Hong Kong Macau

COUNTRY REPORT

Hong Kong Macau

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4th quarter 1999

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group.

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ISSN 0269-6762

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK Contents

3 Summary

Hong Kong

5 Political structure 6 Economic structure 7 Outlook for 2000-01 12 The political scene 18 Economic policy 23 The domestic economy 23 Output and demand 26 Employment, wages and prices 29 Financial indicators 32 Sectoral trends 33 Foreign trade and payments

Macau

37 Political structure 38 Economic structure 39 Outlook for 2000-01 40 The political scene 42 Economic policy and the economy

45 Quarterly indicators and trade data

List of tables

7 Hong Kong: forecast summary 10 Hong Kong: economic results and forecasts 24 Hong Kong: gross domestic product estimates 26 Hong Kong: retail sales 27 Hong Kong: employment by sector 28 Hong Kong: inflation indicators 31 Hong Kong: money supply 31 Hong Kong: financial indicators 33 Hong Kong: balance of trade, Jan-Sep 34 Hong Kong: patterns of trade, Jan-Aug 36 Hong Kong: customer deposits by currency and foreign-exchange reserves

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43 Macau: foreign trade, Jan-Jun 43 Macau: exports by sector 44 Macau: imports by end-use category 45 Hong Kong: quarterly indicators of economic activity 46 Hong Kong: foreign trade

List of figures

11 Hong Kong: gross domestic product 11 Hong Kong: Hong Kong dollar real exchange rates 25 Hong Kong: gross domestic product and consumption 25 Hong Kong: retail sales 28 Hong Kong: inflation 30 Hong Kong: Hang Seng index 30 Hong Kong: merchandise trade 40 Macau: gross domestic product 40 Macau: pataca real exchange rates

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November 12th 1999 Summary

4th quarter 1999

Hong Kong

Outlook for 2000-01 Hong Kong will continue to be dogged by constitutional controversy in 2000-01. The “opposition parties”, although remaining vocal critics of the government, may lose out in the 2000 legislative election. The government will strive for fiscal balance, which could result in tax reform. The fixed link between the Hong Kong and US dollars will remain in place. External demand will strengthen. Domestic demand will also begin to grow again, boosted partly by a recovery in investment growth. Inflation will remain low but the goods and services surplus will narrow.

The political scene The Court of Final Appeal (CFA) has been asked to rule on the case of the “overstayers”, so the controversy over the right-of-abode issue has continued. The government’s estimate of the number of people made eligible to come to Hong Kong by the CFA’s original right-of-abode ruling has been questioned again. The CFA has also been asked to decide on the legality of legislation outlawing the defacing of flags in Hong Kong. Dissatisfaction with the Democratic Party of Hong Kong has increased. Fears about press freedom in Hong Kong have arisen. The chief executive, Tung Chee-hwa, has been accused of asking people to stop commemorating the 1989 Beijing massacre.

Economic policy The government has started to sell off some of its shares. A more active economic policy is being adopted, as Mr Tung seeks to “restructure” the economy. High-tech activities are being encouraged, and it has been claimed that a deal with a US company, Walt Disney, to establish a theme park in Hong Kong will boost the local tourism industry. Plans for the merger of the stock and futures exchanges have progressed. The first mortgage-backed securities have been issued.

The economy • An economic recovery, driven by neither gross fixed investment nor export demand, but rather by private consumption, has begun. The Hong Kong Monetary Authority has released a paper suggesting that economic growth is not as surprising as it may appear to be.

• Unemployment has remained above 6%. Although employment in most major sectors has risen, in manufacturing and construction it has continued to fall. Real wages have continued to rise, owing to sharp falls in prices.

• Nominal interest rates have risen, but M1 has started to grow again. The stock exchange’s second board, the Growth Enterprises Market (GEM), has started to accept applications from companies wishing to list. A large Chinese oil firm, China National Offshore Oil, has been forced to delay an initial public offering, but China Telecom (HK) has raised funds in Hong Kong.

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• A new firm has entered the supermarket sector, intensifying price competition. A large conglomerate, Hutchison Whampoa, has restructured its telecoms interests. The development of Hong Kong’s Internet industry has continued, and property firms have diversified into high-tech activities.

Foreign trade and The merchandise trade deficit has narrowed. Merchandise exports to some payments Asian countries have risen, as have imports from China. Foreign-exchange reserves have risen slightly, and depositors have maintained their confidence in the durability of the fixed link.

Macau

Outlook for 2000-01 A new government which will take office on December 20th, when Macau will become a special administrative region (SAR) of China. The incoming administration will attempt to improve the law and order situation but has warned that the gang-related violence that has plagued Macau since late 1996 will not disappear overnight. The economy may start to grow again in late 1999 as a result of expenditure related to the handover, and because of the nascent economic recovery in Hong Kong.

The political scene The chief executive-designate, Edmund Ho, has made seven appointments to the SAR’s Legislative Assembly. Mr Ho has also appointed judges, and individuals to his Executive Council (Exco). The trial of alleged members of the 14K gang has begun. Mr Ho has said he will not adopt a heavy-handed approach to the gangs. Portugal will allow a “technical” contingent of People's Liberation Army (PLA) troops to enter Macau before the handover.

The economy • Two ferry firms have merged, and an insurance joint venture has been launched. Construction activity has contracted, but exports, imports and tourist numbers have all increased.

Editor: Paul Cavey All queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023 Next report: Our next Country Report will be published in February

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Hong Kong

Political structure

Official name The Hong Kong Special Administrative Region (SAR) of the People’s Republic of China

Form of state Special administrative region of China, with its own constitution (the Basic Law), guaranteeing a “high degree of autonomy” for the next 48 years. Headed by a chief executive appointed by China

The executive 14-member Executive Council (Exco), serving in an advisory role for the chief executive

Head of state Jiang Zemin, president of the People’s Republic of China

Legislature Unicameral Legislative Council (Legco), comprising 20 directly elected members, 30 members elected by functional constituencies and 10 elected by an election committee comprising mostly delegates chosen by functional constituencies. Legco was temporarily replaced by the Provisional Legislative Council (PLC) from July 1997 to April 1998

Local government The current two municipal councils (the Urban Council and the Regional Council), the second tier of government, are being merged with the third tier, the district boards, in elections scheduled for November 2000. While nearly all seats to these bodies were elected in 1994 and 1995, 20% of the renamed district boards will now be appointed by the government

Legal system Based on English law, with foreign affairs and defence the responsibility of the central government in Beijing

Elections September 1994 (district boards); March 1995 (municipal councils): the chief executive appointed extra members to these bodies in June 1997. The Provisional Legislative Council (PLC), which replaced the dissolved Legco on July 1st 1997, was itself replaced when a new Legco was elected in May 1998. Next Legco election due in 2000

Main political parties The pro-democracy Democratic Party (DP, or Democrats) is the largest party in Legco. The second largest is the conservative Liberal Party (LP), which represents business interests, and the third is the pro-China Democratic Alliance for the Betterment of Hong Kong (DAB)

Chief executive Tung Chee-hwa Chief secretary for administration Anson Chan Financial secretary Donald Tsang Secretary for justice Elsie Leung

Secretaries Constitutional affairs Michael Suen Economic services Stephen Ip Education & manpower Joseph Wong Financial services Raphael Hui Treasury Denise Yue Trade & industry Chau Tak-hay Head of central policy unit Gordon Siu

Chief executive of the Hong Kong Monetary Authority Joseph Yam

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Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998 GDP at market prices (HK$ bn) 1,010.9 1,077.1 1,191.9 1,325.2 1,268.0 Real GDP growth (%) 5.4 3.9 4.5 5.0 –5.1 Consumer price inflation (av; %) 8.1 8.6 6.0 5.7 2.5 Population (m) 6.04 6.16 6.31 6.50 6.69 Exports foba ($ bn) 151.4 173.8 180.7 188.1 174.0 Imports cifb ($ bn) 162.3 193.3 199.1 209.2 184.9 Goods & services balancec ($ bn) 1.6 –6.1 –2.2 –5.9 0.8 Reserves excl gold (year-end; $ bn) 49.3 55.4 63.8 92.8 89.6 Total external debt ($ bn) 26.8 29.2 38.1 40.3 42.6d External debt-service ratio, paid (%) 1.5 1.5 2.0 1.9 2.9d Exchange rate (av; HK$:$) 7.728 7.736 7.734 7.742 7.745

November 12th 1999 HK$7.77:US$1

Origins of gross domestic product 1997 % of total Components of gross domestic product 1998 % of total Primary industries 0.1 Private consumption 60.5 Manufacturing 6.5 Government consumption 9.3 Utilities 2.4 Gross fixed capital formation 30.7 Transport, storage & communications 9.1 Stockbuilding –1.0 Construction 5.8 Exports of goods & services 127.4 Wholesale & retail import & export trade 25.4 Imports of goods & services –126.9 Finance, insurance, real estate & business services 26.2 Total at current market prices 100.0 Total incl others at factor cost 100.0

Principal domestic exports fob 1998 US$ m Principal imports cif 1998 US$ m Clothing 9,661 Consumer goods 65,968 Electrical machinery & apparatus 3,444 Raw materials & semi-manufactures 62,383 Textiles 1,389 Capital goods 44,699 Watches, clocks & photographic equipment 1,617 Foodstuffs 8,334 Office machinery 1,151 Fuels 3,015 Total incl others 24,331 Total 184,399

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total China 34.4 China 40.6 US 23.4 Japan 12.6 Japan 5.2 US 7.5 Germany 3.9 Taiwan 7.3 UK 3.9 South Korea 4.8 a Including re-exports. b Based on national accounts data. c The EIU publishes a goods and services balance as Hong Kong currently only has current-account data for 1997. The government will publish data for 1998 at end-1999; current-account data will then be published at regular quarterly intervals. d EIU estimates.

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Outlook for 2000-01

Hong Kong: forecast summary ($ m unless otherwise indicated) 1998a 1999b 2000c 2001c Real GDP growth (%) –5.1 0.5 2.7 3.4 Consumer price inflation (av; %) 2.5 –3.3 2.0 4.3 Merchandise exports fobd 173,996 169,985 175,904 186,259 Merchandise imports cif –184,941 –174,419 –182,963 –196,886 Merchandise trade balance –10,945 –4,435 –7,058 –10,628 Services trade balance 11,736 12,369 13,611 14,763 Goods & services balance 790 7,934 6,552 4,135 Exchange rate (av; HK$:$) 7.75 7.75 7.80 7.80

a Actual. b EIU estimates. c EIU forecasts. d Including re-exports.

Constitutional controversy In September the Hong Kong government’s chief secretary for administration, will continue— Anson Chan, spoke of the “learning curve” that was an inevitable result of the changes to Hong Kong’s constitutional arrangements that occurred in July 1997. The learning curve has so far been steep, and political debate in the Hong Kong Special Administrative Region (SAR) has for much of the past two years been dominated by legal and constitutional controversies. The gradient of this curve is unlikely to lessen much in 2000-01. The highly contentious right-of-abode issue continues to rumble on. Hong Kong’s highest court, the Court of Final Appeal (CFA), is currently deliberating on the legality of the interpretation of the SAR’s mini-constitution, the Basic Law, that was issued in June by the standing committee of China’s National People’s Congress (NPCSC). If the CFA rules that this interpretation, which was requested by the government, was unconstitutional, then Hong Kong would be plunged into a constitutional crisis of unprecedented proportions.

A court ruling in favour of the government would be greeted with dismay by “opposition” politicians in Hong Kong, although perhaps not by surprise— individuals such as the chairman of the Democratic Party of Hong Kong (DPHK), Martin Lee, have accused the post-July 1997 government of trying to intimidate the judiciary. Such a ruling apparently gives officials in Hong Kong—and in China—carte blanche to reverse court decisions in Hong Kong that the two governments disagree with. Senior officials have attempted to assuage such fears, saying that the government does not intend to run frequently to China for interpretations of the basic law, and that the NPCSC was only invited to intervene over the right-of-abode issue because of the exceptional circumstances of the case. The government has argued that if a January decision by the CFA to strike down immigration restrictions imposed by the government had been allowed to stand, Hong Kong’s population would have risen by 25% within ten years.

—because many will This apparent reluctance by the SAR government to seek China’s intervention remain sceptical of the will be tested by another case that the CFA is currently ruling on. The CFA may government’s intentions well uphold a lower court ruling that legislation introduced by Hong Kong’s

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government in July 1997 outlawing the desecration of national and regional flags in the SAR violates the Basic Law. The SAR administration has been careful not to rule out seeking China’s intervention in this and other cases. A decision to request the NPCSC to issue an interpretation of the Basic Law on the flag issue would undermine trust in assertions by the SAR’s chief executive, Tung Chee-hwa, that the government is committed to upholding the rule of law in Hong Kong. Even without a further approach to the NPCSC, opposition figures in Hong Kong will remain highly sceptical in 2000-01 of the government’s commitment to the rule of law in the SAR. This lack of trust in the administration will ensure that almost any government decision taken during the next two years relating to the SAR's relationship with China will generate considerable controversy.

