COUNTRY PROFILE 2000

Hong Kong

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Comparative economic indicators, 1999

EIU Country Profile 2000 © The Economist Intelligence Unit Limited 2000 1

Contents

Hong Kong

4 Basic data

5 Political background 5 Historical background 12 Constitution and institutions 15 Political forces 18 International relations and defence

19 Resources and infrastructure 19 Population 20 Education 23 Health 24 Natural resources and the environment 25 Transport and communications 28 Energy provision

29 The economy 29 Economic structure 30 Economic policy 37 Economic performance

41 Economic sectors 41 Agriculture, forestry and fishing 41 Mining and semi-processing 41 Manufacturing 43 Construction 44 Financial services 47 Other services

49 The external sector 49 Trade in goods 51 Invisibles and the current account 52 Capital flows and foreign debt 53 Foreign reserves and the exchange rate

55 Appendices 55 Sources of information 56 Reference tables 56 Population 56 Labour force 57 Transport statistics 57 National energy statistics 58 Government finances 58 Money supply

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58 Interest rates 59 Gross domestic product 59 Gross domestic product by expenditure 59 Gross domestic product by sector 60 Prices 61 Wage indices 61 Manufacturing production 61 Miscellaneous manufacturing statistics 62 Construction statistics 62 Banking statistics 63 Stockmarket indicators 63 Retail sales 63 Tourism statistics 64 Domestic exports by main commodity section 64 Re-exports by end-use category 64 Imports by end-use category 65 Trade volume indices 65 Domestic exports by main destination 65 Re-exports 66 Imports by major trading partner 66 Trade in services 66 Trend of foreign trade 67 Direction and composition of foreign trade, 1999 68 Balance of payments 69 External debt 69 Foreign-exchange reserves 70 Exchange rates

Macau

71 Basic data

72 Political background 72 Historical background 74 Constitution and institutions

76 Resources and infrastructure 76 Population 77 Education 77 Health 77 Natural resources and the environment 78 Transport and communications 79 Energy provision

79 The economy 79 Economic structure 80 Economic policy 80 Economic performance

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81 Economic sectors 81 Agriculture and fishing 82 Manufacturing 83 Construction 83 Financial services 84 Other services

85 The external sector 85 Trade in goods 87 Invisibles and the current account 87 Exchange rate

88 Appendices 88 Sources of information 88 Reference tables 88 Population 89 Labour force 89 Enrolment in education institutions 90 Transport and communications 90 National energy statistics 90 Government finances 91 Money supply 91 Gross domestic product 91 Gross domestic product by expenditure 92 Prices 92 Construction statistics 92 Tourism 93 Trend of foreign trade 93 Exports by main sector 93 Imports by end-use category 93 Exports by main destination 94 Imports by main source 94 External debt 94 Exchange rates

© The Economist Intelligence Unit Limited 2000 EIU Country Profile 2000 4 Hong Kong

Hong Kong

Basic data

Land area 1,097 sq km

Hong Kong Island 80 sq km Kowloon 47 sq km New Territories and outlying islands 970 sq km (Reclamation since 1851) 60 sq km

Population 6,843,000 (mid-1999 official estimate)

Main regions Population in ‘000 (mid-1998)

Hong Kong Island 1,394 Kowloon 2,101 New Territories 3,090 All islands 84 Marine population 15

Climate Sub-tropical

Weather in Victoria Hottest months, July and August, 24-34°C; coldest month, March, 4-26°C; (altitude 33 metres) driest month, December, 46.6 mm average rainfall; wettest month, July, 547 mm average rainfall

Languages English and Chinese (mainly )

Measures UK imperial system changing to metric system. Local measures are used including: 10 fan=1 tsun (Chinese inch)=0.037 metres; 10 tsun=1 check (Chinese foot)=0.371 metres; 10 tsin=1 leung (tael)=37.8 g; 16 leung=1 kan (catty)=0.605 kg; 100 kan=1 tam (picul) = 60.48 kg

Currency 1 Hong Kong dollar=100 cents. Annual average exchange rate in 1999: HK$7.76:US$1. Exchange rate on July 14th 2000: HK$7.8:US$1

Time GMT +8 hours

Public holidays January 1st, Chinese New Year (three days in late January or early February), Good Friday, Easter Saturday, Easter Monday, Ching Ming Festival (one day, early April), Labour Day (May 1st), Buddha’s Birthday (May 22nd), Dragon Boat Festival (one day at the end of May or in early June), Hong Kong Special Administrative Region Establishment Day (July 1st), the day following Chinese Mid-Autumn Festival (late September/early October), National Day (October 1st), Chung Yeung (one day, second half of October), December 25th and the first business day following

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Political background

On July 1st 1997 Hong Kong, which had been a UK colony since 1841, became a Special Administrative Region (SAR) of the People’s Republic of (PRC). Hong Kong is now ruled on the basis of a mini-constitution, the Basic Law, which guarantees the SAR its own legislature, legal and judicial system and full economic autonomy, while giving the central government in Beijing res- ponsibility for defence and foreign affairs. The SAR has an executive-led government, headed by the chief executive, Tung Chee-hwa, who was appointed by a 400-member Election Committee in December 1996. The current Legislative Council (Legco) was formed by elections in May 1998; the next Legco poll is due to be held in September 2000.

Historical background

Colonisation by Britain: Until it was seized from China by the British navy in January 1841 at the gunboat diplomacy height of the first opium war (1839-43), Hong Kong Island was home to fewer than 6,000 Chinese inhabitants, two-thirds of them farmers, one-third fishermen. The then foreign secretary, Lord Palmerston, referred to it famously, and largely accurately, as “a barren island with hardly a house upon it”. Thereafter it grew rapidly as an entrepôt for trade between the Chinese empire, which Britain prised open with its gunboats, and the rest of the world.

At the end of the second opium war, in 1860, Britain extended its territorial holdings to include Kowloon, situated on the mainland peninsula facing Hong Kong Island, and Stonecutters Island. Rapid population growth soon robbed the colony of land on which to grow food, while in the aftermath of the Sino-Japanese war (1894-95) the UK felt the need for a defensive zone from which to protect Hong Kong from attack by the other imperialist powers. In 1898 China was therefore forced to cede to the UK the New Territories—the land north of Kowloon up to what is now the Shenzhen Special Economic Zone—plus 235 islands, on a 99-year lease, to expire in June 1997. With the exception of the second world war, when the territory was occupied by Japan, Hong Kong remained a colony ruled directly by the British crown through an appointed governor, up to its retrocession to China on July 1st 1997.

The 1984 Sino-British The lease arrangement for the New Territories, to which little significance was Joint Declaration attached at the time, proved to be a problem for the UK. In the late 1970s individual land leases in the New Territories that straddled 1997 were coming up for renewal. The UK government raised this subject with the Chinese government, hoping that a solution could be found that preserved the status quo. China initially refused to discuss the matter, but by late 1981 it became clear that the government in Beijing intended to resume sovereignty over all of Hong Kong in around 1997. The UK was not in a position to prevent China from doing this; the territory was dependent on China for basic resources such

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as water. Retaining British sovereignty over the parts of Hong Kong not affected by the lease was never really an option; the rest of Hong Kong would have been unviable without the New Territories, which accounted for 92% of the colony’s land area. In any case, the Chinese government did not accept the validity of the documents that had ceded the other parts of Hong Kong to the British.

The British government did try to reach an agreement, whereby sovereignty over the colony would be returned to China with the UK keeping respon- sibility for the administration of Hong Kong. Unsurprisingly, the Chinese government would not agree to such an arrangement. The UK therefore had to accept that sovereignty of Hong Kong would be returned to China, and entered into negotiations with the communist government on exactly how this would occur. The result was an agreement signed on December 19th 1984 by the British and Chinese prime ministers, the main document of which was the Joint Declaration. In this, the UK agreed to surrender Hong Kong to China on July 1st 1997. For its part, China agreed that Hong Kong would, under the guiding principle of “one country, two systems”, become a Special Administrative Region (SAR) of China, with its capitalist way of life guaranteed for the following 50 years by a mini-constitution, the Basic Law.

1985-91: the Joint A Sino-British Joint Liaison Group (JLG) was established in 1985 to implement Liaison Group the Joint Declaration and supervise the transfer of sovereignty (in accordance with the Joint Declaration, the JLG remained in existence until January 1st 2000). In its first few years the JLG reached agreement on a number of subsidiary issues, including travel and identity documents, air traffic, shipping, civil service pensions, the surrender of fugitive offenders and the localisation of UK legislation. The productivity of the JLG work slowed following the Beijing massacre in 1989, which resulted in a sharp deterioration in China’s relations with the West. This worsening of relations affected the UK’s ability to push through a massive programme of infrastructure expenditure, the Port and Airport Development Strategy (PADS). This programme was drawn up by the Hong Kong government in an attempt to boost confidence in the territory, which had plummeted in the aftermath of the killings in 1989. As a result of China’s suspicions of British actions in Hong Kong, however, it was not until July 1991 that an agreement approving the core projects in PADS— subsequently referred to as the Airport Core Programme (ACP)—was reached.

1992-94: the Patten plan In July 1992 the then governor, Sir David Wilson, a Foreign Office sinologist, was succeeded by a former UK government minister and Conservative Party chairman, Chris Patten. In his first annual policy address, in October 1992, Mr Patten announced that he wished to make changes to widen the franchise for elections to Hong Kong’s three tiers of government. The most important of the governor’s proposed reforms affected the Legislative Council (Legco), which was to be elected in 1995. The changes involved: increasing the number of directly elected seats from 18 to 20; abolishing the appointed seats; increasing the number of seats elected by functional constituencies to 30 and broadening the functional constituency electorate from 110,000 people to 2.7m; and filling an Election Committee responsible for electing ten Legco

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members with directly elected members of district boards. Mr Patten also proposed that the geographical constituencies comprise single-seat constituencies; that the voting age be lowered from 21 to 18; and that the appointed seats to the district boards be abolished.

Mr Patten insisted that his proposals accorded with the Basic Law’s stipulations about the constitution of the post-1997 government. As a result, the governor argued, the Legco elected in 1995 would be able to see out its four-year term through to 1999. This was significant, as the “through train” was viewed as an important guarantee of stability during the transition period. China, however, was not impressed. This was partly because Mr Patten announced his proposals without first discussing them with the government in Beijing. China’s authorities were also angered at what they saw as the flouting of previous Sino- British understandings on the issue of elections. The communist government viewed the proposals as a British attempt to rig the elections in favour of forces hostile to China.

Months of Sino-British talks failed to produce an agreement on the proposals. Consequently, and in accordance with threats to set up a “second kitchen” if the UK insisted on implementing the Patten reforms, in July 1993 China established a Preliminary Working Committee (PWC). Talks between the two sides continued but came to nothing, even though the British tabled a watered- down version of the proposals. In December 1993 Mr Patten announced that he would press ahead with the reforms as originally proposed. The PRC res- ponse was not surprising: on August 31st 1994 the Standing Committee of the National People’s Congress (China’s parliament) voted unanimously to abolish this political structure on the occasion of the handover on July 1st 1997.

The first polls to be held under Mr Patten’s electoral reforms were the district board elections in September 1994. At just 33.1%, the turnout rate was disappointing, but the government was able to point to the record number of people, around 700,000, who had voted as a sign of popular support for the governor’s reforms. As in the previous direct elections in 1991, the pro- democracy lobby the largest number of seats, but this time the pro-Beijing forces gained some ground.

1994-95: progress on The disagreement over future electoral arrangements stalled progress on other transitional issues issues related to the transition. Beginning in June 1994, however, accords were finalised on the future of British army sites in Hong Kong, and on financing for the new airport. In June 1995 Chinese and British negotiators finally reached agreement on what had become the most important outstanding dispute surrounding the transfer of Hong Kong’s sovereignty, the question of the Court of Final Appeal (CFA). This deal was, however, only sealed after the UK made concessions to Chinese demands. The Democratic Party, which had previously been among Mr Patten’s closest allies in Hong Kong, was outraged by the agreement finally reached, as was the Hong Kong Bar Association. Both feared that imprecise language in the agreement, in particular the inclusion of references to “acts of state”, meant that China might assign sensitive cases to pliable courts on the mainland instead of to more independent courts in Hong Kong.

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Important recent events

1990: In April the Basic Law of the Hong Kong Special Administrative Region (SAR) is enacted by China’s parliament, the National People’s Congress (NPC).

1992: In July Chris Patten succeeds Sir David Wilson as governor of Hong Kong. In his first annual policy address in October Mr Patten outlines his proposals for the elections for the three tiers of government before 1997.

1993: China establishes a Preliminary Working Committee in July to give weight to its threat to set up a “second kitchen” if the UK insists on implementing the Patten plan. In December Sino-British co-operation over Hong Kong’s political future breaks down over electoral arrangements, as Mr Patten proceeds to legislate unilaterally for his reforms.

1994: In June the Legislative Council (Legco) approves the governor’s controversial proposals for the 1995 Legco election by 30 votes to 29. As a result, in August the NPC votes unanimously to abolish Hong Kong’s district boards, municipal councils and Legco on June 30th 1997. The pro-democracy parties win the most seats in the district board elections in September, the first poll held under Mr Patten’s reforms.

1995: The pro-democracy movement wins another clear victory in the Legco election in September; the pro-Beijing Democratic Alliance for the Betterment of Hong Kong (DAB) wins just seven seats in the 60-seat Legco. In December China names the 150-member Preparatory Committee on Hong Kong.

1996: China, in a March vote by the Preparatory Committee, presses ahead with its pledge to scrap Hong Kong’s elected Legco and replace it with an appointed Provisional Legislative Council (PLC). In April the mainland regulatory agency, China National Aviation Corp (CNAC), and Citic Pacific pay Swire Pacific HK$8.27bn (US$1.1bn) to buy control of the regional carrier, Dragonair, and to take Cathay Pacific Airways out of British hands. The deal, at a big discount to market prices, is seen as the shape of things to come for big non-Chinese companies wishing to operate in Hong Kong after 1997. On July 1st Hong Kong becomes a Special Administrative Region of the People’s Republic of China.

April 1998: The PLC passes the Adaptation of Laws Ordinance. This grants Chinese government institutions in Hong Kong the same immunity from most laws as that enjoyed by the British Crown, but also appears to contravene the Basic Law.

May 1998: Elections to a new Legco are held, using rules that reduce greatly the size of the electoral franchise compared with the 1995 election. The pro- democracy parties win two-thirds of the popular vote, but win just one-third of the eats in the new Legco.

August 1998: The government undertakes a HK$118.1bn (US$15.2bn) spend- ing spree in the local stockmarket in a controversial attempt to preserve the fixed link between the Hong Kong and US dollars. The government initially claims that as a result of the Adaptation of Laws Ordinance it is not bound by

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rules that require disclosure of substantial share ownership. The authorities later back down and publish details of the official share portfolio.

January 1999: In its first major confrontation with the executive and legislative branches, the Court of Final Appeal (CFA) strikes down on constitutional grounds elements of immigration legislation passed by the PLC in July 1997. China objects to the ruling and demands that the court’s decision be “rectified”.

May 1999: The local government, claiming that 1.67m people could come to Hong Kong as a result of the CFA’s ruling, refers elements of the Basic Law to the Standing Committee of the NPC for an “interpretation”. Despite the SAR government’s insistence that this action does not undermine judicial independence in Hong Kong, pro-democracy legislators condemn the action as constituting an effective appeal against the CFA, and claim that the rule of law in Hong Kong has been damaged.

December 1999: CFA judges rule that the NPC’s interpretation on Hong Kong was “valid and binding”. By stating that the interpretation could be applied retrospectively, the judges rule that the restrictions on immigration that the court itself had struck down in January were now lawful. In the same month the CFA rules that legislation introduced in July 1997 criminalising the desecration of national and regional flags in the SAR did not violate the Basic Law.

April 2000: The chairwoman of the Citizens’ Party, Christine Loh, announces she will not seek re-election to Legco, citing frustration at the unwillingness of the SAR’s executive to expand participatory politics in Hong Kong.

September 1995: Despite China’s plans to disband Legco and replace it with a wholly unelected Legco election body on July 1st 1997, pro-Beijing candidates did participate in the Legco poll in September 1995. As expected, the pro-democracy camp trounced the pro- China candidates in the direct election in geographical constituencies. The strong showing by pro-democracy candidates probably reinforced China’s fears, which had earlier been fed by the emotional reaction of much of Hong Kong’s population to the 1989 Tiananmen Square massacre in Beijing, that the territory was a centre for subversion requiring tight control. The poll result certainly did nothing to cause China to rethink its stated aim of dismantling the elected Legco on July 1st 1997.

1996: Hong Kong’s new In December 1995 Beijing appointed a Preparatory Committee (PC) on Hong power structure Kong, which was charged with “managing” the transition to Chinese rule. One year later a 400-member Election Committee, chosen by the PC, appointed Tung Chee-hwa, a former shipping executive whose ailing family company had been rescued by China in 1985, as the first chief executive of the Hong Kong SAR. It also selected a Provisional Legislative Council (PLC), which was to replace Legco on July 1st 1997. China did make some attempt to preserve the “through train” by allowing several top officials, including the chief secretary, Anson Chan, and the financial secretary, Donald Tsang, to continue in their roles after July 1st 1997.

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The 1997 handover: a At midnight on June 30th 1997 British rule of Hong Kong ended and China smooth transition resumed sovereignty of the territory. The handover ceremony was attended by several luminaries: China’s president and prime minister, Jiang Zemin and Li Peng respectively, the Prince of Wales (representing the queen), the UK prime minister, Tony Blair, and the new SAR chief executive. The rites were smoothly and peacefully conducted, and, partly because of a massive security cordon, no untoward accident or incident occurred. Some acts of defiance were permitted: a leading member of the Democratic Party, Martin Lee, accompanied by fellow ex-legislators, was allowed to proclaim “We shall return!” from the balcony of the Legco building after midnight on July 1st.

1997-99: Hong Kong Fears that Hong Kong would suffer heavy-handed interference from the central does not appear to government after the handover have proved unfounded. Troops of China’s change radically army, the People’s Liberation Army (PLA), who entered Hong Kong in the morning of July 1st 1997, have adopted an extremely low profile. During 1997 and 1998 the government in Beijing appeared to take every opportunity to demonstrate a “hands-off” approach to Hong Kong. A feared crackdown on political dissent has not materialised. Protesters have continued to air their concerns in the streets, and those few mainland dissidents who have stayed in Hong Kong remain at liberty. The press has not been fettered by new legal restrictions (although rumours of “self-censorship” persist).

Fears persist that the rule While life in Hong Kong does not seem to have changed radically since of law is being eroded sovereignty returned to China, worries persist that Chinese rule is having an adverse effect on the former colony. Several decisions made by the local government since 1997 were attacked for undermining Hong Kong’s autonomy from China. The most serious incident occurred in January 1999, when the CFA struck down elements of a controversial immigration law passed by the PLC in July 1997. The court claimed that parts of this law were inconsistent with clauses in the Basic Law, which grant the right of abode in Hong Kong to anyone with at least one parent with permanent residency rights in the SAR. China reacted angrily to this ruling, partly because, in making its decision, the CFA appeared to put the provisions of the Basic Law above the NPC.

The rule of law

A critical factor differentiating UK-ruled Hong Kong from the rest of China, where the legal system was arbitrary and politicised, was a strong tradition of rule of law. As such, rule of law is viewed as having played an important part in Hong Kong’s rapid economic development. Under British rule, the strength and independence of Hong Kong’s legal system also played an important political role: as the colony’s democratic institutions were extremely weak, the rule of law was the only check-and-balance on the actions of the local government.

These economic and political considerations remained relevant after July 1997. If anything, the role of the rule of law asa check on the actions of the Hong Kong government acquired even more importance after the handover, as the actions of the local government would no longer be restricted by the democratic traditions of the sovereign country, as was arguably the case under

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British rule. As a result, since China assumed sovereignty over Hong Kong, any incident that has been perceived as weakening the rule of law in the SAR has attracted a great deal of controversy.

One such event was the “Big Spender” case of December 1998. Named in a reference to the flamboyant life-style of the chief culprit, Cheung Tze-keung, this case involved the mainland trial and conviction of several SAR residents on charges related to kidnappings carried out in Hong Kong. Another was the non-prosecution of the head of the Sing Tao newspaper publishing group, Sally Aw. Ms Aw was not charged over the publication of inflated circulation figures for one of her newspapers, the Hong Kong Standard, even though she was named as a co-conspirator in the case (in January 1999 the three other executives named in addition to Ms Aw were found guilty, and imprisoned). A third incident was the government’s May 1999 decision to seek an “interpretation” of right of abode clauses in the Basic Law.

All three incidents prompted fears that the principle of equality before the law, an essential element of the rule of law, was not being strictly observed in Hong Kong. One of Mr Cheung’s victims was Victor Li, the son of one of Hong Kong’s most prominent tycoons, Li Ka-shing. Although the Li family reportedly paid Mr Cheung and his gang a huge ransom of HK$1.38bn (US$178m), the incident was not reported to the Hong Kong police. This sparked a widespread belief that the elder Mr Li had used his contacts in Beijing to ensure a trial on the mainland, where the authorities’ ability to achieve a conviction is more certain (the tycoon later denied he had used his influence). Government critics feared that Ms Aw also managed to escape prosecution because of her high-level contacts in both Beijing and Hong Kong (Ms Aw is a long-standing friend of Hong Kong’s chief executive, Tung Cheehwa). In February 1999 the justice secretary, Elsie Leung, tried to dispel these fears. But by admitting that one reason why the government had not pressed charges against Ms Aw was the health of the Sing Tao group, Ms Leung only served to exacerbate fears about equality before the law in Hong Kong.

The most controversial case was the government’s decision to seek an interpretation from China’s National People’s Congress Standing Committee (NPCSC) of the right of abode clauses in the Basic Law. Critics have argued that this was not a request for an “interpretation” at all, but rather for a “reinter- pretation”. The Hong Kong government effectively asked the NPCSC to interpret the Basic Law in such a way as to uphold aspects of the government’s July 1997 Immigration Ordinance that had been struck down by Hong Kong’s highest court, the Court of Final Appeal, in January 1999. The NPCSC duly issued an interpretation on June 28th 1999.

Unsurprisingly, officials reject criticism that the strength of Hong Kong’s legal system has been weakened since July 1997. The government claims that some of the controversial legal incidents simply reflect a lack of clarity in some areas of the Hong Kong-Beijing relationship, rather than an erosion of the rule of law. For example, officials claim that the government’s difficulties during the “Big Spender” case were caused by the lack of a formal rendition agreement between the two sides. The government also claims that its actions in other cases, although seemingly controversial, are consistent with Hong Kong’s new

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political circumstances. Requesting the ultimate law-making authority to issue an interpretation of a piece of legislation is accepted practice in a civil law jurisdiction, for example. During the right of abode controversy the govern- ment argued that the Basic Law was a “bridge” between Hong Kong’s common law system and China’s system of civil law. As such, the SAR government could ask the NPCSC to issue an “interpretation” of the Basic Law, even though such a request is an alien concept in a common law jurisdiction.

Officials claim that as Hong Kong’s new political arrangements become more established, it will become clear that the controversial incidents that have occurred since July 1st 1997, of which the above three are just a selection, have not adversely affected the rule of law in the SAR. Critics fear that in a few years’ time the incidents of 1997-99, rather than being viewed as exceptional post- handover cases, will be judged as just the first steps in a serious erosion of the rule of law in Hong Kong. By then, however, it will be too late to repair the damage.

Hong Kong’s government was also not impressed, claiming that the court’s ruling would lead to the immigration to the SAR of 1.67m people within around the next ten years. Mr Tung claimed that the consequences of such immigration would be “unimaginable”. The government therefore decided to ask the Standing Committee of the NPC to issue an “interpretation” of the relevant articles of the Basic Law to restrict the numbers who could claim right of abode in Hong Kong. The government argued it was legally justified in doing this. Pro-democracy politicians and the Hong Kong Bar Association were, however, horrified, claiming the government’s decision undermined both the rule of law in the SAR and Hong Kong’s autonomy from China.

Constitution and institutions

The Basic Law: Hong Kong’s A Basic Law drafting committee, with members from both China and Hong post-1997 constitution Kong, was set up by China in 1985 to draw up a mini-constitution, known as the Basic Law of the Hong Kong SAR. The law was enacted in April 1990 by the NPC in Beijing after lengthy consultation and redrafting. The Basic Law ensures that Hong Kong will be ruled until at least 2007 by a chief executive acceptable to China, with the ultimate objective being the election of this post by universal suffrage. Only a minority of Legco seats are initially to be directly elected, and progress towards an expanded and fully elected legislature will, as in the case of the chief executive, stretch well into the next century.

Under the Basic Law, the SAR has its own legislature, legal and judicial system and full economic autonomy, while defence and foreign affairs are the responsibility of the central government in Beijing. Hong Kong is still able to participate in international organisations and agreements where appropriate. Hong Kong continues to function as an international financial centre, with no exchange controls, free convertibility of the Hong Kong dollar and free inward and outward movement of capital. Existing freedoms, including free speech and assembly, press, religion, and the right to strike and travel, are ensured by law, although the PLC ruled that demonstrations in favour of such causes as

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independence for Tibet or Taiwan may not be held. Business ownership, private property, the right of inheritance and foreign investment are also protected by law.

