COUNTRY REPORT
Hong Kong Macau At a glance: 2001-02
OVERVIEW The increasing number of protests by various disgruntled interest groups in recent months indicates the potential for increased social discontent, which has remained low-key in recent decades. Tung Chee-hwa’s five-year term of office as chief executive ends in 2002. As he is not directly elected, it is conceivable that he will be returned for a second term even if his current unpopularity is maintained. Real GDP is estimated to expand by 9.7% in 2000, before slowing to 4.8% in 2001 and 4.5% in 2002. After falling by an estimated 3.4% in 2000, consumer prices are expected to start recovering in 2001, rising by 2.3% in 2001 and 3.7% in 2002. The Hong Kong dollar will remain fixed to the US dollar. The current-account surplus is expected to narrow in 2001-02, with the surplus likely to total around US$0.8bn (0.5% of GDP) and US$0.4bn (0.2% of GDP) in 2001 and 2002 respectively. Key changes from last month Political outlook • Speculation is growing that the administration will enact the Basic Law Article 23 provisions, which require the SAR “on its own” to legislate against treason, subversion, sedition and secession. This would undermine press freedoms in the territory. Economic policy outlook • Competition and competitiveness issues have dominated much discussion in the press and among business and government officials over the past quarter, and look set to continue. Pressure for either comprehensive competition policy laws or more active sectoral laws to regulate competition is increasing. Economic forecast • Strong real GDP growth of 10.4% year on year in the third quarter of 2000 has led us to revise upwards our forecast for growth in 2000 to 9.7%. • As a result of the continued weakness of consumer prices, we have revised downwards our forecast for consumer price deflation to 3.4% in 2000. December 2000
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ISSN 0269-6762
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Contents
3 Summary
Hong Kong
5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2001-02 8 Political outlook 9 Economic policy outlook 10 Economic forecast 14 The political scene 19 Economic policy 22 The domestic economy 22 Output and demand 23 Employment, wages and prices 25 Financial indicators 27 Sectoral trends 29 Foreign trade and payments
Macau
32 Political structure 33 Economic structure 33 Annual indicators 34 Outlook for 2001-02 34 Political outlook 34 Economic forecast 36 The political scene 37 The domestic economy and economic policy
List of tables
11 Hong Kong: international assumptions summary 12 Hong Kong: forecast summary 13 Hong Kong: gross domestic product by expenditure 23 Hong Kong: gross domestic product estimates 24 Hong Kong: employment by sector 25 Hong Kong: inflation indicators 26 Hong Kong: financial indicators 29 Hong Kong: balance of trade, Jan-Sep 29 Hong Kong: patterns of trade, Jan-Sep
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 2
31 Hong Kong: current account 37 Macau: tourism statistics, 2000 38 Macau: merchandise trade account, Jan-Sep 38 Macau: domestic exports by main market 38 Macau: imports by main market
List of figures
13 Hong Kong: gross domestic product 13 Hong Kong: Hong Kong dollar real exchange rates 23 Hong Kong: quarterly gross domestic product 24 Hong Kong: inflation 31 Hong Kong: external balances 35 Macau: gross domestic product 35 Macau: pacata real exchange rates
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 3
Summary
December 2000
Outlook for 2000-01 The issue of Taiwan could threaten Hong Kong’s autonomy during the forecast period. The EIU does not expect an extension of democratic accountability. In this year’s policy address delivered on October 11th, the current chief executive, Tung Chee-hwa, emphasised that the “process of adjustment and adaptation” would have to “take time” because Hong Kong had inherited “systems and institutions” from before the 1997 handover. After expanding by an estimated 9.7% in 2000, real GDP growth is forecast at 4.8% and 4.5% in 2001 and 2002 respectively. Consumer prices are estimated to fall by 3.4% in 2000, before rising by 2.3% in 2001 and 3.7% in 2002. The Hong Kong dollar will remain fixed to the US dollar. The current-account surplus will steadily narrow in 2001-02.
The political scene Despite party splits and a loss of support, the Democratic Party (DP) narrowly won the highest number of seats at the Legislative Council (Legco) elections on September 10th. A report compiled by a member of the European Parliament, John Cushnahan (and endorsed by the European Parliament), called for the extension of universal franchise for the election of the Legco and the chief executive. In his policy address in October the chief executive, Mr Tung admitted mistakes in preparing and implementing some reforms, and pledged more careful and comprehensive assessments and better preparation before presenting reforms, but interspersed his speech with calls for more harmony.
Economic policy Nothing in the Policy Address will act to reduce mounting concern at rising income inequalities. The chief executive announced that extra funding to combat poverty over the next two years will total just HK$2.7bn (US$346m: equivalent to just 1% of planned public expenditure). Instead, he argued that widening income disparities could only be corrected by long-term solutions, especially better education. A report for the European Parliament questioned the dominance of large sectors of the economy by a small group of tycoons, especially that of the Li Ka-shing family, and argued for stiffer competition laws, including anti-trust legislation.
The economy Real GDP continued to expand very strongly in the third quarter of the year, rising by 10.4% year on year. This follows growth of 14.2% year on year and 10.9% in the first and second quarters of the year respectively. In spite of the strength of the economic recovery, prices continued to fall in the third quarter, albeit at a slower rate: the Composite Consumer Price Index (CCPI) fell by 2.8% year on year, compared to 5.1% year on year and 4.5% in the first and second quarters respectively.
Foreign trade and The merchandise trade deficit has widened. China and the US remain the payments largest export markets. The current-account surplus narrowed in the first quarter of 2000.
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Macau
Outlook for 2000-01 Mainland officials are unlikely to have cause to intervene in the domestic affairs of the Macau Special Administrative Region (SAR). The new government will have to make decisions relatively quickly with regard to the SAR’s largest industry, gambling. GDP growth is expected to remain only moderate in 2001- 02. Interest rates will remain high, and the economy will continue to be dragged down by an oversupply of property.
The political scene The chief executive, Edmund Ho Hau Wah, gave his second policy address on November 9th. He concentrated on outlining measures to accelerate the SAR’s weak economic recovery. Mr Ho’s contention that the “one country, two systems” principle was working very well appears to be shared by the population. According to an opinion poll in November, conducted by researchers from the University of Macau, 85% of those polled expressed themselves satisfied with the performance of the SAR government since it took power at the end of December 1999.
The economy The government has indicated that it is willing to see more competition within the SAR’s highly lucrative gambling industry. Tourist numbers have continued to rise strongly, as Macau has profited from the Asian recovery and a decline in gang-related violence. Export growth accelerated in the third quarter of 2000, underpinning a sharp rise in the trade surplus. Over the first three quarters of 2000, the trade surplus was MPtc2.1bn (US$263m), with exports and imports rising by 14.7% year on year and 9.4% respectively.
Editor: Simon Tilford Editorial closing date December 1st 2000 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 Hong Kong 5
Hong Kong
Political structure
Official name The Hong Kong Special Administrative Region (SAR) of the People’s Republic of China
Form of state Special administrative region of China, with its own constitution (the Basic Law), guaranteeing a “high degree of autonomy” for the next 48 years. Headed by a chief executive appointed by China
The executive 14-member Executive Council (Exco), serving in an advisory role for the chief executive
Head of state Jiang Zemin, president of the People’s Republic of China
Legislature Unicameral Legislative Council (Legco), comprising 20 directly elected members, 30 members elected by functional constituencies and 10 elected by an election committee comprising mostly delegates chosen by functional constituencies. Legco was temporarily replaced by the Provisional Legislative Council (PLC) from July 1997 to April 1998
Local government The current two municipal councils (the Urban Council and the Regional Council), the second tier of government, are being merged with the third tier, the district boards, in elections scheduled for November 2000. While nearly all seats to these bodies were elected in 1994 and 1995, 20% of the renamed district boards will now be appointed by the government
Legal system Based on English law, with foreign affairs and defence the responsibility of the central government in Beijing
Elections September 1994 (district boards); March 1995 (municipal councils): the chief executive appointed extra members to these bodies in June 1997. The Provisional Legislative Council (PLC), which replaced the dissolved Legco on July 1st 1997, was itself replaced when a new Legco was elected in May 1998. Next Legco election due in 2000
Main political parties The pro-democracy Democratic Party (DP, or Democrats) is the largest party in Legco. The second largest is the conservative Liberal Party (LP), which represents business interests, and the third is the pro-China Democratic Alliance for the Betterment of Hong Kong (DAB)
Chief executive Tung Chee-hwa Chief secretary for administration Anson Chan Financial secretary Donald Tsang Secretary for justice Elsie Leung
Secretaries Constitutional affairs Michael Suen Economic services Stephen Ip Education & manpower Joseph Wong Financial services Raphael Hui Treasury Denise Yue Trade & industry Chau Tak-hay Head of central policy unit Gordon Siu
Chief executive of the Hong Kong Monetary Authority Joseph Yam
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 6 Hong Kong
Economic structure
Annual indicators
1996 1997 1998 1999 2000a GDP at market prices (HK$ bn) 1,191.9 1,323.9 1,266.8 1,232.2 1,196.5 GDP (US$ bn) 154.1 171.0 163.6 158.8 153.4 Real GDP growth (%) 4.5 5.0 –5.1 3.0 9.7 Consumer price inflation (av; %) 6.4 5.7 2.8 –4.0 –3.1 Population (m) 6.3 6.5 6.7 6.8 7.0 Exports of goods fob (US$ bn) 180.7 192.2 175.8 174.7 204.0 Imports of goods fob (US$ bn) 199.1 209.5 183.7 177.9 214.7 Current-account balance (US$ bn) –2.2 –6.2 2.9 9.3 3.0 Foreign-exchange reserves excl gold (US$ m) 63,808.0 92,804.0 89,601.0 96,236.0 97,218.0 Total external debt (US$ bn) 38.1 40.4 48.7 53.5 56.5 Debt-service ratio, paid (%) 2.0 1.5 2.5 3.0 2.8 Exchange rate (av) HK$:US$ 7.73 7.74 7.75 7.76 7.80
November 30th 2000 HK$7.80:US$1 Origins of gross domestic product 1998 % of total Components of gross domestic product 1999 % of total Primary industries 0.1 Private consumption 60.2 Manufacturing 6.5 Government consumption 9.8 Utilities 2.4 Gross fixed capital formation 25.7 Transport, storage & communications 9.1 Stockbuilding –0.3 Construction 5.8 Exports of goods & services 132.0 Wholesale & retail import & export trade 25.4 Imports of goods & services –127.4 Finance, insurance, real estate & business services 26.2 Total at current market prices 100.0 Total incl others at factor cost 100.0
Principal domestic exports fob 1999 US$ m Principal imports cif 1999 US$ m Clothing 9,519 Consumer goods 65,174 Electrical machinery & apparatus 3,050 Raw materials & semi-manufactures 60,494 Textiles 1,216 Capital goods 42,043 Office machinery 803 Foodstuffs 7,335 Watches, clocks & photographic equipment 646 Fuels 3,508 Total incl others 21,872 Total 178,554
Main destinations of exports 1999 % of total Main origins of imports 1999 % of total China 33.4 China 43.6 US 23.8 Japan 11.7 Japan 5.4 Taiwan 7.2 UK 4.1 US 7.1 a EIU estimates.