The opposition parties will Although the “opposition” parties will continue to attack the government in criticise the government— 2000-01, the influence of these groups will remain extremely limited (apart from the DPHK, the “opposition”—by which we mean those parties that are most critical of the current political system in Hong Kong—includes the Citizens Party and Frontier). The expansion of the electoral franchise of the Legislative Council (Legco) at the next election, due to be held in September 2000, will not greatly enhance the power of these parties. This is partly because next year’s changes will produce a Legco that is only slightly more democratic—the number of representatives directly elected from geographical constituencies is to be increased from 20 to just 24.

—but may lose out in the Another reason why the opposition may not strengthen their presence in 2000 Legco election Legco next year is their diminishing popular support. Parties such as the DPHK have taken a stance against the government’s decision to seek an interpretation from China of the SAR’s mini-constitution, arguing that this damages the rule of law in Hong Kong. Voters in Hong Kong are also concerned about the strength of the SAR’s existing legal institutions. Ordinary people have been more worried, however, about the consequences of immigration to Hong Kong of the 1.7m people that the government claimed would be eligible to seek right of abode in the SAR as a result of the CFA’s January ruling. It is therefore possible that the DPHK will be replaced as the largest party in Legco at the 2000 election by the Democratic Alliance for the Betterment of Hong Kong (DAB). Although the DAB, which won nine seats in the last Legco election in 1998, is “pro-democracy”, it is also “pro-Beijing” and supported the government’s request for NPCSC intervention.

The government will strive The government of Mr Tung will adopt a more active approach in 2000-01 in for fiscal balance— directing the long-term economic development of Hong Kong than former UK- led administrations. Short-term economic policy priorities for the Hong Kong authorities, however, will not change. Officials will continue to stress the need to achieve budget surpluses. During the next two years recording at least a balanced budget will be even more important for the government than it was in the past: officials will be eager to repair any damage caused to Hong Kong’s traditional reputation for fiscal prudence by the economic difficulties of 1998- 99, which resulted in two successive years of fiscal deficit (the government is

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also legally required to take the budget back into the black at some stage, as the Basic Law calls for the government “to strive to achieve a fiscal balance”).

—which could result in tax The government’s ability to achieve fiscal surpluses during the next two years reform will be aided by an economic recovery—GDP, which contracted by 5.1% in 1998 and is likely to have grown by just 0.5% in 1999, is expected to grow by 2.7% in 2000 and by 3.4% in 2001 (see below). This recovery will encourage the government to implement revenue-raising initiatives. In the 2000/01 (April-March) budget, which will be unveiled in March 2000, government charges and fees are likely to be increased (Hong Kong’s financial secretary, Donald Tsang, has already indicated that he is considering unfreezing these government levies, which have not been raised since 1998). With GDP growth increasing further in 2001/02, the government will attempt to introduce further revenue-boosting measures. In the final year of the forecast period Mr Tsang may even be tempted to restructure the tax system in Hong Kong, in an attempt to diversify the government’s revenue base away from the traditional dependence on the property sector (in his 1999/2000 budget, Mr Tsang mentioned that the government had undertaken some investigation of a consumption tax).

The fixed link will remain The EIU has this quarter changed its forecast for the Hong Kong dollar in place exchange rate. We now no longer expect a change in the exchange rate in 2000. Instead, backed by a currency board system, the Hong Kong dollar is expected to remain fixed to the US dollar at HK$7.8:US$1 throughout the next two years. We have changed our forecast for three reasons.

• The rate of consumer price disinflation. Prices, as measured by the Consumer Price Index (A), are likely to have fallen by an average of 3.3% in 1999, and are expected to rise by just 2% in 2000. As a result, Hong Kong is expected to regain quickly some of the competitiveness lost in 1997-98 when the currencies of other emerging market economies fell sharply in value: Hong Kong’s real effective exchange rate, which appreciated by 12.9% between 1996 and 1998, is expected to depreciate by almost 5% between 1998 and 2000.

• A reduction in financial market volatility. The extreme regional financial market instability of 1997-98 made the fixed link between the Hong Kong and US dollars appear vulnerable. Financial market sentiment has now improved. In addition, measures to strengthen Hong Kong’s currency board system, announced by the Hong Kong Monetary Authority (HKMA) in September 1998, seem to have been effective in firming up the link.

• Changing market expectations about the vulnerability of the fixed link to a devaluation of the Chinese renminbi. During 1998 many market players seemed to believe that the fixed link would be destabilised if and when the renminbi was devalued: this was illustrated by the rise in Hong Kong interbank interest rates that accompanied any official comment in China suggesting that a devaluation was possible. The Hong Kong government now seems to have been successful in persuading market players that a devaluation of the renminbi would not threaten the Hong Kong dollar fixed link. Indeed, a market consensus now seems to have emerged that a

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devaluation of the renminbi, by boosting Hong Kong’s re-export trade and thereby lifting GDP growth, would actually bolster the fixed link. As market expectations tend to be self-fulfilling, this consensus will help the Hong Kong government preserve the fixed link in the event that the renminbi is devalued.

External demand will The negative effect on the growth of domestic exports of goods and services of strengthen— maintenance of the fixed link will be partly offset by strengthening external demand. World trade, which grew by an average of just 3.5% per year in 1998- 99, is expected to increase by 6.2% in 2000 and by 6.6% in 2001. Non-OECD GDP growth will also accelerate during the forecast period, increasing from 3.7% in 1999 to 5.2% in 2000 and to 5.5% in 2001. Exports of goods and services, which are likely to have fallen by 0.7% in 1999, are expected to grow by 2.9% in 2000, and by 4.1% in 2001. As Hong Kong’s merchandise exports are very import-intensive—around 85% of its goods exports are re-exports—an increase in export growth will pull up import growth. Imports of goods and services, which probably fell by around 3.6% in 1999, are expected to grow by 3% in 2000 and by 5.5% in 2001.

Hong Kong: economic results and forecasts (HK$ bn at constant 1987 prices; % change year on year in brackets) 1998a 1999b 2000c 2001c Private consumption 467.59 469.92 481.67 499.49 (–6.7) (0.5) (2.5) (3.7) Government consumption 62.07 64.24 66.17 67.82 (0.8) (3.5) (3.0) (2.5) Gross fixed investment 285.23 241.02 248.25 266.86 (–6.4) (–15.5) (3.0) (7.5) Stockbuilding –14.90 –16.00 –14.00 –4.00 (–3.1)d (–0.1)d (0.3)d (1.2)d Final domestic demande 814.88 775.18 796.09 834.18 (–6.0) (–4.9) (2.7) (4.8) Foreign balance –13.54 31.38 30.13 9.78 (4.3)d (5.7)d (0.2)d (2.5)d Exports of goods & services 1,547.1 1,536.4 1,580.3 1,644.5 (–4.6) (–0.7) (2.9) (4.1) Imports of goods & services –1,560.6 –1,505.0 –1,550.2 –1,634.7 (–6.6) (–3.6) (3.0) (5.5) GDP 786,443 790,563 812,214 839,957 (–5.1) (0.5) (2.7) (3.4)

a Actual. b EIU estimates. c EIU forecasts. d Change as a percentage of GDP in the previous year. e Excluding changes in stocks.

—and so will domestic Imports will also be pulled up by the strengthening of domestic demand demand— growth that is expected to occur during the next two years. Private consumption, which contracted sharply during the recent recession, has already started to recover. Private consumption growth will pick up in 2000-01 as the unemployment rate starts to fall from current highs and asset prices rise. Private consumption is consequently expected to grow by 2.5% in 2000, and by 3.7% in 2001.

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—which will be boosted Domestic demand growth will also be driven by a recovery of gross fixed in- partly by a recovery in vestment. Government-backed projects, such as construction of a new rail link investment growth between Hong Kong’s urban areas and the north-western New Territories—the HK$64bn (US$8.3bn) West Rail project—and the development of a Disney theme park, will boost gross fixed investment growth during the forecast period. Private-sector capital expenditure is also expected to begin to grow again in the next two years. Increasing growth in domestic private consumption expenditure, and strengthening external demand, will encourage greater investment in new plant and machinery. Construction activity is also expected to pick up as the local property development industry recovers from the slump of 1997-99. Overall gross fixed investment, which is likely to have plummeted by 15.5% in 1999, is expected to grow by 3% in 2000 and by 7.5% in 2001.

Inflation will remain low— This relatively weak rate of economic growth will prevent consumer price inflation averaging more than 2% in 2000, and 4.3% in 2001.

—but the goods and Growth in the value of merchandise exports will increase during the forecast services surplus will period. Strengthening domestic demand will ensure, however, that the value of narrow merchandise imports grows at an even more rapid rate. The merchandise trade deficit, which narrowed sharply between 1997 and 1999, will consequently widen during the forecast period, reaching US$10.6bn in 2001. This will more than offset an increase in the services surplus, which will be boosted by a further recovery of Hong Kong’s tourism industry. As a result, the goods and services surplus will fall from around US$7.9bn, or 5.4% of GDP in 1999, to US$4.1bn, or 2.5% of GDP, in 2001.

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The political scene

Controversy over the right On October 25th the right-of-abode issue once again came before the highest of abode continues— court of the Hong Kong Special Administrative Region (SAR), the Court of Final Appeal (CFA). This latest case was triggered by the government’s desire to reinstate removal orders issued previously by officials against 17 immigrants from China. Most of these immigrants had entered Hong Kong lawfully on two-way visas but had not returned to China after their travel documents had expired. Instead, the immigrants had remained in the SAR, claiming right of abode (as promulgated in the Basic Law, which grants the right of abode in Hong Kong to any Chinese child with at least one parent who already has permanent residency rights in the SAR). The government argued that by “over- staying”, the immigrants had acted illegally. In June, however, the Court of Appeal overruled the government, saying that the mainlanders had the right to stay in the SAR.

—as the CFA is asked to rule The outcome of the current case will not just affect the lives of the 17 on the “overstayers” respondents. The CFA’s ruling will also have huge constitutional implications for the SAR and will be instrumental in shaping the political relationship between Hong Kong and the central government in Beijing. This is because the court, in deciding on the fate of the 17 immigrants, is having to rule on the legality of an interpretation of the Basic Law that was issued in June—at the request of the SAR government—by the standing committee of China’s National People’s Congress (NPCSC; 3rd quarter 1999, pages 11-16). This interpretation essentially reimposed restrictions on the right of abode in Hong Kong, limitations that the SAR government had originally sought to introduce through immigration laws passed in July 1997. The CFA had struck down the government’s legislation in January this year, arguing the laws were in- compatible with the Basic Law (2nd quarter 1999, pages 11-13).

It is argued that the NPCSC The Basic Law does give the NPCSC the power to issue interpretations of it, and acted unconstitutionally— these interpretations are then binding on the local courts. However, the counsel for the immigrants, Denis Chang, argued that the Basic Law grants only the CFA the right to seek such an interpretation; Mr Chang claimed that, as the June intervention was requested by the government, it was unconstitutional and consequently invalid. Mr Chang went further than this, claiming that a 1988 draft of the Basic Law included a clause granting the NPCSC the power to issue free-standing interpretations of the Basic Law. As this clause did not appear in the promulgated version of the Basic Law, Mr Chang argued that the Basic Law had been drafted specifically to prevent interpretations of the sort that was requested and issued in June.

—and that the Mr Chang also argued that even if the June interpretation was valid, the “interpretation” is narrow NPCSC’s intervention did not permit the government to remove his clients from the SAR. Mr Chang claimed that as a result of the interpretation, individuals wishing to migrate from mainland China to Hong Kong had first to obtain permission from the Chinese authorities. The interpretation did not, however, require aspiring immigrants to apply for one-way permits from the mainland, nor did it mean that those wishing to live in Hong Kong could only

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leave the mainland as part of China’s quota system (since an agreement reached before the UK returned the sovereignty of Hong Kong to China, the mainland has allowed 150 people per day to leave China for Hong Kong on one-way permits). Mr Chang therefore argued that the interpretation did not make it unlawful for a mainland resident to come to the SAR on a two-way permit and then claim right of abode in Hong Kong.