The chief executive: The chief executive is appointed by China’s central government after selection a regional autocrat by an Election Committee, whose members are nominated by corporate bodies. It is constitutionally possible, although by no means a foregone conclusion, that a more popular form of election for the chief executive will be adopted after 2007. The term of office of the chief executive is five years, and no individual may serve for more than two consecutive terms.

Like the 28 British governors who preceded him, the first chief executive, Tung Chee-hwa, has strong policymaking and executive powers approximating to those of a president. These powers are, however, limited from above by the central government in Beijing, to whom he reports directly, and from below (to a far more limited extent) by the legislature.

Legco: not yet fully elected The Legislative Council (Legco), elected in September 1995, was dissolved on July 1st 1997, when it was replaced by a Provisional Legislative Council (PLC), appointed seven months earlier. The first post-handover election to Legco took place on May 24th 1998. This poll was conducted under new rules embodied in an electoral law passed in September 1997, rules which were far more restrictive than the ones that had governed the 1995 polls. As a result, even though the Hong Kong Democratic Party and other pro-democracy groups won two-thirds of the popular vote, they emerged with just one-third of the seats in Legco.

The number of voters in functional constituencies (comprising half the 60 Legco seats) was reduced from 2.7m to 180,000, disenfranchising workers in the enterprises concerned and thereby ensuring that pro-business candidates predominated. In the 20 seats directly elected by geographical constituencies, the method of election was changed from first-past-the-post to a system of pro- portional representation. The remaining ten seats were chosen by an Election Committee largely made up of representatives of functional constituencies.

The electoral arrangements for the next two Legco elections are set out in the Basic Law. In the September 2000 poll, only six representatives will be chosen by the Election Committee, with the number of representatives directly elected from geographical constituencies rising to 24; the Legco elected in 2003 will include only representatives elected by functional and geographical consti- tuencies. The Basic Law does not specify the electoral arrangements to be used thereafter, so it is at least possible—although by no means guaranteed—that the 2007 Legco could be elected on the basis of universal suffrage.

Given that the executive needs to gain Legco’s approval for policy changes, the council does have some power. Opposition in Legco, for example, appeared to be one factor behind the government’s decision not to include proposals for a sales tax in the budget for fiscal year 2000/01 (April-March). The legislature on occasion also appears able to hold the executive to account. In June 2000 a vote of no-confidence was called in leaders of the government’s Housing

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Authority (HA)—the chairwoman of the HA, Rosanna Wong, resigned even before the vote occurred.

Legco has little ability, however, to play a more positive role in the policy- making process in Hong Kong. As a result of provisions of the Basic Law, Legco’s powers to introduce private members’ bills without the consent of the chief executive are severely restricted compared with the 1995 legislature. Even the ability of Legco to serve as an effective check on the powers of the government is limited. Although intensive lobbying of wavering members is sometimes needed, the government is often able to win Legco support for its proposals.

Local government: In the past Hong Kong had two tiers of local government. At the highest level a democracy diluted by extra 40-member Urban Council governed the main urban centres, while the appointed members equivalent body in the New Territories, the Regional Council (established in 1986), had 36 members. The first fully direct elections for both bodies were held in March 1995, although in 1997 Mr Tung’s administration watered down the democratic character of both the Urban and Regional Councils by appointing additional members to each. After assuming office in 1997 Mr Tung also added appointed members to the lowest tier of government in Hong Kong, the district boards.

On January 1st 2000 the two municipal councils were abolished. These two institutions were previously the only elected bodies outside of the executive branch of the central government that possessed policymaking powers. The district boards (now renamed district councils), which only have the power to “advise” the central government, are therefore technically the only form of local government in Hong Kong. Elections for 390 of the 492 district council seats were held in November 1999. The new district councils also include 102 appointed members, and Mr Tung filled these seats on January 2nd.

The judiciary With one major exception, the SAR’s judicial system is unchanged from when Hong Kong was a British colony. The difference is that now the power of final adjudication lies with the CFA, rather than with the Privy Council in London. Most existing judges in Hong Kong have been allowed to retain their posts. However, the chief justice of the CFA and the chief judge of the High Court must now be Chinese citizens who are permanent residents of Hong Kong with no right of abode in any foreign country. Judges in the High Court, comprising the Court of Appeal and the Court of First Instance, are appointed by the chief executive on the recommendation of an independent commission composed of local judges, persons from the legal profession and other “eminent persons”.

The basic principles of judicial independence and trial by jury, which contrast strongly with the arbitrary and politicised operation of courts in the rest of China, are supposed to be guaranteed by the Basic Law. One of the reasons why the government’s decision to seek an “interpretation” from the Standing Committee of the NPC on the right of abode issue was attacked so heavily was that it was seen as an attack on the independence of the judiciary. The government’s actions suggested that whenever the SAR courts made a decision that the local government did not like, officials in Hong Kong would seek redress from China. Critics, such as the leader of the Democratic Party, Martin

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Lee, said that in this way the government was attempting to “soften up” the judiciary. So far, however, little evidence has emerged that the government’s action has made judges more compliant, even on right of abode issues: in June 1999, after the “interpretation” request had been issued, the Court of First Instance struck down government-imposed restrictions aimed at preventing mainland children adopted by Hong Kong parents from living in the SAR.

Institutions of Before the handover the office of the mainland’s New China News Agency mainland China (Xinhua) served as the unofficial representative office in Hong Kong of the Chinese government and is also widely believed to have also functioned as the headquarters of the Hong Kong branch of the Chinese Communist Party, which operated as a clandestine organisation before the 1997 handover. The agency was also believed to provide funds to pro-Beijing political groups in Hong Kong.

On January 17th 1998 the Hong Kong branch of the mainland’s New China News Agency (Xinhua) was renamed the Liaison Office of the Central People’s Government. The renamed agency is supposed to act like a consulate, conducting liaison activities with local groups and maintain information contacts. The Liaison Office is also likely to monitor the activities of mainland officials who have connections with Hong Kong. Also in the SAR is an office of China’s Ministry of Foreign Affairs, and a garrison of the People’s Liberation Army (PLA—see International Relations and Defence). In addition, China has many non-governmental channels of influence in the SAR, including pro- China newspapers such as the Wen Hui Pao and Ta Kung Pao, as well as major corporate groups, including the Bank of China Group, China Resources and the China International Trust and Investment Corporation.

Political forces

Political parties are in Political parties were discouraged by the colony’s political structure until the their infancy early 1990s and were in any case illegal before 1990. Under British rule, both the Executive Council (Exco) and the Legislative Council (Legco) were, at least in theory, merely advisory bodies, and not the executive and legislative bodies that their names suggested. Before the 1991 Legco election, members were either appointed by the governor or selected by functional constituencies; consequently there was no need for extra-parliamentary support organisations. Politicians were business people or professionals representing sectional interest groups rather than professional politicians and tended to eschew developed political ideologies. However, after direct elections for some seats in Legco began in the early 1990s, several political parties formed.

Pro-democracy parties The United Democrats of Hong Kong (UDHK) enjoyed for a long time the largest following of Hong Kong’s fledgling political parties. In October 1994 the UDHK merged with the next largest pro-democracy party, Meeting Point, to form the Democratic Party of Hong Kong (DPHK), which also enjoys widespread support. Two senior members of the party, Martin Lee and Szeto

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Wah, have led protests against repression in China, and the government in Beijing has branded some of the party’s leadership as “subversive”.

Pro-business parties The other pro-democracy parties formed in the early 1990s are the Association for Democracy and People’s Livelihood and the Hong Kong Democratic Foundation. Two relatively new parties, Frontier and the Citizens Party, are centred around two formerly independent Legco members, Emily Lau and Christine Loh respectively. Although small, they are already prominent.

The pro-business parties, quite inappropriately, use the word “liberal” in their titles. A loose grouping of 20 prominent gubernatorial appointees to Legco and Exco, the Co-operative Resources Centre, formed itself into the Liberal Party in July 1993. The principal concern of the Liberal Party is to ensure “stability and prosperity”, in other words, to avoid upsetting China. This attitude of the pro- business groupings, and their tendency to ally with the pro-China groups, which in former years were anathema to them, is now commonplace.

Pro-China groups The Chinese Communist Party was technically illegal in British-ruled Hong Kong, where it had operated underground since the 1920s, largely through trade unions and front organisations. One of these, DAB, formed in July 1992, has emerged as the leading pro-China group, having secured the endorsement of Chinese government leaders. Although being a less vociferous advocate of democratisation than parties such as the DPHK, the Frontier and the Citizens’ Party, the DAB has in recent years come to publicly support the idea of universal suffrage in Hong Kong. In addition to groups such as the DAB, many “independents” in Legco are also consistently pro-China.

The political balance The DPHK has traditionally been the most popular political party in Hong Kong. The party may be losing its pre-eminent position, however. Since July 1997 the DPHK has taken non-populist stances over some controversial government decisions. The party, for example, attacked the May 1999 request for an NPC “interpretation” of the Basic Law even though a majority of people in Hong Kong supported the government’s decision in this case. In addition, the DPHK is a broad coalition united only on the issue of securing full democracy. There is much disagreement within the party over other issues, such as economic policy, and even over the political tactics that the party should use. Since 1998 these internal divisions have on occasion developed into well-publicised bickering between party members.

The party’s difficulties appear to have affected its popularity: in the November 1999 district council elections the percentage of the vote won by the DPHK and its allies fell from the 46% gained in the May 1998 Legco election to just 33%. The party that has gained most from the DPHK’s difficulties has been the DAB. In November 1999 the DAB and allied independents took about 32% of the votes cast, above the 25% proportion achieved in the May 1998 Legco elections. It is possible that in the September 2000 election the DAB will replace the DPHK as the largest party in Legco.

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Main political figures

Tung Chee-hwa: The first chief executive of the Special Administrative Region (SAR), a former member of Hong Kong’s Executive Committee (Exco) and shipping magnate. Mr Tung’s low profile during the crises that affected the SAR in late 1997 and 1998 caused an erosion of his popularity. Mr Tung responded by abandoning the consensual approach to leadership adopted early in his term as chief executive in favour of a more decisive style. But political blunders have prevented this change in tactics from greatly enhancing his popularity. Mr Tung is rumoured to want to stand as chief executive for a second term, but his popularity is by no means assured.

Anson Chan: Chosen as chief secretary by the last British governor, Chris Patten. Despite supporting Mr Patten’s ill-fated democratic reforms, Ms Chan was retained by Mr Tung after the handover to preserve administrative continuity and public confidence in the government. In March 1999 Ms Chan had her term of office extended past retirement age, and she will serve until the end of Mr Tung’s current term in July 2002.

Donald Tsang: Hong Kong’s first ethnic Chinese financial secretary, appointed in September 1995. Committed to the fixed link between the Hong Kong and US dollars, Mr Tsang was retained in the government after the handover to maintain financial stability. Mr Tsang vigorously defended the government’s unprecedented HK$118.1bn (US$15.2bn) intervention in the stockmarket in August 1998.

Martin Lee: Barrister, member of Legco and chairman of the Democratic Party of Hong Kong (DPHK). Mr Lee has been a vigorous critic of the SAR government, and has in the past been branded a subversive by China. Mr Lee is expected to step down soon. When he goes, the DPHK will be hard pressed to find a leader of similar standing, and his departure may therefore trigger a further bout of the infighting that dented the party’s popularity in 1999-2000.

Szeto Wah: One of the most senior members of the Democratic Party; member of Legco and also regarded as subversive by China.

Emily Lau: Member of Legco; vocal campaigner for greater democracy and human rights. Founder and leader of Frontier, initially a non-party grouping but now a political party. Gave up her UK citizenship in December 1997 in order to be eligible for election to Legco in 1998.

Christine Loh: On May 4th 1997 founded the Citizens’ Party, which is close to the Democrats and Frontier but focuses more strongly on “green” issues. Ms Loh has been more active than most Legco members in proposing alternative policies to those favoured by the government. Ms Loh, too, renounced her UK citizenship to contest a Legco seat in 1998, but in April 2000, citing frustration at the unwillingness of the SAR’s executive to expand participatory politics in Hong Kong, Ms Loh announced that she was stepping down from Legco.

Tsang Yok-sing: Chairman of the Democratic Alliance for the Betterment of Hong Kong (DAB). Suffered embarrassment when, in September 1994, it was revealed that he had applied to emigrate to Canada in 1989; failed to win a seat

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in the 1995 Legco election but was nonetheless appointed a member of the Provisional Legislative Council (PLC). Elected to Legco in 1998. Since the handover Mr Tsang has started to press for democratic reforms to Legco alongside his former pro-democracy opponents, and the DAB has become increasingly popular.

Jiang Enzhu: Head of the Liaison Office of the Central People’s Government (which until January 1999 had been the Hong Kong branch of the New China News Agency—Xinhua). Mr Jiang, a former ambassador to the UK is widely regarded as much more diplomatic than his predecessor, Zhou Nan. His appointment as a Hong Kong representative to the National People’s Congress (NPC, China’s parliament) despite his actual status as a mainland representative to the SAR, seemed to go against China’s commitment in the Joint Declaration to “Hong Kong people ruling Hong Kong”.

Liao Hui: Director of the Hong Kong and Macau Affairs Office of China’s State Council (cabinet), the body formerly responsible for arranging the smooth return of the territory to China, and which now acts as a liaison office between the SAR and central administrations. Mr Liao, a native of neighbouring province, is the son of Liao Chengzhi, who carved out China’s policy towards overseas Chinese communities in earlier decades.

International relations and defence

China is in charge of Hong Kong’s “high degree of autonomy” does not extend to security, defence foreign policy and international relations, which after July 1st 1997 became the preserve of the central government in Beijing. Hong Kong is, however, still allowed to maintain separate representation in many international bodies, such as the World Trade Organisation (WTO) and the IMF, under the title of “Hong Kong, China”.

The role of the People’s British forces departed from Hong Kong on July 1st 1997 and were replaced by Liberation Army the Chinese People’s Liberation Army (PLA). As well as defending Hong Kong against potential external enemies, the PLA will be available for emergency use in the unlikely event of “turmoil” that the Hong Kong government is unable to control. Defence-related costs are borne by China’s national budget, not by Hong Kong. A law on troops stationed in the SAR has been drafted, defining their functions, powers, management and jurisdiction, and the relationship between the troops and the SAR. Apart from abiding by national laws, the troops will have to respect Hong Kong laws and must not interfere with local affairs or engage in business activities. Troops will also receive in-depth political education, military training and education on Hong Kong’s basic social situation and existing laws. To date, PLA troops have been conspicuous by their absence from the streets of Hong Kong.

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Resources and infrastructure

Population

The population The population grew at an average annual rate of 1% in 1984-93, but since approaches 7m— 1994 annual growth rates have been faster. According to government estimates, Hong Kong’s population totalled 6.8m at mid-1999, 2.3% higher than a year earlier. (Reference table 1 gives historical data on population, while Reference table 2 gives data on the labour force.) This faster population growth is not the result of an acceleration in the rate of natural increase: the crude birth rate fell from 10.1 per 1,000 to 7.5 per 1,000 between 1996 and 1999. The crude death rate has fallen from 5.1 per 1,000 to 4.8 per 1,000 during the same period.

The population has been boosted in recent years by immigration, particularly from mainland China. In 1994 the government increased the number of one- way permits issued to mainland residents from 75 per day to 105 per day, and then to 150 per day in 1995. As a result, the number of legal immigrants from China increased from around 27,000 a year in the late 1980s to 45,986 in 1995 and 61,179 in 1996. The number of expatriates has also grown rapidly in recent years, rising from 320,700 in December 1993 to 485,800 at the end of 1998—some 7.1% of the population. Filipinas, mostly domestic servants, make up the largest group. The rest consist of expatriate employees and their dependants, together with a sizeable number of returned former emigrants who have obtained passports from countries such as Canada.

Origin of foreign citizens in Hong Kong, end-1999

Philippines 136,100 Indonesia 53,400 US 35,100 Canada 33,400 Thailand 27,300 UK 22,300 India 22,000 Australia 21,800 Japan 17,600 Nepal 17,700 Total incl others 495,200 Source: Immigration Department.

—and is ageing Hong Kong’s population is ageing. Between 1988 and 1999 the proportion of the population aged over 65 grew from 8.1% to 10.9%, and official estimates suggest that the proportion will rise to 13% by 2016, and to 20% by 2035. To deal with the financial implications of this change, the government in 1995 decided to introduce Mandatory Provident Funds (MPFs). This scheme, which will come into effect at the end of 2000, requires standard contributions of 5% of salary to be made by both employers and employees. The funds will be

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managed by private firms that have been approved by the government’s Mandatory Provident Fund Schemes Authority.

Population by age and sex, end-1999

Male Female Total % of total 0-14 594,900 554,700 1,149,600 16.5 15-29 725,100 759,100 1,484,200 21.3 30-44 1,028,300 1,037,900 2,066,200 29.6 45-60 660,000 578,200 1,238,200 17.8 60+ 496,800 539,800 1,036,600 14.9 Total 3,505,100 3,469,700 6,974,800 100.0 Source: Government of the Hong Kong SAR website.

Migration to new towns In recent years there has been a marked shift in the population away from the overcrowded central urban areas, notably to new satellite towns in the New Territories. According to official figures, overall population density was 6,354 per sq km in 1999, ranging from 45,470 people per sq km in urban areas of Kowloon to 3,475 per sq km in the largely rural New Territories and outlying islands.

Education

Education for all The government provides free compulsory education for children between the ages of six and 15. The majority of secondary school pupils below the age of 15 are in Anglo-Chinese grammar schools, following courses leading to the Hong Kong Certificate of Education Examination. According to government figures, 94% of children aged between 12 and 14 years are in full-time education. Students over 15 years of age have to pay to remain in education, although government subsidies are available (in 1998 the government provided sub- sidised places for 84% of 15-year-olds attending school). These students study for the Hong Kong Advanced Level Examination, which is the standard entry test for the SAR’s tertiary-level institutions.

Higher education has expanded rapidly in recent years, and there are now seven self-accrediting degree-awarding universities: the City University of Hong Kong; Hong Kong Baptist University; Lingnan University; the Chinese University of Hong Kong; Hong Kong Polytechnic University; the Hong Kong University of Science and Technology; and the University of Hong Kong. Altogether, places on full-time degree courses in tertiary institutions in Hong Kong are available for 18% of the 17-20 age group (another 8% of these people can find places on full-time sub-degree programmes). According to government figures, the number of full-time students in tertiary institutions has risen from 54,000 in 1994 to 65,800 in 1998.

Reforming the The education system in Hong Kong suffers from a number of weaknesses. education system Some primary schools, for example, still operate two sessions a day (although the government is encouraging reforms which will lead to primary schools offering just one whole-day session). More seriously, concerns have also been

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expressed that the education system does not provide the skills necessary for a modern economy. Responding to these criticisms, the authorities have raised education spending in recent years from 2.8% of GDP in 1993 to 4.2% of GDP in 1999. The first government of the Special Administrative Region (SAR) also established a special education commission as soon as it took office in July 1997. This body was charged with conducting a comprehensive review of Hong Kong’s education system. In May 2000 the commission completed its review, and released its recommendations for public consultation (see box: Reforming Hong Kong’s education system).

Reforming Hong Kong’s education system

On May 20th 2000 the Education Commission released its recommendations for reform of the education system for public consultation. Specific reform proposals included the following.

Early childhood education Raise the standard of education by enhancing the professional standards of principals and teachers and strengthening the quality assurance mechanism.

Reduce pressure on students by allocating primary one places according to school nets and parental choice.

Nine-year basic education Abolish the Academic Aptitude Test to increase coherence between primary and secondary education, and free up students’ time to allow them to undertake different types of learning activity “conducive to their all-round development”.

Reduce the number of allocation bands so as to avoid labelling students, and thereby bolster their self-confidence.

Make the curriculum more flexible and diversified to allow students to acquire basic knowledge and develop basic abilities, and foster among them positive values and commitment to the nation and society.

Improve and diversify internal school assessment mechanisms. Establish Basic Competency Assessments in Chinese, English and Mathematics. Strengthen enhancement and remedial measures.

Senior secondary education Reform the school curriculum, public examination and the university admission mechanism to allow students more scope in choosing subjects and to participate in other activities (eg sports).

Establish a three-year academic structure for senior secondary education.

Higher education Develop different types of higher education institutions (for example, community colleges and private universities) to give students greater choice.

Reform the university admission system to reduce excessive reliance on public examination results. Instead, performance in “all relevant aspects” will be taken into account.

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Adopt a flexible and transferable credit unit system to give students more flexibility in choosing their learning modules and deciding on their own pace of study.

Reform first degree courses to provide students with a wider range of learning experiences.

Continuing education In the long run develop a comprehensive qualifications accreditation and recognition mechanism.

Further develop continuing education.

Source: Education Commission, Review of Education System: Reform Proposals, consultation leaflet.

Language policy The SAR education system is aimed at making students biliterate—in other words able to read and write—in English and Chinese, and trilingual—having the ability to listen and speak—in English, Cantonese and Putonghua (the official language of mainland China, which is also known as Modern or Mandarin). Use of the “mother tongue” has spread rapidly in Hong Kong in recent years. Improving English-language abilities has proved more difficult, although the SAR government has begun to take action to tackle this deficiency. Shortly after taking office in 1997 the government announced that it would deregister a majority of schools then registered to teach in English, on the grounds that the standard of English in these institutions was inadequate. At the same time, in an attempt to deflect criticism that this policy change amounted to a downgrading by the government of the importance of English- language skills in Hong Kong, plans were drawn up to introduce housing allowances for expatriate teachers of English coming to the SAR.

Retraining the workers Surprisingly, the relocation of Hong Kong’s manufacturing sector to mainland China during the 1980s and 1990s did not lead to a rise in unemployment: the average annual unemployment rate remained below 3.5% throughout 1985-97. Many of those who lost jobs in manufacturing over the past decade managed to find employment in the growing services sector.

There are initial signs of another economic transformation in Hong Kong have become apparent, this time involving a diversification away from real estate and financial services towards information technology (IT) activities. Accom- panying this shift have been indications of a rise in structural unemployment. Despite the sharp recovery in GDP growth following the difficulties of 1998, the average unemployment rate was still over 5% in March-May of 2000. At the same time, according to the SAR’s Labour Department, the number of employment vacancies in Hong Kong rose by 35% year on year in March 2000 to reach an all-time high of 18,400. That a shift in the economy towards IT activities should result in structural unemployment should not be surprising: jobs in the high-tech sector require skills that have previously not been in high demand in Hong Kong. (See Reference table 2 for a breakdown of labour force statistics.)

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Prompted by these indications of a mismatch between skills and job opportunities, the government has recently begun to pay more attention to the issue of retraining. In his budget speech for fiscal year 2000/01 (April 1st- March 31st) the financial secretary, Donald Tsang, said that life-long learning was a priority for the government, and that government was “stepping up” its efforts in this area. According to the government’s Education and Manpower Bureau, spending on retraining, which grew by just 5.4% in 1997/98, expanded by 7% in 1998/99, by 11.8% in 1999/2000, and is budgeted to surge by 42.8% in 2000/01.

Health

Standards of healthcare The standard of healthcare in Hong Kong is generally high. At the end of 1998 are high Hong Kong had 4.8 hospital beds per 1,000 population, compared with 13.2 per 1,000 in Japan (1996), 4 per 1,000 in the US (1996) and 3.5 per 1,000 in Singapore (1996). Hong Kong has 1.4 registered doctors per 1,000 people, about the same ratio as in Singapore and the UK, but less than the 1.9 per 1,000 in Japan (1996) and 2.8 per 1,000 in the US (also 1996). Although private hospitals exist in Hong Kong, government-run institutions dominate the sector, providing 85% of hospital beds in the SAR. Healthcare in government hospitals is not free, but the costs are subsidised, and can be waived: treatment at public-sector out-patient clinics costs just HK$37 (US$4.70) a visit, and patients in general wards of public hospitals are charged just HK$68 a day.

Proposed healthcare Partly because of these low charges, official spending on healthcare has reforms increased rapidly in recent years, rising from 11.1% of total government spending in 1989/90 to 14.3% in 1996/97. These escalating costs prompted the SAR government in November 1997 to commission a team from Harvard University in the US to review healthcare in Hong Kong. When it reported in April 1999, the team recommended far-reaching reforms to the financing of the SAR’s health system. The Harvard team suggested that the government should establish an insurance scheme, the Health Security Plan (HSP), to protect people against unexpected large medical expenses, such as hospitalisation. The HSP would require compulsory contributions equal to 1.5- 2% of workers’ wages, to be paid jointly by employers and employees. The team also suggested the establishment of a separate MEDISAGE scheme, under which people would be required to put funds aside—the committee suggested that 1% of wages would suffice—to be used to purchase a long-term insurance policy to cover disability or retirement. Finally, the report recommended an increase in the average costs already being levied by hospitals at the point of provision. An example included in the report suggested that the direct costs faced by middle-income patients would rise from 3% of costs currently to 20% of costs. The report claimed this increase was necessary to provide revenue and prevent the system being abused.