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Quarterly indicators
1998 1999 2000 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Output GDP at constant 1990 prices (HK$ bn) 202.3 183.3 192.5 212.6 221.0 209.3 213.6 234.8 % change, year on year –5.7 –2.9 1.1 4.4 9.2 14.2 10.9 10.4 Manufacturing index (1986=100) 111 91 104 110 108 90 103 n/a % change, year on year –14.0 –9.9 –7.1 –6.0 –2.7 –1.1 –1.0 n/a Employment and prices Employment (end-period;'000) Internal tradea 913.1 976.8 966.2 997.5 1,002.3 1,027.9 1,036.4 n/a Financial servicesb 390.5 397.9 409.2 406.9 415.3 414.8 429.3 n/a Manufacturing 245.5 248.6 253.5 244.5 244.7 233.7 238.8 n/a Unemployment rate (% of the labour force; seasonally adjusted) 5.5 6.0 6.2 6.1 6.1 5.6 5.2 4.9 Consumer prices(1994/95=100) CPI (A)c 115.1 115.3 113.9 112.0 111.7 110.6 110.0 109.7 % change, year on year –0.8 –1.5 –3.5 –5.0 –3.0 –4.1 –3.4 –2.1 Composite CPI 116.1 115.5 114.3 111.8 111.3 109.6 109.2 108.6 % change, year on year –0.8 –0.9 –4.0 –5.9 –4.1 –5.1 –4.5 –2.8 Financial indicators Exchange rate HK$:US$ (av) 7.74 7.75 7.75 7.76 7.77 7.78 7.79 7.80 HK$:US$ (end-period) 7.75 7.75 7.76 7.77 7.77 7.79 7.79 7.80 Interest rates (av; %) Prime lending 9.42 8.75 8.33 8.42 8.50 8.75 9.33 9.50 Money market 5.88 5.90 5.11 5.42 5.94 5.69 6.04 5.90 M1 (end-period; HK$ bn) 197.67 200.16 201.21 206.41 225.16 220.38 215.21 n/a % change, year on year –5.0 –0.9 6.9 9.4 13.8 10.1 7.0 n/a M2 (end-period; HK$ bn) 3,066.1 3,075.1 3,120.7 3,225.4 3,313.5 3,325.6 3,428.4 n/a % change, year on year 11.8 9.5 10.8 7.9 8.1 8.1 9.9 n/a Hang Seng stockmarket index (end-period; Jul 31st 1967=100) 10,048.6 10,942.2 13,532.1 12,733.2 16,962.1 17,406.5 16,155.8 15,649.0 % change, year on year –6.3 –5.0 58.4 61.5 68.8 59.1 19.4 22.9 Sectoral trends Building work completed (private; usable floor area; ‘000 sq m) Total 482 492 767 498 822 355 408 n/a Commercial 105 52 54 150 115 9 42 n/a Passenger arrivals ('000) 15,480 15,251 15,865 16,389 17,056 16,729 17,924 n/a Retail sales (1994/95=100) (Value; % change, year on year) –18.5 –13.7 –7.9 –7.4 –3.1 7.5 5.0 1.8 (Volume; % change, year on year) –16.3 –10.0 –1.6 1.8 4.6 14.3 10.7 5.8 Foreign trade (HK$ bn) Exports fob 338.6 283.1 325.7 368.0 373.8 339.9 382.1 432.6 Re-exports fob 292.6 246.8 284.0 321.1 328.0 298.3 337.7 382.2 Imports cif –346.8 –296.0 –337.9 –374.4 –385.5 –363.6 –406.8 –449.4 Trade balance –8.2 –12.9 –12.2 –6.5 –11.7 –23.7 –24.7 –16.8 Foreign reserves (US$ bn) Reserves excl gold (end-period) 89.65 89.51 88.52 90.52 96.24 93.81 97.08 n/a a Wholesale, retail and import/export trades, restaurants and hotels. b Financing, insurance, real estate and business services. c Low income group. Sources: Census and Statistics Department. IMF, International Financial Statistics.
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 8 Hong Kong
Outlook for 2001-02
Political outlook
Domestic politics As guaranteed by the Basic Law of the Hong Kong Special Administrative Region (SAR), the territory’s post-handover mini-constitution, Hong Kong will retain a high degree of autonomy vis-à-vis China’s central government. China will continue to refrain from direct intervention, except in the areas of defence and foreign affairs, where the Basic Law explicitly enjoins it to take sole charge. The main threat to the rule of law will continue to come from within Hong Kong, as evidenced in 1999 by the Hong Kong government’s appeal over the head of the Court of Final Appeal to the Standing Committee of China’s rubber-stamp parliament, the National People’s Congress (NPC), regarding the right of abode in the SAR. The international uproar of disapproval that greeted this decision was loud enough to prompt the government to announce that it will only make an appeal to the NPC Standing Committee in exceptional circumstances, so that it will not have regular recourse to this procedure.
The increasing number of protests by various disgruntled interest groups in recent months indicates the potential for the eruption of social discontent, which has remained low-key in recent decades. Although GDP per head remains among the highest in the world, the distribution of income is wider than in other economies at a similar level of development, and public awareness of—and dissatisfaction with—this inequality is increasing. The migration of manufacturing to the mainland has left a large pool of long-term (effectively permanent) unemployment among middle-aged men with redundant skills and limited basic education. If this group is not given a place in civil society, it will provide the fuel for social disorder, whether in the form of crime or organised protest, that will be more difficult to control than the handful of professional protesters that the police are accustomed to confronting.
The executive-dominated system established under British colonial rule has survived the 1997 handover to China and will continue during the forecast period with no effective challenge. Despite signs of growing concern at the reluctance to increase democratic accountability in Hong Kong (a report compiled by an member of the European Parliament, John Cushnahan, and endorsed by the European Parliament), called for the extension of universal franchise for the election of the Legislative Council (Legco) and the chief executive. The report also questioned the domination of large sectors of the economy by a small group of tycoons, especially that of the Li Ka-shing family, and argued for stiffer competition laws, including anti-trust legislation. While the Hong Kong government can justly claim that Hong Kong remains one of the freest economies in the world, it will have to move to head off concerns over the power of particular business interest groups if Hong Kong is to retain its competitive position as one of Asia’s pre-eminent locations for foreign investors.
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The EIU does not expect an extension of democratic accountability in the forecast period. In this year’s policy address delivered on October 11th, the current chief executive, Tung Chee-hwa promised to enhance the accountability of top civil servants, implicitly ruling out the establishment of a ministerial system. He also promised to improve communications between the executive and the legislature. But he declined to pronounce judgement on the speed of political reform.
Election watch The Legco election on September 10th produced no great change in the composition of the administration. Voters for the 24 directly elected geographical constituency seats showed their disdain for a process in which they are not allowed to choose the majority of the 60 Legco representatives by staying away in droves: turnout was 43.6%, nearly 10 percentage points lower than in the previous election. Half the seats in Legco represent functional constituencies, varying in size from 143 “electors” (finance) to 71,284 (education); turnout for the larger functional constituencies was similar to that in the geographical constituencies, but reached up to 90% in the smaller ones. The remaining six seats were filled by the Election Committee, which is henceforth defunct.
Mr Tung’s five-year term of office as chief executive ends in 2002. As he is not directly elected, it is conceivable that he will be returned for a second term, even if his current unpopularity is maintained. Opinion polls have consistently shown the chief secretary for administration, Anson Chan, to be the person most voters would choose as chief executive if a full and free election were allowed to take place. Ms Chan has never said that she would put herself forward in 2002, but neither has she ruled out the possibility. By remaining in her post beyond the usual retirement age, she has left open the possibility that she will emerge as a candidate as the “election” approaches. However, it is unlikely that China would allow Ms Chan to take the reins of power, as she was originally a Patten appointee and has often voiced staunch support for democracy in Hong Kong. Instead, it seems more probable that Mr Tung will seek, and be granted, a second term. His policy address, which concentrated on popular issues such as education and helping the poor, appears to have been designed as an early election address.
Economic policy outlook
Policy trends Although economic policy during the forecast period will remain broadly non- interventionist, the government will seek in 2001-02 to diversify the economy away from its traditional dependence on property development and financial services. Taxes will remain low, but new official levies may be announced in the second half of the forecast period as officials try to broaden the government’s revenue base. With the Hong Kong dollar remaining fixed to the US dollar throughout the forecast period, the local authorities will have little ability to manipulate monetary conditions in 2001-02. Local nominal interest rates will, instead, continue to move in line with those in the US.
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Fiscal policy The government’s fears, enunciated in this year’s budget, of the possible emergence of a large and growing budget deficit, are exaggerated. The official forecast of a deficit in the current (2000/01) financial year of HK$6.2bn (US$795m) is likely to be undershot and is quite small as a proportion of the government’s fiscal reserve, let alone GDP. The steady economic recovery will help boost revenue, while the government’s civil service reforms will restrain the growth in public spending. The budget deficit, although unintentional, has helped to stimulate the recovery, which was initially export-led. With the economy growing at around its current trend rate, running a balanced budget or a small budget surplus is once again acceptable. Privatisation measures, such as the sale in October of shares in the Mass Transit Railway Corporation (MTRC, the territory’s underground railway operator), which brought the government a windfall gain of HK$9bn (US$1.2bn), will also provide a limited series of one-shot boosts to government revenue during the forecast period. The MTRC share sale represents only a 20% stake in the company, and a further tranche is likely to go up for sale during the forecast period.
The government has no control over interest rates because one of the main mechanisms by which the fixed exchange rate of the Hong Kong dollar against the US dollar is effected is a close relationship between Hong Kong and US interest rates. The Hong Kong dollar risk premium—the differential between the London interbank offered rate (Libor) and its Hong Kong equivalent (Hibor) for three-month funds—shot up in 1997-98, returned to zero at the end of 1999, and stayed there during 2000. Provided there are no major shocks to the economy, Hong Kong rates can be expected to be no higher than those in the US. Lending rates will continue to be deregulated—by July 1st 2001, all interest rate restrictions will have been removed.
Economic forecast
International assumptions The outlook for Hong Kong’s external environment in 2001-02 is broadly favourable. World trade growth will remain robust throughout the period, and Chinese GDP growth is expected to be robust. Although growth in the US and the euro zone will slow, world trade growth will be supported by rising import demand from Japan, as that country’s economic recovery deepens, and other parts of Asia, particularly the members of the Association of South-East Asian Nations (ASEAN). Events in the world’s largest economy could dampen GDP growth in Hong Kong even if US interest rates do not continue to rise. The rapid GDP growth achieved in the US in recent years has been accompanied by growing economic imbalances, such as a widening current-account deficit and extremely inflated asset prices. These imbalances could yet trigger a recession in the US economy. Although this would cause US interest rates to fall, it would also undermine growth in Hong Kong’s largest export market.