Immigration may total SAR government officials claimed that the request for the NPCSC’s inter- only 562,000— vention was justified by the exceptional circumstances of the right-of-abode case—on April 28th the secretary for security, Regina Ip, released figures suggesting that the court’s decision would cause Hong Kong’s population to increase by 1.7m, or around 25%, within ten years. These figures were greeted with some scepticism at the time (3rd quarter 1999, pages 12-13). The government’s data came under attack once again in October, with the publication of a survey undertaken by a Hong Kong law firm on behalf of a non-governmental organisation, the Hong Kong Human Rights Monitor. On the basis of a sample size of 5,000 right-of-abode claimants, the law firm, Pam Baker and Company, claimed that only 562,000 individuals would be able to claim permanent residency rights in the SAR as a result of the CFA’s January ruling.

—a figure initially The independence of this survey may be questionable—in July Ms Baker had suggested by officials launched a legal challenge to the NPCSC interpretation. However, Ms Baker’s figures are very similar to initial government estimates of the immigration that would result from the right-of-abode ruling. A survey conducted by the government in March and April 1999 found that 560,000 individuals could claim right of abode in the SAR as a result of the CFA’s January decision (in this survey, officials simply asked Hong Kong residents the number of children they had conceived on the mainland out of registered marriage). This estimate was, however, abandoned in April in favour of the 1.7m figure (this later statistic was arrived at through a survey using a more sophisticated “taxi method”, designed to avoid the inaccuracies that could result when sensitive questions were asked).

A mainland right-of-abode Confidence in the government’s 1.7m April estimate has not been boosted by survey is stopped events in China. In February Ms Ip asked mainland officials to help the Hong Kong government determine the number of people made eligible to claim right of abode in Hong Kong by the CFA ruling. In response to this request, mainland officials undertook surveys of households in four Chinese cities that have close ethnic ties with the SAR—Dongguan, Zhaoqing, Maoming and Quanzhou. The results of these surveys were, however, never released. It seems that survey efforts on the mainland were discontinued after the NPCSC issued its interpretation; even the data collected before June are unlikely to be publicised, as Chinese officials now claim—perhaps conveniently for the Hong Kong government—that the information is confidential.

The CFA is asked to rule on The “overstayers” case was the second government appeal that the CFA heard the legality of flag laws in October. In the first, the CFA was asked to rule on the legality of legislation, also introduced in July 1997, which outlawed the desecration in Hong Kong of both China‘s national flag and the SAR flag (on March 23rd this legislation had

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been struck out by the Court of Appeal, which ruled that the government’s legislation violated the Basic Law’s provisions on freedom of expression—2nd quarter 1999, page 13). The CFA judges retired on October 22nd to make their decision, and seem likely to issue a ruling without first seeking an interpretation from the NPCSC. When the government’s barrister, Gerard McCoy, raised the question whether the case needed to be referred to China, one of the CFA judges, Charles Ching, replied that requesting the NPCSC’s opinion on this issue would make him and his colleagues look like a “bunch of clowns”.

Mr Tung cannot even The SAR’s chief executive, Tung Chee-hwa, delivered his third annual policy mention the rule of law address on October 6th. In his speech, Mr Tung stated that the government without being criticised— had resolved the right-of-abode issue in “full accordance with the Basic Law”. In an illustration of the sensitivity that now surrounds legal issues in Hong Kong, this statement was quickly criticised by some legal experts in the SAR. A law professor at the University of Hong Kong, Raymond Wacks, claimed that Mr Tung should not have commented on the right of abode, as the CFA was still hearing representations concerning this case. In his policy address, Mr Tung also said that he would do his utmost to uphold the rule of law in Hong Kong. Mr Wacks appeared sceptical of the sincerity of this claim: he complained that by commenting on the right-of-abode case, Mr Tung was violating a core element of the rule of law—non-interference by the executive in the workings of the judiciary.

—and his economic policies The economic aspects of Mr Tung’s policy address (see Economic policy) were are also attacked also attacked. Pro-democracy members of the SAR’s Legislative Council (Legco) criticised the chief executive for using his speech to focus on issues associated with the long-term development of Hong Kong, thereby neglecting the short- term livelihood concerns of ordinary people. The leader of the Democratic Party of Hong Kong (DPHK), Martin Lee, even tried to move an amendment to Legco’s traditional motion of thanks for the policy address, to express regret at Mr Tung’s failure to tackle current problems such as unemployment. The DPHK and the other pro-democracy parties in Hong Kong hold only a minority of the seats in Legco, so Mr Lee’s amendment was unsurprisingly rejected, and on October 28th the motion of thanks was passed by 40 votes to 16.

DPHK support falls because Highlighting livelihood issues may have been an attempt by the DPHK leaders of the right-of-abode case— to boost the party’s popularity. Opinion polls have suggested that the percentage of people satisfied with the DPHK’s performance fell from 63% in October 1998 to just 43% in July 1999. This fall in popularity has been partly a result of the non-populist stances taken by the party over controversial government decisions. The DPHK, for example, was a leading critic of government action in the right-of-abode case, highlighting the damage that executive- requested NPCSC intervention would cause to the rule of law in Hong Kong. A majority of people in Hong Kong, however, fearing that 1.7m people would otherwise move to the SAR, supported the government’s request for NPCSC involvement in this case.

—and because of internal Mr Lee’s stress on livelihood issues may also have been an attempt to alleviate divisions— internal divisions within his party. These tensions, created by disagreements

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over the degree to which the party’s economic policies should be aimed at the interests of the middle class compared with the less well-off members of society, first emerged into the open late last year: in December 1998 party members voted to replace the incumbent DPHK vice-chairman, Anthony Cheung, with the more activist chairman of the Confederation of Trades Unions, Lau Chin-shek (1st quarter 1999, page 12). Internal divisions emerged again in September this year when at an extraordinary general meeting, DPHK members were required to vote on whether the party’s official platform should include advocating a minimum wage. Although the vote was defeated, harmony is unlikely to return to the party in the near future: the member who initiated the minimum wage vote, Andrew Cheng, claimed that the internal debate over the issue had been useful for the party; a DPHK legislator, Cheung Man-kwong, however, argued that having such a vote had harmed the party.

—so DPHK leaders worry Support—always a concern for political parties—is a particularly pressing issue about November polls for the DPHK because of the approaching district council elections, due to be held on November 28th (the district councils used to be called district boards). The DPHK has traditionally been the most popular political party in Hong Kong and is keen not to be surpassed in the November poll by the Democratic Alliance for the Betterment of Hong Kong (DAB). The DAB is fielding 176 candidates for the 390 seats available in the election, compared with 172 individuals who are standing for the DPHK.

The municipal councils are Changing the name of the district boards is not the only change that to be abolished— Mr Tung’s administration has made to local government in Hong Kong. In his October 1998 policy address the chief executive announced the abolition from 2000 of the two municipal councils, the Urban Council (which governs the main urban areas), and the Regional Council (the equivalent body in the New Territories). This restructuring has been criticised for damaging democracy in Hong Kong, as before the handover in 1997 both the municipal councils were fully elected; even after July 1997 all councillors elected in 1995 were retained, although their influence was diluted by the inclusion in both bodies of government appointees. The municipal councils will not be replaced next year by new democratic institutions; instead, functions that were previously the responsibility of the Urban and Regional Councils will be taken up by the central government bureaucracy.

—and the DPHK fails to In October, in an attempt to prevent this restructuring occurring, the DPHK prevent both this reform— proposed that a referendum on the fate of the municipal councils be held on the same day as the district council elections. The attempt to stall the restructuring failed: legislators from both the pro-business Liberal Party and the DAB spoke against the referendum initiative, and the DPHK’s motion was defeated in Legco, by 33 votes to 17.

Many political parties The DPHK has long argued for the full democratisation of Hong Kong’s support democratisation— political institutions at an early date. However, it is not just “opposition” parties—which, apart from the DPHK, include the Citizens Party and Frontier—which want an extension of democracy in Hong Kong (the EIU uses the term “opposition” to describe collectively the parties in Legco that are most

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critical of the current political system in Hong Kong). The DAB, although being “pro-Beijing”, is also “pro-democracy” (the DAB, after the DPHK, won the largest number of directly elected geographical-constituency seats in the 1998 Legco election). On October 20th the leader of the DAB, Tsang Yok-sing, argued that a debate should be held next year on the pace at which Hong Kong’s political institutions are being democratised.

—but the government Bipartisan support is not, however, sufficient to achieve a speeding up of does not democratisation. The Basic Law sets out procedures for the election of both the chief executive in 2002, and for Legco in 2000 and 2004; according to the provisions of the Basic Law, the democratic franchises of both institutions will be expanded only slightly at each poll. Achieving a more rapid democratisation of the SAR’s main political institutions would therefore require an amendment of the Basic Law. The government will not, however, support such changes to Hong Kong’s constitutional arrangements. In his policy address Mr Tung stated that the government is “committed to the progressive development of our democratic institutions in accordance with the Basic Law”.

Personnel changes at RTHK On October 19th the government announced that the head of Radio and are controversial— Television Hong Kong (RTHK), Cheung Man-yee, was to be reassigned. In mid- December Ms Cheung will become the SAR government’s principal representative in Tokyo. Ms Cheung, who had been head of Hong Kong’s public service broadcaster for 13 years, was respected by many in the SAR for upholding RTHK’s editorial independence. Not surprisingly, therefore, her re- assignment was criticised both by members of the media and by opposition politicians in the SAR as an attempt by the government to erode RTHK’s independence. Mr Lee said that Ms Cheung’s “exile” to Japan would send the message to others in RTHK that they should not criticise the central government; Hong Kong’s Foreign Correspondents’ Club (FCC) issued a statement that “it is very difficult in the wider context not to view Ms Cheung’s removal from RTHK and transfer as a politically inspired decision taken ... to give hope to those who would like to turn the station into a propaganda organ”.

—because a Press Council One of the issues in the “wider context” referred to by the FCC was a re- has also been suggested— commendation issued by the privacy subcommittee of the Law Reform Commission (LRC) in August (the LRC is part of the government’s Department of Justice). The LRC suggested that a press council for the protection of privacy be established in Hong Kong. This institution would deal with complaints from individuals that magazines or newspapers had violated their privacy. A survey undertaken by the Hong Kong Policy Research Institute suggested that only 24% of people opposed this proposal. Journalists expressed fears, however, that the press council would lead to an erosion of press freedom.

—and because Mr Tung did Members of the LRC tried to allay these fears: the secretary of the LRC’s privacy not vigorously defend subcommittee, Godfrey Kan, said that Hong Kong’s reputation as a “relatively RTHK in 1998 free city” would not be affected if the establishment of the council complied with provisions of the Basic Law. The government, and Ms Cheung, also rejected charges that the changes at RTHK represented an attack on its editorial independence. Opposition figures did not have confidence in these assurances.

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This was partly because since July 1997 Mr Tung has not appeared to be a zealous defender of RTHK’s editorial independence. In March 1998 RTHK was criticised by a veteran pro-China politician, Xu Simin, as being a remnant of British colonialism. During the controversy that ensued, Mr Tung said: “While freedom of speech is important, it is also important for government policies to be positively presented.” Only later did Mr Tung confirm the service's “editorial independence”. Unsurprisingly, Mr Xu was not distressed by the departure of Ms Cheung, saying that he hoped RTHK would now develop “constructive opinions” about the government.

Ms Ng is not allowed to In September an independent legislator and representative of the legal con- enter China— stituency in Legco, Margaret Ng, was prevented from boarding a flight to Beijing: airline officials told Ms Ng that her visa had been revoked. Ms Ng has been a prominent critic of many legal decisions made by SAR officials since July 1997. She was particularly outraged by the government’s decision to seek China’s intervention over the right-of-abode issue. Ironically, the legislator's planned trip to Beijing was to a attend an academic conference on the mainland’s constitution; the government has said that one of the reasons for the legal controversies that have arisen in Hong Kong since July 1997 is that local lawyers have an insufficient understanding of China’s legal system.

—and has difficulty finding Ms Ng’s difficulties occurred when the chief executive was in New Zealand, an explanation attending the Asia Pacific Economic Co-operation (APEC) forum. On September 14th the chief secretary of administration, Anson Chan, said that Mr Tung would pursue Ms Ng’s case “at the first opportunity” upon his return to Hong Kong. Although officials in Mr Tung’s office said letters from Ms Ng concerning her barring were receiving “attention”, but Mr Tung initially declined to meet the legislator until after the policy address, three weeks later. Mr Tung eventually agreed to an earlier meeting, but Ms Ng came away dissatisfied. This is perhaps unsurprising: before their meeting the chief executive had said that he was powerless to act in this case, as under the “one country, two systems” principle the SAR government has no control over China’s visa-issuing policies.