Unsurprisingly, this report generated considerable controversy and the government is yet to try to introduce legislation based on the Harvard team’s recommendations. However, in the medium term the government will have

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little choice but to implement some of the recommendations. According to the report, under the existing system, and with a GDP growth rate of 5% a year, expenditure on healthcare would grow to 21-23% of total government spending by 2016.

Natural resources and the environment

Land is scarce Hong Kong has virtually no mineral resources. Much of the territory’s vegetation was lost through indiscriminate tree-felling during the Japanese occupation between 1941 and 1945 but has now been largely replaced through a reforestation programme. Hong Kong is small and hilly, with several high peaks; consequently agricultural land—or indeed any flat land—is scarce. Land has therefore been extensively reclaimed from the sea for housing, offices, factories and major infrastructure projects such as the old Kai Tak airport and the new Hong Kong International Airport. Despite high rainfall, Hong Kong is unable to meet its own domestic and industrial water requirements, so supplies are piped in from the neighbouring Chinese province of Guangdong.

The problem of pollution About 40% of the territory is protected by country parks, one of the highest proportions in the world, but the extremely high overall population density puts pressure on the environment. Air, sea and noise pollution has risen fast over the past decade, contributing to a rise in respiratory diseases (including diseases such as lung cancer, which may also be linked to pollution). These levels of pollution, combined with a more affluent society, have resulted in the general population becoming more concerned about the environment; the attention that some of Hong Kong’s political parties, notably the Citizens’ Party, led by Christine Loh, have devoted to the environment has further raised public interest in “green issues”.

In the face of such public concern, the government has taken some steps to improve the environment. The chronic problem of sewage disposal is at last gradually beginning to be addressed through a long-term programme. From 1999 newly licensed taxis have no longer been allowed to run on diesel fuel but have to use liquefied petroleum gas instead. Also, after air pollution reached record levels in March 2000, the government unveiled an action plan aimed at cleaning up the environment. Officials said that the implementation of the plan will make the air in Hong Kong as clean as that in London or New York within five years—in some ways a rather modest aim. The action plan included various measures aimed at cleaning up vehicle emissions in the SAR. The government also established a Task Force on Air Pollution Control, to be chaired by the secretary for Environment and Food, Lily Yam (a successful former head of Hong Kong’s respected Independent Commission Against Corruption) and including representatives from the transport, economic services, finance and planning and lands bureaus, as well as from the environmental protection and transport departments. Such inter-departmental co-operation is important if the government is to be successful in tackling pollution in Hong Kong.

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Transport and communications

An efficient and expanding Hong Kong’s transport and communications networks are among the best in rail network the region and are undergoing constant improvement. Public transport facilities, especially rail, are excellent. The mainly underground Mass Transit Railway (MTR) serves 42 stations; by the end of 1999 it was used by an average of 2.2m passengers on each working day, making it one of the most heavily used mass transit systems in the world. A state-of-the-art extension to link the existing MTR network with the new Hong Kong International Airport was completed in July 1998, and the Mass Transit Railway Corporation (MTRC) is currently extending its Kwun Tong Line by 12.5 km.

The Kowloon-Canton Railway (KCR) runs from Hung Hom on the Kowloon peninsula to the Chinese border and beyond to Guangzhou (Canton). Following the completion of Hong Kong International Airport in July 1998, the government approved the first phase of a HK$64bn (US$8.3bn) railway project to link Kowloon with the farthest points in the north-western New Territories. In addition, the KCR is building three extensions of the existing East Rail line and has a light rail transit system already operating in the New Territories.

In May 2000 a further expansion of Hong Kong’s rail network was signalled when the transport bureau unveiled the Railway Development Strategy 2000 (RDS-2). This blueprint sets out the government’s preferred railway network expansion plan for the SAR up to the year 2016 (see map). Under the plan, six new rail corridors would be built at a projected cost of HK$80bn-100bn (US$10.3-12.8bn). The RDS-2 includes proposals to construct a fourth harbour

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crossing which would connect the KCRC network service directly to Hong Kong island for the first time, and to develop a Port Rail system to improve freight links with mainland China.

The plan would improve transport links both within urban Hong Kong and between the city and mainland China. According to the transport bureau, full implementation of the plan would place around 70% of Hong Kong’s population and around 80% of job opportunities within one kilometre of a railway station. The plan foresees the proportion of public transport handled by rail rising from 33% to 45% in the next 15 years. Expansion of the rail network in the way laid out by the RDS-2 would also help to lessen transport bottlenecks in Hong Kong which otherwise could slow road-based container transport and thus threaten port growth.

Bus and ferry services Bus services are also very good. The government has granted franchises to four bus companies (one, China Motorbus, lost its franchise in 1998 to a newly formed consortium). These are supplemented by public and private light minibus services, and by minibuses used mainly on contract for carrying tourists, factory workers, schoolchildren and commuters. There is some 30 km of tramway track along the north side of Hong Kong Island, and around 18,000 taxis operate in the urban areas, the New Territories and Lantau.

Ferries are important in Hong Kong. The Star Ferry Company (SFC) operates four famed cross-harbour passenger services. After 75 years the Hong Kong and Yaumati Ferry Company (HYF) lost an exclusive franchise to several routes linking Hong Kong, Kowloon and outlying islands on March 31st 1999. HYF continues to operate some of these services, but has been joined by operators such as the SFC, Hong Kong and Kowloon Ferry, Discovery Bay Transportation Services, and Shun Tak Ferries.

The road network Hong Kong’s road infrastructure has expanded steadily in recent years, with the addition of new tunnels, including the Western Harbour Crossing, the third road tunnel linking Hong Kong Island with Kowloon and the territory’s first six-lane tunnel, which was opened in 1997. But congestion has risen further, with the road-building programme apparently encouraging more people to drive cars. The government has responded by improving public transport yet further, and attempting to discourage car use, by imposing a punitive registration fee for private cars, accompanied by a compulsory car inspection scheme for cars over six years old and a points system to disqualify offending drivers. Further measures to restrict car use are likely to be implemented in the future—proposals have included increasing licence fees, abolishing tax benefits on company cars and introducing electronic road pricing (ERP). (See Reference table 3 for an historial breakdown of transport statistics.)

Container ports The SAR has one of the busiest container ports in the world, handling 16.2m twenty-foot equivalent units (TEUs) in 1999. Hong Kong’s pre-eminent position is by no means secure, however. The port of Singapore briefly overtook Hong Kong to become the busiest in the world in 1998; Kaohsiung in Taiwan has also recorded rapid increases in throughput in recent years. But perhaps the biggest threat to Hong Kong’s port business comes from China.

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The shipping of re-exports to and from China has provided valuable business for Hong Kong’s port since the early 1980s. As ports within China develop, such goods are increasingly likely to be shipped directly out of China, rather than first passing through Hong Kong. These structural changes may stall further expansion of Hong Kong’s port facilities beyond the construction of Container Terminal 9, the first stage of which is due to be completed in 2002.

New airport and extra run- In 1997 a total of 10.3m passengers arrived at Hong Kong’s Kai Tak way to relieve congestion international airport, a 7.3% decrease on the 1996 figure. Despite the drop, Kai Tak was still running well beyond its intended capacity. Kai Tak closed on July 5th 1998 and was replaced by the new Hong Kong International Airport at Chek Lap Kok, north of Lantau Island. Major logistical problems during the new airport’s first weeks of operations have been fixed, and the airport is now generally regarded as one of the best in the world. A second runway at Chek Lap Kok was opened in May 1999, and the airport now handles up to 460 flights, 84,000 passengers and 5,600 tonnes of cargo a day. The airport has the capacity to handle 45m passengers a year.

Telecommunications thrive Hong Kong’s telecoms infrastructure is excellent. Under British rule Hong Kong Telecom, renamed Cable & Wireless HKT in June 1999, had a monopoly on telecoms services in the territory. The company, which was taken over by the Hong Kong company Pacific Century Cyberworks in 2000, is still the dominant fixed-line operator in the SAR, offering free local calls, a line rental that is among the world’s cheapest, and one of the world’s most modern networks. Cable & Wireless HKT’s privileged position as monopoly provider of telecoms services has, however, been eroded in recent years. In 1996 three companies—Hutchinson Communications, New T&T and New World Telephone—began to compete with Hong Kong Telecom in operating fixed- line services in the local market. (These three companies are subsidiaries of leading Hong Kong conglomerates Hutchinson Whampoa, Wharf Holdings and New World Development respectively.) The government had originally planned to introduce even greater competition into the fixed-line market in 1999. However, these three companies had only gained a combined market share of 3% by 1999, prompting the government to extend the moratorium on introducing more competition until 2003.

The government has, however, introduced more competition in other areas of the telecoms sector. In January 2000 officials announced that five companies would be awarded licences to provide fixed telecom services using wireless networks. (Under this system, the cable network systems already installed in buildings in Hong Kong will be connected to those in other buildings via microwave signals, rather than fixed-line cables.) Cable & Wireless HKT’s exclusive rights over international call business from the SAR also ended on March 31st 1998, and new firms were allowed to enter this market from January 1st 1999. (The government paid Hongkong Telecom a lump-sum of HK$6.7bn in compensation, as the company’s monopoly was not due to end until October 2006.)

Competition is particularly fierce in the market for cellular phone services, especially since March 1999 when subscribers were allowed to switch between

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companies while retaining their old cellular phone number. In the year to the end of February 2000 the number of people owning mobile phones in Hong Kong increased by over 28% to 3.9m people. As a result, mobile phone penetration in Hong Kong is now at around 55.6%, one of the highest rates of usage in the world.

Energy provision

All fuels are imported Hong Kong has no indigenous fuel supplies and imports all its hydrocarbons. The rate for energy consumption per head is one the highest in Asia. (See Reference table 4 for national energy statistics.) Electricity consumption increased by up to 10% in some years in the late 1980s, but since 1990 these increases have slowed. As most of the territory’s manufacturing enterprises have been shifted to China, consumption by commercial users has increased more rapidly, by 12.1% in between end-1997 and end-1999, than that of industrial users, which dropped by 7.5% during the same period.

Two private companies, Hong Kong Electric (HEC) and CLP Power Hong Kong (CLP Power, formerly known as China Light & Power), supply electricity in the SAR. Each has a monopoly in its appointed area: HEC supplies consumers on Hong Kong Island and the nearby islands of Ap Lei Chau and Lamma, while CLP supplies consumers in Kowloon and the New Territories through its three associated generating companies, Pepco, Kesco and Capco. HEC supplies power from a power station on Lamma. CLP Power’s electricity supplies are sourced from three power stations in Hong Kong, at Castle Peak, Black Point and Penny’s Bay, as well as from Conghua in Guangzhou and Daya Bay nuclear power station in Shenzhen (this nuclear facility is a joint venture between the mainland China state-owned Guangdong Nuclear Investment Company and the Hong Kong Nuclear Investment Company, a wholly owned subsidiary of CLP). At the end of 1998 HEC had installed capacity of 3,305 mw, compared with maximum demand of 2,316 mw; in the same year installed capacity of the three SAR power stations used by CLP Power was 6,285 mw, compared with maximum demand of 5,304 mw.

HEC and CLP Power Hong Kong supply electricity subject to prior government approval of their financial plans, in the form of Scheme of Control Agreements (SCAs). This system has been criticised for encouraging overcapacity and causing higher power charges. In response, the government in 1998 commissioned a consultancy study, Interconnection and Competition in the Electricity Supply Sector in Hong Kong. Despite publication of this report, no radical changes are likely in the short term: the consultants found that although increasing competition would be beneficial, it would be difficult to achieve, as the current SCAs are not due to expire until 2008.

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Energy balance, 1999 (m tonnes oil equivalent) Elec- Oil Gas Coal tricity Other Total Primary production 0.0 0.0 0.0 0.0 0.1 0.1 Imports 18.0 2.4 3.9 2.5a 0.0 26.8 Exports –8.5 0.0 0.0 –0.1a 0.0 –8.6 Primary supply 9.5 2.4 3.9 2.4 0.1 18.3 Losses & transfers –0.6 –2.4 –3.9 2.7 0.0 –9.6 Transformation output 0.0 0.5 0.0 3.3b 0.0 3.8 Final consumption 8.9 0.5 0.0 3.0b 0.1 12.5

a Input basis. b Output basis. Source: Energy Data Associates.

Gas supplies Total gas consumption increased by 3% in 1999 on the year-earlier period. Domestic users account for more than half of total gas consumption, while industrial users account for less than 4%. Two types of gas are available. The Hong Kong and China Gas Company supplies man-made town gas to Hong Kong Island, Kowloon and the New Territories. Town gas, which is produced from naphtha at Ma Tau Kok and Tai Po, is now used by about 1.2m families.

The other type of gas used is liquefied petroleum gas (LPG), supplied by companies such as Shell, Mobil, Esso, Caltex and China Resources. According to a Housing Authority directive adopted in 1987 as part of government plans to improve safety, LPG should not be considered unless town gas is not available. These regulations banned the installation of gas mains for LPG across a road, so an LPG depot had to be built near a housing project for piped LPG to be supplied to households. As a result, LPG was supplied either in 15-kg cylinders or piped from bulk storage and vaporiser installations. These rules restricted the use of LPG but the government now looks more favourably on the use of LPG. The percentage of domestic dwellings using LPG from cylinders declined to 28% in 1998.

The economy

Economic structure

Main economic indicators, 1999

Real GDP growth (%) 3.0 Consumer price inflationa (av; %) –3.3 Current-account balance (US$ bn) 9,285 Exchange rate (av; HK$:US$) 7.8 Population (m) 6.84 Foreign debt (year-end; US$ m) 53,495

a Consumer Price Index (A).

Source: EIU.

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Hong Kong’s economy Hong Kong is first and foremost a trading centre. It has virtually no natural depends on trade resource base and is therefore dependent on imports for raw materials, food and fuel. Domestic demand, although increasingly important, is limited by the size of the population. The total value of foreign trade in goods was equivalent to almost 225% of current-price GDP in 1998, compared with, for example, 15.7% in Japan and 18.5% in the US.

Services have largely Hong Kong is different from the other Asian newly industrialising countries replaced manufacturing (NICs). Although all four started out as low-cost, labour-intensive manu- facturing bases, Singapore, Taiwan and South Korea have all developed high- technology industries, whereas Hong Kong has become a services centre, in particular for companies doing business in China. The structure of the economy has therefore changed dramatically over the past decade: the manu- facturing sector, which in 1984 accounted for 24.3% of GDP, contributed just 6.2% of GDP in 1998 (latest available figures) and now employs fewer than 250,000 people. Banking, trade, tourism and other services, which together provided 84.7% of output in 1998 and almost the same proportion of employ- ment, have become far more important.

Comparative economic indicators, 1999

Hong Kong Singapore Taiwan US Japan GDP (US$ bn) 158.8 86.8 288.6 9256.2 4350.5 GDP per head (US$) 23,213 26,976 13,147 33,889 34,341 Consumer price inflation (av; %) –3.3 0.5 0.2 2.2 –0.3 Current-account balance (US$ bn) 9.3 18.9 5.8 –338.9 106.9 % of GDP 5.8 21.8 2.0 –3.7 2.5 Exports of goods fob (US$ bn) 174.7 115.6 121.1 685.3 403.7 Imports of goods fob (US$ bn) –177.9 –104.3 –106.1 –1,030.2 –280.4 Source: EIU, CountryData.

Economic policy

Positive non- Economic policy in British-ruled Hong Kong was based on the principle of interventionism “positive non-interventionism”. This involved keeping taxes low and limiting government expenditure to the provision of essential support services, such as housing, education and healthcare. Major utilities, which in most other places in the world were originally state monopolies, have largely been in private hands in Hong Kong. Unlike the governments of the other “Asian tiger” economies—Singapore, South Korea and Taiwan—that of Hong Kong, while under British sovereignty, generally refrained from promoting specific industries.

Economic policy in post-handover Hong Kong is supposed to be little different. The mini-constitution of the Hong Kong Special Administrative Region (SAR), the Basic Law, guarantees that Hong Kong will retain its free-trade, free- enterprise, low-tax environment for at least 50 years. Specific provisions stipulate that:

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• the Hong Kong SAR will have its own independent finances; the Hong Kong government will keep its revenue for its own use and not hand it over to the central government in Beijing; the central government will not levy taxes in Hong Kong;

• the government should aim to keep spending in Hong Kong within the limits of revenue, and deficits should be avoided;

• the Hong Kong dollar will be retained and will continue to be backed by a 100% reserve fund (the Basic Law does not mention any particular exchange- rate regime, such as a fixed link to the US dollar);

• the Hong Kong dollar will remain convertible and exchange controls may not be imposed; the free flow of capital into and out of the SAR will be safeguarded; and

• Hong Kong will remain a free port, pursuing a free-trade policy, although tariffs may be lawfully imposed in unspecified circumstances.

These stipulations have not prevented the first government of the Hong Kong SAR from making some controversial decisions since taking office. In August 1998 the authorities spent HK$118.1bn (US$15.2bn) in the local stockmarket. The government claimed that this intervention was made necessary by “exceptional” circumstances, namely intense attacks on the fixed link between the Hong Kong and US dollars. As a result officials said that although unprecedented, this action did not mark an abandonment of the principle of positive non-interventionism. Indeed, the government has not appeared keen to hold on to its large stock portfolio, and began to dispose of these shares in the last quarter of 1999.

Although this stockmarket intervention does not appear to have marked a break in economic policy in Hong Kong, the difficulties experienced in 1998 do appear to have prompted the government to take a more active interest in the direction of economic development in the territory than did previous administrations. Officials have been particularly eager to diversify the economy away from its traditional dependence on property development and financial services. In his annual policy address delivered in October 1999, the SAR’s first chief executive, Tung Chee-hwa, spoke of the need to encourage the development of innovative, knowledge-intensive economic activities.

Even before Mr Tung made these comments, the government had initiated a controversial “Cyberport” project, to provide a base for high-tech businesses in Hong Kong (Critics claimed that this project, which was awarded without public tender, was more of a residential property development than an effective first step in promoting high-tech industry in Hong Kong.) Since then, the government has unveiled a sweeping liberalisation of the telecoms industry in Hong Kong (see Resources and Infrastructure: transport and communi- cations). In recent years the government has also taken steps to promote the development of the tourism industry in Hong Kong. Most notable was the agreement announced on October 31st 1999, under which the government will invest HK$22.5bn in public funds in a joint venture with a US company,

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Walt Disney, in order to establish a theme park in the SAR (see Other services: tourism).

Important recent policy events

1983: The Hong Kong dollar is pegged to the US currency at a rate of HK$7.8:US$1.

1994: A phased timetable for interest rate deregulation is introduced.

1995: In January plans for an old-age pension scheme are abandoned in the face of opposition from China and the business community. In February the legislature, the Legislative Council (Legco), passes the Mandatory Provident Fund bill.

1996: In July the Exchange Fund approves the new Public Mortgage Corporation.

1997: On assuming office in July the chief executive, Tung Chee-hwa, promises to build 85,000 housing units per year and increase home ownership from 50% to 70% of the population within ten years.

1998: In June the government withdraws all public land from the market until April 1999. In August the government becomes the largest shareholder on the stock exchange after buying shares worth HK$118.1bn (US$15.2bn); it also appears to back off its 85,000 housing units pledge. New measures are announced in September in an attempt to boost liquidity and make it more difficult to manipulate interest rates by short-selling the Hong Kong dollar.

March 1999: The government awards the right to develop a HK$12.5bn “Cyberport” to Richard Li, the son of tycoon Li Ka-shing. The deal is controversial, as it was done without resort to public tender and because 75% of the floor space in the development will be residential property. The government announces that it will cut its holdings of Hong Kong equities by about two-thirds. In June the government outlines proposals as to how it will sell off some of its shareholdings, a process that begins in October.

October 1999: The government reaches an agreement on October 31st with Walt Disney, allowing the US company to establish a theme park at Penny’s Bay on the SAR’s Lantau Island, near the new airport. As part of the deal, the government agrees to invest a total of HK$22.5bn (US$2.9bn), of which HK$13.6bn will go towards developing infrastructure for the project. As a result, the government gains 57% of the company that will be established to manage the project, Hong Kong International Theme Parks Limited (HKITP); Walt Disney will own just 43%.

March 2000: In his budget for fiscal year 2000/01 the financial secretary, Donald Tsang, shies away from reforming Hong Kong’s tax regime. He does, however, announce the establishment of two committees, one to monitor the relationship between recurrent revenue and GDP growth, and the other to investigate the suitability of introducing a new broad-based tax in Hong Kong. Mr Tsang said that the second committee would release its recommendations “as soon as possible”.

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The fixed link In 1983 political uncertainty led the UK and Hong Kong authorities to tie the local currency to the US dollar through a currency board system. In such a system, all local notes and coins have to be backed by official foreign-exchange reserves at the pegged rate of HK$7.8:US$1. Notes and coins are issued only when there is sufficient foreign exchange to back them. A currency board system is supposed to ensure that if there is an external shock to the economy, interest rates automatically either rise or fall to deflate or inflate the domestic economy, thereby allowing the fixed link to be maintained. If investors sell Hong Kong dollars, for example, foreign-exchange reserves fall and the supply of Hong Kong dollars automatically shrinks. The reduction in liquidity pushes up interest rates, until a level is reached when it becomes attractive enough to buy the local currency once again.

The currency board system is backed by considerable resources. At the end of April 2000 the SAR government had US$93.9bn in foreign-exchange reserves (see The external sector: Foreign reserves and the exchange rate). This was equivalent to seven times the value of currency in circulation in Hong Kong. In addition, both before and after the handover in 1997 the government of mainland China pledged to help support the fixed link if this was necessary, and at the end of April 2000 China had almost US$160bn in foreign- exchange reserves.

Although the confidence in Hong Kong’s economy generated by the fixed link during its 17-year history has been very useful, the system is not without its drawbacks. In particular, as a result of the fixed link the floor for interest rates in Hong Kong is determined by US rates, meaning that local monetary policy is dictated by the economic situation in the US rather than that in Hong Kong. Consequently, even though consumer price inflation—as measured by the Consumer Price Index (A)—averaged 7.8% in 1991-96, nominal savings deposit rates in Hong Kong averaged just 3%. The poor real return on bank deposits prompted surges of money into the stockmarket and the property sector, contributing to high rates of asset price inflation, particularly in late 1996 and early 1997. These rising property prices caused both economic and social problems, eroding Hong Kong’s competitive position, and making it impossible for many people to buy their own homes. The situation was then reversed sharply in 1997 when capital outflows contributed to a rise in interest rates in Hong Kong. With the rate of consumer price inflation easing throughout the next year real interest rates rose further—even though in 1998 Hong Kong experienced its most severe recession in a generation.

Over the years the currency board system in Hong Kong has been refined. The most recent package of changes was announced by the SAR’s de facto central bank, the Hong Kong Monetary Authority (HKMA), in September 1998. The HKMA initiative was aimed at increasing liquidity in the interbank market, and involved an acceptance of greater volatility in the level of the government’s foreign-exchange holdings in exchange for lessened instability in interbank interest rates. (Speculative attacks against the Hong Kong dollar in 1997-98 had contributed to surges in interbank interest rates: at one in October 1997 overnight rates shot up to 300%). As part of the 30 measures the government:

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• abolished the ability of banks to lend to the government overnight in the hope that they would lend to the interbank market instead;

• restored the right of banks to borrow repeatedly from the government; in April 1998 the government, concerned that such borrowed funds were being used by speculators against the Hong Kong dollar, had sought to restrict such borrowing; and

• made it easier for banks to use government-issued paper to back overnight loans from the HKMA’s discount window.

Property policy It is not just the fixed link that has contributed to volatile property prices in Hong Kong. Other government policies have also played a part in the instability of asset price inflation. Following a rapid rise in real estate prices in the first quarter of 1994 the government, in an attempt to curb speculation, introduced measures to make it more difficult to buy and sell unfinished flats. These measures contributed to a slowdown in construction activity by property developers. Suggestions in early 1997 by officials from the incoming SAR administration that a capital gains tax was needed to arrest soaring property prices caused real estate prices to cool even before the crash of October 1997 occurred. (No such tax change was in the end forthcoming.)

Further downward pressure on prices in 1997 came from the release onto the market of a massive amount of new commercial space as a result of the airport railway project. Although this was a one-off development, the supply of property is in fact a particularly important issue in Hong Kong. The govern- ment owns all land, and only releases a small amount each year for redevelop- ment. Before 1999, at the start of each year the government would commit itself to auctioning a certain amount of land in the following 12 months, and would set a minimum price for the properties concerned. But to prevent property prices falling too far during the 1998 crisis, officials withdrew even this limited amount of new land from sale for a period of nine months.

The moratorium on land sales came to an end in February 1999 and the government took this opportunity to announce changes to its sales strategy. Officials said that although some land would still be sold using the rules that had applied previously, other lots would also be made available, through a so- called reserve list. Developers can now apply to the government with a minimum price to buy land on the reserve list. If the government considers the offered floor price reasonable, the land is put up for public auction or for tender. The new policy is aimed at giving the government flexibility to adjust the supply of new land in accordance with demand.

A hands-off approach to Although the government welcomes foreign investment (partly through an foreign investment “Invest Hong Kong” agency) and does not discriminate between domestic and foreign business, it offers no specific incentives to attract it; nor are there any rules to exclude it from particular sectors. Yet Hong Kong’s geographical location, excellent infrastructure and low tax regime continue to attract high value-added direct investment, particularly from firms involved in financial services or from those wishing to do business in China.