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Hong Kong: international assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.5 4.9 4.2 4.1 OECD 2.9 4.1 3.1 2.7 EU 2.3 3.4 3.0 2.6 Exchange rates (av) ¥:US$ 113.9 107.3 104.0 102.0 US$:¤ 1.07 0.92 0.95 1.05 SDR:US$ 0.731 0.766 0.775 0.738 Financial indicators ¥ 2-month private bill rate 0.27 0.19 0.40 0.98 US$ 3-month commercial paper rate 5.18 6.32 6.38 5.25 Commodity prices Oil (Brent; US$/b) 17.9 28.8 23.5 18.8 Gold (US$/troy oz) 278.8 283.2 275.0 270.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –7.1 4.7 11.5 Industrial raw materials (% change in US$ terms) –4.3 14.9 8.7 2.3
Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP) exchange rates.
Economic growth Real GDP continued to expand very strongly in the third quarter of the year, rising by 10.4% year on year. This follows growth of 14.2% year on year and 10.9% in the first and second quarters of the year. Seasonally adjusted quarter- on-quarter growth was 1.7% in the third quarter, compared to 5.1% and –0.6% in the first and second quarters of the year respectively. The strength of growth in the third quarter was surprising in light of the weaker base effects. In addition to further strong export growth, the continued strength of the expansion owes much to the recovery in fixed capital formation, which rose by 13% year on year in the third quarter, up from 4.9% in the first half of the year. Although the rate of GDP will definitely slow considerably in the fourth quarter, as exports are hit by weaker growth in the US and because of the high base for comparison (real GDP expanded by 9.2% year on year in the fourth quarter of 1999), growth for the year as a whole is now expected to average 9.7%. However, growth is expected to slow to 4.8% in 2001 as the build up of stocks comes to a halt and the foreign balance makes a negative contribution to growth.
Inflation After falling by 4% in 1999, consumer prices are estimated to fall by a further 3.4% in 2000. In spite of the economic recovery, the rate of consumer price deflation has moderated only gradually to 2.9% year on year in the third quarter of the year, from 5.1% year on year and 4.5% in the first and second quarters respectively. Prices are expected to start recovering in 2001, rising by 2.3% in 2001 and 3.7% in 2002. Pushing the rate up will be the persistence of relatively strong domestic demand forecast for 2001-02, plus a recovery in consumer prices in China (mainland China is the source of around 40% of all Hong Kong’s imports).
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Hong Kong: forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth 3.0 9.7 4.8 4.5 Manufacturing production growth –6.4 2.1 3.5 3.0 Gross agricultural growth –4.0 –3.0 –2.0 –1.0 Unemployment rate (av) 6.3 5.3 4.1 3.5 Consumer price inflation Average –4.0 –3.4 2.3 3.7 Year-end –2.9 –1.5 2.8 4.0 Short-term interbank rate 9.0 9.3 9.1 7.5 Government balance (% of GDP) –4.0 –4.0 –3.5 –3.0 Exports of goods fob (US$ bn) 174.7 204.0 225.3 250.5 Imports of goods fob (US$ bn) 177.9 214.7 238.9 265.7 Current-account balance (US$ bn) 9.3 3.0 0.8 0.4 % of GDP 5.8 1.9 0.5 0.2 External debt (year-end; US$ bn) 53.5 56.5 62.0 67.4 Exchange rates HK$:US$ (av) 7.76 7.80 7.80 7.80 HK$:¥100 (av) 6.81 7.27 7.50 7.65 HK$:¤ (year-end) 7.81 6.83 7.88 8.50 HK$:SDR (year-end) 10.67 9.71 10.39 10.75
a Actual. b EIU estimates. c EIU forecasts.
Exchange rates The Hong Kong dollar is expected to remain fixed to the US dollar at the rate of HK$7.8:US$1 throughout the forecast period. Since 1998 both the currency board system and financial market regulation in the SAR have been reformed, strengthening the ability of the Hong Kong authorities to dampen any volatility that does arise. Furthermore, the revival of GDP growth in the Asian economies worst affected by the downturn of 1997-98 will contribute to greater regional financial market stability during the forecast period. The recovery in the rest of Asia contributes to the stability of the Hong Kong dollar in one further way. Hong Kong suffered a loss of competitiveness when the currencies of other emerging markets depreciated sharply in 1997-98. The regional economic recovery now under way will contribute to the appreciation of the currencies of other Asian countries. This will cause Hong Kong’s real trade-weighted exchange rate, which strengthened by 13% in 1996-98, to depreciate throughout the forecast period. The fixed link between the Hong Kong and US dollars will, therefore, not prevent the SAR from retaining international competitiveness.
External sector The current-account balance is expected to deteriorate steadily over the forecast period, from an estimated surplus of US$3bn (equivalent to 1.9% of GDP) in 2000 to a deficit of US$0.4bn (0.2% of GDP) in 2002. The deficit on the merchandise trade balance will rise strongly as recovering domestic demand growth causes the value of merchandise imports to grow more rapidly than that of merchandise exports and the importance of service exports continues to increase relative to those of merchandise goods. This is already happening: over the first three quarters of 2000, the trade deficit more than doubled compared to the year-earlier period. The worsening of the trade
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balance will be offset only partially by an anticipated rise in the services surplus, which is expected to increase from an estimated US$12.7bn in 2000 to US$15bn in 2002.
Hong Kong: gross domestic product by expenditure (HK$ m at constant 1990 prices; % change year on year in brackets unless otherwise indicated) 1999a 2000b 2001c 2002c Private consumption 472,625.0 499,564.6 526,041.6 554,973.8 (1.1) (5.7) (5.3) (5.5) Public consumption 64,151.0 65,883.1 67,530.2 69,556.1 (3.4) (2.7) (2.5) (3.0) Gross fixed investment 234,785.0 252,393.9 272,080.6 294,119.1 (–17.7) (7.5) (7.8) (8.1) Final domestic demand 771,561.0 817,841.6 865,652.3 918,649.0 (–5.3) (6.0) (5.8) (6.1) Stockbuilding –8,713.0 13,500.0 13,500.0 12,500.0 (0.8)d (2.7)d (0.0)d (–0.1)d Total domestic demand 762,848.0 831,341.6 879,152.3 931,149.0 (–4.6) (9.0) (5.8) (5.9) Exports of goods & services 1,609,047.0 1,823,643.0 1,971,124.7 2,130,936.5 (4.0) (13.3) (8.1) (8.1) Imports of goods & services –1,561,668.0 –1,766,050 –1,918,713.0 –2,088,363 (0.1) (13.1) (8.6) (8.8) Foreign balance 47,379.0 57,593.1 52,411.7 42,573.7 (7.7)d (1.3)d (–0.6)d (–1.1)d GDP 810,227.0 888,934.7 931,564.0 973,722.7 (3.0) (9.7) (4.8) (4.5)
a Actual. b EIU estimates. c EIU forecasts. d Contribution to real GDP growth.
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The political scene
The DAB increases its Legislative Council (Legco) elections held on September 10th proved a proportion of the vote watershed after a summer of scandals. Voter turnout dropped significantly from the May 1998 elections, which saw a record number of votes cast after a year of an appointed Legco, following China’s resumption of Hong Kong’s sovereignty on July 1st 1997. Besides turnout in the direct elections falling from 53.3% in 1998 to 43.6% in September 2000, support for the Democratic Party (DP) fell very sharply. In the last election under British sovereignty in 1995, 42.3% of the direct electoral vote went to the DP. In 1998 that share rose to 43.7%, but this time it fell to just 34.7%. The performance of the DP’s main rivals, the Democratic Alliance for the Betterment of Hong Kong (DAB), continued to improve, with their share of the vote rising to 29.7%, up from 25.2% in 1998 and 22.2% in 1995. Analysts agree that only a scandal involving Gary Cheng Kai-nam—one of the founding members of the DAB and lead candidate against the leader of the DP, Martin Lee, on Hong Kong Island— prevented the pro-government and pro-Beijing party from recording more than 30% of the vote for the first time.
Despite party splits and a loss of support, the DP narrowly won the highest number of seats. While the DP gained nine seats in direct elections of 24 contested and hold 12 of the 60 seats in Legco, the DAB took six in the direct elections, and allies running on joint tickets with the DAB took a further two. However, the DAB’s total number of seats dropped from 11 to ten, following the resignation of Mr Cheng on September 19th. Overall, while the administration does not formally have a single committed vote in Legco— since the current chief executive, Tung Chee-hwa, is himself not a party affiliated leader—the votes that the government can count on total 37, just about the same as in the previous legislature. The 22 opponents are likely to rise to 23 with a by-election for the Hong Kong Island seat surrendered by the DAB, scheduled for December 10th, but the government’s ability to secure a majority of votes will normally be ensured.
Universal suffrage will be In 2004 half (30) of the Legco seats will be directly elected. The success of the an issue in 2004 DAB and its pro-Beijing allies, the Hong Kong Progressive Alliance (HKPA), augurs well for their ability to take from two to three of the six extra seats returned by direct elections in 2004. The battle in the 2004 elections will be over when, or whether, to abolish the 30 functional constituency seats and when to achieve the universal suffrage election of legislators promised under the Basic Law. The number of seats to be directly elected has been stipulated up to that date by the Basic Law; after that election, by agreement of the chief executive and two-thirds of Legco, all seats may become directly elected.
The Democrats and other pro-democracy allies, who had been squabbling among themselves for months, buried their differences when the cost of such internal divisions became apparent. While Frontier held on to all its seats, its leader, Emily Lau, saw a large fall in the number of votes cast for her. A Trotskyist anti-Tung radical, Leung Kwok-hung, took over 18,000 votes from Ms Lau in a campaign noted for low expenditure but remarkably astute use of
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the media. Most pro-democracy candidates, except Mr Leung, had refrained from directly attacking the chief executive after pro-Beijing forces launched a “black hands” campaign wildly accusing all and sundry of plots to overthrow the SAR government. This followed revelations in the Apple Daily about Mr Cheng’s release of a confidential government document to clients, and Hong Kong University opinion pollster, Robert Chung’s, accusations that Mr Tung, or a designate, had attempted to interfere in his polls. These polls, like all others including the government’s own, showed very low levels of satisfaction with the performance of Mr Tung and the government. The fallout from the polling affair saw the top two officials at Hong Kong University resign and unsuccessful attempts in Legco to pass motions to launch investigations, or to call for the resignation of Mr Tung’s senior advisor, Andrew Lo, who was apparently the source of the pressure exerted on the academics.
Anson Chan is summoned Demonstration marches in August by thousands of civil servants in protest at to Beijing civil service reform programmes and mounting evidence that civil servants had turned against Mr Tung (see September 2000 Hong Kong Country Report) led vice-premier, Qian Qichen, on September 26th to, as conflicting reports put it, either rebuke chief secretary for administration, Anson Chan, for failing to support Tung Chee-hwa, or to plead with her to rally the civil service behind the beleaguered chief executive. Ms Chan’s work assessment report had been deferred for several months, perhaps prompting jittery officials in Beijing in late-August to send a delegation led by Liao Hui, the vice-director of the State Council’s Hong Kong and Macau Affairs Office, to Hong Kong to see if there were “organised forces” behind a campaign to oust Mr Tung. Ms Chan has continued to win over 60% approval ratings for her job performance, despite a fall in those for Mr Tung to less than half that. There is frequent speculation in the Hong Kong press that Ms Chan is plotting to stand against Mr Tung in the 2002 election for the chief executive. Legislation setting out the details of the 800-member Chief Executive Election Committee (CEEC), which will be charged with voting in the second SAR chief executive, are expected to be tabled before the summer of 2001. However, the CEEC will for the first time include all 60 elected members of Legco, as well as about 600 members returned by functional constituencies. Several hundred of these are expected to vote for Ms Chan, who retires from the civil service in the first half of 2002, if she chooses to stand for the office.