Mr Tung is criticised over “Opposition” politicians have also been refused permission to visit Beijing: in June 4th June a DPHK legislator, James To, was banned from a flight going to Beijing. Mr Tung told Legco on October 8th that DPHK members would be allowed to visit the mainland only if the party was to “prove its worth” to China. It seems that one of the ways that the DPHK could do this would be by ending its association with the candlelit vigil held annually in Hong Kong to remember those who died in the massacre that ended the large-scale protests in China in 1989. In October it was revealed that Mr Tung had held a secret meeting in April with the organiser of the vigil, the chairman of the Hong Kong Alliance in Support of the Patriotic Democratic Movement in China, Szeto Wah (Mr Wah is also a DPHK member of Legco). Mr Wah has alleged that at their April meeting, Mr Tung asked him to stop organising this vigil; the result of this, Mr Tung is claimed to have said, would be that the government in Beijing would be less hostile to the DPHK.

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Mr Tung has denied both charges, claiming that he only asked Mr Wah to “drop the baggage of June 4th”, a phrase that has been used publicly by the chief executive in the past. In any case, the government in Beijing is unlikely to welcome visits by leading democrats or other China critics: both Mr Lee and Mr Wah have previously been branded “subversives” by China. Neither politician is expected to stop commemorating the June 4th 1989 massacre.

Economic policy

The government tries to On October 25th the entity established to manage the shares purchased during sell some of its shares— the government’s controversial August 1998 intervention in the stockmarket, Exchange Fund Investment (EFIL), formally launched the Tracker Fund of Hong Kong (TraHK). This marked EFIL’s first effort to sell off part of the government’s huge share portfolio, which at the end of June was worth HK$217bn (US$27.9bn). The TraHK, which will track the performance of the benchmark Hang Seng Index (HSI), is similar to Standard & Poor’s 500 Depository Receipts—“Spiders”—which are traded in the US. Through TraHK, which is to be managed by State Street Global Advisors (Hong Kong), investors will be able to able to buy a stake in all 33 stocks of the HSI through just one security. The fund is similar to, although not the same as, a unit trust. Unlike a unit trust, for example, units in TraHK cannot be redeemed for cash.

—offering attractive In an effort to conquer the lack of enthusiasm that is traditionally exhibited by incentives to investors— retail investors in Hong Kong towards collective investments (3rd quarter 1999, page 18), an aggressive marketing campaign accompanied the launch of the TraHK. The fund has also been attractively priced. The cost of investing in the fund will be low compared with the costs associated with mutual funds. No entrance fees or exit penalties will be levied, and the annual management fees will not exceed 0.1%. Retail investors taking advantage of the initial public offering (IPO) will benefit from a discount of at least 5%. Hong Kong residents buying units in TraHK will also be eligible for a loyalty bonus, receiving one share for every 20 owned after the first year, and one for every 15 held after the second year.

—but the official stock The TraHK generated considerable investor interest: 1m application forms were portfolio will remain large reportedly distributed on the day the IPO was launched, and the size of the launch was consequently increased from HK$10bn (US$1.3bn) to HK$33.3bn. Even after this share sale, however, EFIL’s stock portfolio will still be worth around HK$200bn, so the share disposal programme—which may include further increases in the size of the TraHK fund—will have to continue for some time to come.

A more active economic The eagerness of the EFIL to sell off the government’s shares seems to support policy is being adopted— official claims that the August 1998 buying spree was a temporary aberration from the existing policy of “positive non-interventionism”, rather than a signal that the government was adopting a more interventionist approach to economic policy. However, although the government’s role in the economy remains extremely limited, officials do now seem to be taking a more active

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interest in the direction of economic development in Hong Kong than they did in the past. This was made clear by the title of the third annual policy address of the SAR’s chief executive, Tung Chee-hwa, which was delivered on October 6th: “Quality People, Quality Home: Positioning Hong Kong for the 21st century.”

—as Mr Tung tries to In his speech, Mr Tung unveiled a whole range of measures aimed at “restructure” the improving the quality of the living environment in Hong Kong (see box economy— below). The chief executive also spoke of the need to “restructure our economy in the most advantageous direction”. That Hong Kong’s economy has structural weaknesses was made clear by the economic events of 1997-98. Although the severity of the recession experienced in the SAR last year was related largely to the downturn in external demand—and high interest rates resulting from the fixed link between the Hong Kong and US dollars—domestic economic difficulties also highlighted the economy’s overdependence on financial services and property development.

—towards high-tech Mr Tung seems to favour reducing this dependence by encouraging the growth activities of other industries: in his speech, the chief executive said it was necessary for “innovative, knowledge-intensive economic activities” to be developed in the SAR, to allow Hong Kong to become a “knowledge-based” economy. The government has already taken some steps to encourage the development of high-technology activities in Hong Kong. In March 1999 the government announced that a controversial “cyberport” was to be established in the SAR. (2nd quarter 1999, pages 15-16, 19 and 25). The Stock Exchange of Hong Kong (SEHK) has also launched a second board, the Growth Enterprise Market (GEM), which is aimed at allowing easier access to capital for high-tech start-up companies (see Financial Indicators). This recent official fondness for in- novation and technology, by influencing the corporate culture in Hong Kong, already seems to be yielding results: some of Hong Kong’s leading conglomerates have become noticeably more interested in high-tech economic activities in recent months (see Sectoral trends).

These developments are encouraging. However, the government faces a difficult task in transforming Hong Kong into a “knowledge-based” economy. For one thing, a top-quality education system is needed to allow the economy to develop in this direction (Mr Tung did devote considerable time to labour issues in his speech, stressing the need for higher levels of education and saying that Hong Kong would start to import more skilled workers from China). Moreover, Hong Kong is not the only economy seeking to become a high-tech centre: for example, the Singapore government’s blueprint for long- term economic development calls for the establishment of an “advanced, globally competitive, knowledge economy”. However, even such a modest goal as providing full-day schooling for children of primary-school age remains a medium-term objective in Mr Tung’s new programme.

The tourism industry is In its quest to diversify the economy, the government is not only promoting also to be developed— the development of high-tech activities. Officials are also seeking to strengthen the local tourism industry. The agreement reached on October 31st between the government and Walt Disney, allowing the US company to establish a

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theme park in the SAR, forms a central part of this effort. Government pro- jections suggest that this project will produce significant economic benefits for Hong Kong. Officials estimate that construction of the park will create 16,000 new jobs, with a further 18,400 openings being created when the park commences operation in 2005. The park will also boost the SAR’s tourism industry. Official figures suggest that 5m people will visit the park in 2005, with the number of visitors rising to 10m per year by around 2020. The government estimates that the theme park will bring a new economic benefit to Hong Kong of HK$148bn (US$19bn) over 40 years.

—through development of Despite these apparent economic benefits, the Disney project is controversial. a Disney theme park— This is partly because, to ensure construction of the theme park, the government is once again taking a direct stake in the development of the economy: the government will own 57% of the company that will be established to manage the project, Hong Kong International Theme Parks Limited (HKITP); Walt Disney will consequently own just 43%. This continues a theme set by the “cyberport” development, in which the government also owns an equity stake. The project is also controversial because of the huge sums the government will be required to invest in the theme park: a total of HK$22.5bn (US$2.9bn). Of this contribution, HK$13.6bn will go towards developing infrastructure for the project, which is to be built at Penny’s Bay on Lantau Island, near the new airport. The remainder of the government’s investment will be in the form of equity and loans.

—which, although Given the huge sums involved, it was not surprising that pro-democracy controversial, will go ahead politicians started to question the economic worth of the Disney project as soon as the deal to develop it was announced. Scrutiny of the deal by members of Hong Kong’s Legislative Council (Legco) will not prevent the project from going ahead, however. The project will give a boost to the economy, even if the net economic benefits are not as great as the government currently claims (officials have openly said that more conservative estimates of visitor numbers could reduce the total net economic benefit to HK$80bn-120bn). The government is likely to win majority support for the Disney project in Legco.

Casinos, on the other hand, Speculation has been rife that the government is thinking of establishing will not be established casinos in Hong Kong (betting on horse races is already permitted in the SAR, through the Hong Kong Jockey Club). During a recent visit to the US the SAR’s financial secretary, Donald Tsang, visited Las Vegas; the government’s Service Promotion Strategy Group (SPSG) has also been studying casino-related issues. It is unlikely, however, that casinos will be established in Hong Kong soon, if ever. Mr Tung has said that the SPSG’s work is a low-level review. In any case, the government in Beijing would probably object if the SAR government went ahead with a casino plan. One of China’s vice-premiers, Qian Qichen, said in October that it would be inappropriate for Hong Kong to set up casinos.

The financial markets are The merging of Hong Kong’s stock and futures exchanges, together with their being reformed— three associated clearing houses, is progressing rapidly. This restructuring was initiated only in March 1999, yet on July 30th the management teams of the SEHK and of the Hong Kong Futures Exchange (HKFE)—albeit after

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acrimonious negotiations—reached agreement on the terms of the merger. The proposed amalgamation was approved by members of both the SEHK and the HKFE on September 27th. The government plans to implement the merger by the end of January or early February 2000, with the new body, Hong Kong Exchanges and Clearing (HKEC), being floated in September 2000.

—perhaps in an attempt to Officials claim that the decision to merge the exchanges was motivated by a enhance monitoring— desire to increase the efficiency and competitiveness of Hong Kong’s financial markets. Capital-market restructuring certainly seems necessary if Hong Kong is to continue to compete effectively with financial centres elsewhere in the region—a reform similar to those now being implemented in the SAR was initiated in Singapore in 1998. It seems, however, that competitiveness was not the only motivation behind the creation of the HKEC. Instead, the government apparently initiated this merger also to give Hong Kong’s monetary authorities the ability to monitor more effectively activity in the SAR’s financial markets. Such an ability will be useful if the capital-market turmoil of 1997-98—which at times threatened to break the fixed link between the Hong Kong and US dollars—is repeated.

—as the government The SAR’s financial markets have been less volatile in 1999 than they were in remains committed to the 1997-98. In addition, general confidence in the durability of the fixed link has fixed link increased as a result of the major price adjustments that have occurred in Hong Kong since early 1999 (see The domestic economy: employment, wages and prices). The question of the exchange rate remains a delicate one for the Hong Kong authorities, however. This was made clear by the government’s reaction to a newspaper article that appeared in Singapore’s Straits Times on October 22nd. The newspaper quoted Mr Tsang as saying that Hong Kong and Singapore should consider moving towards a common currency within a time horizon of “five to seven years”. Hong Kong’s government responded quickly to the suggestion that the fixed link is not a permanent feature of Hong Kong’s economy. Soon after this article being published, Mr Tsang’s office issued a statement claiming that the financial secretary had been quoted “out of context”, and that the government’s total commitment to the fixed exchange rate regime was unchanged.

Given the differences between the SAR and Singapore economies, tying the Hong Kong dollar to the Singapore dollar would be difficult to achieve and foolhardy even to attempt. Furthermore, in the sense that it would be im- possible for any senior government official to admit that the authorities were considering changing the exchange-rate regime, the ideas attributed to Mr Tsang were surprising. However, although it is not clear that the financial secretary made these comments, it would be most surprising if Mr Tsang has not at least thought about the future of the fixed link. After all, it would be quite worrying if officials such as the financial secretary were not even considering whether Hong Kong’s current exchange-rate regime is the most suitable mechanism for ensuring the long-term economic development of the SAR.

Government bonds have Efforts to deepen Hong Kong’s bond market have continued in recent months. been listed— In line with a pledge given by Mr Tsang in his budget speech in March, the

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government’s exchange fund notes were listed on the SEHK on August 19th. Further bond listings have occurred since then: on October 29th bonds issued by Hong Kong Mortgage Corporation (HKMC) were traded for the first time on the stock exchange. It is expected that these listings by the government and by government-related bodies will be followed eventually by trading on the SEHK of private-sector corporate bonds.

—and the HKMC issues It is not only through listing of its debt securities that the HKMC has mortgage-backed contributed to the development of Hong Kong’s bond market. On October securities— 22nd the HKMC launched a guaranteed mortgage-backed securities (MBSs) programme. Under this programme, the HKMC—through the HKMC Funding Corporation—will purchase mortgages from banks in Hong Kong, repackage them as MBSs, and then sell these securities back to the banks. The HKMC will receive the principal and interest payments accruing to the underlying mortgage loans, subtract a portion to cover service fees, and pass the remainder back to the banks. In the inaugural issue, the HKMC agreed to buy HK$1bn (US$128.7m) worth of mortgages from Dao Heng Bank. Other banks are expected to follow Dao Heng’s lead: according to the deputy chairman of the HKMC, Joseph Yam, the corporation aims to issue HK$3bn-5bn in mortgage- backed securities in 2000 (Mr Yam is also the chief executive of the Hong Kong Monetary Authority—HKMA).