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Labour issues have been Labour issues have attracted more and more attention in recent years. With a controversial labour market that is often tight, particularly for high-skilled workers, the business community has called on the government to ease restrictions on imported labour. Local union leaders, supported by political parties, including both the Democrats and the Democratic Alliance for the Betterment of Hong Kong, are, however, constantly calling for an end to the imported labour programme. The controversy surrounding the hiring of foreign workers lessened in 1997-98, as Hong Kong’s economy deteriorated sharply. Labour activists turned their attention instead to trying to protect workers, as companies attempted to reduce costs.

Another weakness of Hong Kong’s economy is the lack of competition in some areas. The independent Consumer Council has in the past highlighted the uncompetitive nature of the markets for grocery retailing, petroleum and liquefied natural gas. Although among the world’s most advanced economies, Hong Kong has one of the least advanced competition laws. The government has steadfastly declined to set up a competition authority.

A prudent fiscal policy As a result of spending related to the construction of the new airport, the budget balance slipped into deficit in fiscal year 1995/96 (April 1st-March 31st). Under British rule, however, such deficits were the exception rather than the rule. This was not supposed to change following the handover of sovereignty in 1997: the Basic law requires the authorities to strive for fiscal balance.

This provision of the Basic Law does not prevent the fiscal balance from ever falling into deficit, and in 1998/99 the government recorded a deficit of HK$23.3bn (US$3bn, or 1.8% of GDP). In a sense, this deterioration in the government’s finances was not particularly worrying. The health of government finances everywhere tend to worsen when economic problems mount, and the economic recession in Hong Kong in 1998 was the most severe for a generation. The fiscal deficit did, however, cause some concern in Hong Kong, as it seemed mainly to be due to structural weaknesses in the govern- ment’s finances, in particular an over-dependence on revenue generated by property transactions. Estimates put forward by one of Hong Kong’s pro- democracy political parties, the Citizens’ Party, suggested that that over half of all government revenue in 1998/99 was budgeted to come from property transactions. Land premiums alone generated revenue equivalent to 27% of total government expenditure in 1993/94-1997/98. This dependence on property was not a problem when property prices were rising rapidly. The collapse in property prices in 1998 has, however, made this reliance seem more problematic: government revenue from land premiums, which was budgeted to total HK$50.4bn in 1998/99, was just HK$18.2bn. (See Reference table 5 for a summary of government finances.)

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Highlights of the 2000/01 budget

Revenue highlights • No new taxes.

• No tax increases.

• No change to existing allowances and deductions.

• Extending the diesel duty concessionaire rate of HK$2 per litre for another nine months until end-2000; the rate will then rise to HK$2.89.

• Extending the First Registration Tax exemption for electric vehicles for a further three years until end-March 2001.

• Reducing stamp duty on stock transactions from 0.25% to 0.225% of enhance Hong Kong’s competitiveness as an international financial centre.

Expenditure highlights • Additional spending of HK$700m on schemes to promote employment and training; improving services for the elderly, the disabled, and low-income and single-parent families; and enhancing building safety.

• Earmarking HK$800m for the implementation of new education initiatives.

• Cutting the size of the civil service by 10,000 within three years; and introducing a voluntary retirement scheme to accelerate the pace of reform.

Other initiatives • Establishing a government task force headed by the secretary for the treasury to examine whether Hong Kong has any long-term fiscal problems and to review the viability of the existing tax regime.

• Forming a committee of tax experts, professionals and academics to examine the suitability and implications of introducing new broad-based taxes, such as a consumption-based tax, in Hong Kong.

• Setting up a new dedicated agency to attract investment into Hong Kong.

Source: Government of the Hong Kong SAR.

These revenue weaknesses prompted officials to talk of a need to widen the government’s tax base. In his 1999/2000 budget, announced in February 1999, the financial secretary, Donald Tsang, announced that the government had done some initial work on a new consumption-based tax; comments made by Mr Tsang in early 2000 prompted widespread speculation that he would use his 2000/01 budget speech to announce the introduction of such a tax. In the end, the financial secretary shied away from making any radical changes to government revenue in 2000/01. Mr Tsang’s conservatism may have been due to the sharp improvement in the health of the government’s finances in

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1999/2000: although a deficit of HK$36.5bn (US$4.7bn) had originally been forecast, the outturn was a surplus of HK$9.9bn. More important, however, was opposition to tax changes from Hong Kong’s legislature, the Legislative Council (Legco): before Mr Tsang’s speech Legco members had voted by a wide margin to oppose any attempts by the government to introduce a sales tax.

The improvement in the government’s finances in 1999/2000 has not resulted in the government abandoning the idea of widening the tax base in Hong Kong. The budget surplus in 1999 was, after all, due to a surge in the value of the government’s share portfolio, rather than an underlying improvement in recurrent revenue flows. Indeed, in his budget speech the financial secretary announced the establishment of two committees, one to monitor the relation- ship between recurrent revenue and GDP growth, and the other to investigate the suitability of introducing a new broad-based tax in Hong Kong. Mr Tsang said that the second committee would release its recommendations “as soon as possible”. The government is likely to be able to act on any proposals that this committee makes: legislative opposition to unpopular tax changes will fade after the next Legco election in September 2000. (See Reference tables 6 and 7 for data on the money supply and interest rates.)

Summary of government recurrent expenditure (HK$ m unless otherwise indicated; fiscal years) % change in 1999/2000a 2000/01b real termsc Community & external relations 7,480 7,355 –1.6 Economic 10,605 11,060 3.9 Education 43,360 45,175 4.2 Environment & food 8,455 8,635 2.2 Health 30,020 30,790 2.8 Housing 12,885 12,845 –0.3 Infrastructure 10,905 11,320 3.8 of which: buildings, lands & planning 2,775 2,920 5.3 transport 2,910 2,970 2.1 water supply 5,220 5,430 4 Security 24305 25,210 3.8 Social welfare 27260 29,755 9.2 Support 24395 26,950 10.7 Total recurrent expenditure 199,670 209,095 4.8

a Official revised estimates. b Official draft estimates. c Official figures, based on forecasts for inflation in each individual sector.

Source: Hong Kong government 1999/2000 Budget website.

Economic performance

Economic growth is The economy of Hong Kong is strongly cyclical. In an economy so open to high but uneven foreign trade, with the government normally choosing not to iron out cyclical fluctuations, booms and recessions have tended to be comparatively violent.

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However, the growth trend in the 1980s and most of the 1990s was upwards. Annual GDP growth averaged 7.7% in real terms in the years from 1980 to 1988, although the actual rates varied from 0.4% in 1985 to 13% in 1987. A sharp slowdown in China in 1989-90 and the negative impact on local confidence of the June 1989 Beijing massacre trimmed the growth rate in those years, but between 1991 and 1994 GDP growth recovered. (See Reference tables 8, 9 and 10 for various breakdowns of GDP.)

After a slowdown in growth in 1995-96 as the Hong Kong dollar strengthened, a bubble in property prices saw strong growth continue to the third quarter of 1997. This boom was brought to a sharp halt in October 1997, when speculative attacks against the fixed link between the Hong Kong and US dollars produced a sharp rise in interest rates. Continued high real interest rates, and a collapse in regional demand, resulted in Hong Kong’s economy contracting by 5.1% in 1998, the most severe recession in a generation. The contraction in GDP bottomed out in the third quarter of 1998, however, and the economy has since recovered strongly: in the first quarter of 2000 real GDP grew by 14.3% year on year.

Gross domestic product (% real change) Annual average 1999 1995-99 GDP 3.0 2.2 Private consumption 1.1 1.3 Investment –7.7 1.3 Exports of goods & services 4.0 4.1 Imports of goods & services 0.1 3.3 Regional comparisons Taiwan 5.7 5.9 South Korea 10.7 4.8 Singapore 5.4 5.9 Sources: National sources.

The economy is vulnerable Economic activity has been cyclical partly because of the importance of private to shifts in confidence consumption. Such expenditure accounts for about 60% of GDP, but in recent years consumer sentiment has been quite volatile. Private consumption growth slowed sharply in 1989, following the Beijing massacre, and soared in 1993 and the first quarter of 1994, when the stock and property markets were booming. In 1998 private consumption contracted by 6.7%, as asset prices collapsed and unemployment rose to record highs. The private component of gross fixed capital formation is also greatly affected by the general climate of business con- idence. Consequently, the government habitually initiates large infrastructure projects to try to revive confidence in the territory.

An economic environment With the exception of the recession of 1998, the rates of GDP growth that have proves conducive to growth been achieved in recent years have been impressive—particularly given the already advanced level of development of the Hong Kong economy. Important factors facilitating this growth have been low taxes (the corporate tax rate is 16%), the absence of customs and excise duties on almost all items, the

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convenient transport system and other excellent infrastructure facilities, and the largely hands-off economic management style of the government. These favourable conditions have enabled Hong Kong to attract high value-added direct investment, particularly financial services, and companies establishing regional headquarters and doing business in China.

A changing economic While some domestic industries, notably electronics, have continued to structure expand over the past decade, since the early 1980s a large share of Hong Kong’s manufacturing capacity has been shifted over the border into China in order to take advantage of lower operating costs. The relative decline in Hong Kong’s manufacturing sector has been accompanied by the rapid development of its services industries, such as finance, business and catering, but particularly those relating to trade. These have been facilitated by the continuous upgrading and expansion of Hong Kong’s excellent container port—which in 1999 was the busiest in the world in terms of throughput. (See Economic sectors for a discussion of sectoral trends.)

Exports of services have as a result grown rapidly. However, growth in service exports has in most years been outpaced by growth in merchandise exports. This has been caused by the rapid growth in re-export business, resulting from the export boom in neighbouring Guangdong and the sharp increase in indirect trade through Hong Kong between China and third countries. In 1987-95 re-exports grew by an average of 24.9% per year in volume terms; by contrast, domestic exports grew by just 2.8%.

In 1995-97 re-exports grew by an average of just 7.2% per year, and in 1998 they fell by 3.7%. Although re-exports have since begun to grow at double- digit rates once again, such rapid rates of expansion will not be sustained. The recent surge in re-export growth is after all partly due to a low base of comparison. More fundamentally, factories in mainland China are increasingly gaining the capacity to package their own goods and export them through the mainland’s own rapidly expanding ports. This process will eventually begin to reduce Hong Kong’s merchandise exports. The outlook for the SAR is, however, not all bad: it will benefit from increases in revenue generated by Hong Kong- owned container terminals on the mainland and from an increase in transshipment business in Hong Kong waters.

Merchandise import growth is largely determined by export growth, since most imports are destined for re-export or for incorporation into domestic exports, although growth in investment and private consumption also play a role.

Price inflation Inflation in Hong Kong has traditionally been high. In 1991-95 prices, as measured by the Consumer Price Index (A), which monitors prices of goods purchased by the lowest 50% of income earners, inflation rose by an average of 9.3% per year. Inflation was pulled up partly by increases in wages, but the fixed link between the Hong Kong and US dollars also had an important effect on prices. The negative interest rates caused by the fixed link in the early to mid-1990s led to rapid increases in property prices, adding to the costs of services, in particular.

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Inflation (% change) Average average 1999 1995-99 Consumer price inflationa –3.3 3.9 Regional comparisons Taiwan 0.2 1.9 South Korea 0.8 4.4 Singapore 0.5 1.1

a Based on Consumer Price Index (A). Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; EIU.

Since 1997 the situation has been reversed. Rather than exerting upwards pressure on prices, the exchange-rate system in the last two years has acted to dampen inflationary pressures in Hong Kong. This is no accident. The currency board system is supposed to ensure that the internal price level, rather than the exchange rate, adjusts to external demand shocks, such as the sharp regional economic downturn of 1998. Nonetheless, the prolonged nature and extent of disinflation in Hong Kong has been surprising. Consumer prices began to fall in October 1998, and, as measured by the CPI(A), fell by 3.3% in 1999 as a whole. Prices continued to decline in 2000: in the first five months of this year the CPI(A) fell by an average of 3.8% year on year. Perhaps surprisingly, however, these falls in prices do not appear to have discouraged consumption in Hong Kong: retail sales in volume terms have been growing year on year every month since July 1999. (See Reference tables 11 and 12 for historical data on inflation and wage increases.)

High rates of With the economy often at or near full employment, wage growth has been wage inflation high—with pay for skilled workers increasing particularly quickly. The recession of 1998, which caused unemployment to surge to a record high of 6.3% in early 1999, eased wage pressures in Hong Kong: in the year to September 1998 average earnings in manufacturing increased by 0.8% in nominal terms but fell by 1.5% in real terms. Unemployment has since started to fall once again, and there are already signs of renewed wage inflation in some sectors of the economy.

Hourly earnings in manufacturing, 1997

% change % changea US$ 1996/97 1993-97 Hong Kong 5.42 5.4 6.7 Singapore 8.24 –1.0 10.7 Taiwan 5.89 –0.7 3.0 South Korea 7.22 –10.8 6.7

a Annual average.

Source: US Department of Labor, International Comparisons of Hourly Costs for Production Workers in Manufacturing.

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Economic sectors

Agriculture, forestry and fishing

Most food is imported The agriculture and fishing sector accounts for about 0.1% of GDP (latest available data), and less than 7% of the territory’s land area is devoted to farming and fish ponds (much of this land is fallow). The bulk of Hong Kong’s food is imported from China. Rice growing has largely disappeared, replaced by the more lucrative intensive vegetable farming—vegetable and flower pro- duction account for 93% of the total value of crops grown in Hong Kong. There is insufficient land for extensive grazing, so poultry and pigs are the main animals reared for food (10% of the live poultry and 16% of the live pigs purchased in the Special Administative Region (SAR) are supplied by local farms). The government provides support services, including technical advice, development loans, a tractor ploughing service and a vegetable marketing organisation.

Fishing and fish farming Local marine fishing provides 75% of the fresh marine produce consumed in the territory, while pond fish farmers produce about 11% of the freshwater fish consumed. In recent years growing numbers of boat-dwelling fishermen have moved onshore, as mechanisation of fishing has reduced the need for crews. The fishing fleet consists of around 4,460 junks of various sizes and designs, 3,820 of which are motorised. In 1998 total estimated production from the main sectors, marine capture and culture fisheries, was 188,000 tonnes, with a wholesale value of HK$2.1bn (US$269.2m). Fish ponds covering 1,100 ha are located mainly in the north-western New Territories, although they are increasingly being crowded out by the development of new towns; they produced 4,900 tonnes of fish in 1998, worth HK$83m

Mining and semi-processing

Hong Kong has no Hong Kong has virtually no mineral resources. Mining and quarrying activities mineral resources together account for only about 0.02% of GDP. The most important of these activities is cement production.

Manufacturing

The manufacturing sector, end-1999

Production (1986=100) 103.2 Establishments (no.) 23,553 Employment (no.) 244,720 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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From sweatshop to Lack of space and the absence of mineral resources have prevented Hong Kong container port from developing either land-intensive or heavy industry. Instead, the 1950s- 1970s were spent developing a range of labour-intensive consumer products: clothing and textiles, fabricated metal products, printed products, and food and beverages. However, as wages started to rise in the 1980s, and as China opened its doors to foreign investment, manufacturers were able to adapt to growing competition from other low-cost producers by moving upmarket to more sophisticated, higher-quality products, and by moving much of their productive capacity over the border to the neighbouring Chinese province of Guangdong. Much of Hong Kong’s industry is now engaged in packaging, presenting, selling and shipping goods produced in China at much lower wage rates than those prevailing in Hong Kong. (See Reference tables 13 and 14 for historical data on manufacturing.)

Key sectors The textiles and clothing industry on which Hong Kong’s industrialisation was built is still the territory’s most important industry and its largest industrial employer. Clothing manufacturers are prevented by quota restrictions from basing their operations in China (see The external sector: Merchandise trade), but this is side-stepped by complex outward processing chains, and in some cases by straightforward smuggling. Attempts to move the garment industry upmarket have in recent years had some success, as witnessed by Hong Kong’s growing reputation as an international fashion centre.

The electronics industry is Hong Kong’s second major industry and the largest recipient of foreign investment. Now also the territory’s second largest export earner, the electronics industry has advanced rapidly from the assembly of radios to a wide range of sophisticated products, including semiconductors, computer systems, television and video equipment and telecommunications equipment. This development was aided by the inflow of foreign capital and advanced technology. There are, however, fears that the industry is too reliant on imported components, as only 20% of the industry is made up of component makers.

Hong Kong’s electronics industry remains small and largely low-tech compared with that of other Asian countries, particularly Taiwan and Singapore. One frequently quoted reason for the failure of Hong Kong’s electronics industry to match the export performance of these other Asian economies is inadequate government support for research and development in high-technology industries. Since Hong Kong became a SAR of China in 1997 the local authorities have adopted a more pro-active stance to the development of high- tech related activities. But officials are pinning their hopes on the growth of an information-technology service industry (see Other services); the government is realistic about the limited potential for the development of large-scale manufacturing production—even if it is high-tech and therefore high value- added—in the SAR.

The plastics industry, which grew rapidly in previous decades, has been shrinking in the 1990s, as output has shifted into China. Hong Kong nonetheless remains one of the world’s largest exporters of toys. The watches and clocks industry is also important.

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Factories are small The average manufacturing establishment is extremely small, typically housed on one or two floors of a high-rise building (“flatted factories”). In December 1998 there were 244,720 people employed in 23,553 establishments, an average of just ten employees per enterprise. This small average size of manufacturing enterprises, coupled with the absence of legislation protecting jobs or wages, enhances the ability of local exporters to respond flexibly to fluctuations in the business cycle and changes in taste.

Manufacturing job losses Shifting Hong Kong’s manufacturing base over the border into southern China has resulted in the loss of well over 500,000 manufacturing jobs in the past decade. At the same time, nearly twice as many jobs have been created in the growing services sector. However, it is becoming increasingly difficult for the services sector to absorb the people losing their jobs in manufacturing: the number of jobs being created in the services sector had already started to slow even before the recession of 1998-99. It is also more difficult for older, poorly educated employees, who have worked in manufacturing for many years, to adapt their skills to the services industries. Such workers are going to find it even more difficult to find work if an information-technology sector—in which skills demands are high—really does develop in Hong Kong (see Resources and Infrastructure: Education).

Construction

Booms and slumps The construction industry is an important part of Hong Kong’s economy, accounting for 6.1% of GDP in 1998 and in December 1999 employing 71,789 persons, or 2.1% of the labour force. The private sector accounts for a little over half of all investment in building and construction. (See Reference table 15 for a summary of construction data.)

The construction sector has been through a series of booms and slumps since the early 1980s. The measures introduced by the government in 1994 to make it more difficult to buy and sell unfinished flats contributed to prices falling by as much as 40% over the 18 months from March 1994. After rising by 10-15% in the first half of 1996, property prices boomed as consumer confidence surged in the run-up to the handover to China in July 1997. According to the government, average private domestic residential property prices rose by 65.9% between the final quarter of 1995 and the third quarter of 1997. Prices rose particularly sharply in the fourth quarter of 1996 and the first quarter of 1997.

The rate of increase began to slow as developers took fright at suggestions by officials from the incoming SAR administration that a capital gains tax might be needed to arrest soaring property prices. Further downward pressure on prices came from the release onto the market of a massive amount of new commercial space as a result of the airport railway project. Property prices then plummeted as a result of both the regional economic downturn and rising interest rates caused by speculative attacks against the fixed link between the Hong Kong and US dollars (see The economy: Economic policy, including public finance). Prices have remained relatively low since then and, with real

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interest rates in Hong Kong still at high levels, it is unlikely that property prices will rise sharply in the foreseeable future.

Financial services

A major financial centre Hong Kong is an important global financial centre, as it is being the ninth largest international banking centre in terms of volume of external transactions. The growth of financial services has played a huge role in the development of the Hong Kong economy in the past decade. Financial services contributed 10.1% of GDP in 1997 (latest available figures) and in December 1999 (together with the insurance, real estate and business services sectors) provided employment for 11.6% of the total labour force. Hong Kong offers the full range of financial institutions and services, in which foreign companies play a very important role.

The Hong Kong There is no central bank, but in 1993 the government set up the Hong Kong Monetary Authority Monetary Authority (HKMA), formed by a merger between the Office of the Exchange Fund and the Office of the Commissioner of Banking. The HKMA has assumed some of the functions of a central bank, such as monetary management and supervision of the banking sector, but it does not issue bank- notes. Notes are issued by the Hongkong and Shanghai Banking Corporation (HSBC, which owns HongkongBank and Hang Seng Bank), Standard Chartered Bank, and since 1994 the Bank of China.

The banking system At the end of 1999 there were 156 licensed banks in Hong Kong. In addition, there were 58 restricted-licence banks. Together with 71 “deposit-taking companies”, Hong Kong had 285 authorised banks, and 127 further insti- tutions had representative offices in the SAR. Of the licensed banks, 125 were incorporated outside Hong Kong. A small number of banks with large branch networks dominate the market for retail bank deposits, while the other banks and financial institutions rely mainly on the interbank market for funds. In 1998, when interbank rates were high and extremely volatile, this became a painful way to raise money. As a result, banks were reluctant to cut deposit rates even as interbank rates fell. (See Reference table 16 for a breakdown of banking statistics.)

Since 1995 the HKMA has been the regulator for all three types of authorised institutions. All licensed banks are required to be members of the Hong Kong Banking Association (HKBA). The HKBA was founded in 1981 to supervise banking standards and to regulate charges and interest rates. Interest rates in Hong Kong have been steadily liberalised in recent years. Until recently, however, interest rates on deposits continued to be regulated. This began to change in July 2000, when the HKMA removed the ceiling on time deposits with a maturity of less than seven days. Deregulation will continue in 2001 when interest rates on current and savings accounts will be liberalised.

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A developing The Stock Exchange of Hong Kong (SEHK) was formed in 1986 through the equities market merger of four previously existing exchanges. The development of the stockmarket has not always been smooth. Hong Kong’s reputation as a developing financial centre suffered a setback in 1987 when, in response to sharp falls in stockmarkets everywhere, the SEHK was closed for three days (Hong Kong’s benchmark Hang Seng Index had fallen by 12%). Fears about impending Chinese rule caused some firms to move their legal domicile away from Hong Kong in the run-up to 1997. (The parent company of the Jardine Matheson group, for example, moved to Bermuda.) In addition, the problems of 1997-98 caused market capitalisation to more than halve. Nonetheless, the main board of the SEHK is now the largest stockmarket in Asia (excluding Japan), with a market capitalisation at end-June 2000 of US$616.3bn.

China-related shares The growth of the market has been due in part to the absence of restrictions on foreign ownership of shares. The market has also benefited from Hong Kong’s close links with mainland China. In 1993 the Hong Kong market was opened up to fundraising by China-incorporated companies, listings known as H- shares. In addition to H-shares, “red chips”, or Chinese-controlled companies incorporated in Hong Kong, are also traded on the HKSE. The best known “red chip” is CITIC Pacific. Others include Guangdong Investment and Cosco Pacific Shipping, During the “red chip fever” of 1997 all were bid up to multiples almost double the Hang Seng Index (HSI) average, as investors were lured by what they hoped was more professional management.

Investing in the shares of China-affiliated companies has not been without its risks. This is partly because of disclosure: in 1995 it emerged that the maker of China’s most famous brand of beer, Tsingtao Brewery, had used some funds generated by an H-share listing in Hong Kong to provide loans to third parties; in its listing prospectus the company had pledged to use this capital to fund expansion. Similar concerns dogged the red chips, the profits of which were often driven up by financial engineering—particularly asset sales from parent companies—rather than by increased operating earnings. Worries about the underlying financial health of the red chips became particularly prevalent in late 1998 after it was revealed that because of financial difficulties Guangdong Enterprises (GDE) had declared a moratorium on external debt repayments— GDE has a 40.5% stake in Guangdong Investment, as well as owning shares in other companies listed in Hong Kong. (in July 2000 GDE was near reaching a restructuring agreement with its creditor banks.)

Like other shares, red chips crashed in October 1997. But, partly because of the financial problems experienced by companies such as GDE, red chip prices have not benefited from much of a recovery since then. On March 28th 2000 HSI reached an all-time high of 18,302; on the same day the index which tracks the performance of the red chips, the Hang Seng China Affiliated Corporations Index (HSCACI), was at just 1,668, 59% below its all-time high of 4,111, also recorded in August 1997. (See Reference table 17 for various stockmarket indicators.)

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The Growth In an effort to jump on the global information technology bandwagon, the Enterprise Market SEHK in November 1999 launched a second board, the Growth Enterprise Market (GEM). As the name suggests, the GEM is aimed at companies with strong growth potential, particularly high-tech and high value-added industrial companies. The criteria for companies wishing to list on the GEM are therefore less stringent than those required for firms wishing to issue shares on the SEHK’s main board. Initially requiring firms to provide a two-year corporate history—compared with the three years required by the main board—since March 11th 2000 firms with only a 12-month history have been allowed to list on GEM (GEM’s corporate history requirements may be tightened again however). Moreover, the GEM imposes no profitability requirements. Partly as a result of these easier listings criteria, the GEM became embroiled in some scandals during its first few months in existence. Nonetheless, there has been considerable interest in the market and by the end of June 2000 29 companies had listed on GEM, and the board had a capitalisation of US$7.2bn.