Mr Tung could win a The ability of pro-Tung and pro-Beijing forces to deliver votes on command second term has been greatly lessened by the expansion of the body from the 400 hand- picked delegates, who made the first selection of chief executive in 1996, to 800 members mostly returned by functional election. Most analysts expect Mr Tung to gain a second term if he chooses to stand, and if Beijing decides that a second term would be desirable. However, if Ms Chan stood against Mr Tung, against a background of very low levels of public support for him, the Chinese government might observe a strict neutrality, which is what it officially insists is the case. (See below.) Allegedly, pro-Beijing forces have been trying to fix a second term for Mr Tung term since March when a gathering of Hong Kong tycoons visited Beijing. This meeting, vividly described by Willy Wo-Lap Lam, the well-known China analyst for the South China Morning Post, prompted the
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owner of his newspaper, Robert Kuok, and other tycoons present to vigorously protest that they had not been told to back Mr Tung for a second term. Nevertheless, articles frequently appear in the pro-Tung press in support of a second term.
Jiang Zemin denounces the Mr Tung himself went to Beijing on October 27th to report on the response to Hong Kong press his Policy Address given on October 11th. During a photo opportunity of Mr Tung with President Jiang, Mr Jiang rounded on Hong Kong journalists who had sought to determine whether Chinese government supported a second term for Mr Tung. This question came after the premier, Zhu Rongji, and vice- premier, Qian Qichen, had expressed their support for Mr Tung during the previous weeks. Speaking on camera for five minutes in English, Mandarin and Cantonese, Mr Jiang reacted angrily and compared the Hong Kong press unfavourably with Mike Wallace of the American investigative television show “60 Minutes”. The question that triggered the outburst included a phrase which roughly translates into whether the Chinese government’s support for Mr Tung was an “imperial order” to the Election Committee to re-elect him. Mr Jiang accused the journalists of being naïve and perfidious: of course Beijing supported Mr Tung; after all, they had appointed him. However, a second term was up to the people of Hong Kong through the Election Committee, and then up to the Chinese government to approve the results.
Renewed concerns over Mr Jiang may have felt aggrieved by questions which made him out to be the press freedoms final arbiter of appointments. He had recently failed to get a key protégé, Zeng Qinghong, into the Politburo after running foul of the National People’s Congress chairman, Li Peng, and the premier, Zhu Rongji, who had united to outvote President Jiang’s move. The details of this encounter had also been revealed by Willy Wo-Lap Lam, which may have been the final straw precipitating the editor of the South China Morning Post, Robert Keatley, to tell Mr Lam that he would henceforth vet his columns before publication, and that a former China Daily business reporter, Wang Xiangwei, would replace him as China editor. Lam resigned on November 3rd amid charges of censorship and bad faith. The Foreign Correspondents’ Club Press Freedom Committee weighed in with a public letter to the South China Morning Post questioning the move, while 115 reporters and editors of the paper signed a petition conveying their disquiet and stating that they publicly “deplored the way” the reorganisation was carried out. The incident, coming so soon after the Robert Chung academic freedom affair, sparked renewed concerns about press and other freedoms in Hong Kong.
Rights and religious These freedoms include the right to protest, a right vigorously taken advantage controversies of by Hong Kong people, but also strictly supervised by the police. According to the Public Order Ordinance, as revised during by the Provisional Legco in 1997, any procession of more than 30, or any gathering of more than 50, unless religious, academic, or a sports or cultural event, requires the organisers to send the police notice of the event and likely attendance numbers, along with the desired routing and site, at least seven days prior to the event. The police could then ban the event, assist the procession, or negotiate changes in protest routes or sites in order to safeguard participants and protect the public
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right to travel. However, in the first three years of the SAR over 600 processions and protest meetings have been held without notification to the police, potentially subjecting the organisers to fines and jail sentences of up to a year.
No one had been prosecuted under the ordinance until the Right of Abode applicants started a fire and killed two people on August 2nd. A group of university students who had protested against rises in tuition fees in April 2000 and then later joined in a Right of Abode protest, found themselves taken into custody and warned of possible prosecution. On October 1st and 8th, two large unauthorised protest marches took place in support of the students, while scores of public groups petitioned the government not to prosecute them and to change the ordinance. The government, after some delay, declined to prosecute the students, but warned that in future that it would more strictly enforce the law.
Possible subversion Speculation is growing that the administration, after delaying more than three legislation raises fears years, plans a motion supporting the Public Order Ordinance, and to follow it up with a raft of laws enacting Basic Law Article 23 provisions, which require the SAR “on its own” to legislate against treason, subversion, sedition and secession. The rise in voter support for pro-government parties has somewhat emboldened the administration to take steps long-feared by democrats. Legislation in this area is a subject of concern for foreign governments and local businesses who conduct and publish research on China business conditions which, in some cases, have been held on the mainland to consist of subversive or treasonably obtained “state secrets”. Journalists and academics have been jailed by the mainland on such charges, and fears are rising that the laws to be passed on Article 23 may damage Hong Kong’s free press and tradition of investigative journalism. Hence the concern over the Willy Wo-Lap Lam incident.
Environmental awareness Concern with, and expenditure on, environmental protection has been continues to increase growing steeply in Hong Kong over the past year. As another indicator that the SAR is taking the environmental clean-up seriously, for the first time in Hong Kong history the Environmental Protection Department (EPD) ruled against plans by the Transport Department. On October 16th the EPD rejected the Kowloon-Canton Railway’s (KCR’s) proposal, as approved by the Transport Department, to build a rail spur through Long Valley in the New Territories to the border with the mainland. The KCR reacted with stunned disbelief. Indigenous residents threatened to poison the wetlands used by some 200 species of migratory birds and other wildlife in protest at the decision, while green groups exulted about the ruling which came a week after Greenpeace’s successful injunction forcing the EPD to stop toxic mud dumping in a nearby mainland estuary.
Environmental concerns have taken centre stage over the last year and the EPD has grown in stature. Green building rules are also under active review, with speeded up processing and concessionary structural allowances likely within the next year or two. As the government works on selling off its public housing stock and moves toward contracted building and subsidised private purchase programme in place of its traditional commitment to the provision of public
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housing—with an ultimate goal of building and housing only 15% of the population in public housing by 2007 versus the present 37% (down from 48% four years ago—such moves will result in more visual variation of the urban environment and more energy efficient buildings. Housing is a major political issue, as is demonstrated by the resignation of Housing Authority head, Rosanna Wong, in August under political pressure following revelations of short pilings and other poor building standards which cost over HK$600m (US$77m) dollars to correct. An administration appointed review panel is scheduled to report on recommended housing programme reforms in December.
Long-term strategy to Political pressures played a major role in the chief executive’s policy address on tackle income inequalities October 11th. Laying out his vision not just for the next year, but in some cases the next ten years, Mr Tung cut 45 minutes off his usually overly detailed and bureaucratic speech which normally runs over two hours. Using a teleprompter for the first time in such an address, and standing down before Legco members, rather than sitting enthroned above them as did his colonial predecessors, the chief executive conveyed an image of alertness, vigour and business-like equality.
He admitted mistakes in preparing and implementing some reforms, and pledged more careful and comprehensive assessments and better preparation before presenting reforms, but interspersed his speech with calls for more harmony and less criticism. In addition to long-term moves to combat rising income disparities (see Economic policy), Mr Tung also proposed to examine, but made no promise to implement, reforms to make the top government officials more accountable. The barriers to improved accountability lie mainly with the undemocratic character of policy-making, and not in the presentation of policies, he said. There have been increasingly widespread and vocal demands for better accountability from government officials, especially following the housing scandals.
Mr Tung emphasised that the “process of adjustment and adaptation” would have to “take time” because Hong Kong had inherited “systems and institutions” from before the 1997 handover. (He neglected to mention that the extension of the vote to most working people by the last governor, Chris Patten, had been reversed, not inherited, by the incoming administration.) Mr Tung promised to enhance the accountability of top civil servants, implicitly ruling out the establishment of a ministerial system. He also promised to improve communications between the executive and the legislature. But he declined to pronounce judgement on the speed of political reform. A clear indication of Mr Tung’s reluctance to commit himself unconditionally to full democracy is his suggestion that political reform is conditional on patriotism. As most residents are Chinese, he said in the policy address, it was “only natural that they should stand up and strongly support the nation”. He concluded that the “identification of Hong Kong people with our cultural and historical roots” would “provide a basis for developing our future political structure”.
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Economic policy
Limited funds to tackle In his policy address given on October 11th, the chief executive, Tung Chee- growing social inequality hwa, announced that extra funding to combat poverty over the next two years will total just HK$2.7bn (US$346m—equivalent to just 1% of planned public expenditure). Instead, he argued that widening income disparities could only be corrected by long-term solutions, especially better education. He set a target of raising the current average of 30% of secondary school leavers going on to post secondary university or technical education to 60% receiving post- secondary education in ten years time. He also endorsed proposals to extend the current three-year university degrees to four years, but provided no additional government funding beyond that currently provided. (Government funds all but 18% of the tuition for all tertiary undergraduate and post-graduate degrees.) He pledged to reduce kindergarten class sizes from a 30:1 student- teacher ratio to 15:1, and to raise teacher standards for kindergartens. The government is committed to achieve full-day primary level schooling for all by 2004; currently just over half go to split-shift half-day primary schools.
Nothing in Mr Tung’s policy address will act to reduce mounting concern at rising income inequalities, however. Indeed, despite strong reported GDP growth in 2000, discontent among the lower quarter of income earners looks set to rise with the implementation of the Mandatory Provident Fund in December. Many employers, including the government itself, are taking the 5% matching funds to be provided by the employer out of current wages rather than funding it themselves. Despite expectations of an average rise of some 3% in salaries next year, nearly half the firms polled indicated a continued wage freeze. For Christmas, many working people will see a net drop in take-home pay of 10%, providing support for growing calls for a minimum wage and strengthening popular opposition to Mr Tung running for a second term in 2002.
The EU worries about Former Hong Kong governor and current EU external affairs commissioner, competition Chris Patten, came to Hong Kong in late October, shortly after the EU Parliament Committee on Foreign Affairs, Human Rights, Common Security and Defence Policy tabled a report on Hong Kong, and before a visit to the SAR by members of the committee in early November. The report raised concerns about various human rights issues which have arisen during the SAR’s first three years, called for universal suffrage elections by 2008 for Legco and by 2012 for the chief executive, decried the abolition of the municipal councils, and, in what came in for the most comment in Hong Kong and abroad, raised the issue of the Li Ka-shing’s family dominance of the Hong Kong economy and the issue of competition in general. The Li family countered that was is not as dominant as the report portrayed it, but did admit to controlling between 15% and 17% of the capital value of the Hang Seng Index. The report did not deal with sectoral market share enjoyed by the Li family’s various firms, nor in its privately held or overseas-listed companies which had local investments or operations.