—which will bolster banks’ The selling of Hong Kong dollar-denominated MBSs will contribute to the capital-adequacy ratios development of the SAR’s debt market. The participating banks—of which Dao Heng Bank was the first—will also benefit. The HKMC will guarantee payment of principal and interest payments due to banks participating in the programme, reducing the risk associated with mortgage lending. The swapping of mortgage loans for MBSs will also improve the banks’ risk-weighted capital- adequacy ratios: MBSs guaranteed by the HKMC will have just a 20% risk weighting for capital-adequacy purposes, whereas mortgages have a 50% weighting.

The HKMA may regulate This reduction in risk may allow the HKMA to relax its guideline that mortgage the mortgage business lending should not exceed 40% of a banks’ total assets. The HKMA may, however, be forced to tighten up other types of mortgage-related regulation. In recent months competition in the mortgage market has been fierce, as banks have sought to increase consumer lending in an attempt to offset a poor demand for business credit. According to the HKMA, 82.5% of mortgages granted in July were at or effectively below the prime rate (at which the banks lend to their best customers); by comparison, 76.2% of the new mortgages granted in September 1997 were at rates 0.25% or more above prime rates. The change reflects the willingness of banks to lower mortgage rates in an attempt to win new customers. The HKMA has expressed concern that these lower lending rates are cutting into profit margins of the banks. The HKMA has warned that if such fierce competition threatens to undermine financial and economic stability in Hong Kong, it will take action.

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Main points of the annual policy address

On October 6th 1999 the chief executive of the Hong Kong • introducing a scheme to allow selected skilled individuals from Special Administrative Region (SAR), Tung Chee-hwa, the mainland to work in Hong Kong. delivered his third annual policy address, entitled “Quality People, Quality Home: Positioning Hong Kong for the 21st Improve the quality of life in the SAR: century”. Mr Tung stressed the need to do the following. • cutting respirable particles produced by vehicle emissions in Hong Kong by 60% within four years and by 80% within seven Position the SAR to allow economic growth in the years, and cutting vehicle nitrogen oxide emissions by 30% by long term: 2005. To be achieved by reducing the use of polluting vehicles • establishing Hong Kong as a world-class city—the “New (for example by replacing diesel-fuelled taxis and buses with York and London” of Asia; and liquefied petroleum vehicles), and by expanding pedestrian zones; • further integrating Hong Kong with the mainland, particularly with Guangdong. • raising water quality, by upgrading sewerage facilities, and co- operating with the Guangdong authorities to improve the quality Cultivate the skills necessary for Hong Kong to of Hong Kong’s water supplies; become a knowledge-based economy: • developing a system of “life-long learning”; • reducing waste, by doubling within eight years the rates of municipal waste reduction and recycling, and by investigating • requiring all kindergarten principals to have completed the ways to reform Hong Kong’s waste management systems; Certificate of Kindergarten Education Course by September 2002 (previously the government had a target date of 2004); • establishing a joint Hong Kong-Guangdong working group on environmental issues; • further phasing out the shift-system of primary level education. Mr Tung said the proportion of primary school • promoting the concept of sustainable development, partly by children benefiting from full-day schooling, which rose from providing a HK$100m grant to support community initiatives on 19% in 1997 to 32% in 1999, would rise to 60% by 2002; sustainable development;

• distributing HK$120m (US$15.4m) in 1999-2004 to • improving the living environment in Hong Kong. Mr Tung tertiary institutions to develop “areas of excellence” in announced that the Land Development Corporation would be information technology, biotechnology, and economics and replaced with a more effective Urban Renewal Authority. Among business strategy; other initiatives, the chief executive said that the managed country park areas on the outlying Lantau Island would be • ensuring by 2005 that all language teachers have met expanded. minimum teaching-standard criteria;

The domestic economy

Output and demand

An economic recovery, After contracting year on year for five consecutive quarters, Hong Kong’s eco- driven not by investment— nomy expanded by 0.7% year on year in the second quarter of 1999. This recovery was not driven by investment spending. The contraction in gross domestic fixed capital formation (GDFCF), which had begun in the second quarter of 1999, accelerated in the first half of 1999 (investment as measured by GDFCF excludes the effect of changes in stocks). GDFCF contracted by 22.2%

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and 26.4% year on year respectively in the first and second quarters of 1999, compared with a contraction of just 6.4% in 1998 as a whole. The rate of decline of investment increased in 1999 largely because of comparison with the first half of 1998, when GDFCF was boosted by investment spending related to the final stage of construction of Hong Kong’s new airport. (Spending on this huge project resulted in GDFCF contracting by just 0.8% year on year in the first quarter of 1998, and lifted GDFCF by 5.4% year on year in the second quarter.) The airport opened in July 1998 and the level of GDFCF started to contract in the second half of 1998. As a result, the rate of investment decline in Hong Kong is expected to be slower in the second half of 1999 than in the first half.

Hong Kong: gross domestic product estimates (% change; year on year) 1998 1999 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Private consumption 6.2 –6.7 –2.5 –5.0 –9.9 –9.0 –4.4 1.3 Government consumption 2.4 0.8 2.1 –5.3 3.8 2.5 3.9 3.5 Gross domestic fixed capital formationa 12.7 –6.4 –0.8 5.4 –9.8 –19.2 –22.2 –26.4 of which: construction 4.7 –4.6 5.3 5.9 –10.8 –17.4 –11.8 –19.9 machinery 13.1 –6.6 –6.3 8.5 –7.1 –21.2 –29.8 –28.3 Goods Exports 6.1 –4.3 1.4 –0.5 –7.0 –9.6 –4.8 –2.0 Imports 7.2 –7.2 –1.7 –1.8 –10.5 –13.5 –10.3 –7.9 Services Exports –0.1 –6.6 –10.1 –11.6 –4.6 –0.3 0.6 1.7 Imports 4.0 –0.6 1.2 1.6 –2.7 –2.0 –0.8 –0.6 GDP 5.0 –5.1 –2.6 –5.1 –6.9 –5.6 –3.2 0.7 a Excluding changes in stocks.

Source: Census and Statistics Department.

—nor by exports— In the first half of 1999 Hong Kong’s merchandise exports continued to be hit by weak external demand, and by the relative strength of the Hong Kong dollar. Although still remaining weak, however, external demand growth has begun to increase from the low levels of 1998. As a result, the year-on-year contraction in Hong Kong’s merchandise exports, which began in the second quarter of 1998, appears to have moderated. Merchandise exports fell by just 2% year on year in the second quarter of 1999, compared with contractions of 4.8% in the first quarter of 1999 and 9.6% and the final quarter of 1998. Service exports which, owing to a fall in the number of overseas visitors, began to contract in the third quarter of 1997, grew in the first half of 1999 as the domestic tourism industry began to recover from the difficulties of 1997-98 (tourist arrivals to Hong Kong, which fell by 21% year on year in the first half of 1998, increased by 11.7% in the first six months of 1999). Exports of services grew by 0.6% and 1.7% year on year in the first and second quarters of 1999 respectively.

—but by private The economy expanded in the second quarter of 1999 because private consumption, began in the consumption—which accounted for over 60% of GDP in 1998—began to grow second quarter— again. After contracting by 6.7% of GDP in 1998 as a whole, and falling by

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 Hong Kong 25

4.4% year on year in the first quarter of 1999, private consumption expanded by 1.3% year on year in the second quarter. The recovery of private consumption, although driving growth in the economy as a whole, was not sufficient to lift domestic demand, which contracted by 11.9% year on year in the first half of 1999. As a result both of this and of the further fall in exports imports of goods and services also contracted in the first half of 1999, by an average of 9.1% and 0.7% respectively (as over 85% of Hong Kong’s merchandise exports are re-exports, merchandise import growth is closely tied to growth in exports of goods).

—and seems to have Retail sales figures suggest that the recovery in private consumption has continued since then continued in the second half of the year. The volume of retail sales, which had fallen year on year in every month since October 1997, increased by 0.8% and 1.9% year on year in July and August 1999 respectively. Sales of motor vehicles and consumer durables, and of jewellery, watches and clocks, all increased by more than 10% in volume terms in August. The value of retail sales has not yet begun to grow but, given the rate at which consumer prices in Hong Kong are falling (see Employment, wages and prices) this is not surprising.

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 26 Hong Kong

Hong Kong: retail sales (% change, year on year) Value Volume 1998 Sep –21.5 –21.7 Oct –19.2 –18.1 Nov –19.6 –17.1 Dec –16.9 –14.0 1999 Jan –20.7 –18.4 Feb –4.1 0.0 Mar –13.8 –9.4 Apr –9.3 –3.3 May –7.9 –1.3 Jun –6.3 –0.3 Jul –7.7 0.8 Auga –7.7 1.9

a Provisional.

Source: Census and Statistics Department.

Economic recovery is not Given that short-term real interest rates in Hong Kong are high and rising, this surprising as it may seem recovery of private consumption and GDP growth—which has been accompanied by rising asset prices—seems surprising (see Financial indicators). According to a recent paper published by the research department of the Hong Kong Monetary Authority (HKMA, Hong Kong’s de facto central bank), however, the coexistence of economic recovery and rising short-term real interest rates is not as puzzling as it first may appear. This is because, according to the HKMA, long-term interest rates are a more important determinant of economic activity and asset prices in Hong Kong than short-term rates. The HKMA argues that, as with short-term real rates, long-term interest rates rose sharply when the Asian financial crisis first hit Hong Kong in October 1997. Unlike short-term rates, however, long-term rates have been falling since the third quarter of 1998. According to the HKMA, these falling long-term real rates have allowed asset prices to rise and the overall economy to begin to grow.

Employment, wages and prices

The unemployment rate The average unemployment rate in Hong Kong rose from 2.5% in the January- remains above 6%— March period of 1997 to 6.3% in the February-May period of 1999. Labour market conditions have tightened only slightly since then—the average unemployment rate in the July-September period of 1999 was still above 6%. The ending of Hong Kong’s long economic recession and the renewed GDP expansion that began in the second quarter of 1999 therefore had little effect on the unemployment rate. This is because the lowering of the jobless total that would have resulted from the economic recovery was almost entirely offset by the influx into the labour market in mid-1999 of school leavers and university graduates.

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Although employment in Between June 1998 and June 1999 employment in most major sectors of Hong most major sectors has Kong’s economy increased. The sharpest increases were in the community, risen— social and personal services sector, where employment in June 1999 was 7.6% higher than it had been a year earlier, and in the financing, insurance, real estate and business services sector, where 3.4% more people were employed in June 1999 than had been the case a year earlier.

—in manufacturing and Employment in two sectors did, however, shrink year on year in June. The construction it continues long-term decline in manufacturing employment in Hong Kong continued. In to fall the past this reduction had been caused by local companies relocating production capacity offshore to escape Hong Kong’s high cost base. Since late 1997 manufacturing firms in Hong Kong have also had to cope with the problem of falling external demand. As a result, employment in manufacturing was 6.7% lower in June 1999 than it had been a year earlier. Employment in the building industry also declined: almost 12% fewer people were employed in the construction industry in Hong Kong in June 1999 than had been the case a year earlier. This fall in building-related employment has been caused by a sharp decline in construction activity. On a national accounts basis expenditure on construction, dragged down by the sharp fall in property prices in Hong Kong that occurred from late 1997, contracted by an average of 15.9% year on year in the first half of 1999.

Hong Kong: employment by sectora (’000) 1998 1999 Jun/Jun Jun Mar Jun % change Manufacturing 271,600 248,600 253,500 –6.7 Construction (manual workers only) 81,000 71,900 71,400 –11.8 Wholesale, retail & import/export trades, hotels & restaurants 954,100 976,800 966,200 1.3 Transport, storage & communications 175,600 175,200 175,900 0.2 Finance, insurance, property & business services 395,700 397,900 409,200 3.4 Community, social & personal services 315,200 335,700 339,200 7.6 a Data refer to numbers engaged rather than employment.

Source: Census and Statistics Department.

Real wages continue to Continued high unemployment has not prevented real wage inflation from rise— rising: according to the government’s Census and Statistics Department, real payroll per person employed in Hong Kong, which had increased by an average of 0.2% year on year in the first half of 1998, rose by an average of 3.3% year on year in the first six months of 1999. These real wage pressures have not been produced by higher nominal labour costs: in the first half of 1999 nominal payroll per person rose by an average of just 0.3% year on year, slower than the 4.9% growth rate recorded in the first six months of 1998. Instead, real wages have risen as a result of the steep fall in consumer prices that have occurred in Hong Kong in 1999. As measured by the Consumer Price Index (A)—CPI (A)—the rate of consumer price deflation in Hong Kong increased from 0.9% year on year in January to 5.2% year on year in August.

