fell from HK$54.8bn in 1996/97 to just HK$29.5bn in 2001/02, and government revenue from stamp duty declined from a peak of HK$29.1bn in 1997/98 to HK$7.5bn in 2002/03. The governments other major sources of revenue are corporate tax and the salaries tax. In a reflection of Hong Kongs low marginal rates of personal income tax (just 16%) and high personal allowances, however, revenue from the salaries tax was only HK$28.8bn in 2002/03, accounting for just 2.3% of GDP.
The size of these non-property-related income streams is clearly dependent on the health of the economy. Furthermore, along with the collapse in property prices in 1997-2003, Hong Kongs economy has suffered from three recessions since the 1997 handover, and total government revenue consequently fell from a peak of HK$281.2bn in 1997/98 to HK$177.5bn in 2002/03. At the same time, public expenditure rose (public spending includes government expenditure, spending by the Trading Funds and the Housing Authority and payments from the Lotteries Fund). This is partly owing to the work of automatic stabilisers, such as public social welfare spending, but new policy initiatives have also pushed up government spending. As a result, public expenditure rose from HK$194.4bn in 1997/98 to HK$239.2bn in 2002/03.
The economic recovery produced a strong rise in revenue collection in 2003/04, to HK$207.3bn, even as expenditure remained broadly flat at HK$247.5bn. It is nevertheless clear that Hong Kong has a large structural fiscal deficit: a deficit has been recorded in four of the past five years. In his 2002/03 budget speech, Mr Leung said that he would seek to bring the governments finances back into balance within a five-year period, partly by trimming public expenditure as a proportion of GDP to 20% or less. Mr Leung also announced a plan to cut civil servants pay by 4.75%, but in the end he had to settle for reductions of between 1.6% per cent and 4.4%, and implementing even these more moderate cuts triggered considerable amounts of controversy.
In the budget for 2003/04, Mr Leung increased the highest income-tax rate by 1 percentage point to 16%, and reduced tax allowances, other marginal tax rates and tax bands to 1997/98 levels. A 1-percentage-point increase in property tax over two years, to 16%, was also announced. The corporate tax rate was raised by 1.5 percentage points to 17.5%, and the air passenger departure tax was increased by 50% to HK$120 (US$15). In a bid to raise more revenue, football betting has been legalised and will be taxed.
Mr Leungs successor as financial secretary, Henry Tang, who was appointed in August 2003, has said that the budget will not be balanced until 2008. Given the apparent stickiness of public-sector spending, it is likely that tax changes will be needed at some point in the future to balance the budget. However, Mr Tangs maiden budget, for 2004/05, contained no new taxes and no specific
Government revenue relies on land sales
Government finances deteriorate
Hong Kong 29
spending cuts. The increases in the profit tax for non-corporate taxpayers and in the property tax!both announced by Mr Leung in the preceding years budget! were implemented, and Mr Tang confirmed that the government still intended to introduce a goods and services tax. Plans were also announced for a HK$20bn sovereign bond sale, which took place at end-July, in order to promote the development of a local debt market.
Summary of recurrent public expenditure (HK$ m unless otherwise indicated; fiscal years Apr-Mar)
2003/04a 2004/05 b % real change Community & external relations 7,350 7,116 -4.2
Economic 10,857 10,844 -0.5 Education 46,761 49,189 2.4
Environment & food 8,315 8,198 -4.4 Health 31,706 30,325 -2.1 Housing 11,849 12,806 0.2 Infrastructure 11,392 11,367 -1.4 Security 24,483 23,949 -1.6 Social welfare 32,512 33,715 6.3 Support 29,235 31,296 0.9 Total recurrent expenditure 214,460 218,805 0.7 a Revised estimates. b Estimates.
Source: Hong Kong government, 2004/05 budget.
Economic performance
Annual GDP growth averaged 7.7% in real terms in 1980-88, although the annual rates varied from 0.4% in 1985 to 13% in 1987. A sharp slowdown in China in 1989-90 and the negative impact on local confidence of the June 1989 Beijing massacre trimmed the growth rate in those years, but between 1991 and 1994 GDP growth recovered. After a slowdown in growth in 1995-96 as the Hong Kong dollar strengthened along with the US dollar, a bubble in property prices saw strong growth up to the third quarter of 1997. This boom was brought to an abrupt halt in October 1997, when speculative attacks against the fixed link between the Hong Kong and US dollars produced a sharp rise in interest rates.
Continued high real interest rates and a collapse in regional demand caused Hong Kongs economy to contract by 5% in 1998, the most severe recession in a generation. The contraction in GDP bottomed out in the third quarter of 1998 and the economy then recovered strongly, expanding by 3.4% in 1999 and by 10.2% in 2000. The recovery was, however, short-lived. Hit by the US-led global economic downturn of 2001, Hong Kongs economy grew by just 0.5% in 2001, contracting year on year in the final two quarters of the year, and again in the first three months of 2002. A gradual recovery in the remainder of 2002 allowed GDP growth to rise to 1.9% for the year. GDP growth in 2003 was depressed by the local outbreak of Severe Acute Respiratory Syndrome (SARS), which sharply cut visitor arrivals to the territory, especially in the second quarter, and pushed down retail sales. However, a recovery set in during the second half of the year, aided by rising tourist arrivals from the Chinese mainland, which lifted retail sales. As a result, GDP grew by 3.2% in 2003 as a
Highly variable rates of economic growth
30 Hong Kong
whole. Economic growth has remained strong in 2004, aided by the boom in neighbouring mainland China and improving growth in OECD economies.
Gross domestic product (% real change)
Annual average 2003 1999-2003
GDP 3.2 3.8 Private consumption -0.2 1.9
Government consumption 1

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