The Li family are not the only firm whose size may lend itself to market distortions. Bill Overholt asked rhetorically in a Nomura report, “Between third
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world and first” (on November 8th 1999), whether Hong Kong was the world’s freest economy or a conglomeration of cartels. The locally based investment analyst described cartels in airline hubbing, taxis, property, banking, port services, buses, supermarkets, petrol, auto sales, lawyers, doctors, dentists, nurses, pharmaceutical suppliers, performing arts, cruises, education and monopolies in electricity, gas, water and telephones, with mobile phones as an exception. Competition and competitiveness issues have dominated much discussion in the press and among business and government officials over the past quarter, and this looks set to continue. Ratings from a number of independent groups (including the EIU) downgraded Hong Kong in the past two years from its usual first or second slot as the most competitive or business-friendly governmental entity. The launch of the 2001-02 budget process in the November 2nd “Quad Forum”, which includes Legco members, administration officials, business people and top academics, had two sessions from four which addressed the issue of Hong Kong’s competitiveness. Many speakers pressed for either comprehensive competition policy laws or more active sectoral laws to regulate competition.
Currently, only telecoms have a competition policy, law and enforcement/oversight process. Technically, in most areas of business, it is not illegal to agree to fix prices, and indeed, the banking industry is only slowly dismantling a legal cartel which fixed interest rates for decades. Recently, Carrefour withdrew from the supermarket business in Hong Kong amid charges that the two dominant supermarket firms, Wellcome and Park & Shop (owned by the Li family) had pressured suppliers not to sell to Carrefour at a discount. Administration officials at the conference strongly objected to drafting laws and setting up regulatory agencies to supervise competition. However, less than a week later, the secretary for economic services, Sandra Lee, one of the stoutest defenders of the administration’s no competition law policy, accused oil firms of improperly retaining as profit much of the 89% per litre subsidy the government provides for ultra-low sulphur diesel fuel in order to cut Hong Kong’s growing smog. She successfully demanded cuts in prices from the oil suppliers. Moves are under way to introduce more competition among fuel suppliers by bringing in new vendors and changing the terms of fuel facilities’ bidding and leasing.
Full deregulation of Full deregulation of interest rates next year should give small and medium interest rates to take place banks in Hong Kong new opportunities to poach depositors from larger banks, heightening overall competition among the region's lenders. Caps on savings deposits and current accounts are to be removed in July 2001, along with a prohibition on benefits and gifts to depositors, in the second phase of interest rate deregulation. The move follows the lifting, effective last July 3rd, of interest rate ceilings on time deposits with a maturity of less than seven days.
While the first phase of deregulation had little impact on the banking system, the second phase should have profound implications. It could spark a bidding war for deposits, benefiting consumers in the form of higher interest paid on deposits and the introduction of more banking products (such as interest- bearing checking accounts). On the other hand, the increased cost of competition is likely to force bigger banks to raise fees and charges. The Hong
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Kong Monetary Authority (HKMA) has said that it expects net interest margins—the main driver of bank profits—to narrow following the liberalisation. Regulated deposits account for a significant portion of the deposit base of large Hong Kong banks.
Banks kept deposit rates low in the third quarter, as they struggled to maintain their margins while interbank interest rates traded at unusually steep discounts to the US dollar. The soft rates reflected excessive liquidity in the banking system—the result of a build-up of capital inflows in the third quarter, low credit growth (total loans and advances declined 1.3% year on year in July) and plenty of deposits. The recent volatility in the equities market have also boosted the banks' liquidity. The comparatively cheap funds worked well for bank borrowers—including the government. The HKMA reported an unusual over-subscription of its Exchange Fund short-term paper in the third quarter.
Tighter regulation of According to a Securities and Futures Commission (SFC) survey of business securities dealings activities of 1,422 intermediaries, banks have been eroding brokers’ shares of the dealings in local securities markets. Banks earned HK$12.9bn (US$1.65bn) from securities-related dealings last year, a 250% rise on the HK$3.67bn in 1998. During the same period, brokers’ earnings rose from HK$20bn to a relatively modest HK$27bn. This had prompted calls for banks to come under the same regulations as brokers in dealing with stock trading. Currently, banks are regulated by the HKMA and are outside the jurisdiction of the SFC. Banks have the advantage of selling stockmarket securities to their customers without having to meet all SFC requirements, such as face-to-face meeting with clients, although their clients might not have any previous dealings with their broking arms. A proposed Composite Securities and Futures Bill would ensure that the HKMA used the same regulatory standards on banks as that of SFC on brokers. The bill would also give HKMA the powers to supervise banks’ securities business and SFC the powers to investigate alleged misconduct of banks in securities dealings. A proposal to amend the Banking Ordinance would allow the HKMA to reprimand banks for wrongdoing as a new disciplinary measure. Existing rules restrained the HKMA from using such measures for fear of shaking public confidence.
Stockmarket “safe harbour The stockmarket is another area where the government has been introducing rules” extended changes. Deputy secretary for financial services, Au King-chi, indicated in late October that the government had decided to meet brokers’ demands to extend the “safe harbour” rules to all market misconduct under the controversial Composite Securities and Futures Bill, which was first drafted in 1992 and had gone through four controversial consultations. This was considered an effort to push the controversial bill through Legco. “Safe harbour” rules apply where conduct may be seen to have breached the law but it will be deemed legal if it is carried out in accordance with the rules. The bill originally proposed to apply these rules to only certain types of misconduct but brokers lobbied to extend the rules to cover all types, especially conduct relating to initial public offering (IPO) stabilisation. IPO stabilisation, banned in Hong Kong but legal in the US, UK and Australia, involves IPO sponsors buying shares to support the IPO of their client companies. The bill also sought to consolidate all ten
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existing pieces of securities and futures ordinances as well as to add new rules to help Hong Kong catch up with international trends. The bill had faced strong opposition from brokers who claimed that it was too harsh and would discourage foreign investment. A number of changes had been made to accommodate broker demands, including shifting the burden of proof for misconduct to the SFC from defendants in criminal cases. On November 10th legislators and brokers were reported to have reacted positively to the bill when it was presented to Legco.
Discussions on improving The SFC executive director, David Stannard, met with Thomas Bowman, chief corporate governance executive of the Association for Investment Management and Research (AIMR), in early November to discuss ways to co-operate to improve corporate governance. AIMR, an organisation representing financial analysts and portfolio managers who administered the Charter Financial Analysts qualification, had 900 members in Hong Kong. The AIMR advised the Hong Kong Exchange (HKEx) avoid introducing disclosure rules, such as those of the US Securities and Exchange Commission (SEC), which attempted to give investors equal access to company information. The SEC’s new rule—called Regulation FD—states that no information can be passed only to individual analysts and that company information must be disclosed to all investors at the same time. Critics said that this had led to less information being provided to investors as companies worried about giving out any information to any analysts for fear of contravening the new rule.
The domestic economy
Output and demand
Exports led GDP growth Real GDP continued to expand very strongly in the third quarter of the year, rising by 10.4% year on year. This follows growth of 14.2% year on year and 10.9% in the first and second quarters of the year. Seasonally adjusted quarter- on-quarter growth was 1.7% in the third quarter, compared to 5.1% and –0.6% in the first and second quarters of the year respectively.
The strength of growth in the third quarter was surprising in light of the weaker base effects. In addition to further strong export growth, the continued strength of the expansion owes much to the recovery in fixed capital formation, which rose by 13% year on year in the third quarter, up from 4.9% in the first half of the year. Investment in machinery and equipment grew by 27.8% year on year in the third quarter, while construction sector activity continued to decline, but at a slower rate: after falling by 12.2% year on year over the first half of the year, the decline in construction sector fell to 3.5% year on year in the third quarter. There was also a further build up in inventories in the third quarter in line with the strengthening of domestic demand. Strong global and regional demand, as well as strong price competitiveness, have continued to drive double-digit growth in total exports: in the third quarter exports of goods rose by 17.7% year on year, unchanged
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over the second quarter. Services exports have, however, slowed, rising by 12.6% in the third quarter, down from 18.3% in the previous quarter.
Hong Kong: gross domestic product estimates (% change, year on year) 1999 2000 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1999 1 Qtr 2 Qtr 3 Qtr Private consumption -7.4 -5.0 1.0 2.8 4.5 0.8 8.7 5.1 5.6 Government consumption 0.6 3.9 3.7 0.6 5.4 3.4 3.7 2.7 2.5 Gross domestic fixed capital formation -7.5 -20.9 -25.6 -10.8 -10.0 -17.3 4.8 4.9 13.0 of which: construction -5.5 -10.8 -17.2 -9.0 -7.2 -11.1 -14.3 -10.0 -3.5 machinery -8.2 -28.7 -29.5 -8.6 -5.9 -18.9 29.8 19.5 27.8 Goods Exports -4.3 -4.8 -2.0 8.1 12.3 3.7 20.7 17.7 17.7 Imports -7.2 -10.3 -7.9 6.8 11.9 0.1 22.9 18.8 18.4 Services Exports -1.8 0.9 3.8 12.3 13.0 7.8 15.3 18.3 12.6 Imports 2.8 -0.8 0.4 2.0 0.9 0.2 -0.2 3.8 3.2 GDP -5.3 -2.9 1.2 4.4 9.2 3.1 14.2 10.9 10.4 Source: Census and Statistics Department.
Although the rate of GDP will definitely slow considerably in the fourth quarter, as exports are hit by weaker growth in the US and because of high base effects (real GDP expanded by 9.2% year on year in the fourth quarter of 1999), real GDP growth for the year as a whole is now estimated to average 9.7%.
Employment, wages and prices
Manufacturing At first sight, the strength of the economic recovery has been quite slow to employment declines have an impact on the labour market: the seasonally adjusted rate of unemployment fell from 5.2% in the second quarter to 4% in the third. However, employment is actually rising relatively strongly, up 3.4% year on
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year in the third quarter, compared to a rise of 1.9% in the second. The secular decline in employment in manufacturing has continued, falling by 5.8% year on year in the second quarter of the year. The migration of manufacturing to the mainland has left a large pool of long-term (effectively permanent) unemployment among middle-aged men with redundant skills and limited basic education.
Hong Kong: employment by sectora (’000) 1998 1999 2000 % change Jun Sep Jun Sep Dec Mar Jun Jun/Jun Manufacturing 271,600 257,000 253,500 244,500 244,700 233,700 238,800 –5.8 Construction (manual workers only) 81,000 75,800 71,400 68,700 71,800 74,500 79,300 11.1 Wholesale, retail & import/export trades, hotels & restaurants 954,100 946,600 966,200 997,500 1,002,300 1,027,900 1,036,400 7.2 Transport, storage & communications 175,600 169,600 175,900 175,600 172,000 175,800 180,600 2.7 Finance, insurance, property & business services 395,700 398,100 409,200 406,900 415,300 414,800 429,300 4.9 Community, social & personal services 315,200 323,900 339,200 340,000 336,500 345,500 346,200 2.1 a Data refer to numbers engaged rather than employment. Source: Census and Statistics Department.