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 28 Hong Kong

(CPI (A) tracks changes in the prices of goods bought by the lowest 50% of income earners.) Other consumer price indices suggest that prices are falling at an even more rapid rate.

—but this is owing to sharp These sharp price falls are the result partly of government policy. According to falls in prices officials, the 50% rate rebate implemented by the government in the third quarter of 1999 reduced the rate of change of the CPI (A) in July-September by 0.8 percentage points. Prices are also falling as a result of weak real domestic demand. Hong Kong has not, however, entered a deflationary spiral, in which declining prices cause domestic demand to contract, which in turn promotes a further fall in prices—despite falling consumer prices, the volume of retail sales in Hong Kong started to increase in August (see Output and demand).

The fall in consumer prices instead seems to be the result of the effective operation of Hong Kong’s currency board system. Under this mechanism, the level of domestic prices, rather than the value of the currency, must adjust when an external shock affects the economy. The current falls in consumer prices are therefore necessary if Hong Kong is to regain the competitiveness that was lost through the sharp devaluations of other emerging market currencies that occurred in 1999.

Hong Kong: inflation indicators (Oct 1994-Sep 1995=100; % change, year on year)

1998 1999 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep CPI(A) –0.1 –0.9 –1.4 –0.9 –1.5 –2.3 –3.3 –3.5 –3.7 –5.0 –5.2 –4.9 CPI(B) 0.0 –0.9 –1.7 –1.6 –2.3 –3.3 –4.5 –4.6 –4.8 –6.3 –6.9 –6.9 CPI (C)a 0.5 –0.2 –1.8 –0.5 –1.1 –1.9 –3.3 –3.6 –3.6 –5.1 –6.1 –6.1 Composite CPI 0.1 –0.7 –1.6 –1.1 –1.7 –2.6 –3.8 –4.0 –4.1 –5.5 –6.1 –6 a Previously called the Hang Seng CPI.

Source: Census and Statistics Department.

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 Hong Kong 29

Financial indicators

Nominal interest rates have As a result of the fixed link between the Hong Kong and US dollars, interest risen— rates in the Hong Kong Special Administrative Region (SAR) generally move in line with those of the US. Consequently, following an August 24th decision by the US Federal Reserve to increase benchmark US interest rates from 5% to 5.25%, prime rates in the SAR—the rate banks charge their best customers— were raised from 8.25% to 8.5%. Given continued strong US GDP growth, there is a risk that US rates will be increased again in 1999, which would lead to further upward pressure on retail rates in Hong Kong. Concerns that this will occur is contributing to relatively high interbank rates in Hong Kong—the three-month Hong Kong interbank offered rate (Hibor) has remained above 5.7% since the end of July. Heightened tensions between China and Taiwan, caused by a July decision by the island’s government to redefine cross-strait relations as “state-to-state”, is also causing tighter liquidity in the interbank market.

—but M1 has started to The supply of narrow money, M1, which contracted sharply during 1998, has grow again recently started to grow again: in the year to the end of June M1 expanded by 6.9%. The renewed growth of M1 is due to the recent recovery of private consumption growth, which has increased demand for cash. Growth in M2 and M3 was similar in the year to the end of June to the growth rates recorded in previous months.

The GEM starts to accept On September 14th the Stock Exchange of Hong Kong (SEHK) began to accept applications— applications from companies wishing to issue shares on the Growth Enterprise Market (GEM). As the name suggests, the GEM, which will be the SEHK’s second board, is targeting 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. The GEM will require firms to provide only a two-year corporate history—compared with the three years required by the main board. Moreover, the GEM will impose no profitability requirements. The first listing on the new board is expected to occur during the fourth quarter of 1999.

—and could become the The Hong Kong authorities hope that the GEM can become the NASDAQ of NASDAQ of Asia Asia (NASDAQ is the market on which the shares of many of the US’s leading high-technology companies are listed). Judging by the companies that have been reported to have expressed an interest in GEM, these hopes may be fulfilled. According to Hong Kong’s South China Morning Post, an SAR-based developer of e-commerce software, @direct, will list on the GEM in the first quarter of 2000. A Taiwan-owned company that is the main provider of real- time stockmarket information in China, Qian Long, is also reported to be seeking a listing on the new board.

CNOOC is forced to delay In October China’s largest offshore oil producer, China National Offshore Oil an IPO— (CNOOC), first reduced in size, and then postponed, a planned initial public offering (IPO). The company originally planned to raise US$2.2bn-2.5bn by

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 30 Hong Kong

listing on the SEHK, and issuing American Depositary Receipts (ADRs) in the US. CNOOC blamed the delay on “adverse market conditions”—on October 14th, the day the company announced the decision to delay the IPO, the benchmark Hang Seng Index (HSI), which had reached a 1999 year-high of 14,507 on July 5th , was at just 12,487.

—but China Telecom CNOOC was the first of China’s big oil firms to attempt to undertake a global manages to raise funds— share issue. In the aftermath of CNOOC’s difficulties, China’s second largest oil company, China Petrochemical (Sinopec), said that it was still intending to undertake a US$8bn IPO in the first half of 2000; the mainland’s largest oil firm, China National Petroleum (CNPC), is also planning an IPO, which could be worth as much as US$10bn. These other firms may have been encouraged to continue with their IPO plans by the apparent ease with which one prominent China-linked firm, China Telecom (Hong Kong), recently raised funds in Hong Kong. On October 28th China Telecom, Hong Kong’s largest “red chip”, raised US$2.6bn through a sale of new shares and bonds. (“Red chips” are Hong Kong-listed subsidiaries of Chinese companies.) The company had originally planned to raise just US$2.2bn in October, but increased the size of both the bond and stock issues to tap strong investor demand.

—to buy mobile networks China Telecom needed to raise funds to help finance its planned US$6.4bn in China acquisition of mobile phone networks in three provinces of China. This deal, announced on October 4th, had the support of both the government in Beijing, and of many investors in China Telecom (Hong Kong). Such investor support for “red chip” deals has not been guaranteed. Recently, for example, investors objected to a plan by a Hong Kong-listed shipping conglomerate, Cosco Pacific, to buy a stake in a sister company, Cosco Investment (Singapore). According to a report in a UK-based newspaper, the Financial Times, Cosco Pacific’s offer of HK$261m (US$33.6m) was the equivalent of 55 times the historical earnings of the Singaporean firm. The Financial Times later reported that as a result of shareholder pressure, Cosco Pacific was considering revising the terms of the planned acquisition.

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 Hong Kong 31

Hong Kong bank lending to According to the Hong Kong Monetary Authority (HKMA), the exposure of China falls again banks in Hong Kong to non-bank Chinese entities fell by 22% between the end of September 1998 and the end of June 1999, from HK$325.4bn (US41.9m) to HK$254.8bn. This fall is the result of the financial difficulties encountered by some institutions in China during the last year. The exposure of Hong Kong banks to the Guangdong International Trust and Investment Corporation (GITIC), a firm closed by the Chinese authorities in October 1998 and later declared bankrupt, fell by 19.2% between the end of September 1998 and the end of June 1999.

Hong Kong: money supply (HK$ bn) 1998 1999 Mar Jun Sep Dec Mar Jun M1 HK$ 185.5 170.2 168.9 178.3 181.8 182.1 Foreign currency 16.4 18.0 19.8 19.4 18.4 19.1 Total 201.9 188.2 188.7 197.7 200.2 201.2 % change, year on year n/a n/a n/a –5.0 –0.9 6.9 M2 HK$a 1,678.7 1,681.9 1,770.9 1,814.1 1,821.8 1,846.2 Foreign currrencyb 1,129.9 1,135.0 1,219.6 1,252.0 1,253.3 1,274.4 Total 2,808.6 2,816.9 2,990.5 3,066.1 3,075.1 3,120.6 % change, year on year n/a n/a n/a 11.8 9.5 10.8 M3 HK$a 1,693.6 1,696.3 1,783.7 1,826.2 1,833.2 1,857.4 Foreign currrencyb 1,185.2 1,181.8 1,266.4 1,296.1 1,292.4 1,307.9 Total 2,878.8 2,878.1 3,050.1 3,122.3 3,125.6 3,165.3 % change, year on year n/a n/a n/a 10.5 8.6 10.0

a Adjusted to include foreign currency swap deposits. b Adjusted to exclude foreign currency swap deposits.

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

Hong Kong: financial indicators, 1999 (end-period) Hang Seng Index 3-month Hibora Jan 29th 9,506.9 6.68 Feb 26th 9,858.5 6.25 Mar 31st 10,942.2 5.75 Apr 30th 13,333.2 5.11 May 31st 12,147.1 5.46 Jun 30th 13,532.1 5.87 Jul 30th 13,186.9 6.39 Aug 31st 13,482.8 6.58 Sep 30th 12,733.2 5.80

a 3-month Hong Kong interbank offered rate (Hibor).

Source: Bloomberg.

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 32 Hong Kong

Sectoral trends

A new firm enters the Hong Kong’s two dominant supermarket chains, Park ‘N’ Shop and Wellcome, supermarket sector— have long enjoyed an effective duopoly in Hong Kong’s groceries industry—the two companies were recently estimated to have a combined market share of around 70%. The dominance of these two companies is now under threat, however. In June a prominent Hong Kong entrepreneur, Jimmy Lai, launched an Internet- and telephone-based retailer, Admart. Mr Lai used low prices and his Apple Daily, Hong Kong’s second most popular Chinese-language newspaper, to promote his new venture. Mr Lai’s tactics seem to have been successful: by October Admart was reported to be receiving 8,000-10,000 orders, and making 3,500 deliveries, per day.

—creating intense price Both of the market leading firms have cut prices in a reaction to the threat competition posed by Admart. Competition is likely to intensify further in the coming months. Mr Lai’s new venture is increasing the size of its workforce from 1,600 to 2,500, and aims to achieve 30,000 orders and deliveries a day by the end of 1999. The long-established supermarkets will continue to react aggressively to the Admart threat (as both Wellcome and Park ‘N’ Shop are backed by large Hong Kong conglomerates—Jardine Matheson and Hutchison Whampoa— both have the resources to compete with Mr Lai’s new venture). Supermarket prices in Hong Kong are therefore likely to fall still further.

Hutchinson restructures its Hutchinson Whampoa, controlled by one of Hong Kong’s most prominent telecoms interests tycoons, Li Ka-shing, has recently restructured its telecoms holdings. In August the conglomerate’s stake in Hutchinson Telecommunications Australia fell from 77.5% to 54% after the cellular phone company undertook an initial public offering (IPO) on the Sydney Stock Exchange. On October 21st Mr Li’s company conditionally agreed to sell its 44.8% stake in a UK mobile telecoms company, Orange, to a German conglomerate, Mannesmann. In return, Hutchinson Whampoa received HK$22bn (US$2.8bn) in cash, HK$22bn in notes and a 10% stake in Mannesmann, entitling the Hong Kong-based company to a seat on the board of the German firm. Hutchinson benefited from a further cash influx shortly after the Mannesmann deal: in late October Hutchinson’s part-owned Partner Communications, the third largest mobile phone company in Israel, was floated, raising US$525m.

The development of the On October 29th the SAR’s largest telecoms company, Cable & Wireless HKT SAR’s Internet industry (formerly Hong Kong Telecom), launched a new Internet portal, iZene (at continues— www.iZene.netvigator.com). The portal, designed for Internet users with broadband facilities, offers multimedia applications and audiovisual services. The portal is the result of the “strategic co-operation” agreement that Cable & Wireless HKT reached earlier this year with the world’s leading software company, Microsoft (2nd quarter 1999, page 26). iZene uses Microsoft technology, and the two firms will share the revenue generated by the new service (Internet users who subscribe to Cable & Wireless HKT’s broadband service can use iZene for free; other users will be charged HK$30 (US3.9bn) per month).

—and Microsoft signs an Microsoft has linked up not only with Cable & Wireless HKT. On October 28th agreement with Sun the US firm and one of Hong Kong’s leading property developers, Sun Hung Hung Kai— Kai Properties (SHKP), announced the establishment of a “strategic partnership” to “develop opportunities in the areas of information technology and property development”. The two firms announced that SHKP would deploy Microsoft technologies in its commercial and industrial properties, with the aim of creating “intelligent commercial properties”.