A small futures market In addition to offering four derivative products based on local stockmarket indices, the Hong Kong Futures Exchange (HKFE) also offers foreign-exchange futures, as well as individual stock and interest rate derivative products. Despite the number of products offered, however, the exchange is dominated by HSI- related trading. In June 2000, for instance, of the around 300,000 futures contracts traded on the exchange, 270483 were HSI futures; in addition, over 99% of the options traded were HSI options. HSI futures contracts were first offered in May 1986, with HSI options contracts being added in March 1993. The products are all traded on the Hong Kong Futures Automated Trading System (HKATS).

The debt market Hong Kong has taken a number of measures in recent years to encourage the development of the local debt market. Although budget surpluses have tended to be recorded in recent years, in 1990 the government started to issue debt in Hong Kong, with the aim both of assisting the government’s monetary management and helping to develop a debt market yield curve. The HKMA now issues 91-, 182- and 364-day Exchange Fund Bills, and 2-, 3-, 5- ,7-, and 10-year Exchange Fund Notes. By the end of March 1999 a total of HK$97.5bn (US$12.5bn) in Exchange Fund Bills and Notes were outstanding. In another major step forward, aimed at developing a local secondary mortgage market, Hong Kong Mortgage Corporation (HKMC) was founded in March 1997. Other initiatives taken by the government include: establishing a central clearing and custodian system for debt securities, the Central Moneymarkets Unit; implementing the Real Time Gross Settlement interbank payment system; and introducing a Securities Lending Programme.

Improving regulation The regulation of Hong Kong’s financial markets continues to evolve. In response to the market difficulties of 1987 a Securities and Futures Commission (SFC) was established in 1989 to oversee the clean-up and modernisation of the stock exchange. A further round of regulatory reforms followed the financial market volatility of 1997-98. In particular, the authorities introduced a series of strict new rules governing futures trading. Apparently in an attempt to improve efficiency, in March 1999 the financial secretary, Donald Tsang, announced

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that the stock and futures exchanges were to be demutualised, merged, and eventually listed. This process, which led to the formation of Hong Kong Exchanges and Clearing, had been completed by the end of June 2000.

Competition from Increasing efficiency did not seem to be the only motivation behind the Singapore merger announcement. The fact that Singapore had announced a similar move in 1998 probably also played a part in the government’s decision. Singapore has long seemed to be a potential rival to Hong Kong’s position as the leading financial centre in Asia (excluding Japan). Singapore offers significantly lower commercial rents and housing costs than Hong Kong. Prior to the transition of Hong Kong to Chinese sovereignty, Singapore stepped up its efforts to woo Hong Kong-based companies and citizens, even airing television commercials in the territory espousing the advantages of life in Singapore. Newspaper advertisements urged Hong Kong residents to “look to Singapore for security” when deciding where to deposit their money.

Singapore has used the opportunity created by the economic difficulties being experienced across Asia to push forward its challenge to Hong Kong’s financial services industry. Since late 1997 Singapore’s government has unveiled wide- ranging reforms of the island’s financial markets, including measures to liberalise the banking and debt markets. Hong Kong’s government maintains that such competition is healthy. Furthermore, despite the SAR government’s HK$118.1bn (US$15.2bn) intervention in the local stockmarket last August, Singapore still lags far behind Hong Kong in terms of market openness.

Other services

Retailing The retail sector is highly developed, offering every type of store and item imaginable, including international department store chains such as Sogo and Mitsukoshi of Japan and Marks & Spencer of the UK, as well as domestic retail chains such as Lane Crawford and Giordano. Shops are open seven days a week and many do not close until 10 pm. In recent years Hong Kong Island and the main shopping area of Kowloon, Tsim Sha Tsui, have witnessed the emergence of several massive shopping malls containing multiscreen cinemas, department stores, shops selling designer clothes and international retail chain stores, as well as smaller specialist shops and restaurants. The retail sector was hit hard by the recession of 1998: in value terms retail sales fell year on year every month between November 1997 and December 1999. Since January 2000, however, sales have started to grow again. (See Reference table 18 for data on retail sales.)

Tourism Tourism is a major industry in Hong Kong. The tourism industry slumped in 1998, however, as lower incomes in the region, cheaper destinations in the rest of Asia and the successful transfer of sovereignty—removing the incentive to visit Hong Kong “before the handover”—reduced tourist numbers. Total tourism receipts amounted to HK$53.1bn (US$6.9bn) in 1998, 24% below the amount generated in 1997. (See Reference table 19 for historical data on the tourism industry.)

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The number of tourists started to increase once again in the second half of 1998, and has continued to grow since then. But spending per head by visitors, which fell from HK$6,722 in 1997 to HK$5,544 in 1998, declined further in 1999, reaching just HK$4,778. Also rapid growth in tourism numbers is by no means assured in the future. Until 1997 the growing numbers of visitors from China and Taiwan had contributed to the growth in tourist numbers. People wishing to travel between Taiwan and China cannot do so directly; they must first pass through a third region, and Hong Kong is often chosen as a stopping- off point. During the next few years, however, Taiwan is expected to ease the ban on direct links with the mainland. Such a development could substantially reduce the numbers of travellers to Hong Kong.

Aware of this, the government has been attempting to enhance the attractiveness of Hong Kong as a destination for tourists other than those travelling between Taiwan and China. The centre-piece of these efforts was the announcement in October 1999 that in a joint venture with the government a US company, Walt Disney, was to establish a theme park in the SAR. Govern- ment projections suggest that in 2005, the park’s first year of operation, attendance will total 5m people. Officials have forecast that the number of visitors will then rise to 10m per year by around 2020. The government estimates that the theme park will bring substantial economic benefits to Hong Kong (estimated at HK$148bn, or US$19bn, over 40 years).

Tourism, 1999

Total visitor arrivals 10,678,000 Average stay (no. of days) 3.36 Average spending (per head; HK$) 4,778 Occupancy rate (av; %) 79 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

An information technology Following the economic problems of 1998, the government has tried to services sector? encourage the diversification of the economy away from its traditional dependence on property and financial services. The government has been particularly keen to encourage the development of high-tech-related activities in Hong Kong (see The economy: Economic policy). The government’s first initiative in this area, the controversial Cyberport development, was widely criticised, but since then the concept of Hong Kong as an information technology-related services has gained greater credence. The SAR, after all, has one of the most advanced telecommunications networks in the world—and this has already begun to encourage the development of an Internet industry in Hong Kong. The SAR’s largest property companies have also been falling over themselves to establish high-tech-related subsidiaries, and list these on the GEM. In the first months of 2000 newspapers in Hong Kong were full of advertisements for personnel with information technology skills.

It is too early to determine whether a real transformation of the economy is under way. The property developers may begin to lose interest in the high-tech sector when real estate prices in Hong Kong begin to rise again. There are also significant barriers to the development of an information technology sector in

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the SAR, notably a shortage of skilled labour. But the early signs are positive, and Hong Kong’s economy has proved extremely flexible and versatile in the past.

The external sector

Trade in goods

A bastion of free trade Trade is Hong Kong’s raison d’être and its lifeline. As a proclaimed bastion of free enterprise and free trade, the government imposes minimal restrictions on exports and imports. In stark contrast to Japan and the other Asian newly industrialising countries, Hong Kong has refrained from protecting and subsidising its industries in order to accumulate trade surpluses. In April 1986 Hong Kong was admitted in its own right as the 91st contracting party to the GATT and continues to enjoy membership of the World Trade Organisation (WTO), which replaced the GATT in 1995.

Merchandise trade, 1999 (HK$ bn) Exports 1,349.0 of which: domestic 170.6 Imports –1,392.7 Trade balance –43.7 Balance with China –157.9 Balance with the US 222.2 Balance with Japan –89.7 Balance with Taiwan –67.5 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Domestic exports by principal commodity, 1999 (HK$ m; fob) Apparel & clothing 74,251 Electrical machinery & apparatus 23,790 Textile yarn & fabric 9,488 Office machinery & data processing equipment 6,261 Watches & clocks 5,040 Telecommunications equipment 3,771 Jewellery 5,042 Printed matter 4,033 Plastics 1,272 Baby carriages, toys, games & sports goods 673 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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From domestic exports to During the last two decades the composition of Hong Kong’s merchandise re-exports exports changed. As companies shifted their manufacturing facilities from Hong Kong into China to take advantage of lower operating costs, domestic exports were replaced by re-exports. Although some domestic export in- dustries, notably electronics, have expanded, far more new capacity has been installed in China, from where products are imported into Hong Kong before being re-exported. Consequently, while the volume of domestic exports rose by just 17.3% between 1986 and 1996, the volume of re-exports rose by almost 700% during the same period.

The garment industry, textiles and clothing, remains the territory’s most important domestic export industry, accounting for 49% of domestic export earnings in 1999. In recent years the garment industry has been one of the most active in shifting its operations across the border. However, as China’s Multi-Fibre Arrangement (MFA) quotas are already full, manufacturers have to be careful about moving operations that can change the all-important country of origin of their products. This is particularly important following a decision by the US administration in 1994 to change the rules of origin of its apparel imports from the place where the garment is cut (still mainly Hong Kong) to the place where the goods are assembled (usually China for the Hong Kong industry). Manufacturers have a major economic incentive to circumvent the MFA rules and label Chinese-made garments as made in Hong Kong, because the Hong Kong quota is so much cheaper on the secondary market than the quota for imports from China. (Reference table 20 gives information on domestic exports by main commodity sectors, and Reference table 21 on re- exports by end-use category.)

Slowing re-export growth Re-exports will not continue to grow rapidly indefinitely. In fact, growth has already begun to slow. Re-exports in volume terms, which in 1988-92 had grown by an average of 26.6% a year, expanded by an average of just 12.3% a year in 1993-97. Growth in re-exports has slowed as China’s infrastructure, product processing and auxiliary services have improved. This has allowed products to be finished and shipped direct from mainland China, rather than having to pass first through Hong Kong.

Mercantilism denied Hong Kong relies on imported raw materials and semi-finished goods as inputs to its industries, and it also relies on imports for its consumer goods, capital goods, food and fuel. As a result, despite spectacular growth in total exports, Hong Kong has traditionally run large trade deficits. (Reference table 22 gives imports by end-use category; Reference table 23 contains trade volume indices.)

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Main trading partners, 1999

Exportsa to: % of total Imports from: % 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 Including re-exports.

Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

The importance of China In recent years the direction of Hong Kong’s trade has veered markedly away from the US, traditionally its main market, and towards China. Between 1986 and 1999 the US’s share of Hong Kong’s domestic exports fell from 41.7% to 30.1%, while China’s share rose from 11.7% to 29.6%. China is now the source of 61.1% of Hong Kong’s re-exports and the buyer of 33.9% of them. Because of the re-export trade, China is easily the most important source of imports. (Reference table 24 gives data on export markets; Reference table 25 breaks down re-exports by source and eventual destination; Reference table 26 gives figures for imports by supplier; Reference table 27 breaks down trade in services; Reference table 28 gives trends of foreign trade; Reference table 29 gives direction and composition of foreign trade for 1999.)

Invisibles and the current account

A recent current- Hong Kong only began to publish balance-of-payments figures in April 1999, account surplus and a full breakdown of the current-account balance is so far only available for 1997-99. These data show that Hong Kong has achieved large surpluses on the services balance in these years, averaging around 6% of GDP. National accounts figures suggest that Hong Kong has recorded a services surplus for several years. Given the rapid growth in the local services sector in recent years, this is not surprising. Hong Kong’s most important services exports are transport services (related to demand for the SAR’s port facilities) and trade-related services. The SAR also maintains a surplus in the trade of financial services. The recently released balance-of-payments figures show that Hong Kong’s income surplus, at HK$10.5bn (US$1.3bn, or 0.8% of GDP) in 1997, rose to HK$28.8bn (2.3% of GDP in 1998) and remained above 2% of GDP in 1999.

Overall, the current-account balance moved from a deficit of HK$47.7bn (3.6% of GDP) in 1997 to a surplus of HK$22.5bn (1.8% of GDP) in 1998 and to HK$72bn (5.8% of GDP) in 1999. The improvement in the current account was largely the result of a narrowing of the trade deficit. In 1998 domestic demand contracted and the need for imported components fell with the collapse of merchandise exports. As a result, the trade deficit narrowed from HK$133.9bn (10.1% of GDP) in 1997 to HK$60.7bn (4.8% of GDP) in 1998, and to HK$24.5bn (2% of GDP) in 1999.

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Current account (US$ m unless otherwise indicated) 1997 1998 1999 Merchandise trade balance –17,298 –7,833 –3,158 Services balance 11,397 8,617 10,398 Income balance 1,353 3,713 3,516 Current transfers balance –1,610 –1,596 –1,471 Current-account balance –6,159 2,902 9,285 % of GDP –3.6 1.8 5.8 Source: Census and Statistics Department, Hong Kong government website.

Capital flows and foreign debt

A shifting balance Based on the figures that have been published for the years 1997-99, it is not of payments possible to detect any trends in the movement of Hong Kong’s balance of payments. The balance swung from a surplus of HK$95.1bn (US$12.2bn, or 7.2% of GDP) in 1997 to a deficit of HK$53.8bn (4.2% of GDP) in 1998, and then back to a surplus of HK$74.1bn (6% of GDP) in 1999. In 1998-99 Hong Kong recorded large net inflows of portfolio investment, but big net outflows of other investments. In both 1997 and 1998 a small deficit was recorded in net flows of capital transfers, but moderate net surpluses were achieved on flows related to financial derivatives. (See Reference table 30 for balance-of- payments data.)

Direct investment flows In 1998 Hong Kong experienced a net outflow of direct investment, totalling HK$17.1bn (1.3% of GDP). This moved into a surplus of HK$24.6bn (2% of GDP) in 1999. According to the government figures for 1998 (latest available data), the British Virgin Islands was both the biggest recipient and the largest source of direct investment related to Hong Kong. This is not surprising: this small UK territory is a favourite tax domicile for Hong Kong-based companies because of its strict confidentiality and lax regulations. Mainland China was the second largest destination for and source of direct investment in 1998. Mainland Chinese entities invested HK$20.2bn (US$2.6bn) in Hong in 1998, accounting for 17.7% of the total foreign direct investment (FDI) inflows to Hong Kong recorded in that year. By 1998 mainland China had invested a cumulative HK$213.7bn in Hong Kong, 12.3% of the total. Apart from offshore tax havens, other important sources of FDI into Hong Kong are the UK, Netherlands, US and Japan.

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Balance of payments (HK$ m) 1998 1999 Current-account balance 2,902 9,285 Direct investment balance –17,016 24,615 Portfolio investment balance 171,052 250,472 Financial derivatives balance 25,374 95,475 Other investment balance –245,059 –358,872 Financial balance –18,452 –13,765 Overall balancea –53,754 74,141

a Including net errors & omissions.

Source: Census and Statistics Department, Hong Kong government website.

External debt Hong Kong entities have tapped the international capital markets for remains small increasing amounts of funds in recent years. According to the International Financing Review (IFR), Hong Kong entities issued US$6.7bn in bonds on the international markets in 1997, compared with just US$941m in 1995. Supply- sides factors—the increased costs faced by Asian borrowers wishing to borrow overseas—and demand-side factors—a reduced need for funds as domestic capital expenditure contracted—caused issuance to drop to US$1.9bn in 1998. However, issuance rose again in 1999: according to the IFR, Hong Kong entities issued US$4.2bn in investment-grade international bonds in 1999.

Despite this rising issuance, external debt remains small. According to the OECD, Hong Kong’s total external debt was just US$48.7bn, or 29.7% of GDP, in 1998 (latest available figures). Short-term debt as a proportion of the total has been falling in recent years, from 45.8% in 1992 to 21.4% in 1998. In recent years more than 80% of Hong Kong’s medium- and long-term debt has been owed to private-sector creditors. (See Reference table 31 for historical data on Hong Kong’s external debt.)

Foreign reserves and the exchange rate

Abundant foreign Hong Kong has abundant foreign-exchange reserves, which are continuing to exchange grow rapidly. At some US$97.1bn at the end of June 2000, they are the fourth largest foreign-exchange holdings in the world, behind Japan, China and Taiwan. In terms of foreign-exchange reserves per head, Hong Kong’s reserves are second only to Singapore. The reserves, which are mostly US dollar- denominated securities, are held chiefly in the Exchange Fund. (Reference table 32 gives historical data on foreign reserves.)

A strong exchange rate In an attempt to bolster confidence at a time when the prospect of transition to Chinese sovereignty was a potentially destabilising factor, the Hong Kong dollar was fixed to the US dollar at a rate of HK$7.8:US$1 in October 1983 (although during much of the 1990s the currency traded nearer to HK$7.7:US$1). Since then Hong Kong has gone through a number of crises, including the temporary panic induced by the Beijing massacre of June 1989,

© The Economist Intelligence Unit Limited 2000 EIU Country Profile 2000 54 Hong Kong

the 1991 Gulf war and extensive short-selling by speculators and locals in 1997-98. The fixed link has survived these events, although the authorities have sometimes had to protect it using unorthodox means—most notably the HK$118bn (US$15.1bn) intervention in the stockmarket in August 1998.

In the aftermath of the financial market turbulence of 1998, the authorities unveiled a number of measures aimed at strengthening the fixed link (which included moving the currency back to its formal pegged rate of HK$7.8:US$1). The link will be further strengthened in 2000 when the Hong Kong Monetary Authority (HKMA, the de facto central bank) introduces a US-dollar clearing system in the SAR. The Hong Kong Exchange and Clearing Company (HKEC, formed from the recent merger of the SAR’s stock and futures exchanges) is also working to introduce a US dollar clearing system for securities. (According to Hong Kong’s financial secretary, Donald Tsang, after this US dollar- denominated market is established, the authorities will work to build a Euro- denominated market.) The new system, aside from bolstering Hong Kong’s position as an international financial centre, is aimed at strengthening the exchange rate as the Hong Kong dollar will no longer be used in non-domestic business transactions. (See Reference table 33 for exchange rates since 1995.)

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Appendices

Sources of information

National statistical sources Government Secretariat, Budget Papers (annual)

Hong Kong Census and Statistics Department, Hong Kong Annual Digest of Statistics

Hong Kong Census and Statistics Department, Hong Kong Monthly Digest of Statistics

Bob Howlett (ed), Government Information Services, Hong Kong 1997

International statistical Energy Data Associates, Bishops Walk House 19-23 High Street, Pinner, sources Middlesex HA5 5PJ

Select bibliography Edward K Y Chen, Mely C. Anthony, Economic Integration and Political Divergence: Hong Kong-China Relations in the Run-up to 1997, Asia Club Papers, Centre for Asian Studies, Hong Kong, June 1995

Maurice Collis, Foreign Mud, Faber and Faber, London, 1956

Robert Cottrell, The End of Hong Kong: The Secret Diplomacy of Imperial Retreat, John Murray, London, 1993

Ken Davies, Hong Kong after 1997, Economist Intelligence Unit Special Report, London, 1996

Economist Intelligence Unit, Asia-Pacific Regional Overview (quarterly), London, various issues

Economist Intelligence Unit, Business China (fortnightly), various issues

Economist Intelligence Unit, Hong Kong Country Forecast (quarterly), various issues

Economist Intelligence Unit, Hong Kong Country Report (quarterly), various issues

G B Endacott, A History of Hong Kong, Oxford University Press, Hong Kong, 1973

Sonny Lo Shiu Hing, Donald Hugh McMillen, A Profile of the “Pro-China Hong Kong Elite”: Images and Perceptions, Issues and Studies, Vol 31 No. 6, Hong Kong, June 1995

Richard Yan-Ki Ho, Robert Haney Scott, Kie Ann Wong (eds), The Hong Kong Financial System, Oxford University Press, Hong Kong, 1991

Donald Hugh McMillen & Man Si-Wai, The Other Hong Kong Report, 1994, The Chinese University Press, Hong Kong, 1994

Werner Menski (ed), Coping with 1997: The reaction of the Hong Kong people to the transfer of power, Trentham Books and School of Oriental and African Studies, London, 1995

© The Economist Intelligence Unit Limited 2000 EIU Country Profile 2000 56 Hong Kong

Frank Welsh, A History of Hong Kong, Harper Collins, London, 1993

The World Bank, The Emerging Asian Bond Market (Background Paper), Hong Kong, The World Bank East Asia & Pacific Region, Washington, June 1995

Reference tables

These reference tables provide the most up-to-date statistics available at the time of publication.

Reference table 1 Population (m unless otherwise indicated) 1995 1996 1997 1998 1999 Total (mid-year) 6.156 6.311 6.502 6.687 6.843 % change, year on year 2.0 2.5 3.0 2.8 2.3 Crude birth rate (per ‘000) 11.2 10.1 9.1 7.9 7.5 Crude death rate (per ‘000) 5.1 5.1 4.9 4.9 4.8 Infant mortality rate (per ‘000) 4.6 4.1 3.9 3.2 3.1 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 2 Labour force (% unless otherwise indicated) 1995 1996 1997 1998 1999 Labour force (‘000) 3,000.7 3,093.8 3,216.0 3,358.6 3,476.6 Participation rates Men 76.6 76 75.7 75.5 75.2 Women 47.6 47.8 48 48.5 49.2 No. unemployed (‘000) 95.6 86.1 71.3 157.6 217.1 Unemployment rate 3.2 2.8 2.2 4.7 6.2 Share of employment Construction 2.3 2.6 2.6 2.2 2.1 (no.) 68,525 81,676 83,251 72,253 71,789 Manufacturing 12.5 10.5 9.0 7.3 7.0 (no.) 375,766 325,068 288,887 245,457 244,720 Financial services 12.6 12.8 12.8 11.6 11.9 (no.) 378,244 395,903 410,979 390,454 415,326 Trade, restaurants & hotels 33.9 34.1 31.2 27.2 28.8 (no.) 1,018,198 1,056,136 1,003,072 913,070 1,002,263 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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Reference table 3 Transport statistics

1995 1996 1997 1998 1999 Roada Motor cycles (no.) 21,031 22,650 23,511 23,343 24,258 Private cars (no.) 285,467 293,381 314,833 318,137 321,617 Taxi (no.) 17,841 17,789 17,918 18,053 18,008 Goods vehicles (no.) 117,928 116,791 118,279 115,051 113,770 Rail Passenger train departures (no.) 1,868 1,877 2,108 2,376 2,595 Cargo loaded (‘000 tonnes) 316 255 174 138 173 Air Passenger arrivals (‘000) 10,631 11,692 10,841 10,284 10,699 Cargo loaded (‘000 tonnes) 772 830 947 855 1,133 Aircraft landings (no.) 75,053 79,401 82,573 81,616 83,686 Sea Vessel departures (‘000) n/a n/a 44 42 38 ‘000 NRT n/a n/a 198,349 207,645 215,226 Outward cargo handled (‘000 tonnes) 40,127 39,145 41,351 37,378 39,601 Inward cargo handled (‘000 tonnes) 87,048 86,694 91,950 90,104 88,621

a Licensed vehicles.

Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 4 National energy statistics (terajoules unless otherwise indicated) 1995 1996 1997 1998 1999 Electricity Total electricity sales 112,817 115,790 118,087 127,643 127,555 Domestic 27,063 29,194 28,937 32,793 31,400 Commercial 59,908 64,465 67,849 73,857 76,028 Industrial 20,222 19,934 18,965 18,489 17,547 Street lighting 284 287 322 307 301 Export to China 5,340 1,910 2,014 2,197 2,279 Domestic (%) 24.0 25.2 24.5 25.7 24.6 Commercial (%) 53.1 55.7 57.5 57.9 59.6 Industrial (%) 17.9 17.2 16.1 14.5 13.8 Street lighting (%) 0.3 0.2 0.3 0.2 0.2 Export to China (%) 4.7 1.6 1.7 1.7 1.8 Gas Total gas sales ) 21,972 22,989 23,905 23,943 24,687 Domestic 11,408 11,986 12,465 12,519 13,064 Commercial 9,586 10,085 10,529 10,536 10,709 Industrial 978 918 911 888 914 Domestic (%) 51.9 52.1 52.1 52.3 52.9 Commercial (%) 43.6 43.9 44.0 44.0 43.4 Industrial (%) 4.5 4.0 3.8 3.7 3.7 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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Reference table 5 Government financesa (HK$ m unless otherwise indicated; fiscal years) 1994/95 1995/96 1996/97 1997/98 1998/99 Revenue Direct taxes Earnings & profits tax 74,295 77,419 83,966 91,524 75,746 Indirect taxes 42,256 41,849 54,291 65,121 38,239 Other revenue 30,567 31,680 32,552 41,757 52,718 Total operating revenue 147,118 150,948 170,809 198,402 166,703 Capital revenue 27,880 29,097 37,549 82,824 49,412 Total government revenue 174,998 180,045 208,358 281,226 216,115 Operating expenditure 106,620 121,903 135,853 160,566 177,406 Recurrent expenditure 63,113 70,263 78,466 85,937 93,698 Subventions 42,909 50,021 56,271 63,449 70,579 Education 13,859 15,632 17,179 18,877 21,082 Health 15,546 18,370 20,930 24,040 26,562 Social welfare 2,274 2,738 3,207 4,598 5,419 Universities & polytechnics 8,050 9,385 10,723 11,792 13,189 Vocational training council 1,279 1,497 1,668 1,806 1,968 Miscellaneous 1,901 2,399 2,564 2,336 2,359 Other non-recurrent 598 1,619 1,116 11,180 13,129 Total capital expenditure & equity investments 57,535 61,255 46,827 33,794 61,950 Total government expenditure & equity investments 164,155 183,158 182,680 194,360 239,356 Budget balance 10,843 –3,113 25,678 86,866 –23,241 a Includes sales revenue generated by sales of land by public auction and tender, private treat grants, the modification of existing leases, exchanges and extensions and fees received in respect of short term waivers.