Consumer prices continue In spite of the strength of the economic recovery, prices continued to fall in to deflate the third quarter, albeit at a slower rate: the Composite Consumer Price Index (CCPI) fell by 2.8% year on year, compared to drops of 5.1% year on year and 4.5% in the first and second quarters respectively. Nevertheless, price deflation remains severe: over the first nine months of the year the CCPI fell by 4.2%. The CCPI has now fallen for 25 consecutive months. The CPI (B) and CPI (C) (these consumer price baskets include luxury items) continued to decline faster than the CPI (A) (which comprises of essentials), indicating that the upper 50% of income earners were still holding off non-essential purchases. In light of the unexpected weakness of consumer prices (the CCPI fell by 2.7% year on year in October), we have revised down our estimate of price deflation for the year as a whole to 3.4%.
The choice of GDP deflator could possibly be exaggerating the extent of inflationary pressure in the economy and boosting official estimates of real GDP growth. The GDP deflator (as calculated by the Census and Statistics Office) was 6.6% year on year in the third quarter of 2000, only slightly down on the 7.3% year on year recorded over the first half of the year. For the year as a whole, the official estimate is now –5.5%. The deflator is calculated by collating the price deflators for domestic consumption and exports of goods and services, as well as for overall investment. In particular, it is possible that the price deflation of investment goods and services is being overstated.
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Hong Kong: inflation indicators (Oct1994-Sep 1995=100; % change, year on year) 2000 1998 Jan Feb Mar Apr May Jun Jul Aug Sep Oct CPI (A) 5.7 –4.2 –4.2 –4.0 –3.4 –3.4 –3.5 –2.2 –1.8 –2.1 –2.1 CPI (B) 5.8 –5.7 –5.4 –5.3 –4.6 –4.6 –4.5 –3.3 –2.7 –2.5 –2.8 CPI (C)a 6.1 –6.2 –5.8 –5.7 –5.2 –5.6 –5.7 –4.3 –3.6 –3.3 –3.5 Composite CPI 5.8 –5.3 –5.1 –5.0 –4.4 –4.5 –4.5 –3.2 –2.7 –2.6 –2.7 a Previously called the Hang Seng CPI. Source: Census and Statistics Department.
Real wage growth Average nominal wages rose by 1.7% year on year in the second quarter of the strengthens year, with rates of growth being similar across the major sectors. Real wage growth picked up in all sectors, and averaged 6.5% year on year as a result of further strong price deflation. This compares with average real wage growth of 5.5% in the first quarter of 2000 and 3.6% in the final quarter of 1999.
Financial indicators
Rising oil prices hit the Rising oil prices in mid-September started the declining trend of the stockmarket stockmarket. This was followed by investors cutting their losses by dumping certain shares, most notably high-tech and telecommunications shares. The Hang Seng Index (HSI) dropped from above 17,000 points at the end of August to fluctuate below 15,000 in late October. The HKEx also announced a 36% drop in futures-market turnover in the first half of the year. Average daily turnover of futures and options contracts was 19,223, compared to 29,828 for the same period last year. Stockmarket trading, in comparison, boomed in the first half, with daily trading surging 134% to HK$14.8bn, compared to HK$6.3bn in the year-earlier period. With the aim of stimulating retail interest, the HKEx launched Mini-Hang Sang Index (Mini-HSI) futures contracts on October 9th. The Mini-HSI futures offered the chance to tap a new source of business by bringing the cost of futures trading within the easy reach of retail investors. The futures enjoyed a modest debut, with 986 contracts traded.
Further sale of EFI stocks Due to the weak performance of the stockmarket, Exchange Fund Investment postponed (EFI) postponed its plan to sell HK$65bn worth of the stocks acquired in the 1998 stockmarket intervention. Of the HK$150bn worth of shares acquired, EFI had disposed HK$84.6bn through Tracker Fund of Hong Kong (TraHK; an index-linked fund designed to dispose of a part of the government’s massive stockmarket portfolio), with the remaining to be disposed through two methods—private placement and convertible bond issues. The HKEx postponed the introduction of a number of new products, including regional index-related futures products, commodities futures and options, and long- term interest rate futures. Brokers speculated that the delay was caused by weak stockmarket sentiment, although the HKEx rejected such claims.
MTRC shares were Evidence of the recovery in the local IPO market came in the successful sale in successfully offered September of 1bn shares, or 20%, of the Mass Transit Railway Corp (MTRC),
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which raised HK$10.79bn for the government before expenses. About 60% of the shares were sold to Hong Kong retail investors while the remainder were snapped up by institutions. As in the HK$10bn IPO of TraHK in late October 1999, the MTRC offering was swamped by retail investors. The share offer by the MTRC, widely regarded as one of the most modern and efficient subways in the world, attracted nearly one-tenth of Hong Kong’s 6.8m residents.
Hong Kong: financial indicators (end-period) Hang Seng Index 3-month HIBOR Jan 29th 1999 9,506.9 6.68 Feb 26th 1999 9,858.5 6.25 Mar 31st 1999 10,942.2 5.75 Apr 30th 1999 13,333.2 5.11 May 31st 1999 12,147.1 5.46 Jun 30th 1999 13,532.1 5.87 Jul 30th 1999 13,186.9 6.39 Aug 31st 1999 13,482.8 6.58 Sep 30th 1999 12,733.2 5.80 Oct 29th 1999 13,257.0 6.73 Nov 30th 1999 15,377.0 6.40 Jan 30th 2000 15,532.3 6.02 Feb 29th 2000 17,169.4 6.13 Mar 31st 2000 17,406.5 6.11 Apr 28th 2000 15,519.3 6.64 May 31st 2000 14,713.9 7.00 Jun 30th 2000 16,155.8 6.49 Jul 31st 2000 16,841.0 6.18 Aug 31st 2000 17,097.5 5.92 Sep 30th 15,649.0 6.23 October 31st 14,895.3 6.06 Source: Bloomberg.
With 610,000 applications, the retail tranche was 29.6 times oversubscribed, while the institutional tranche was 15.2 times oversubscribed. As it did in last year’s sale of TraHK, the government provided incentives to retail investors, including a 5.25% discount. Banks, brokers and the stock exchange launched Internet IPO services allowing retail investors to apply for the MTRC offering via their websites, helping ease long queues outside 66 banks that distributed subscription forms. The recovery of Hong Kong’s IPO market, however, appears precarious given rising oil prices, which began to trigger a sell-off of equities near the end of the third quarter.
Flexible yuan could Hong Kong’s linked exchange rate system could potentially be subjected to pressure currency peg more pressure if currency volatility followed China’s move to adopt a more flexible exchange rate scheme for the Chinese yuan. A joint statement by China and the US released on October 27th indicated that China was going to liberalise its exchange rate system. The existing system allowed the yuan to float within a very narrow trading band of 8.27 and 8.28 to the US dollar.
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China is expected to widen the trading band at the end of this year, in the run- up to its accession to the WTO.
Sectoral trends
Concerns about Li family A European Parliament report on Hong Kong, drafted by Irish Euro MP, John having dominant influence Cushnahan, had voiced concerns over the power wielded by a number of tycoons in Hong Kong, exemplified by the Li family, and worried about their undue and dominant influence in certain sectors of Hong Kong’s economy. The report by the European Parliament estimated that the Li family’s businesses accounted for between one-quarter to one-third of stockmarket capitalisation. Cheung Kong (Holding) Group, one of the Li family’s businesses, immediately denied this estimate and indicated that the group accounted for 15.23% of mainboard capitalisation. Li Ka-shing also refuted the report’s estimate by stating that the companies owned by his family accounted for less than 18% of total market capitalisation. He further indicated that his companies generated most of their profits overseas.
The report highlighted the apparently preferential treatment accorded to the Li family, such as granting the rights to develop the Cyber-Port project to Richard Li Tzar-kai without open bidding and the exemptions granted to Li Ka-shing in the flotation of Tom.com, an Internet services provider (ISP). The report called for a strengthening of competition law.
Li family’s companies In late October, Cheung Kong Infrastructure Holdings (CKI) signed a continue to grow memorandum of understanding with the French-based Groupe GTM, South Korea’s Daewoo and the South Korean Pusan and Kyongnam governments to undertaken a US$1.7bn project to build bridges and tunnels connecting Pusan and Koeji Island in the south of South Korea. The South Korean government would provide a US$500m subsidy for the project. CKI, which has a 39% stake in Hongkong Electric, operates three core businesses: infrastructure materials, energy and transportation. CKI was one of six companies that failed to bid for a stake in China’s liquefied natural gas project in Shenzhen but it purchased Power Australia for A$2.31bn (US$1.26bn) and took an 18% stake in Canada’s Stuart Energy System in August this year. CKI has been slowing its investment in the mainland and looking for investment opportunities elsewhere since 1998, due to growing difficulties in securing attractive projects in China.
Future of property market There is no consensus over whether the property market has finally bottomed debatable out or not. Sun Hung Kai Properties expect residential housing prices to rise by up to 10% next year, as does New World Development and Henderson Land Development. UBS Warburg, however, is forecasting that property stock prices will fall by up to 15% by the end of the year due to loss of confidence in the sector. The prediction was based on uncertainty surrounding public housing policy and a Housing Authority plan to turn Home Ownership Scheme flats into luxury units to be sold at subsidised prices. In response, Sun Hung Kai Properties’ share price dropped by 6.69% to HK$62.75 and Henderson Land Development’s price dived 6.25% to HK$33 a share on October 27th, wiping out more than HK$14bn of market capitalisation. New World Development
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suffered its worst financial performance in 21 years after incurring a net loss of HK$907.2m in the first half of the year—the first loss since it was listed in 1972.
Small property developers The government announced on November 2nd a plan to sell 20,000 Home want more competition Ownership Scheme flats and 6,700 private-sector participation scheme flats in 2001-02. In mid-September, eight small developers complained to the government that the property market was dominated by big companies. They urged the government to divide land into smaller plots in order to improve competition. Since only big developers had the financial capability to bid for large parcels of land, the existing practice did not encourage competition. In early October, Li Ka-shing’s Cheung Kong (Holdings) teamed with Sino Land and K Wah International (Holdings) to win the bidding for a large residential site in Tsuen Wan for HK$835m, far below the forecast range of between HK$920m and HK$1.08bn, raising suspicions that the two companies had collaborated in order to lower prices.
Tourism sector still under In spite of a near-record number of visitors this year, the Hong Kong Tourist pressure Association chairwoman, Chow Liang Shuk-yee, indicated on October 24th that tourists were spending on average HK$2,000 (US$256) less per person and staying almost one day less compared to four years ago. She also mentioned that rival destinations in the region had attracted an increasing number of visitors, in particular Singapore and Thailand, as well as the mainland. Nevertheless, she estimated that 12.5m people would visit Hong Kong this year, up from last year’s 11.3m and close to the record of 13m in 1996. The General Chamber of Commerce chief economist, Ian Perkin, expressed concerns over the increasing reliance on visitors from Greater China, including Taiwan, whose share had grown from 15% to 50% of all Hong Kong visitors in the last 15 years. Ms Chow said that Hong Kong needed to win back long- distance holiday-makers whose numbers had been declining, citing the exchange rate as an important reason for the decline.