—as the developers seek to On August 10th SHKP and the government’s Hong Kong Industrial Technology go high-tech Centre (Tech Centre) launched the SAR’s first “cyberincubator”, the SHKP.Tech Centre. Under this development SHK provides office premises free of charge to start-up companies, and the Tech Centre helps to run the premises, for example by providing a full-service business centre. In return, both entities receive equity stakes in the start-up firms. Announcing the centre, the Tech Centre said it had spoken to other property developers about establishing further “cyberincubators”. This project is aimed at encouraging the development of high-tech businesses in Hong Kong. It will also, however, help property developers to diversify the activities, at a time when property prices in Hong Kong are stagnant.

Foreign trade and payments

The improvement in the The value of goods exports contracted by 3.3% year on year over January- merchandise trade deficit— September 1999, from HK$1.009trn (US$129.9bn) to HK$976bn. Owing to a continuing decline of industrial activity, the value of domestic exports contracted by 12.4% year on year in this period, whereas re-exports fell by 1.8%. The value of merchandise imports, dragged down by falling domestic demand, contracted by 6.9% year on year in January-August 1999, from HK$1.083trn to HK$1.008trn. The merchandise trade deficit narrowed from HK$73.3bn in the first eight months of 1998 to HK$31.5bn in January-August 1999.

Hong Kong: balance of trade, Jan-Sep (HK$ m unless otherwise indicated) 1998 1999 % change Exports 1,009,158 976,160 –3.3 Domestic exports 142,500 124,894 –12.4 % of total exports 14.1 12.8 Re-exports 866,658 851,266 –1.8 % of total exports 85.9 87.2 Imports –1,082,484 –1,007,654 –6.9 Visible trade balance –73,326 –31,494 –57.0 Source: Census and Statistics Department.

—is unlikely to be This improvement in the trade balance is unlikely to be sustained. Although in sustained recent months the year-on-year decline in merchandise exports has been reversed—the Hong Kong dollar value of total merchandise exports increased by 3% and 4.4% year on year in July and August respectively—the value of

merchandise imports has also begun to rise. The value of goods imports, which had fallen year on year every month since March 1998, was 2.7% higher on average in July and August 1999 than in the same period a earlier. Merchandise export growth is expected to continue to increase in 2000 as a result of a rise in world trade growth. Import growth, however, will also increase next year as domestic demand begins to grow once again.

Hong Kong: patterns of trade, Jan-Aug (HK$ bn, unless otherwise indicated) 1998 1999 % change Imports by major source China 381,217 383,120 0.5 Japan 124,918 101,660 –18.6 US 71,971 62,921 –12.6 Taiwan 70,361 64,206 –8.7 South Korea 46,862 10,947 –12.6 Singapore 43,421 37,287 –14.1 Germany 23,486 18,577 –20.9 Malaysia 22,050 18,660 –15.4 UK 20,580 17,411 –15.4 Thailand 14,207a 14,633 –3.0 Principal imports Electrical machinery & appliances 128,251 128,674 0.3 Telecoms & sound equipment 90,291 73,581 –18.5 Office machinery 65,557 65,927 0.6 Apparel & clothing 71,608 72,576 1.4 Toys & miscellaneous 71,182 72,130 1.3 Textiles yarn & fabrics 71,899 63,570 –11.6 Photo & optical equipment 36,928 34,153 –7.5 Footwear 31,754 27,827 –12.4 Non-metallic mineral manufactures 23,922a 26,242 9.7 Plastics 232,742a 21,389 –8.1 Domestic exports by main destination China 38,638 32,903 –14.8 US 35,869 32,289 –10.0 UK 6,570 6,363 –3.2 Germany 6,421 5,634 –12.3 Japan 4,532 3,669 –19.0 Taiwan 4,308 3,316 –23.0 Netherlands 3,177 2,754 –13.3 Singapore 3,540 2,269 –35.9 France 2,022 2,229 10.3 Canada 2,453 2,048 –16.5 Domestic exports by main commodity Apparel & clothing 49,027 47,326 –3.5 Electrical equipment & machinery 18,131 14,927 –17.7 Miscellaneous articles (mostly jewellery) 10,052 8,918 –11.3 Photo equipment, watches & clocks 8,343 6,245 –25.1 Textiles & yarns 7,284 6,399 –12.2 Office machinery 6,013 5,293 –12.0 Specialised scientific instruments 3,636 3,814 4.9 Telecoms & sound equipment 4,656 2,499 –46.3 Primary plastics 2,126 1,601 –24.7 Non-ferrous metals 1,029a 1,285 24.9

continued

1998 1999 % change Re-exports by main destination China 276,012 253,547 –8.1 US 170,099 170,849 0.4 Japan 42,224 42,020 –0.5 Germany 27,766 27,091 –2.4 UK 26,415 27,823 5.3 Singapore 16,190 18,220 12.5 Taiwan 18,350 17,592 –4.1 France 13,802 14,510 5.1 South Korea 7,812a 12,561 60.8 Netherlands 12,905 12,310 –4.6 Re-exports by main commodity Electrical machinery & appliances 83,719 93,708 11.9 Miscellaneous manufactured goods, 100,724 102,784 2.0 Telecoms & sound equipment 76,009 70,169 –7.7 Office machinery 57,808 60,863 5.3 Apparel & clothing 63,058 63,484 0.7 Textiles & yarn 61,749 55,644 –9.9 Photo & optical eqpt, watches & clocks 38,545 36,105 –6.3 Footwear 37,021 32,724 –11.6 Travel goods & handbags 23,129 23,299 0.7 Primary plastics 18,948 18,438 –2.7

a EIU estimates.

Source: Census and Statistics Department.

Exports to some Asian The value of domestic exports to most of Hong Kong’s major markets fell in countries rise— the first eight months of 1999 year on year. The pattern for re-exports was more mixed. Re-exports to Hong Kong’s most important market, mainland China, fell by 8.1% year on year in the first eight months of 1999. Re-exports to other Asian countries rose, however, as the region began to recover from the economic difficulties that began in late 1997. In January-August 1999 re- exports to Korea rose by 60.8% year on year, to Singapore by 12.5%; re-exports to Japan, which had fallen by over 17% year on year in the first eight months of 1998, fell by just 0.5% in the same period of 1999.

—as do imports from China Out of Hong Kong’s ten largest suppliers, only imports from China rose year on year in the first eight months of 1999. Imports from Germany and Japan fell particularly sharply. The largest category of imports was electrical machinery, which accounted for 14.6% of the total in the first eight months of 1999. Imports of telecoms equipment, 8.3% of the total, fell by 18.5% year on year in the same period.

Foreign-exchange reserves Hong Kong’s foreign-exchange reserves have remained at about US$89.2bn in rise slightly— recent months. According to the Hong Kong Monetary Authority (HKMA), these reserves were equivalent to over 20 months of import cover in August.

Hong Kong: customer deposits by currency and foreign-exchange reserves (HK$ bn unless otherwise indicated) 1998 1999 3 Qtr 4 Qtr 1 Qtr 2 Qtr Aug Customer deposits with all authorised institutions HK$ 1,607.5 1,655.8 1,653.3 1,678.0 1,660.7 Foreign currency 1,268.3 1,298.3 1,299.4 1,315.0 1,394.6 Total 2,875.8 2,954.2 2,952.7 2,993.0 3,055.3 HK$ as % of total 55.9 56.1 56.0 56.1 54.4 Foreign currency assets Total (US$ m) 88,394.0 89,625.0 89,526.0 88,541.0 89,243.0 Import cover (no.)a 15.9 17.5 18.6 19.9 20.2 Ratio to currency in circulation 7.4 7.5 7.0 7.2 7.3

a Ratio to retained imports.

Source: Hong Kong Monetary Authority.

—and depositors continue The high level of reserves provides the HKMA with considerable resources with to have faith in the fixed which to defend the fixed link between the Hong Kong and US dollars. This link large stock of reserves, however, does not guarantee the stability of the currency. Although HKMA figures show that foreign-exchange reserves are more than seven times greater than currency in circulation, these reserves do not exceed M3. Consequently, the fixed link would be undermined if the deposit-holding general public was to start to believe that a change in the exchange-rate was imminent, and so convert their savings into US dollars and move these offshore. Hong Kong consumers do not seem to have lost faith in the durability of the link, however: at the end of August, over 54% of customer deposits with authorised institutions were denominated in Hong Kong dollars, little changed from the proportion recorded earlier in the year.

Macau

Political structure

Official name Macau

Form of state Portuguese colonial administration (although the Portuguese government insists that Macau is Chinese territory under Portuguese administration) until December 20th 1999, when the territory will revert to China as the Macau Special Administrative Region (SAR) of the People’s Republic of China

The executive Eight-member cabinet (last reshuffle May 1991) composed of the governor and seven secretaries appointed by the president of Portugal on the advice of the governor; a ten- member Consultative Council, five members appointed by the governor and five members indirectly elected, represents the interests of the Chinese community

Head of state The president of Portugal, represented in Macau by a governor

National legislature Unicameral 23-member Legislative Assembly; seven members appointed by the governor, eight elected directly and eight indirectly; members sit for four-year terms; the assembly elects its own president

Legal system Portuguese law operates; the island is part of the judicial system of Portugal although it operates its own courts of first instance and the power of final adjudication is now vested in the Supreme Court of Macau

National elections September 1996 (Legislative Assembly); next election due by September 2000 (Legislative Assembly)

Main political organisations Political parties do not exist in the normal sense, although a number of civic associations operate: Electoral Union (UNE); Pro-Macao and Flower of Friendship and Development of Macao (Fadem); Associação para a Defesa dos Interesses de Macao (Adim); Centro Democrático de Macao (CDM); Grupo Independente de Macao (Gima); Macau Economic Promotion Association; Progress Promotion Union; Development Union

Governor General Vasco Joaquim de Rocha Vieira

Under-secretaries Administration, education & youth Dr Jorge Rangel Communications, tourism & cultural affairs Manuel Salavessa da Costa Economic affairs Vitor Pessoa Health & social affairs Ana Maria Perez Justice Jorge Silveira Public security Brigadier Manuel Monge Public works Jose Manuel Machado

Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998 Real GDP growth (%) 4.6 3.6 –0.5 –0.1 –4.0a Population (year-end) (‘000) 403.6 415.0 415.9 422.0 430.5 Consumer price inflation (av; %) 6.3 8.6 4.8 3.5 0.2 Exports fob (US$ m) 1,906.4 2,040.6 1,995.6 2,142.6 2,135.7 Imports cif (US$ m) 2,155.8 2,071.6 1,999.7 2,076.8 1,949.8 Trade balance (US$ m) –249.4 –31.0 –4.1 65.8 185.9 BIS positionb (net, year-end; US$ m) –1,551 –2,692 –2,754 –3,012 –3,982 Exchange rate (av; MPtc:US$) 8.0 8.0 8.0 8.0 8.0

November 12th 1999 MPtc8:US$1

Origins of gross domestic product 1993 % of total Components of gross domestic product 1998 % of total Manufacturing 40.0 Private consumption 36.0 Tourism 27.0 Government consumption 10.8 Construction 9.0 Gross fixed capital formation 18.3 Trade 6.0 Stockbuilding 0.7 Finance 4.0 Exports of goods & services 72.3 Total incl others 100.0 Imports of goods & services –38.1 Total 100.0

Principal exports 1998 US$ m Principal imports cif 1998 US$ m Clothing & textiles 1,805.2 Raw materials & semi-manufactured goods 1,133.5 Electronics 11.7 Consumer goods incl foodstuffs, beverages & tobacco 503.0 Footwear 47.9 Capital goods 189.4 Toys 11.9 Mineral fuels & oils 123.7 Total incl others 2,134.5 Total 1,949.6

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total US 47.7 China 32.6 EU 30.5 Hong Kong 23.7 Hong Kong 7.6 EU 10.5 China 6.8 Japan 7.7 US 4.7 a Official preliminary estimate. b Net assets, vis-à-vis Macau, of banks reporting to the Bank for International Settlements.

Outlook for 2000-01

Macau has problems The administration that will take charge after Macau becomes a special administrative region (SAR) of China on December 20th will face a difficult first two years in office. Macau has deep-seated structural problems which the new government will be required to address. These problems involve issues that are both economic (Macau’s GDP has contracted every year since 1995) and security-related (the territory continues to be plagued by gang violence).

Although Mr Ho is in a The chief executive-designate, Edmund Ho, is in a good position to tackle these good position to tackle problems. Mr Ho has moved quickly to ensure all senior positions in the in- them— coming government are filled, ensuring there will be no leadership vacuum after December 20th. A popular figure himself, Mr Ho’s appointments have generally been greeted favourably by Macau’s wider population. The incoming chief executive is also likely to receive considerable support from China during the early years of his leadership. The government in Beijing, although not wanting to be seen to be infringing upon the “high degree of autonomy” that the Macau SAR is supposed to enjoy, will be keen to help engineer a turn- around in Macau’s economic and political fortunes.