Sources: Census and Statistics Department, Hong Kong Annual Digest of Statistics; Government of the Hong Kong Special Administrative Region (SAR) estimates.

Reference table 6 Money supply (HK$ m; year-end; % change year on year in brackets) 1995 1996 1997 1998 1999 Notes & coins 81,667 87,113 92,666 92,495 124,224 (4.5) (6.7) (6.4) –(0.2) (34.3) Money (M1) 190,471 217,460 208,093 197,666 225,156 (2.8) (14.2) –(4.3) –(5.0) (13.9) Money (M2) 2,282,849 2,532,236 2,742,993 3,066,089 3,313,534 (14.6) (10.9) (8.3) (11.8) (8.1) M3 2,363,963 2,611,636 2,825,609 3,122,345 3,361,805 (14.2) (10.5) (8.2) (10.5) (7.7) Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 7 Interest rates (%; end-period) 1995 1996 1997 1998 1999 Interbank offered rate (3-month) 5.88 5.5 9.13 5.06 5.69 Prime lending rate 8.75 8.5 9.5 9 8.5 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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Reference table 8 Gross domestic product (HK$ unless otherwise indicated) 1995 1996 1997 1998 1999 Total (US$ m) At current prices 139,242 154,104 170,995 163,562 158,845 Total (HK$ m) At current prices 1,077,145 1,191,890 1,323,862 1,266,840 1,232,239 At constant (1990) prices 755,832 789,753 829,017 786,425 810,227 % change, year on year 3.9 4.5 5.0 –5.1 3.0 Per head (HK$) At current prices 174,972 188,859 203,605 189,443 184,268 At constant (1990) prices 122,778 125,139 127,500 117,602 118,402 % change, year on year 1.9 1.9 1.9 –7.8 0.7 Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; Quarterly Estimates of Gross Domestic Product.

Reference table 9 Gross domestic product by expenditure (HK$ m at constant 1990 prices; % change year on year in brackets) 1995 1996 1997 1998 1999 Private consumption 450,450 471,766 501,015 467,632 472,625 (1.6) (4.7) (6.2) (–6.7) (1.1) Government consumption 57,857 60,162 61,629 62,021 64,151 (3.2) (4.0) (2.4) (0.6) (3.4) Gross fixed investment 243,800 270,146 304,569 285,210 234,785 (10.7) (10.8) (12.7) (–6.4) (–17.7) Stockbuilding 40,103 9,608 10,927 –14,899 –8,713 (2.8)a (–4.0)a (0.2)a (–3.1)a (0.8)a Exports of goods & services 1,461,273 1,540,954 1,621,942 1,547,080 1,609,047 (11.0) (5.5) (5.3) (–4.6) (4.0) Imports of goods & services 1,497,651 1,562,883 1,671,065 1,560,619 1,561,668 (12.7) (4.4) (6.9) (–6.6) (0.1) GDP 755,832 789,753 829,017 786,425 810,227 (3.9) (4.5) (5.0) (–5.1) (3.0)

a Change as a percentage of GDP in the previous year.

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; Quarterly Estimates of Gross Domestic Product.

Reference table 10 Gross domestic product by sector (HK$ m at current prices; % of total in brackets) 1994 1995 1996 1997 1998 Agriculture & fishing 1,596 1,453 1,444 1,464 1530 (0.2) (0.1) (0.1) (0.1) (0.1) Industry of which: manufacturing 87,354 84,770 82,769 80,049 73,080 electricity, gas & water 22,175 23,578 26,989 29,212 33,548 construction 46,325 54,761 65,058 71,650 72,459 Total 156,103 163,426 175,127 181,183 179,390 (16.4) (16.1) (15.5) (14.7) (15.2) continued

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1994 1995 1996 1997 1998 Services Wholesale, retail, trade, hotels & restaurants 249,167 270,520 301,277 313,270 283,919 Transport, storage & communications 92,109 102,199 111,087 112,829 109,452 Financing, insurance & real estate 254,346 247,985 284,119 322,618 302,491 Community, social & personal services 151,293 175,956 198,967 220,451 234,990 Ownership of premises 115,659 134,933 147,547 171,383 170,974 Totala 792,472 851,235 953,642 1,050,386 1,001,507 (83.4) (83.8) (84.4) (85.2) (84.7) GDP at factor costa 950,172 1,016,115 1,130,212 1,233,034 1,182,427 a Adjusted for financial intermediation services indirectly measured.

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; Quarterly Estimates of Gross Domestic Product.

Reference table 11 Prices

1995 1996 1997 1998 1999 Consumer prices (Oct 1994-Sep 1995=100) Consumer Price Indexa (A) 101.8 107.9 114.1 117 113.2 % change (8.6) (6.0) (5.7) (2.5) –(3.2) Consumer Price Indexb (B) 101.9 108.4 114.7 117.9 112.4 % change (9.1) (6.4) (5.8) (2.8) –(4.7) Consumer Price Indexc (C) 102 108.7 115.3 118.9 114.5 % change (9.4) (6.6) (6.1) (3.1) –(3.7) Composite Consumer Price Index 101.9 108.3 114.7 117.9 113.2 % change (9.1) (6.3) (5.9) (2.8) –(4.0) Foreign trade prices (1990=100) Domestic export unit value index 107.3 107.6 105.1 102.1 99.6 % change (2.4) (0.3) (–2.3) (–2.9) (–2.4) Re-export unit value index 107.5 107 105.4 101.3 98.5 % change (3.5) (–0.5) (–1.5) (–3.9) (–2.8) Total export unit value index 108.1 107.7 106 102 99.2 % change (3.3) (–0.4) (–1.6) (–3.8) (–2.7) Import price index 109.5 108.1 105.6 100.4 98.4 % change (5.0) (–1.3) (–2.3) (–4.9) (–2.0) Terms of trade 98.7 99.7 100.4 101.6 100.8 % change (–1.6) (1.0) (0.7) (1.2) (–0.8) a Households spending up to HK$10,000 per month. b Households spending between HK$10,000 and HK$17,499 per month. c Households spending over HK$17,500 per month.

Sources: Census and Statistics Department, Hong Kong Annual Digest of Statistics; Hong Kong Monthly Digest of Statistics.

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Reference table 12 Wage indices (1 Qtr 1994=100) 1995 1996 1997 1998 1999 Nominal terms All industries 110.0 121.1 132.1 136.3 135.4 % change 11.9 10.1 9.1 3.2 3.2 Manufacturing 99.4 108.9 121.0 123.8 122.6 % change 8.6 9.6 11.1 2.4 2.4 Wholesale, retail, trade, hotels & restaurants 106.0 112.5 114.5 119.2 118.4 % change 13.7 6.1 1.8 4.1 4.1 Financing, insurance, real estate & business services 110.2 121.8 136.7 133.3 132.6 % change 15.7 10.5 12.3 –2.5 –2.5 Real terms All industries 94.7 98.2 101.7 105.7 109.5 % change n/a 3.7 3.6 3.9 3.6 Manufacturing 85.6 88.3 93.1 96.0 99.1 % change n/a 3.2 5.4 3.1 3.2 Wholesale, retail, trade, hotels & restaurants 91.2 91.2 88.1 92.4 95.7 % change n/a 0.0 –3.4 4.9 3.6 Financing, insurance, real estate & business services 94.9 98.7 105.2 103.3 107.2 % change n/a 4.0 6.6 –1.8 3.8 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 13 Manufacturing production (volume indices; 1986=100) 1995 1996 1997 1998 1999 Food, beverages & tobacco 160.5 159.0 158.3 143.9 141.7 Clothing excl footwear 114.6 109.7 105.6 99.2 99.3 Textiles 110.8 103.8 106.4 95.1 89.9 Paper products & printing 272.9 264.2 269.7 248.8 225 Chemical, rubber & plastic products 63.0 63.1 63.9 55.5 47.4 Plastics 37.6 36.2 34.1 27.4 22.3 Basic metals & metal products 93.5 85.2 80.4 72.3 58 Electrical machinery, etc 179.5 170.3 166.0 154.7 151.7 Consumer electronics 116.1 103.4 93.4 81.0 78.9 Machinery, equipment & apparatus 274.3 274.6 294.2 298.7 301.3 Miscellaneous 80.7 82.6 84.3 74.4 65.9 Total manufacturing output 126.2 121.5 120.6 110.1 103.2 Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; Hong Kong government website.

Reference table 14 Miscellaneous manufacturing statistics (no.) 1995 1996 1997 1998 1999 Establishments (no.) 30,761 27,412 25,724 22,414 23,553 Total manufacturing, employment (no.) 375,766 325,068 288,887 245,457 244,720 Workers per establishment (no.) 12 12 11 11 10 Work stoppages (no.) 1 0 0 0 0 No. of working days lost 25 0 0 0 0 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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Reference table 15 Construction statisticsa 1995 1996 1997 1998 1999 Buildings completed (no.) 1,058 986 804 807 640 Residential 670 608 328 453 303 Residential/commercial 109 97 81 59 115 Commercial 60 65 57 61 50 Industrial 63 51 43 45 26 Other 156 165 295 189 146 Usable floor area (‘000 sq metres) 2,162 1,834 1,849 2,526 2,578 Residential 885 769 712 875 1,295 Non-residential 1,277 1,065 1,137 1,652 1,283 Value of construction work by building & civil engineers (HK$ m) 99,807 116,290 131,500 133,316 126,388 a Private sector only.

Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 16 Banking statistics 1995 1996 1997 1998 1999 No. of authorised institutions Licensed banks 185 182 180 172 156 Incorporated in Hong Kong 31 31 31 31 31 Incorporated outside Hong Kong 154 151 149 141 125 Restricted-licence banks6362666058 Deposit-taking companies 132 124 115 101 71 Total 380 368 361 333 285 Assets of all authorised institutions (HK$ m) Loans to customers 3,739 3,915 4,122 3,304 2,813 Inside Hong Konga 1,554 1,802 2,210 2,093 1,924 Outside Hong Kong 2,129 2,052 1,844 1,167 856 Others 56 61 68 44 33 Interbank lending 3,270 2,988 3,081 2,942 2,925 Inside Hong Kong 736 770 771 629 536 Outside Hong Kong 2,534 2,218 2,310 2,312 2,389 Negotiable certificates of deposit 101 141 173 144 138 Bank acceptances & bank bills of exchange 69 90 102 53 41 FRN & commercial paper 153 188 192 146 158 Securities & investments 313 348 419 420 457 Other assets 195 237 309 246 253 Total assets 7,839 7,907 8,397 7,254 6,786 of which: foreign currency 5,779 5,403 5,463 4,503 4,103 Liabilities of all authorised institutions (HK$ m) Deposits from customersb 2,226 2,458 2,664 2,954 3,178 Interbank borrowing 5,000 4,705 4,753 3,426 2,731 Inside Hong Kong 736 768 772 622 529 Outside Hong Kong 4,263 3,936 3,981 2,803 2,202 Negotiable certificates of deposit 132 180 220 209 199 Other liabilities 481 564 760 665 678 Total liabilities 7,839 7,907 8,397 7,254 6,786 of which: foreign currency 5,687 5,347 5,476 4,380 3,903 a Includes trade financing loans but excludes loans to finance trade not touching Hong Kong. b Hong Kong dollar customer deposits include swap deposits.

Source: Hong Kong Monetary Authority, Annual Report 1999.

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Reference table 17 Stockmarket indicators (year-end) 1995 1996 1997 1998 1999 Hang Seng index (July 31st 1964=100) 10,073 13,451 10,723 10,048 16,962 Finance subindex 9,847 13,809 14,158 13,915 22,389 Utilities subindex 10,003 9,892 12,283 11,441 18,999 Properties subindex 17,572 26,376 14,839 14,214 19,840 Commerce & industry sub–index 7,550 9,973 6,482 5,791 10,753 Stockmarket turnover (HK$ m) 826,801 1,412,242 3,788,960 1,701,112 1,915,941 Market capitalisation (HK$ bn) 2,348 3,476 3,203 2,662 4,728 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 18 Retail sales (monthly averages; Oct 1994-Sep 1995=100 unless otherwise indicated) 1995 1996 1997 1998 1999 Total value of retail sales (HK$ bn) 210.6 223.9 234.9 195.7 179.9 Value indices Consumer durable goods 95.1 99.9 112.7 90.8 84 of which: motor vehicles & parts 87.3 87.9 110.9 72.8 58.8 Supermarkets 101.3 109 116.5 120.8 122.6 Total 101.1 107.5 112.7 93.9 86.3 % change 4.8 6.3 4.8 –16.7 –8.1 Volume indices Consumer durable goods 94.4 98.5 110.6 91.4 91.3 of which: motor vehicles & parts 86.8 87.1 110 77.9 68.3 Supermarkets 99.4 100.6 100.3 97.8 99.5 Total retail sales volume 99.7 101.3 102.4 85.3 84 % change –1.4 1.6 1.1 –16.7 –1.5 Sources: Census and Statistics Department, Hong Kong Annual Digest of Statistics; Hong Kong Monthly Digest of Statistics.

Reference table 19 Tourism statistics

1995 1996 1997 1998 1999 Total visitor arrivals (‘000) 10,200 11,703 10,406 9,575 10,678 of which from: China 2,243 2,311 2,297 2,597 3,084 Taiwan 1,761 1,821 1,783 1,813 2,000 Japan 1,691 2,383 1,369 945 1,020 South-east Asia 1,264 1,446 1,340 1,035 1,260 Europe 1,137 1,182 1,065 932 939 US 749 751 801 773 803 % change in total visitor arrivals 9.3 14.7 –11.1 –8.0 11.5 Total revenue (HK$ m) 72,940 82,462 69,946 53,079 51,018 % change 16.7 13.1 –15.2 –24.1 –3.9 Hotel rooms (no.) 33,052 33,536 33,425 33,981 35,420 Occupancy rate (av.; %) 85 88 76 76 79 Per head spending (HK$) 7,151 7,046 6,722 5,544 4,778 Average stay (no. of days) 3.9 3.7 3.6 3.4 3.4 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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Reference table 20 Domestic exports by main commodity section (HK$ m; fob) 1995 1996 1997 1998 1999 Apparel & clothing 73,801 69,447 72,228 74,874 74,251 Electrical equipment & machinery 31,889 30,357 32,958 26,668 23,790 Textile yarn & fabric 14,030 13,693 12,655 10,767 9,488 Office machinery & data processing equipment 13,297 10,220 7,765 6,610 6,261 Watches & clocks 13,620 11,987 10,798 8,937 5,040 Jewellery, goldsmiths & silverware 5,711 5,777 5,333 4,770 5,042 Printed matter 4,937 4,785 4,765 4,221 4,033 Telecommunications equipment 10,065 8,363 9,120 6,247 3,771 Plastic articles 3,011 2,350 2,124 1,680 1,272 Baby carriages, toys, games & sporting goods 2,635 1,779 1,905 1,227 673 Total incl others 231,657 212,160 211,410 188,454 170,600 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 21 Re-exports by end-use categorya (HK$ m; fob) 1995 1996 1997 1998 1999 Foodstuffs 19,534 22,374 23,419 21,039 18,214 Consumer goods 546,247 573,095 590,413 541,084 545,322 Raw materials & semi-manufactures 336,550 348,548 365,151 333,412 343,009 Fuels 10,014 13,059 14,177 8,135 3,226 Capital goods 200,125 228,682 251,381 255,525 268,630 Total 1,112,470 1,185,758 1,244,539 1,159,195 1,178,400 a SITC R2-based.

Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 22 Imports by end-use category (HK$ m; cif) 1995 1996 1997 1998 1999 Consumer goods 562,415 572,995 586,995 511,253 508,354 Raw materials & semi–manufactures 543,075 540,851 562,360 483,466 471,854 Capital goods 297,878 323,972 362,916 346,417 327,933 Foodstuffs 61,158 65,227 72,848 64,587 57,214 Fuels 26,595 32,537 29,971 23,369 27,362 Total 1,491,121 1,535,582 1,615,090 1,429,092 1,392,718 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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Reference table 23 Trade volume indices (1990=100; % change year on year in brackets) 1995 1996 1997 1998 1999 Domestic exports 95.7 87.7 89.6 82.5 76.5 (1.9) (–8.4) (2.2) (–7.9) (–7.3) Re-exports 252.9 271.9 290.5 279.7 294.9 (14.3) (7.5) (6.8) –(3.7) (5.4) Total exports 197.4 206.8 219.5 210.1 217.7 (12.0) (4.8) (6.1) (–4.3) (3.6) Imports 212.8 222.0 238.0 221.1 221.5 (13.7) (4.3) (7.2) (–7.1) (0.2) Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 24 Domestic exports by main destination (HK$ m; fob) 1995 1996 1997 1998 1999 US 61,250 53,860 55,073 54,842 51,358 China 63,555 61,620 63,867 56,066 50,414 UK 10,941 10,597 10,723 10,058 10,392 Germany 12,178 11,388 10,321 9,805 8,543 Japan 11,877 11,335 10,641 6,435 5,459 Taiwan 7,971 6,705 7,029 6,505 5,101 Netherlands 5,152 4,674 5,138 4,736 4,119 Singapore 12,236 10,009 8,404 5,103 3,682 Canada 4,324 3,885 3,872 3,598 3,151 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 25 Re-exports (HK$ m) 1995 1996 1997 1998 1999 By origin China 636,392 683,514 723,416 691,219 720,126 Japan 130,511 129,292 133,825 123,879 121,265 Taiwan 83,307 82,177 83,341 71,782 71,957 US 55,636 62,192 62,633 54,530 56,737 South Korea 37,615 38,049 39,672 39,637 38,822 Germany 14,886 16,448 16,616 15,633 15,558 Singapore 21,678 25,464 27,869 20,175 13,805 UK 10,661 12,392 12,664 12,193 13,402 By destination China 384,083 417,752 443,878 407,366 399,188 US 230,997 242,342 261,372 259,856 269,444 Japan 70,081 80,154 77,724 64,194 67,506 UK 32,257 35,991 39,066 42,259 45,541 Germany 45,770 47,216 46,336 42,161 44,122 Singapore 26,011 28,388 29,385 25,625 28,716 Taiwan 27,758 26,638 29,581 27,368 27,859 South Korea 19,292 20,091 19,310 12,241 19,793 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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Reference table 26 Imports by major trading partner (HK$ m) 1995 1996 1997 1998 1999 China 539,480 570,442 608,372 580,614 607,546 Japan 221,254 208,239 221,646 179,947 162,652 Taiwan 129,226 123,202 124,547 104,075 100,426 US 115,078 121,058 125,381 106,537 98,572 South Korea 73,268 73,302 73,226 68,836 65,432 Singapore 78,027 81,495 79,186 61,457 60,017 Malaysia 28,797 33,994 38,008 32,479 30,010 Germany 32,038 33,884 38,518 32,639 28,114 UK 30,448 33,264 36,285 29,671 26,961 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 27 Trade in services (HK$ m) 1995 1996 1997 1998 1999 Exports of services Transportation 96,424 100,555 101,532 94,579 n/a Travel 74,914 84,520 72,086 55,250 n/a Insurance 3,699 2,826 2,825 3,142 n/a Financial services 16,343 19,032 20,131 14,785 n/a Trade-related services 54,246 68,338 77,888 75,388 n/a Other services 20,009 20,917 23,714 24,249 n/a Total 265,635 296,188 298,176 267,393 277,056 Imports of services Transporation 38,305 39,887 38,997 34,323 n/a Travel 81,203 88,640 98,155 104,461 n/a Insurance 4,653 3,147 3,213 2,941 n/a Financial services 6,106 6,266 6,931 4,862 n/a Trade-related services 12,421 13,880 13,880 11,884 n/a Other services 18,189 19,116 19,094 18,028 n/a Total 160,877 170,936 180,270 176,499 174,356 Services balance 104,758 125,252 117,906 90,894 102,700 Source: Census and Statistics Department, Trade in Services Statistics Department.

Reference table 28 Trend of foreign trade (HK$ bn unless otherwise indicated) 1995 1996 1997 1998 1999 Exports fob Domestic 231.7 212.2 211.4 188.5 170.6 Re-exports 1,112.5 1,185.8 1,244.5 1,159.2 1,178.4 Total 1,344.1 1,397.9 1,455.9 1,347.6 1,349.0 Imports cif –1,491.1 –1,535.6 –1,615.1 –1,429.1 –1,392.7 Trade balance –147.0 –137.7 –159.1 –81.4 –43.7 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; Trade in Services Statistics Department.

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Reference table 29 Direction and composition of foreign trade, 1999 (HK$ m) Domestic exports fob US China EU Japan Total Food 475 150 284 234 1,691 Crude materials, inedible 4 810 25 129 1,496 Mineral fuels & lubricants 0 583 0 0 594 Chemicals 68 4,339 25 99 5,655 Paper & manufactures 50 1,160 29 22 1,464 Textile yarn, cloth & manufactures 1,521 4,231 210 49 9,488 Non-metallic mineral manufactures 173 93 54 84 551 Non-ferrous metals 47 707 39 6 2,065 Metal manufactures 431 660 121 27 1,630 Machinery & transport equipment 7,462 13,017 6,917 2,220 39,731 Clothing 34,477 16,332 19,325 566 74,251 Scientific instruments etc 2,338 4,064 4,019 1,109 14,180 Miscellaneous manufactures, incl plastic products 5,070 2,715 1,584 839 14,197 Total: merchandise 51,358 50,414 32,753 5,459 170,600 gold & specie 0 101 763 13 3,036

Re-exports fob China US Japan EU Total Food 11,772 957 974 303 17,082 of which: meat & products5,6461305,893 Beverages, tobacco & manufactures 2,632 36 192 226 6,820 Wood & cork 5,178 7 18 7 5,260 Mineral fuels & lubricants 2,519 1 10 19 4,265 Chemicals 57,117 928 512 885 66,951 Leather & manufactures 12,147 126 34 274 13,168 Paper & manufactures 9,561 2,100 130 1,253 14,153 Textile yarn, cloth & manufactures 59,825 2,005 444 1,719 85,710 Non-metallic mineral manufactures 3,907 5,702 1,711 2,582 21,843 Iron & steel 13,58377121413,900 Non-ferrous metals 10,880 153 301 141 12,850 Metal manufactures 3,607 7,514 905 5,036 21,655 Machinery & transport equipment 158,284 82,077 24,052 62,235 431,673 of which: office machinery 29,533 18,902 6,496 17,574 98,136 telecommunications & sound equipment 34,255 28,478 5,368 19,996 114,325 road vehicles 3,611 1,140 754 526 8,782 Prefabricated buildings, heating, lighting etc fixtures 528 5,600 285 3,197 11,904 Travel goods, handbags etc 217 11,133 3,568 11,372 35,058 Clothing 3,096 26,478 11,870 30,537 99,308 Footwear 1,173 25,675 5,022 6,218 47,840 Scientific instruments etc 19,205 18,343 5,872 16,215 76,710 Miscellaneous manufactures, incl plastic products 9,395 73,348 10,365 39,698 161,888 of which: prams, toys, games, sports goods 3,220 46,093 6,080 22,994 93,263 Total: merchandise 399,188 269,444 67,506 184,121 1,178,400 gold & specie 331 4 40 46 1,069 continued

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Imports cif China Japan EU Taiwan Total Food 12,647 3,206 5,083 1,036 55,746 of which meat & products 2,123 121 1,792 20 12,614 fish & preparations 2,047 1,325 389 459 12,323 fruit, vegetables & products 2,677 254 429 154 11,567 Beverages, tobacco & manufactures 3,516 183 3,278 111 10,887 Crude materials, inedible 2,666 955 5,247 1,543 21,981 of which: wood & cork 287 4 2,160 108 6,099 Mineral fuels & lubricants 7,742 650 172 439 28,555 Chemicals 9,098 14,825 16,637 12,686 89,941 Leather & manufactures 3,281 396 3,366 1,288 16,032 Paper & manufactures 4,931 2,802 3,041 929 21,491 Textile yarn, cloth & manufactures 41,161 6,065 6,161 18,847 97,455 Non-metallic mineral manufactures 6,735 2,323 6,813 1,382 40,632 Iron & steel 1,905 6,897 2,592 4,218 23,258 Non-ferrous metals 3,326 2,303 1,606 1,847 20,048 Metal manufactures 14,636 1,693 1,728 1,230 21,881 Machinery & transport equipment 189,040 92,445 49,429 48,477 540,679 of which: transport equipment 4,237 6,752 5,957 898 24,232 Travel goods, handbags etc 24,023 119 2,718 41 27,480 Clothing 106,394 592 4,308 378 114,485 Footwear 38,435 180 1,193 217 41,304 Scientific instruments etc 30,006 18,326 5,538 1,942 74,380 Miscellaneous manufactures, incl plastic products 86,881 7,215 5,026 2,919 112,719 of which: prams, toys, games, sports goods 48,688 2,535 420 649 54,021 Total: merchandise 607,546 162,652 127,156 100,426 1,392,718 gold & specie 72 396 2,891 3 9,352 Sources: Hong Kong Trade Statistics, Annual Supplement 1999; Hong Kong Trade Statistics, Imports, December 1999; Annual Review of Hong Kong External Trade 1999.