High bankruptcy rate here Statistics from the official receiver indicated that liabilities had more than to stay doubled in the 12 months to the end of October, with corporate failures accounting for HK$23.19bn of HK$35.92bn in insolvencies. Personal bankruptcies went up by 216% during the past year with easy access to credit having apparently contributed to this trend. The official receiver, Eammon O’Connell, said that a high level of personal bankruptcies would be “a feature of the financial landscape in Hong Kong for some time”. He also mentioned the reluctance of banks, financial institutions and creditors to use other alternatives, such as the Individual Voluntary Arrangement scheme, to settle debts. He attributed this reluctance to an old fashioned belief in the need to punish rather than rehabilitate debtors.
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Foreign trade and payments
Hong Kong: balance of trade, Jan-Sep (HK$ m unless otherwise indicated) 1999 2000 % change Exports 976,386 1,153,700 18.1 Domestic exports 124,932 136,204 9.0 % of total exports 12.7 11.8 – Re-exports 851.453 1,017,496 19.5 % of total exports 87.2 88.2 – Imports 1,007,966 1,219,049 20.9 Visible trade balance –31,580 –65,348 106.9 Source: Census and Statistics Department.
The merchandise trade Over the first nine months of the year, the value of imports and exports grew deficit widens by 18.1% and 20.9% respectively year on year, causing a widening of the merchandise trade deficit to HK$65.3bn (US$8.4bn), from HK$31.6bn in the year-earlier period. The value of imports of electrical machinery and appliances, telecommunications and sound equipment, and office machinery grew most sharply, by 41.7%, 36.6% and 35.8% respectively. China remained by far the largest supplier of imports, due to Hong Kong’s heavy reliance on the mainland for food and other supplies. The next most important supplier was Japan, followed by the US, Taiwan, South Korea and Singapore. Growth in imports from all of Hong Kong’s principal Asian trade partners was strong, with imports from Malaysia, Singapore and South Korea showing the strongest rates of increase, at 30%, 29.3% and 27.9% respectively.
Hong Kong: patterns of trade, Jan-Sep (HK$ bn) 1999 2000 % change Imports by major source China 439.4 526.3 19.7 Japan 116.8 145.6 24.5 US 72.4 82.3 13.7 Taiwan 65.0 81.2 24.9 South Korea 46.2 59.1 27.9 Singapore 43.3 56.0 29.3 Malaysia 21.3 27.7 30.0 Germany 20.7 23.6 14.0 UK 19.7 22.9 16.2 Thailand 16.5 20.6 24.8 Principal imports Electrical machinery & appliances 149.90 212.41 41.7 Telecoms & sound equipment 84.65 115.63 36.6 Office machinery 75.99 103.19 35.8 Miscellaneous articles (baby carriages, toys, games, sporting goods) 82.70 94.61 14.4 Apparel and Clothing 83.49 89.59 7.3 Textiles yarn & fabrics 70.99 79.65 11.2 Photo & optical equipment 39.10 43.80 11.9 Non-metallic mineral manufactures 29.72 36.65 23.3 footwear 30.82 33.66 9.2 Plastics 24.08 32.44 34.7 continued
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 30 Hong Kong
1999 2000 % change Domestic exports by main destination China 37.21 40.67 9.3 US 37.20 40.59 9.1 UK 7.41 8.07 8.9 Germany 6.22 7.17 15.2 Taiwan 3.75 4.49 19.8 Japan 4.12 3.86 –6.2 Singapore 2.60 3.61 38.8 Netherlands 3.08 2.96 –4.2 Canada 2.32 2.35 1.3 France 2.37 2.04 –13.8 Domestic exports by main commodity Apparel & clothing 54.10 58.00 7.2 Electrical equipment & machinery 17.07 21.63 26.7 Miscellaneous articles (mostly jewellery) 10.13 12.00 18.5 Textiles & yarn 7.15 6.89 –3.6 Office machinery 6.13 5.79 -5.5 Specialised scientific instruments 4.11 5.78 40.6 Photo & optical equipment, 6.76 4.28 –36.7 Telecommunication, sound equipment 2.82 3.25 15.1 Primary plastics 1.82 2.08 14.0 Non-ferrous metals 1.47 1.97 34.3 Re-exports by main destination China 288.1 356.7 23.8 US 196.6 228.3 16.1 Japan 48.0 58.8 22.5 UK 32.5 37.8 16.3 Germany 31.2 36.8 17.9 Taiwan 20.0 25.1 25.5 Singapore 20.5 23.7 15.6 South Korea 14.3 19.9 38.8 France 16.6 18.8 13.3 Netherlands 14.0 14.6 4.2 Re-exports by main commodity Electrical machinery & appliances 109.2 161.1 47.5 Miscellaneous articles (baby carriages, toys, games, sporting goods) 118.9 131.6 10.7 Telecoms & sound equipment 80.9 106.4 31.5 Office machinery 69.9 85.7 22.6 Apparel & clothing 73.0 79.1 8.3 Textiles & yarn 62.9 71.3 13.4 Photo & optical equipment, 42.0 50.5 20.3 Footwear 36.0 38.6 7.1 Travel goods & handbags 26.1 27.6 5.9 Primary plastics 20.9 26.0 24.4 Source: Census and Statistics Department, Hong Kong government website.
Growth in the value of domestic exports remained strong over the first three quarters of the year at 9% year on year, only slightly down from growth of 9.8% year-on-year for the first half. Specialised scientific instruments, non- ferrous metals, and electrical equipment and machinery registered the highest year-on-year growth, while exports of photo and optical equipment fell by 37%. China and US remained the two largest destinations, accounting for 75% of all domestic exports. Exports to Singapore rose most strongly, up 39%, while those to Taiwan increased by 20%. The value of re-exports grew by 19.5% year on year over the same period. Electrical machinery and appliances, telecommunications and sound equipment, plastics, office machinery, and photo and optical equipment had registered the largest rises. China and the US
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again were the largest destinations, accounting for more than 50% of all re- exports, while exports to South Korea rose most strongly.
Hong Kong: current account (HK$ m) 1999 2000 1999 1 qtr 2 qtr 3 qtr 4 qtr 1 qtr Trade balance –24,501 –8,761 –7,431 –1,068 –7,241 –19,344 Services balance 90,433 14,812 19,028 24,423 32,170 23,754 Incomes balance 27,276 8,616 2,923 9,716 6,021 9,226 Transfers balance –11,409 –2,784 –2,740 –2,917 –2,968 –3,747 Current-account balance 81,799 11,883 11,781 30,154 27,982 10,288 Source: Census and Statistics Department.
Detailed balance of The Census and Statistics Department published a detailed breakdown of the payments published balance of payments in late June for 1998 and 1999, and the four quarters of 1999. While the broad balance-of-payments presentation has been compiled since 1997, this was the first time that a complete balance of payments has been released. According to the data, Hong Kong’s current-account surplus rose to US$9.3bn in 1999 (equivalent to 5.8% of GDP), up from US$2.9bn (1.8% of GDP) in 1998. The trade deficit fell from US$7.8bn to US$3.2bn, while the surplus on the services balance increased from US$8.6bn to US$10.4bn, as exporters and service providers profited from the regional recovery and strong global demand, while weak domestic demand depressed import growth.
The current account recorded a surplus of just US$1.3bn in the first quarter of 2000, compared to a surplus of US$1.5bn in the year-earlier period. The fall in the current-account surplus mainly reflected the rise in the trade deficit, from US$1bn in the first quarter of 1999 to US$2.5bn in the equivalent period of 2000. The decline in the current-account surplus would have been even bigger had it not been for a sharp rise in the services surplus from US$1.9bn to US$3.1bn, as Hong Kong profited from the strengthening regional recovery.
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 32 Macau
Macau
Political structure
Official name Macau
Form of state Formerly a Portuguese territory, Macau has been a Special Administrative Region (SAR) of the People’s Republic of China from December 20th 1999. A post-handover mini- constitution, the Basic Law, is designed to ensure that many of the political, economic and social structures established during the 442-year rule of the Portuguese remain unchanged for at least 50 years
The executive The chief executive, appointed by a selection committee, head the government. The chief executive appoints a cabinet, the Executive Council, of between seven and 11 members (currently ten).
Head of state Jiang Zemin, president of the People’s Republic of China
National legislature The Legislative Council has 23 members: 8 directly elected, 8 indirectly elected and 7 appointed. The current members took office in September 1996. A new council will be selected in October 2001, comprising 27 members: 10 directly elected, 10 indirectly elected and 7 appointed.
Legal system The legal system is based largely on Portuguese law. The territory has its own independent judicial system, with a high court. Judges are selected by a committee and appointed by the chief executive. Foreign judges may serve on the courts.
National elections September 1996 (Legislative Assembly); next election scheduled for October 2001(Legislative Council)
Main political organisations Political parties do not exist in the normal sense, although a number of civic associations operate: Electoral Union (UNE); Pro-Macao and Flower of Friendship and Development of Macao (Fadem); Associação para a Defesa dos Interesses de Macao (Adim); Centro Democrático de Macao (CDM); Grupo Independente de Macao (Gima); Macau Economic Promotion Association; Progress Promotion Union; Development Union
Chief executive Edmund Ho Hau Wa
Secretaries Administration and justice Florinda da Rosa Silva Chan Economy and finance Francis Tam Pak Un Security Cheong Kuoc Va Social affairs & culture Fernando Chui Sai On Transport and public works Ao Man Long
Others Commissioner against corruption Cheong U Commissioner of Audit Fatima Chio Mei Lei President of the Legislative Council Susana Chou President of the Court of Final Appeal Sam Hou Fai
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Economic structure
Annual indicators
1996 1997 1998 1999 2000a Real GDP growth (%) –0.4 –0.3 –4.6 –2.9 2.0 Population (year-end) (‘000) 415.9 422.0 430.5 437.5 444.6 Consumer price inflation (av; %) 4.8 3.5 0.2 –3.2 –1.8 Exports fob (US$ m) 1,995.6 2,142.6 2,135.7 2,197.5 2,571.1 Imports cif (US$ m) 1,999.7 2,076.8 1,949.8 2,037.5 2,375.7 Trade balance (US$ m) –4.1 65.8 185.9 160.0 195.4 Exchange rate (av; MPtc:US$) 8.0 8.0 8.0 8.0 8.0
November 30th 2000 MPtc8:US$1
Origins of gross domestic product 1993 % of total Components of gross domestic product 1998 % of total Manufacturing 40.0 Private consumption 36.0 Tourism 27.0 Government consumption 10.8 Construction 9.0 Gross fixed capital formation 18.3 Trade 6.0 Stockbuilding 0.7 Finance 4.0 Exports of goods & services 72.3 Total incl others 100.0 Imports of goods & services –38.1 Total 100.0
Principal exports 1999 US$ m Principal imports cif 1999 US$ m Clothing & textiles 1,841.0 Raw materials & semi-manufactured goods 1,097.6 Footwear 62.9 Consumer goods incl foodstuffs, beverages & tobacco 542.6 Electronics 18.1 Capital goods 270.8 Toys 4.4 Mineral fuels & oils 126.5 Total incl others 2,197.5 Total 2,037.5
Main destinations of exports 1999 % of total Main origins of imports 1999 % of total US 46.9 China 35.6 EU 30.2 Hong Kong 18.1 China 9.2 EU 12.9 Hong Kong 6.8 Taiwan 9.5 a EIU estimate.