Reference table 30 Balance of payments (US$) 1997 1998 1999 Goods: exports fob 192,188 175,834 174,738 Goods: imports fob –209,487 –183,666 –177,896 Trade balance –17,298 –7,833 –3,158 Services: credit 37,768 33,653 34,853 Services: debit –26,371 –25,036 –24,456 Income: credit 60,582 46,831 47,299 Income: debit –59,229 –43,117 –43,782 Current transfers: credit 751 669 708 Current transfers: debit –2,361 –2,265 –2,179 Current-account balance –6,159 2,902 9,285 Direct investment Inward direct investment n/a 114,446 178,951 Outward direct investment n/a –131,462 –154,336 Balance n/a –17,016 24,615 continued

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1997 1998 1999 Portfolio investment Inward portfolio investment n/a –26,392 448,058 Outward portfolio investment n/a 197,444 –197,586 Balance n/a 171,052 250,472 Financial derivatives Assets n/a 83,644 186,457 Liabilities n/a –58,270 –90,982 Balance n/a 25,374 95,475 Other investment Other investment assets n/a 928,125 327,012 Other investment liabilities n/a –1,173,184 –685,884 Balance n/a –245,059 –358,872 Financial balance Capital account nie credit n/a n/a n/a Capital account nie debit n/a n/a n/a Balance n/a –18,452 –13,765 Net errors & omissions n/a 7,873 4,189 Overall balance 95.087 –53,754 74,141 Sources: Census and Statistics Department website; EIU.

Reference table 31 External debt (US$ m unless otherwise indicated) 1994 1995 1996 1997 1998 Medium- & long-term debt to OECD countries & capital markets Export credits 2,122 2,605 2,778 2,987 2,664 Non-bank 1,545 1,587 1,548 1,141 920 Bank 577 1,018 1,230 1,846 1,744 Bank claims & bonds 16,587 17,459 21,138 27,072 35,578 Total 18,709 20,064 23,916 30,059 38,242 Short-term debt Banks 7,500 7,200 12,000 8,500 8,925 Export credits 585 1,913 2,186 1,805 1,489 Total 8,085 9,113 14,186 10,305 10,414 Total debt outstanding 26,794 29,177 38,102 40,364 48,656 % of GDP 20.5 21.0 24.7 23.6 29.7 Sources: OECD: External Debt Statistics; External Debt Statistics Supplement.

Reference table 32 Foreign-exchange reserves (US$ m) 1995 1996 1997 1998 1999 Foreign exchange 55,398 63,808 92,804 89,601 96,236 Gold (national valuation) 26 25 19 19 19 International reserves 55,424 63,833 92,823 89,620 96,255 Source: IMF, International Financial Statistics.

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Reference table 33 Exchange rates (HK$ per unit of currency unless otherwise indicated; annual averages) 1995 1996 1997 1998 1999 US$ 7.74 7.73 7.74 7.75 7.76 ¥100 8.28 7.12 6.41 5.95 6.85 DM 5.41 5.14 4.47 4.41 4.23 SDR 11.74 11.23 10.65 10.51 10.61 M$ 3.09 3.08 2.81 1.99 2.04 South Korean W100 1.00 0.96 0.83 0.56 0.65 S$ 5.47 5.49 5.23 4.64 4.58 Thai baht 0.31 0.31 0.26 0.19 0.21 NT$ 0.28 0.27 0.26 0.23 0.24 Trade-weighted effective exchange rate index (1983=100) 121.8 125.0 130.3 137.5 134.2 Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

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Macau

Basic data

Land area 23.6 sq km (1999)

Population 437,500 (end-1999)

Macau peninsula 7.8 sq km Taipa Island 6.2 sq km Coloane Island 7.6 sq km Embankment zone between Taipa & Coloane 2.0 sq km

Climate Sub-tropical

Weather Coldest months, January and February, 15°C; hottest months, July and August, 29°C; 1,900 mm average rainfall, wettest in summer, relative humidity 65-85%

Languages Portuguese and Chinese (Cantonese), both now official

Measures Metric system. Some local (Chinese) units are used including: 1 tael=37.8 g; 1 cata=16 taels=0.605 kg; 1 pico=100 cata=60.48 kg

Currency 1 pataca (MPtc)=100 avos. Annual average exchange rate in 1999: MPtc8.0:US$1. Exchange rate on August 17th 2000: MPtc7.99:US$1

Time GMT +8 hours

Public holidays In addition to many of the Hong Kong public holidays, Macau also observes holidays on April 25th, June 10th, October 5th, November 1st, December 1st, 8th and 24th

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Political background

Macau was annexed by Portugal from China in the 19th century and declared a Portuguese province. Portuguese rule will soon end: following the signing of an agreement by Portugal and China in 1987, Macau became a Special Administrative Region (SAR) of the People’s Republic of China on December 20th 1999. Under the terms of Macau’s post-handover mini- constitution, the Basic Law, the SAR will have a “high level of autonomy and independent executive, legislative and judicial powers”. The first chief executive of the Macau SAR is Edmund Ho, who was elected on May 15th 1999 by a China- appointed selection committee.

Historical background

A Portuguese province First established as a Portuguese trading post in the 16th century, Macau was annexed by Portugal from China in the 19th century and declared a Portuguese province. In 1949 the Chinese communist government repudiated as unequal the treaty by which the territory had been ceded to Portugal. In the late 1960s, during the cultural revolution in China, Macau is believed to have saved itself from severe riots, if not annexation, by a promise to ban the activities of strongly pro-Taiwan elements. After this time the authorities remained aware of the need to avoid provoking the displeasure of the Chinese government, and protests following the Beijing massacre in June 1989 were more muted than in Hong Kong.

The post-revolutionary government of Portugal in 1974 offered Macau back to China. The Chinese government rejected this offer, presumably because it wanted to settle the future of Hong Kong first. Portugal and China established diplomatic relations in 1979. Since that date the territory has been described as “Chinese territory under Portuguese administration”.

The joint declaration After a year of secret diplomacy, a joint declaration on the future of Macau was signed between Portugal and China in early 1987. Unsurprisingly, the declaration mirrors the Hong Kong agreement. Under the guiding principle of “one country, two systems” Macau became an SAR of the People’s Republic of China on December 20th 1999. Under the accord Macau retains its existing social and economic system, laws and rights and freedoms, while foreign affairs and defence are handled by Beijing. Macau remains a free port, the currency remains convertible and there are no exchange controls. The durability of these arrangements will be protected by a mini-constitution, the Basic Law.

Although there is no direct reference to gambling in the joint declaration (and Chinese descriptions of Macau usually ignore its existence), the present Portuguese administration understands the agreement to guarantee the continuation of gambling after 1999. At present, a syndicate, the Sociedade de Turismo e Diversões de Macau (STDM), has control over all gambling activities in Macau. The syndicate’s franchise ends in 2001, and it is possible that the government will choose to allow greater competition in the sector. Ending the

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current monopoly is a risky strategy, however. While new—or more diversified—management of the industry could improve its performance, the transition would not necessarily be smooth. This would cause problems for the government: revenue generated by direct taxes on gambling accounted for 48% of total government income in 1999.

Generally smooth progress Macau was used by China as a role model for Hong Kong in the period leading towards Chinese rule up to the transition of the larger territory to Chinese rule in 1997. Chinese officials consistently spoke highly of Macau for trying to achieve a smooth transition to Chinese rule and praised the excellent co-operation between the Chinese and Portuguese governments. Civil servants retained their posts and pensions after 1999 and the reorganised legislative and municipal bodies remained in place. To some extent, Macau has benefited from the constitu- tional wrangling in Hong Kong. The smaller territory has not had to endure years of negotiations to arrive at the transitional agreements; both the joint declaration signed by Portugal in 1987 and the Basic Law are virtually identical to their Hong Kong counterparts.

Relations between China and Portugal were not entirely harmonious, however, with tension between the two sides increasing in the run-up to the handover in 1999. The Chinese government was particularly concerned about the slow localisation of government officials in the territory, and about the deterioration in law and order in Macau from late 1996. In 1998-99 Portugal was irked by announcements by China of plans to send an advance guard of soldiers to the territory before December 20th 1999 and to continue to station troops in Macau after the handover (Portugal has argued that the Joint Declaration does not provide for such a military presence).

On December 20th 1999 Macau became a Special Administrative Region (SAR) of the People’s Republic of China (PRC). A mini-constitution, Macau’s Basic Law, is supposed to ensure that the government of the SAR enjoys a “high degree of autonomy” in managing its domestic affairs for a period of 50 years. This arrangement has already been tried out in Hong Kong and since July 1997 has been broadly successful in preserving the larger territory as an entity distinct from mainland China. The Chinese government, for example, has ruled that mainland companies cannot participate in Macau’s largest industry, gambling. The new administration of the Macau SAR will have to award gambling licences in 2001 when the monopoly franchise enjoyed by the STDM expires. Speaking in March 2000 with Macau’s representatives to the National People’s Congress (NPC, China’s largely rubber-stamp parliament), China’s president, Jiang Zemin, said that mainland companies would not be allowed to bid for such licences.

Since December 20th 1999 the authorities in Beijing have adopted a hands-off stance with regard to events in Macau. In an apparent demonstration of Macau’s autonomy, China did not intervene in the handling of the first major challenge to face the Macau administration—a protest on May 19th this year, which was attended by around 1,500 people. Not since June 1989 had so many people demonstrated in Macau (protests in 1989 were related to the huge pro- democracy demonstrations that were occurring in mainland China at that

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time). In addition, although the protest was aimed at foreign workers, its tone was largely anti-government and anti-establishment. Despite some minor scuffles during the demonstration and the apparent threat to social order, the central government neither publicly tried to control the local authorities’ approach to the demonstrations, nor did it allow the PLA—which was stationed near the march—to take action.

However, it is not clear that this non-interventionist approach will last for the full 50 years mandated in the mini-constitution. Although China has generally respected Hong Kong’s autonomy, mainland officials have commented on events in the larger SAR when issues have arisen that were considered priorities by the government in Beijing—notably Taiwan. Mainland officials could be tempted to intervene still further in Macau, where the democratic opposition is much less vocal than it is in Hong Kong. In addition, Macau is less prominent on the international stage than the former British colony.

Constitution and institutions

The chief executive The governor is appointed by China’s central government after selection by an Election Committee, whose members are nominated by corporate bodies. The chief executive appoints a cabinet, the Executive Council, of between seven and 11 members (currently ten) The term of office of the chief executive is five years, and no individual may serve for more than two consecutive terms. The governor has strong policymaking and executive powers approximating to those of a president. These powers are, however, limited from above by the central government in Beijing, to whom the governor reports directly, and from below (to a far more limited extent) by the legislature. Edmund Ho, a com- munity leader and banker, is the first China-appointed chief executive of the Macau SAR, having replaced General de Rocha Vieira on December 20th 1999.

Main political figures

General Vasco Joaquim de Rocha Vieira: Governor since April 1991.

Edmund Ho: Will be the first chief executive of the Macau Special Administrative Region (SAR). Pro-China, indirectly elected member of the Legislative Assembly and son of the long-time community leader and friend of China, Ho Yin.

Alexandre Ho: Leader of the pro-democracy Associação de Amizade, whose representation in the Legislative Assembly fell from three to one after the 1992 elections; viewed by some as a spent force.

Ng Kuok Cheung: Grass-roots activist and legislator.

Liao Hui: The director of the Hong Kong and Macau Affairs Office of China’s State Council (cabinet), which is responsible for arranging a smooth return of the enclave to China.

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The legislature The legislative organ of the territory is the Legislative Assembly, a 23-member body comprising eight directly elected members, eight members representing functional constituencies and seven members appointed by the governor. The Legislative Assembly is responsible for general law-making, including taxation, the passing of the budget and socioeconomic legislation. In the last election, held in September 1996, pro-business groups won four of the eight directly elected seats, while representation of the pro-China parties dropped from four seats to three and the number of pro-democracy representatives fell from two seats to one. Unlike in Hong Kong, the legislature’s term will straddle the handover of sovereignty to China, and has even been extended from its normal four-year term until 2001. The city of Macau and the islands of Taipa and Coloane each have a municipal council.

Mr Ho has retained a number of Portuguese administrators in senior positions in the first SAR government: Rogerio Santos remains head of the health services; Rudolfo Faustino has responsibility for tourism services, with João Manuel Costa Antunes assigned to the same department; Carlos Roldao Lopes continues to head the post and telecommunications authority; and Rui Balacó is director of the SAR’s Civil Aviation Authority.

The civil service Despite fears that the limited drive to localise the civil service would leave Macau without a functioning bureaucracy post-handover, until the return to Chinese rule senior positions within the civil service were dominated by Portuguese expatriates on fairly short tours of duty. China regularly criticised the Portuguese government for its sluggish progress in the localisation of official posts, which contrasted strongly with the pre-handover success of localisation in Hong Kong. As a result, a large proportion of the newly appointed civil servants are young, inexperienced and poorly trained. In order to raise standards, the new government has been trying to enlist the assistance of the Singaporean authorities in training officials.

The judiciary 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. In July 1999 the chief executive appointed a seven-person committee to select judges for the SAR. Twenty-four judges were recommended by the committee, and these were then appointed by Mr Ho (they were sworn in after the handover). Included are three judges who serve on the Macau SAR’s highest court, the Court of Final Appeal (CFA): 38-year-old Sam Hou Fai (who will be chief justice), 30-year-old Chu Kin, and the 45-year-old Viriato Manuel Pinheiro de Lima.

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Resources and infrastructure

Population

The population at the end of 1999 was officially estimated at 437,500 (other sources suggest a figure well above 550,000). More than 95% of the population are Chinese, and most of the rest are Portuguese-speaking Macanese (Eurasians). Macau is even more overcrowded than Hong Kong, with an official population density of 18,241 per sq km at end-1998, and well over double that density in Macau City. Just under one-quarter of the population is younger than 15, reflecting a low death rate of only 3.1 per 1,000 combined with a high crude birth rate of 9.5 per 1,000 in 1999. It is estimated that 100,000 Portuguese passport holders live in Macau, each of them having full right of abode in Portugal. (Reference table 1 gives various demographic indicators; labour force data are supplied in Reference table 2.)

Population by age and sex, end-1999

Population (‘000) 437.5 Males 206.6 Females 230.9 Population growth (%) 1.6 Population by age group (%) 0-14 23.2 15-64 69.1 65+ 7.7 Source: Census and Statistics Department, Macau in Figures.

A large floating population Despite the high population density, there are many empty properties in Macau. Partly to resolve this housing glut, the government has attempted to attract wealthy migrants to Macau: foreigners can buy a resident’s permit for MPtc2m (US$250,000). The government has been concerned, however, to control other types of immigration. Illegal immigration from China rose temporarily in 1986 because of rumours about a change in policy, but is believed to have stabilised following a wave of repatriations that peaked in 1989. Between 15 and 20 illegal immigrants are arrested and returned each day. To prevent large-scale immigration of Chinese workers, the hiring of temporary labour is strictly regulated; employers must apply to the government to import a specified number of workers from China for a fixed period, and permission is granted only if they can demonstrate that output has fallen recently because of a decrease in the number of staff employed.

In 1989 Chinese was made an official language alongside Portuguese, and the laws are gradually being translated into Chinese. This move is intended to facilitate the development of an indigenous civil service. Most people speak Cantonese, with English as the main second language.

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Education

Technical education Primary education starts at the age of six and lasts for six years, while is in its infancy secondary education lasts for up to five years. The main tertiary education institution is the University of Macau (formerly the University of East Asia), established in 1981 on the island of Taipa, which offers courses in business and economics as well as liberal arts. The languages of instruction are Cantonese, English and Portuguese. However, the university is small, beyond the means of most of the population and catered until recently largely for students from Hong Kong. (Reference table 3 gives historical data on educational enrolment.)

The workforce is largely unskilled or semi-skilled and technical education is in its infancy; the first 600 pupils entered secondary technical school in 1987 (enrolments had risen to 3,239 by 1999), and a smaller number of adults are undergoing formal part-time industrial training. There is also a hotel catering academy, and there is probably a significant amount of unrecorded in-service staff training in hotels.

Health

Selected health statistics

1996 1997 1998 1999 No. of inhabitants per doctor 517 491 495 488 per nurse 456 566 481 488 per hospital bed 428 438 407 415 Main causes of death (% of total) Circulatory system diseases 36.6 36.3 37.2 34.4 Neoplasms 25.6 25.1 24.7 26.6 Respiratory system diseases 9.1 11.9 12.5 12.2 Source: Census and Statistics Department, Macau in Figures.

There are two hospitals, one for Chinese and one for Western medicine. In 1999 there was one doctor for every 488 inhabitants and one nurse for every 488 inhabitants, and there were 415 inhabitants for every hospital bed. The infant mortality rate was 4.1 deaths per 1,000 live births in the first 12 months of life, down from 6.1 per 1,000 in 1996.

Natural resources and the environment

The tiny territory of Macau is situated on the southern coast of China, 60 km south-west of Hong Kong. It consists of Macau City, joined to Zhuhai Special Economic Zone in the Chinese province of Guangdong by a narrow isthmus, and the islands of Taipa (linked to the city by two bridges) and Coloane (linked to Taipa by a causeway). The waters around Macau are China’s own territorial waters, patrolled by the Chinese navy. The territory is dependent on the Chinese mainland for fuel, water and most of its food.

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The total land area, currently 23.6 sq km, has been enlarged by over 50% since 1912 by extensive land reclamation, a process that is still continuing. Taipa Island was expanded to accommodate the new international airport. The Nam Van Lakes project increased the land area of the Macau peninsula by 20%. Ultimately it is intended to join Taipa with Coloane by reclaiming land from the sea on either side of the causeway currently joining them. The US$1.5bn scheme, if completed, will involve the construction of 16m sq ft of hotels, flats and offices and a six-lane highway. It is estimated that it would provide living and working accommodation for up to 60,000 people. Understandably, in view of the glut of vacant housing units arising from the recent construction boom (see Economic sectors: Construction), there are serious doubts about the viability of the project.

Transport and communications

Airport services Until 1995 access to Macau was by ferry, hydrofoil, jetfoil and helicopter from Hong Kong, and for travellers from China by road or ferry. (Various transport and communications statistics are given in Reference table 4.) Macau’s transport infrastructure was boosted in December 1995, when a new inter- national airport, built on reclaimed land on Taipa at a cost of US$1bn, opened for commercial flights. The airport, a joint venture between Chinese and local companies, is designed to service the whole of southern China and to enable tourists to fly direct to Macau (thus avoiding the temptations of Hong Kong).

The airport received a temporary boost in 1998, when some cargo activity moved to Macau following problems during the opening of Hong Kong’s new airport. Macau will have problems competing with Hong Kong on a long-term basis, however: in March 1999 Scandinavian Airline System shifted all of its Macau cargo operations to Hong Kong, taking away one-quarter of the smaller territory’s cargo business. It seems unlikely that the Taipa airport will meet the original projections, which forecast passenger and cargo throughput of 5.9m and 280,000 tonnes respectively by 2009.

Port improvements Macau, once the main Chinese port, was bypassed in the last century because its surrounding waters, unlike those of Hong Kong, were too shallow to provide a harbour for ocean-going cargo vessels. The first phase of a new port, Kao-ho on Coloane, began operating in 1991, handling both container and oil tanker traffic. A new ferry terminal, capable of handling 30m passengers per year, was inaugurated in November 1993.

Telecommunications Macau’s telecommunications service has expanded rapidly in recent years with investment a MPtc1bn (US$125m) investment programme by a UK-based company, Cable & Wireless. In 1999 a total of 70,403 new telephone lines were installed, taking the number of telephones up to 300,066 by the end of the year, equivalent to 686 telephones for every 1,000 people.

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Energy provision

Macau generates most of its own electricity (87% in 1999); in 1999 it had an installed capacity of 351.6 mw. In 1999 net imports were 194.4m kwh, compared with net supply of 1.53bn kwh. Macau is, however, entirely dependent on imports of fuel oil, petrol and gas from China and Hong Kong. (National energy statistics are given in Reference table 5.)

Energy balance, 1999 (m tonnes oil equivalent) Elec- Oil Gas Coal tricity Other Total Imports 0.57 0.0 0.0 0.05a 0.0 0.62 Exports 0.0 0.0 0.0 0.0a 0.0 0.0 Primary supply 0.57 0.0 0.0 0.05a 0.0 0.62 Losses & transfers –0.37 0.0 0.0 –0.06 0.0 –0.43 Transformation output 0.00 0.0 0.0 0.14b 0.0 0.14 Final consumption 0.20 0.0 0.0 0.13b 0.0 0.33

a Input basis. b Output basis.

Source: Energy Data Associates.

The economy

Economic structure

Main economic indicators, 1999

Real GDP growtha (%) –2.9 Consumer price inflation (av; %) –3.2 Merchandise trade balance (US$ m) 160.0 Exchange rate (av; MPtc:US$) 8.0 Population (‘000) 437.5a

a Official estimate.

Source: EIU.

On an expenditure basis, Macau, like Hong Kong, is heavily dependent on the external sector, although domestic demand has been an important factor in sustaining economic growth in the 1990s. In 1999 exports of goods and services accounted for 79.4% of current-price GDP, while private consumption expenditure contributed 41.7%. In 1998 (latest available data) manufacturing output, largely textiles and clothing, accounted for 9.3% of GDP (current prices). The failure of Macau’s manufacturing sector to increase the proportion of value-added in production has left it vulnerable to competition from factories elsewhere in Asia. Gambling is important to the economy: gambling

© The Economist Intelligence Unit Limited 2000 EIU Country Profile 2000 80 Macau

activity contributes about 30% of GDP and around half of the government’s current revenue.

Economic policy

A more interventionist Governments in Macau have traditionally interfered only minimally in the approach economic management of the territory. Then, with the appointment of Vasco Almeida e Costa as governor in 1981, the authorities began to take a more interventionist approach, aimed at promoting economic diversification, foreign investment and, in particular, the development of Macau’s feeble infra- structure. Recent developments in this area have included the construction of the large container port, which opened in 1991, and the new international airport (see Resources and infrastructure: Transport and communications).

Budget surpluses Macau’s budgets are models of sound finance, with consistent surpluses testifying to the government’s frugality. Gambling tax receipts are the largest item of revenue, accounting for 44% of total revenue in 1999. Direct taxes are low. As in Hong Kong, income tax ranges up to only 15%, but there is also a salaries tax which can take another 10%; other taxes include an urban housing tax, a profits tax and a business tax on industrial enterprises. Tax evasion is thought to be fairly widespread. Imports are free of duty but subject to a consumption tax. There are no exchange controls. To attract investment, the government offers generous fiscal incentives, such as carryover of deduction of profits reinvested and accelerated depreciation. (Reference table 6 gives a breakdown of government revenue and expenditure.)

Interest rates follow As far as monetary policy is concerned, Hong Kong is widely regarded as Hong Kong’s lead the main driver, and interest rates in Macau follow those in Hong Kong with a 24-hour delay and only an occasional slight differential. This works well as long as similar trends affect both territories, as has largely been the case in recent years. (Reference table 7 gives data on money supply.)

Economic performance

Real GDP growth averaged –0.2% per year during 1993-99. This slow growth rate was partly the inevitable consequence of an unsustainable construction- related boom in 1992, when investment increased by 36.9% year on year, causing GDP to rise by 10.6%. This construction boom led to a property glut that has dragged down both private consumption and investment growth since 1992. The slow average growth rate is also a result of the regional economic difficulties of 1998. Economic difficulties elsewhere in the region caused Macau’s exports of goods and services to contract in both 1997 and 1998, causing overall GDP to decline by 4.6% in 1998 and 2.9% in 1999. (Reference tables 8 and 9 give historical data on GDP.)

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Gross domestic product (% real change) Average annual 1999 1993-99 GDP –2.9 –0.2 Private consumption 1.7 2.5 Fixed investment –9.2 –8.5 Exports of goods & services 0.9 1.1 Regional comparisons Hong Kong 3.0 3.3 Taiwan 5.7 6.2 South Korea 10.7 5.5 Singapore 5.4 7.3 Sources: Census and Statistics Department, Macau in Figures; national sources.

Employment and wages The government estimates that 64.7% of the population was economically active in 1999, suggesting a workforce of 283,062, but this figure can be only a crude approximation in view of the large number of outside workers on short- term contracts. Most people work in manufacturing, hotels and restaurants, and public, private and personal services industries. Less than 0.1% of the labour force is employed in primary industries of all kinds. Wages are well below those in Hong Kong, and there are no laws requiring employers to pay minimum wages or welfare charges.

In 1984 the territory’s first labour law banned the use of child labour and prescribed a six-day working week and minimum annual leave, but there is little real regulation of the myriad small factories that spring up overnight and disappear just as quickly. The large labour force commuting from China reflects the government’s reluctance to permit permanent settlement in Macau.

Developments in Partly because of relatively high inflation in Hong Kong and China—which Hong Kong and China together provide over 50% of Macau’s imports—prices continued to rise determine price trends relatively rapidly in Macau in the mid-1990s, despite the stagnation of the economy as whole. In 1993-97 inflation in Macau, as measured by the Consumer Price Index (CPI), averaged 4.6%. More recently prices in Hong Kong and China have been falling, and these deflationary forces have been exacerbated in Macau by the continued overhang in the property market. Prices in Macau rose by just 0.2% in 1998 before declining by 3.2% in 1999. (See Reference table 10 for data on inflation.)

Economic sectors

Agriculture and fishing

Only 2% of Macau’s land area is cultivated, mainly by vegetable growers. There is a small livestock industry devoted to cattle, pigs, chickens and ducks. The rearing of pigs is declining because it is more land-intensive than poultry

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farming. Fishing, mostly for crustaceans, is quite important, and some of the catch is exported to Hong Kong. There is a large fish market. The majority of Macau’s food requirements are met by imports, mostly from China.

Manufacturing

Macau’s attractiveness as a manufacturing base for low-cost, labour-intensive production was undermined by the development of the Chinese Special Economic Zone of Zhuhai, just over the border. The large wage differentials between Zhuhai and Macau mean that the enclave cannot compete in the manufacturing of mass-produced, low-value products. Consequently, the number of factories has dwindled in recent years, and many of those that remain have switched to high-value, small-volume manufacturing with tight delivery schedules. Over the past decade employment in manufacturing has fallen from 45% of the working population in 1990 to 22% in 1999.

Textiles and garments Despite attempts to diversify away from textiles and garments, this branch of industry still contributes the bulk of all manufacturing output. In 1999 there were 1,424 licensed manufacturing establishments; 141 of these were textiles and 466 garment factories, and together they contributed 83.7% of total export value. Many firms in this branch of industry are very small; the figures in the 1986 census of industry indicated an average of fewer than 65 employees per establishment.

The industrial sector, 1999

Exports of textiles & garments (MPtc m) 14,728 Exports of footwear (MPtc m) 503 No. of manufacturing establishments 1,424 of which: textiles 141 garments 466 food products & beverages 170 publishing & printing 1136 % of total employment 22.0 Sources: Census and Statistics Department, Macau in Figures.

Like those of Hong Kong, Macau’s textile and garment exports appear to have held up well throughout the Asian crisis, owing partly to the labelling of goods as having been made in Macau, when actually they are not. This happens because the quota for Macau-made goods, as regulated by the Multi-Fibre Arrangement, is much cheaper than the quota for goods made in China, where labour costs are lower. There is therefore an incentive to manufacture in China but to use the Macau quota to secure the right to import to the US, for example. The restrictions caused by this quota system also provide an incentive for producers in Macau to diversify into other products and other markets, but few steps to achieve this have yet been taken.

According to official statistics, the second largest export industry is machinery and apparatus, which contributed 3.7% of export earnings in 1999. Toy exports

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plunged so steeply in 1997 that they have now been overtaken by cement in value terms. Artificial flowers, leather goods, ceramics, electronics and optical goods are also produced for export. It is alleged that pirated software and CD-ROMs are also manufactured in Macau. Such production does not appear in official statistics, but members of the recording industry and private detective agencies allege that a sizeable chunk of this industry, which used to operate in Hong Kong and Southern China, has now moved to Macau.

Construction

As mentioned above, GDP estimates on a production basis are not available, but the surge in capital expenditure in 1992, when gross fixed investment grew by 36.9%, was undoubtedly caused by the rapid expansion of construction activity. Gross floor area completed in 1993 was 18.8% higher than in 1992. The construction industry surged again in 1996, when gross residential floor area completed more than doubled compared with 1995. This strong growth came largely in the wake of massive land reclamation (see Resources and infrastructure: natural resources and the environment). Construction activity has since tailed off, with gross floor area completed falling by 39.7% in 1997, 15.7% in 1998 and 31% in 1999. (Historical data on construction are given in Reference table 11.)

Financial services

Macau aims to establish itself as a financial centre by deepening and broadening the range of financial services on offer. However, the existing banking sector is simple, with none of the attributes of a modern financial centre such as an independent capital market. In 1999 just 7.8% of the labour force were employed in financial services, including insurance and business services. Two institutions, Banco Comercial Portugues and Bank of China, currently dominate the domestic banking sector, where they controlled a combined 52% of total assets at the end of 1997.

The monetary authorities Before 1980 the Banco Nacional Ultramarino (BNU) was responsible for issuing currency, holding deposits of government departments and managing the government’s foreign-exchange reserves. In 1980 the government created the Instituto Emissor de Macau (IEM) to take over these functions and, in addition, to supervise the banking sector, which had previously been overseen directly by government departments, and the insurance industry, which had previously been unsupervised. The IEM was also given a role of advising the government on economic and monetary matters. In July 1989 the IEM was transformed into the Monetary and Foreign Exchange Authority of Macau (the Portuguese acronym is AMCM), which retains the powers of the IEM.

The BNU complained that the changes made by the government in 1980 broke a contract, valid until 1991, giving the bank financial benefits in return for issuing notes. The government therefore agreed a new contract, under which

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the BNU would remain the sole note-issuing agent in Macau until 1995 and would also serve as the government’s banker on behalf of the IEM. In return, the BNU obtained highly lucrative preferential treatment from the government in its role as a private bank.

Following the establishment of the AMCM, the BNU was required to deposit the foreign-exchange equivalent of its note issue with the AMCM. In return, the BNU is allowed to hold a specified quantity of government deposits, supposedly at sight, although they may be untouched for months, at an interest rate of 0%. In 1995 the Bank of China began to issue banknotes in Macau alongside the BNU.

Foreign participation A new banking ordinance was passed in July 1992, opening the sector to foreign competition and allowing the establishment of development banks. In December 1997 there were 22 banks and two finance companies. Of the banks, nine were local and the other 13 were incorporated abroad (in Portugal, France, the US, Germany, China, Hong Kong and Taiwan). The authorities are trying to attract more foreign banks, in particular from Japan, although that seems an uphill struggle at the moment since many Japanese financial institutions are currently retrenching their international operations.

Assets of leading banks, 1997 (MPtc bn; year-end) Banco Comercial Portugues 44.7 Bank of China 40.4 Tai Fung Bank 17.1 Seng Heng Bank 11.4 Banco National Ultramarino 10.0 Banco Luso Internacional 6.9 Banco Comercial de Macau 6.3 Weng Hang Bank 6.2 HongkongBank 4.3 Banco Totta & Acores 2.9 Banco Delta Asia 2.7 Source: KPMG, Banking Survey Report.

Other services

Tourism Despite major efforts to attract tourists to visit Macau for long stays, the territory is still thought of either as a gambling centre, a great place to eat out for weekenders from Hong Kong, or as a destination that can be explored in a day. Consequently, the average length of stay in hotels is only 1.4 days. A rash of gangland killings and bombings, which ran from 1997 until 1999, some in or around major hotels, has done little to encourage tourists to visit Macau. These incidents of violence, together with the Asian economic downturn that began in 1997, caused visitor numbers to fall by 14.7% between 1996 and 1998 before recovering by 7.1% in 1999 (see Reference table 12).

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Rapid growth in construction resulted in a doubling of hotel capacity in the first half of the 1990s. Accommodation has continued to increase in recent years: between the end of 1996 and the end of 1999 the number of hotel rooms went up by 4%, rising from 8,545 to 8,886 (Reference table 12 gives figures for the average number of hotel rooms during the year). As the number of visitors has fallen, however, the hotel occupancy rate has declined, from 64.1% in 1996 to 55% in 1999.

Tourism, 1999

Occupancy rate (av; %) 55.0 Average stay (days) 1.4 Total visitor arrivals 7,443,900 Sources: Census and Statistics Department, Macau in Figures; Macau Economic Services, Economic Studies.

Gambling Gambling is probably the most important single economic activity in Macau. 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 government rightly claims that the gambling franchise agreement enables it to keep other taxation low (direct taxes from gambling in 1999 accounted for 44% of total government revenue). Macau benefits in other ways from the gambling monopoly: under an agreement signed in 1986, STDM is obliged to contribute HK$12bn over 15 years to infrastructure development in Macau.

Mr Ho’s gambling concession does not expire until 2001. Beijing was not consulted before the concession was awarded, but so far there is no indication the franchise will be cut short. Beijing has not been upset by the gambling activities in Macau per se. Of more concern to China has been the gang violence that has emerged in recent years, which is probably related to competition between groups striving to gain the franchise when it comes up for renewal.

The external sector

Trade in goods

Foreign trade, 1999 (MPtc m) Exports fob 17,580 Imports cif –16,300 Trade balance 1,280 Balance with China –4,192 Balance with US 7,418 Balance with EU 3,201 Balance with Hong Kong –1,750 Source: Census and Statistics Department, Macau in Figures.

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The merchandise trade deficit, which appeared in 1991 and increased between 1992 and 1994, disappeared completely in 1997, as textile and garment exports rose while imports of consumer goods declined. The merchandise trade surplus remained large in 1999, at MPtc1,280m (US$160m), as weak domestic demand depressed import demand. (Historical data on the balance of merchandise trade are given in Reference table 13.)

In the past some efforts have been made to diversify Macau’s export base away from the manufacture of textiles and garments. For a while in the 1980s non- textiles products such as toys and artificial flowers assumed greater importance, reaching 30% of total exports in 1985. Since then, however, low-end manufacturing capacity has moved across the border into China, and textiles and garments have once again become dominant, generating 83.7% of total export earnings in 1999. (Data for exports by main sector are shown in Reference table 14; a breakdown of imports is given in Reference table 15.)

Without further efforts to modernise and diversify the merchandise export industries, the deficit could easily widen again in the future. The eventual end to quotas in the garment trade, with the phasing out of the Multi-Fibre Arrangement, could act to Macau’s benefit by making it easier to source garments in China. However, it could also see factories abandon Macau for even cheaper labour in China or elsewhere in Asia.

Exports by product, 1999 (MPtc m) Textiles & garments 14,728.2 Machinery & apparatus 658.9 Footwear 503.0 Cement 140.4 Toys 35.0 Others 1,514.5 Total 17,580.0 Source: Census and Statistics Department, Macau in Figures .

Direction of trade Macau’s largest export market is the US, followed by the EU, although exports to China have recorded the most rapid growth in the 1990s. China has now overtaken Hong Kong as Macau’s largest supplier. In 1999 Macau ran a MPtc7,418m (US$927m) trade surplus with the US and a deficit of MPtc4,191m with China. (Direction of trade statistics are given in Reference tables 16 and 17.)

Main trading partners, 1999

Exports to: % of total Imports from: % 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 Japan 6.6 Source: Census and Statistics Department, Macau in Figures.

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Invisibles and the current account

Balance-of-payments data are not published, nor are any figures published for investment income (interest, profits and dividends) and outflows, or for trans- fer payments.

Capital flows and There are no published estimates of capital account flows. OECD figures put foreign debt total external debt at US$1.7bn as of the end of 1997, compared with just US$61m at the end of 1992. Total external debt has remained at between 20% and 25% of GDP in recent years. Short-term debt accounted for a relatively high 59% of the total in 1997, although this compares favourably with the second half of the 1980s, when short-term debt sometimes accounted for over 90% of the total. A large proportion of finance for Macau is raised in Hong Kong. (Historical data on external debt are given in Reference table 18.)

Exchange rate

The local unit is the pataca (MPtc), divided into 100 avos. The pataca is tied to the Hong Kong dollar, which is also legal tender (and is the currency used in the casinos) and trades at a rate of MPtc103:HK$100. The pataca is thus fixed to the US dollar at a rate of roughly MPtc8:US$1. The pataca is not convertible abroad, except in China and Portugal, where government agreement has been relatively easy to obtain. (For historical data on exchange rates see Reference table 19.)

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Appendices

Sources of information

National statistical sources Census and Statistics Department, Boletim Mensal (monthly)

Census and Statistics Department, Boletim Mensal de Comércio Externo (monthly)

Census and Statistics Department, Macau in Figures (annual)

Census and Statistics Department, Quarterly Economic Bulletin

Census and Statistics Department, Yearbook of Statistics

Instituto Emissor de Macau, Annual Report

Macau Economic Services, Economic Studies

International statistical Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner, sources Middlesex HA5 5PJ

Reference tables

These reference tables provide the most up-to-date statistics available at the time of publication.

Reference table 1 Population

1995 1996 1997 1998 1999 Totala (‘000; year-end) 415.0 415.9 422.0 430.5 437.5 % change 2.8 0.2 1.5 2 1.6 Crude birth rate (%) 14.4 13.2 12.0 10.4 9.5 Crude death rate (%) 3.3 3.4 3.1 3.2 3.1 Marriages per ‘000 inhabitants 5.2 5.1 4.0 3.4 3.1 Divorces per ‘000 inhabitants 0.6 0.8 0.7 0.6 0.6

a Official estimates.

Source: Census and Statistics Department, Macau in Figures.

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Reference table 2 Labour force

1995 1996 1997 1998 1999 Labour forcea 270,995 277,405 277,676 281,117 283,450 Participation rates (%) 65.3 66.7 65.8 65.3 64.7 Men 78.3 79.4 78.3 77.5 75.6 Women 53.7 55.4 54.8 54.6 55.6 Unemployment rate (%) 3.6 4.3 3.2 4.6 6.4 Median monthly earnings (MPtc) 4,830 4,925 5,240 5,063 4,889 Share of employment (%) of which: manufacturing 21.7 20.6 20.7 20.6 22.0 Financial & business services 6.2 6.6 6.8 7.0 7.8 Restaurants & hotels 25.6 27.5 26.5 28.2 26.2

a EIU calculations, based on total population and participation rate.

Source: Census and Statistics Department, Macau in Figures.

Reference table 3 Enrolment in education institutions (no. unless otherwise indicated) 1995 1996 1997 1998 1999 Students per 1,000 inhabitantsa 222 233 235 240 248 Curricular teaching 93,587 96,846 98,347 102,187 107,419 Kindergarten 20,476 19,770 18,964 18,291 17,354 Basic 45,153 46,703 47,300 47,235 48,269 Secondary 20,624 22,277 24,145 26,406 28,543 Technical secondary 1,189 1,163 1,313 1,874 3,239 Teacher training 318 338 417 699 717 Nurse training 172 177 195 227 207 Higher education 5,655 6,933 6,625 8,381 10,104 Special education 349 359 408 442 494 Adult education 38,456 38,506 46,879 46,571 47,504

a Excluding part-time higher education students.

Source: Census and Statistics Department, Macau in Figures.

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Reference table 4 Transport and communications (year-end) 1995 1996 1997 1998 1999 Transport Vehicles licensed (no.) 40,684 45,206 49,450 52,910 55,144 Light load 36,998 41,403 45,509 48,920 n/a Heavy load 3,686 3,803 3,941 3,990 n/a New registrations (no.) 4,090 5,787 4,780 4,247 3,280 Light load 3,877 5,571 4,577 4,082 n/a Heavy load 213 216 203 165 n/a Cars per 1,000 inhabitants 98 109 117 123 126 Communications Telephones (no.) 189,856 206,154 222,465 251,091 300,066 New installations (no.) 41,867 50,485 56,617 59,947 70,403 Telephones per 1,000 inhabitants 457 496 527 583 686 Source: Census and Statistics Department, Macau in Figures.

Reference table 5 National energy statistics

1995 1996 1997 1998 1999 Capacity (mw) 311.8 366.8 366.8 351.6 351.6 Net imports (‘000 mwh) 177.4 174 175.3 172.6 194.4 Net supply (‘000 mwh) 1,265.4 1,345.9 1,410.3 1,520.6 1,526.0 Source: Census and Statistics Department, Macau in Figures.

Reference table 6 Government finances (MPtc m unless otherwise indicated) 1995 1996 1997 1998 1999 Revenue 16,172.5 14,711.3 15,000.6 15,548.3 10,111.8 Recurrent receipts 8,558.2 8,446.8 10,035.1 8,658.7 9,073.8 of which: direct taxes from gambling n/a 4,953.6 6,013.1 4,770.9 4335.7 Capital 77.9 103.3 416.5 1,781.2 755.9 Reimbursements 35.2 19.2 21.1 17.6 29.3 Autonomous funds & funds from previous financial years 7,501.2 6,142.0 4,527.8 5,090.8 252.7 Expenditure 15,449.9 14,687b 14,240.7 15,505.7 9,805.4 Current 6,102.8 6,524.0 7,715.3 8,332.4 8,152.6 Capital 3,928.0 2,021.2 1,997.5 2,082.4 1,400.0 Autonomous funds expenditure 5,419.0 6,142.0 4,527.8 5,090.8 252.7 Balance 722.6 24.2 759.9 42.7 306.4 % of GDP (1.2) (0.0) (1.3) (0.1) (0.7) Sources: Census and Statistics Department; Macau Economic Services website; EIU.

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Reference table 7 Money supply (MPtc m; year-end) 1995 1996 1997 1998 1999 Money supply (M2) 69,284 74,744 78,358 86,217 90,140 % change, year on year 13.5 7.9 4.8 10.0 4.6 Net foreign assets 39,257 43,207 42,820 52,882 58,847 % change, year on year 20.5 10.1 –0.9 23.5 11.3 Source: Macau Economic Services website.

Reference table 8 Gross domestic product (MPtc m unless otherwise indicated) 1995 1996 1997 1998 1999 Total At current prices 55,333.2 55,293.5 55,894.3 51,901.7 49,210.2 At constant (1996) prices 55,526.3 55,293.5 55,139.1 52,579.9 51,074.5 % change, year on year 3.3 –0.4 –0.3 –4.6 –2.9 Per heada At current prices 133,333 132,949 132,450 120,561 112,480 At constant (1990) prices 133,798 132,949 130,661 122,137 116,742 % change, year on year n/a –0.6 –1.7 –6.5 –4.4

a EIU calculations based on population figures at year-end.

Sources: Census and Statistics Department, Macau in Figures; Macau Economic Services website.

Reference table 9 Gross domestic product by expenditure (MPtc m; constant 1996 prices; % change year on year in brackets) 1996 1997 1998 1999 Private consumption 20,202.2 20,490 20,298.6 20,643.1 (4.0) (1.4) (–0.9) (1.7) Government consumption 5,204.1 5,416.4 5,546.9 6,072.6 (4.5) (4.1) (2.4) (9.5) Fixed investment 11,791.3 12,017.5 10,497.0 9,529.0 (–22.0) (1.9) (–12.7) (–9.2) Stockbuilding 540.7 107.0 –70.4 81.3 Exports of goods & services 41,806.8 41,082.4 40,047.8 40,415.8 (–0.6) (–1.7) (–2.5) (0.9) Imports of goods & services 24,251.5 23,974.2 23,740.0 25,667.3 (–7.9) (–1.1) (–1.0) (8.1) GDP 55,293.5 55,139.1 52,579.9 51,074.5 (–0.4) (–0.3) (–4.6) (–2.9) Source: Census and Statistics Department, Macau in Figures.

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Reference table 10 Prices

1996 1997 1998 1999 General CPI Index (June 1995/1996=100) 99.4 102.8 103.0 99.7 % change 4.8 3.5 0.2 –3.2 GDP deflator Index (1989=100) 100.0 101.4 98.7 96.4 % change 1.4 –2.6 –2.4 Source: Census and Statistics Department, Macau in Figures.

Reference table 11 Construction statistics

1995 1996 1997 1998 1999 Buildings completed Gross floor area (‘000 sq metres) 1,221.1 1,908.3 1,150.0 969.2 668.8 Residential 563.4 1,247.7 576.9 559.5 307.7 Commercial & office 398.1 265.4 363.4 174.6 128.6 Industrial 37.2 0.0 0.0 39.6 33.9 Others 222.4 395.2 209.7 195.5 198.6 No. of units 9,432 16,866 9,096 8,321 5,389 Residential 6,030 14,693 6,191 6,695 4,252 Others 3,402 2,173 2,905 1,626 1,137 Building permits issued 142 114 86 51 31 Residential 103 85 72 36 11 Others 39 29 14 15 42 Housing credit to individuals (MPtc m) 9,499 10,825 11,962 11,542 11,435 Sources: Census and Statistics Department, Macau in Figures.

Reference table 12 Tourism

1995 1996 1997 1998 1999 Total visitor arrivals (‘000) 7,753 8,151 7,000 6,949 7,444 of which from: Hong Konga 5,618 5,206 4,400 4,722 4,230 Japan 416 516 291 156 145 Taiwan 416 516 898 817 985 Chinaa 543 604 395 817 1,645 % change –1.0 5.1 –14.1 –0.7 7.1 Hotel rooms (no.; annual averages) 8,479 8,545 8,322 8,320 8,886 Occupancy rate (av; %) 60 64 52 53 55 Average stay (days) 1.3 1.32 1.34 1.43 1.43

a From 1998, Hong Kong and China arrivals are combined.

Sources: Census and Statistics Department, Macau in Figures; Macau Economic Services Research Department website.

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Reference table 13 Trend of foreign trade (MPtc m) 1995 1996 1997 1998 1999 Exports fob 15,914 15,899 17,129 17,084 17,580 Imports cif –16,267 –15,931 –16,603 –15,596 –6,300 Balance –353 –32 526 1,487 11,280 Source: Census and Statistics Department, Macau in Figures.

Reference table 14 Exports by main sector (MPtc m; fob) 1995 1996 1997 1998 1999 Textiles & garments 12,358 12,760 14,565 14,442 14,728 Machinery & apparatus n/a 589 558 601 659 Footwear 327 302 323 383 503 Cement n/a 175 147 99 140 Toys 578 264 92 95 35 Others n/a 1,809 1,445 1,464 1,515 Total 15,914 15,899 17,129 17,084 17,580 Source: Census and Statistics Department, Macau in Figures.

Reference table 15 Imports by end-use category (MPtc m; cif) 1995 1996 1997 1998 1999 Consumer goods 4,520 4,286 4,276 4,024 4,340 Foodstuffs, beverages & tobacco 1,899 1,712 1,673 1,523 1,469 Other consumer goods 2,621 2,574 2,603 2,501 2,871 Raw materials & semi-manufactures 8,631 8,998 9,376 9,068 8,781 Fuels & lubricants 834 1,016 1,070 989 1,012 Capital goods 2,282 1,630 1,881 1,515 2167 Total 16,267 15,931 16,603 15,596 16,300 Source: Census and Statistics Department, Macau in Figures.

Reference table 16 Exports by main destination (MPtc m; fob) 1995 1996 1997 1998 1999 US 6,693 6,411 7,747 8,141 8,249 EU n/a 5,356 5,632 5,210 5,304 China 1,562 1,267 1,111 1,157 1,617 Hong Kong 1,594 1,684 1,315 1,301 1,195 Total incl others 15,914 15,899 17,129 17,084 17,580 Source: Census and Statistics Department, Macau in Figures.

© The Economist Intelligence Unit Limited 2000 EIU Country Profile 2000 94 Macau

Reference table 17 Imports by main source (MPtc m; cif) 1995 1996 1997 1998 1999 China 3,539 3,818 4,741 5,092 5,809 Hong Kong 4,700 4,627 4,177 3,697 2,945 EU 2,397 2,182 2,052 1,641 2,103 Japan 1,711 1,431 1,417 1,208 1,084 US 1,206 939 1,042 733 831 Total incl others 16,267 15,931 16,603 15,596 16,300 Source: Census and Statistics Department, Macau in Figures.

Reference table 18 External debt (US$ m unless otherwise indicated) 1994 1995 1996 1997 Medium- & long-term debt 560 709 662 692 Official/officially supported debt 48 68 30 29 Financial markets 512 641 632 663 Short-term debt 1,140 1,068 859 1,002 Banks 1,136 1,063 850 982 Export credits 4 5 9 20 Total debt outstanding 1,700 1,777 1,521 1,694 % of GDP 25.4 23.9 20.8 23.1 Sources: OECD, External Debt Statistics; External Debt Statistics Supplement.

Reference table 19 Exchange rates (period averages; MPtc per 100 units of foreign currency) 1995a 1996a 1997a 1998a 1999a US$ 796.78 796.64 797.5 797.9 801.3 HK$ 103 103 103 103 103 £ 1,257.81 1,243.69 1,307.24 1,322.40 1,293 DM 557.03 529.6 461.025 454.2 436.1 FFr 159.9125 155.785 136.95 141.3 129.9 ¥ 8.53 7.3275 6.6025 6.1 7.1 Rmb 95 96 96 96 97 Euro 1030.998 997.6175 902.68 896.1 821.4 a EIU calculations based on quarterly rates given in the Economic Bulletin of the Macau Economic Services Research Department.

Sources: Macau Economic Services Research Department, Economic Bulletin and website.

Editor: Simon Tilford Editorial closing date: July 21Julyst 2000 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

EIU Country Profile 2000 © The Economist Intelligence Unit Limited 2000