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 34 Macau
Outlook for 2001-02
Political outlook
Domestic politics Macau’s chief executive, Edmund Ho, has yet to make a serious error of judgement after eleven months in office. Perhaps the most obvious symbol of success has been a dramatic reduction in the number of gangland shootings, down from 37 in 1999 to just one (so far) this year. The reduction has been attributed to better co-ordination between Macau and Guangdong police and (by some) to the presence of the People’s Liberation Army (PLA), even though they are not used for domestic security.
The reduction in violence has already translated into a sharp recovery in tourist numbers (see the Domestic economy). Exports are also enjoying a boom, due largely to strong growth in the US and other markets. Nevertheless, the economy remains excessively dependent on the production and export of textiles and the gambling industry for its economic prosperity.
The government will be keen to avoid further labour protests that took place in July so that China maintains its “hands-off” policy to the Special Administrative Region (SAR). Macau’s constitution since its integration with China on December 20th 1999, the Basic Law, specifies that China should allow the government of the SAR a “high degree of autonomy” in managing its domestic affairs for a period of fifty years. However, the experience of Hong Kong, part of China since 1997, is that mainland officials have felt free to comment on issues judged of particular importance—for example, Taiwan or immigration. However, as the democratic opposition is much less vocal in Macau than Hong Kong, and with Macau much less prominent on the international stage, direct intervention by Beijing should be avoided.
Economic forecast
Macau’s administration still has a lot to do on the economic front. Mr Ho has said that economic issues will be a priority, but many policy building bricks are not yet in place. Judging from a recent decision to sell off up to three mobile telephone licences, the administration is committed to some degree of economic liberalisation. However, a much bigger and trickier decision must soon be taken regarding the gambling syndicate, the Sociedade de Turismo e Diversões de Macau (STDM). This syndicate controls all gambling activity in Macau, and contributes over 40% of government revenue. Its franchise ends in 2001 and the government has indicated that it intends to increase competition in this sector—in the hope of boosting its own revenue. But worries about the dangers of changing to a new regime—both in terms of crime and disruption to its own revenue—may make the government reluctant to accept radical change.
The government also now seems to be thinking about certain medium-term structural economic issues, as evidenced by Mr Ho’s second Policy Address given in November (see The political scene). But it remains to be seen whether
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the government’s talk about diversifying the economy away from its current dependence on gambling, and textiles and garments exports is translated into reality. The government follows fashion by talking of its desire to foster an information technology (IT) sector, but it is unclear whether Singaporean (or other) firms will be keen to establish a presence, even with China next door. Likewise, efforts to widen the appeal of Macau as a destination for non- gambling tourists may have some success.
The search for new start export sectors may become more frantic over the next few years, if the pace of relocation of textiles and garment production to mainland China quickens. This, and the depressed state of domestic demand, makes the economic outlook rather gloomy. Despite the increase in export volumes recorded so far this year, and the pick-up in tourist numbers, the unemployment rate has stabilised at a relatively high level, and it is unclear how the government can reduce it, in the short term at least. Government pledges on job creation and training are not likely to have much impact, and attempts to boost the local economy through encouraging IT investment or a more broad-based tourism sector are likely to take time to bear fruit. Government pledges to reduce the number of foreign workers will also take time to honour. It is also unclear what the government can do about the over- supply of property, or rising local interest rates (inevitable, due to the peg of the local pataca, through the Hong Kong dollar, to the US dollar).
Macau’s economy is therefore likely to register only modest growth in 2001-02, after having contracted over 1996-99 and grown by an estimated 2% in 2000. With growth in Hong Kong forecast to reach a much faster 9.7% in 2000, Mr Ho’s toughest task may be reconciling unrealistic popular expectations with economic reality.
EIU Country Risk Service December 2000 © The Economist Intelligence Unit Limited 2000 The political scene
The chief executive gives The chief executive, Edmund Ho, gave his second Policy Address on his second Policy Address November 9th. He concentrated on outlining measures to accelerate the Special Administrative Region’s (SAR’s) weak economic recovery. Mr Ho claimed that, after an exceptionally difficult period which saw the economy stagnate and the territory revert to Chinese sovereignty, the economy has finally turned the corner, but that the government must now concentrate on improving the market environment. |He announced that the government intends to speed up the revision of business regulation and introduce some element of competition law. In an effort to attract more foreign investment, the government will simplify investment and trading regulation. He praised “one country, two systems”, arguing that the handover had taken place remarkably smoothly.
Mr Ho’s contention that the “one country, two systems” principle was working very well appears to be shared by the population. According to an opinion poll in November, conducted by researchers from the University of Macau, 85% of those polled expressed themselves satisfied with the performance of the SAR government since it took power at the end of December 1999. However, Mr Ho did recognise the need to improve the quality of public administration within the SAR, in order to combat corruption. To this end, Macau is seeking the assistance of other countries, including Singapore and Hong Kong, in training civil service personnel and improving administrative structures more generally. It was also announced that the powers of the Audit Commission are to be strengthened, in an attempt to ensure a more efficient utilisation of public resources.
Journalists from Hong Kong and Macau were banned from attending a ceremony to mark the twentieth anniversary of the Shenzhen Special Economic Zone, just three weeks after President Jiang Zemin angrily berated reporters questioning his support for the retention of the current Hong Kong SAR chief executive, Tung Chee-hwa, for a second five-year term, starting in 2002. Although it is increasingly clear that the Chinese government’s interpretation of the scope of the autonomy of the Hong Kong SAR differs from what was hoped for and expected in the territory, popular concerns about the loss of autonomy after the handover to Chinese sovereignty were more muted in Macau, and public concern at Mr Ho’s consistently pro-Beijing line has so far been limited.
Taiwan attempts to Taiwan has stepped up its attempts to improve relations with Hong Kong and improve relations Macau. In early November, business and academic figures from Taiwan, Hong Kong, and Macao were invited to a meeting with Taiwan’s Mainland Affairs Council (MAC) to review existing political, economic and trade relations between Taiwan and the two SARs. Taiwan announced that it would be upgrading its mission in Hong Kong in recognition of the city state’s importance in the region. All the participants to the talks argued that Hong Kong and Macao will continue to play an important intermediate role as a conduit for trade between mainland China and Taiwan, even after Chinese and Taiwanese accession to the World Trade Organisation (WTO).
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000 Hong Kong 37
The EU’s external relations commissioner, Chris Patten said that the issue of visa-free travel to the EU was being held up by concerns in a couple of EU member states about the potential for illegal immigration from mainland China. Mr Patten said that the trafficking in illegal immigrants from mainland China to the EU has become a serious problem, and that some European governments appear unaware of how stringent immigration controls are in both Hong Kong and Macau. He reiterated his desire for visa-free travel between the EU and Macau.
The domestic economy and economic policy
Government could open up The government has indicated that it is willing to see more competition within gambling franchises the Special Administrative Region’s (SAR’s) highly lucrative gambling industry. The gambling syndicate which operates Macau’s casinos is headed by a prominent Hong Kong-based businessman, Stanley Ho. The syndicate, the Sociedade de Turismo e Diversões de Macau (STDM), operates nine casinos in the enclave and also has interests in greyhound and horse racing, lotteries, property, the new international airport and Air Macau. The chief executive noted that the most important thing is that government revenue from the gaming sector is ensured. The gambling franchise agreement enables it to keep other taxation low (direct taxes from gambling in 1999 accounted for 44% of total government revenue). Moreover, under an agreement signed in 1986, STDM is obliged to contribute HK$12bn (US$1.5bn) over 15 years to infrastructure development in Macau. The government needs to find a way of opening up the industry without endangering its ability to levy significant revenue from it.
Tourist number have continued to rise strongly, as Macau has profited from the Asian recovery and a decline in gang-related violence. Official figures show that more than 6.84m tourists came to Macao in the first three quarters of the year, an increase of 22% over the same period last year, increasing expectations that 2000 could surpass the record of 8.15m visitors set in 1996. In August alone, the peak month for tourism, arrivals totalled 900,974, a 30% rise year on year. Tourism accounts for around 40% of GDP in Macau and employs one-third of the workforce. As a result, a recovery in this sector should quickly feed through into an improved overall economic performance.
Macau: tourism statistics, 2000
Mar Apr May Jun Jul Aug Sep Visitor arrivals 720,511 803,159 737,632 649,112 848,231 900,974 725,469 Hotel occupancy rate (%) 54.7 60.7 60.9 53.5 62.2 67.36 56.22 Average length of stay (nights) 1.27 1.28 1.25 1.28 1.24 1.24 1.30 Source: Direccao dos Servicos de Estatica e Censos, website.
Export growth accelerated in the third quarter of 2000, underpinning a sharp rise in the trade surplus. Over the first three quarters of 2000 the trade surplus
EIU Country Risk Service December 2000 © The Economist Intelligence Unit Limited 2000 was MPtc2.1bn (US$263m), with exports and imports rising by 14.7% and 9.4% year on year respectively. This compares with a trade surplus of just MPtc780m (US$97.5m) in the first half of the year, and export and import growth of 11% and 9% year on year.
Macau: merchandise trade account, Jan-Sep (MPtc bn) 2000 1999 % change Exports 15.26 13.30 14.7 Imports –13.21 –12.07 9.4 Trade balance 2.05 1.73 n/a Source: Direccao dos Servicos de Estatica e Censos, website.
Exports to Hong Kong and mainland China together accounted for just 16.4% of total exports, but 56.2% of total imports over the first three quarters of 2000. By contrast, 48.1% and 28.7% of exports went to the US and the EU respectively, but accounted for just 4.2% and 9.4% of exports. There has been no reduction in Macau’s excessive dependence on textiles exports: over the first eight months of the year, exports of textiles and garments accounted 83% of exports, unchanged from a year ago.
Macau: domestic exports by main market (MPtc m) 1999 2000 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr US 2,588.3 1,870.8 1,792.7 2,459.6 3082.3 EU 1,496.7 1,454.2 1,291.6 1,480.7 1605.1 Hong Kong 302.7 257.9 335.6 354.2 336.0 Taiwan 55.5 53.7 36.9 38.2 52.0 Mainland China 430.6 385.0 331.6 593.4 557.9 Source: Direccao dos Servicos de Estatica e Censos, website.
Macau: imports by main market (MPtc m) 1999 2000 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Mainland China 1491.0 1584.3 1337.6 2020.6 1999.8 EU 388.8 440.8 354.7 374.4 513.2 Hong Kong 709.1 746.5 601.1 801.1 661.2 Taiwan 410.8 340.0 313.8 587.8 424.7 US 182.2 107.5 177.9 180.1 198.0 Source: Direccao dos Servicos de Estatica e Censos, website.
The number of new In an indication that economic conditions are improving, a total of 205 new companies starts to pick up companies were registered in the third quarter of the year, almost twice as many as in the year earlier period. Out of the newly formed businesses, 83 were active in the wholesale and retail sales, 21 in construction sector, 20 in real estate sector and 17 in information-related services. over the first three quarters of the year, 22 companies were closed, nine of which were in real estate.
EIU Country Report December 2000 © The Economist Intelligence Unit Limited 2000