—he has warned that both Mr Ho has said that improving law and order will be a priority for his govern- law and order— ment. However, he has also said that the government cannot take extreme measures in combating the gangs. While some may be disappointed that Mr Ho will not just invite China’s People’s Liberation Army (PLA) in to clean up the city, the chief executive-designate appears to realise that such a drastic response would be counter-productive. A army-induced lessening of the violence would perhaps boost the economy in the short term. However, such a hardline approach would also would ultimately damage the territory’s liberal legal structure, and therefore the competitive edge that it enjoys over neighbouring areas of mainland China.

—and the economy will Mr Ho has warned that, as with the law and order situation, he has no quick take time to fix fixes for Macau’s economic stagnation. Macau’s economy probably grew in the second half of 1999 as a result of handover-related expenditure. Some of the projects that have been finished for the handover will boost the economy beyond December 20th 1999. A new causeway between Taipa and Coloane islands, for example, will be connected to Zhuhai in mainland China by a bridge, and this will allow much easier access to Guangdong province (Macau residents were once limited to crossing to the mainland via a crowded and run- down checkpoint at Gongbei and a few inconvenient water crossings). Macau will become much closer to the economy of China as a result.

Macau’s economy will also be boosted in 2000-01 by the economic recovery in Hong Kong. The economy would be further boosted if the government managed to reduce the gang-related violence in Macau—this would probably result in an increase in visitor arrivals. Even this, however, would not result in rapid rates of GDP growth in Macau. The economy will continue to dragged down during 2000-01 by a huge oversupply of property—around 30,000 flats, or 20% of the total, are currently vacant. In the longer term, the attainment of

sustained high rates of economic growth will be dependent on the government engineering a diversification of the economy away from dependence on gambling-related activities.

Late note On November 23rd Wan Kuok-koi was sentenced to 15 years in jail. “Broken Tooth Wan” was convicted for being a leader of the 14K gang, money laundering, loan sharking and telephone tapping. Eight other defendants were convicted with Mr Wan, and jailed for terms ranging from 18 months to over ten years. The convictions bolstered confidence in Macau’s judicial system. China’s vice-premier, Qian Qichen, said the verdicts were “good for Macau’s stability.”

The political scene

Legislative Assembly The political structure that will govern Macau after the December 20th hand- appointees have been over has continued to take shape during the past three months. On September made— 23rd the chief executive-designate of the Macau Special Administrative Region (SAR), Edmund Ho, appointed seven individuals to the post-handover Legislative Assembly. Of the seven, three are lawyers, two are businessmen, one is a banker and one is an official of Macau’s casino monopoly, Sociedade de Turismo Diversoes Macau (STDM). Three of the seven are Macanese, people of mixed Portuguese and Chinese descent. One of the appointees is Stanley Au, who had run against Mr Ho in the contest to become the first chief executive of the Macau SAR. Even though the result of the race was never in doubt, Mr Au campaigned aggressively against Mr Ho, and his future role in the government had been uncertain as a result. The appointees also included a 47- year-old lawyer, José Manuel de Oliveira Rodrigues, who had been selected to serve on the legislature by Macau’s current governor, Vasco Rocha Vieira.

—and Macau will benefit These appointments do not signal an end to the “through train” in Macau. All from the “through train” but one of the 16 legislators elected in the September 1996 Legislative Assembly poll will retain their positions after December 20th (one legislator

has decided to leave the assembly at the time of the handover). The seven individuals chosen by Mr Ho will simply replace legislators who had been chosen by the Portuguese administration. Not all the legislators keep the same responsibilities within the Legislative Assembly, however. On October 12th Susana Chou was elected as the first president of the post-handover assembly. The existing president, Anabela Ritchie, is Portuguese, and under the Macau SAR’s mini-constitution, the Basic Law, both the president and vice-president of the legislature must be Chinese.

Mr Ho has also appointed Three members of the Legislative Assembly will also serve as advisers to Mr Ho, Exco members— having been appointed to the post-handover Executive Council (Exco). Of the other Exco appointees announced by Mr Ho on September 25th, five are senior government officials and two are leading social figures in Macau.

—and judges Mr Ho has also been working to ensure that no power vacuum exists in the judiciary after the handover. In late July 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 will be sworn in after the handover). Included in the list are three judges who will 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.

Some legislative changes Legislative changes necessary to ensure that the handover to Chinese have been made sovereignty passes smoothly have also been occurring. In late July, legislation was passed protecting freedom of association. This law specifically allows associations to engage in politics and criticise the government. The only groups banned are those that organise for the purpose of committing violence, although the law does allow the courts to restrict the activities of associations.

China’s 100-member Preparatory Committee (PC) has examined 800 pieces of existing legislation for compatibility with the Basic Law. Meeting in Zhuhai in China, the PC’s legal affairs working group recommended that 12 laws be revised and another 19 amended. The working group also recommended that Macau be granted its own territorial waters.

The 14K trial begins— In October the trial of suspected members and leaders of the 14K gang began. A total of 32 people are being prosecuted, including the suspected leader of 14K, Wan Kuok-koi (known as “Broken Tooth Wan”), and a former police detective who is accused of being a member of the gang, Arturo Calderon. That the trial is taking place at all has been welcomed by some, who feared that the trial would be delayed until after December 20th.

—but Mr Ho will not adopt Mr Ho reiterated on Hong Kong television in late August that improving the a heavy-handed approach law and order situation in Macau would be a priority for the new government. towards the gangs Mr Ho’s continued stress on security issues is not surprising, given that the assassination-style murders for which Macau has become famous continued to plague the territory during the middle months of 1999. However, while the chief executive-designate has insisted that gang violence will be dealt with

decisively by his administration, Mr Ho has sought to allay fears that he would be heavy-handed towards criminals in Macau. The chief executive-designate has acknowledged that Macau’s legal system protects suspects’ rights and so limits the ability of the government to halt the activities of the triads by edict.

Portugal permits early These comments suggest that Mr Ho views the People’s Liberation Army (PLA) arrival of the PLA— troops that will be stationed in the SAR after the handover as serving only a limited role in the maintenance of law and order. In late October China and Portugal reached an agreement to allow some members of the PLA to enter Macau even before the handover. This agreement allows China to send a contingent of unarmed, “technical” personnel to Macau before December 20th.

—as China moderates Portugal was previously vehemently opposed to any PLA troops being earlier plans stationed in Macau before the handover. The European government may have become less hostile to the stationing of troops as a result of the scaling down of China’s military ambitions in Macau. Originally, it was thought that 1,000 Chinese troops would be stationed in Macau, a large number in such a small territory. The Macau SAR garrison is now expected to consist of only 700-800 troops. The two sides have still to decide whether the troops will be stationed in Zhuhai or Macau. The main PLA contingent will still enter Macau in the early hours of December 20th, marching into the city from Nanping over the soon-to-be completed Lotus Flower Bridge.

The US will recognise In September the US government said it would recognise the Macau passports Macau passports that will be issued by the SAR from December 20th. The US will also offer holders of Macau passports long-term visitor visas—similar to the favourable treatment received by the holders of Hong Kong passports. After the handover holders of Macau travel permits will be able to obtain visas to visit the US, but the length of permitted stays will be shorter. Also in September, the US government reaffirmed that Macau-issued Portuguese passports will be treated in the same way as those from Portugal—documents that currently allow visa- free access to the US.

In September Macau signed a fiscal technical co-operation agreement with Portugal. Experts from Portugal will train local officials in assessing taxes and meting out fiscal justice.

Economic policy and the economy

Two ferry firms have In July, the two main boat services that run between Hong Kong and Macau, merged— East Asia Jetfoils and Turbo Cat, were merged. STDM, which was the parent of one of the services and is now the owner of both, will certainly benefit from this development.

—and an insurance joint- In October it was announced that East Asia Aetna Life Insurance, a 50:50 joint venture is launched venture between Bank of East Asia and Aetna Insurance, would receive a licence to form an insurance company in Macau. The company views the Macau market as a step towards gaining a foothold in the far larger Chinese market.

Construction activity has Economic statistics suggest that performance of Macau’s economy in the first contracted— six months of 1999 has been mixed. The construction industry continued to stagnate as a result if the huge glut of vacant housing units that exists in Macau: the number of licences issued for new building projects fell by 53.6% year on year in the first six months of 1999. In the same period, loans and credits granted to Macau residents also fell, by 3.3% year on year. Finally, the unemployment rate averaged 6.3% in the second quarter of 1999—2.1 percentage points than it had been in the same period of 1998.

—but exports— Trade statistics suggest, however, that a recovery is beginning. The value of merchandise imports rose by 6.1% year on year in the first half of 1999, from Mptc7.7bn (US$963m) to Mptc8.1bn. This seemed to be produced a recovery in domestic demand: the value of consumer goods imports increased by 6.1% year on year in the first half of 1999; capital goods imports surged by 74.6%.

—imports— The value of merchandise exports, which fell by 0.3% in 1998 as a whole, also rose in the first six months of 1999. The value of merchandise exports in the first half of this year was Mptc8.1bn, 8.1% higher than the value in the same period late year. Exports of all categories of goods rose in the first six months of the year. Exports of electronics and footwear rose particularly sharply, increasing by 47.4% and 23.8% year on year respectively. The merchandise trade balance improved, moving from a deficit of Mptc128m in the first half of 1998 to a surplus of pataca in the same period of 1999.

—and the number of The number of tourists visiting Macau increased by 6.2% year on year in the tourists increases first six months of 1999, rising from 3.4m to 3.6m. Significantly, air arrivals have jumped by 37% in the first half of this year compared with the same period last year. This has provided a boost to Macau’s international airport, which only opened in December 1995.

Macau: foreign trade, Jan-Jun (MPtc m unless otherwise indicated) 1998 1999 % change Exports fob 7,525.3 8,138.6 8.1 Imports cif –7,653.0 –8,121.2 6.1 Visible trade balance –127.7 17.4 –113.6 Source: Macau Economic Services.

Macau: exports by sector (MPtc m unless otherwise indicated) 1998 1999 % change Textiles 6,226.0 6,720.9 7.9 of which: garments 5,549.4 5,800.6 4.5 Other sectors 1,299.3 1,417.7 9.1 of which: toys 42.4 19.6 –53.8 electronics 46.2 68.0 47.2 footwear 186.0 230.2 23.8 Source: Macau Economic Services.

Macau: imports by end-use category (MPtc m unless otherwise indicated) 1998 1999 % change Consumer goods 1941.7 2060.1 6.1 Raw materials & semi-manufactures 4496 4292.3 –4.5 Capital goods 745.1 1301.2 74.6 Fuels & lubricants 470.2 467.6 –0.6 Source: Macau Economic Services.

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 45

Quarterly indicators and trade data

Hong Kong: quarterly indicators of economic activity 1997 1998 1999 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Industrial production Monthly av Manufacturing 1986=100 117 131 129 101 112 117 111 91 n/a Construction, private Qtrly totals New building work: completed no. 208 198 270 157 211 264 175 159 178 residential “ 34 101 165 75 122 156 100 94 90 Passenger arrivals Total '000 12,942 13,161 13,861 13,404 14,016 14,842 15,480 15,250 15,865 Prices Monthly av Consumer prices:a all items 1994/95=100 114.0 115.6 117.1 117.8 119.1 118.8 116.1 115.0 113.5 food “ 108.7 111.3 110.5 112.3 112.1 111.9 110.8 110.7 109.9 Change year on year: all items % 5.6 6.1 5.5 5.1 4.5 2.8 –0.9 –2.4 –4.7 Share pricesb Jul 31st 1964=100 14,286 15,183 10,624 10,751 9,287 7,698 10,202 10,102 13,004 Employment End-Qtr Manufacturing '000 315.4 309.2 288.9 280.7 271.6 257.0 245.5 248.6 n/a Money M1: HK$ bn 226.86 223.66 208.09 201.92 188.21 188.74 197.67 200.16 201.21 change year on year % 14.9 8.4 –4.3 –7.3 –17.0 –15.6 –5.0 –0.9 6.9 M2 HK$ bn 2,741.4 2,786.2 2,744.3 2,808.5 2,817.0 2,990.6 3,066.1 3,075.1 3,020.6 Deposits: DTCsc “ 14.52 14.82 14.53 12.53 10.55 9.85 9.90 7.97 6.19 Foreign traded Qtrly totals Domestic exports fob HK$ bn 51.20 58.84 56.75 41.37 49.38 51.82 45.99 36.33 41.79 Re-exports fob “ 305.83 334.15 335.32 269.52 296.55 300.62 292.59 246.77 283.89 Imports cif ” 405.35 423.95 423.77 343.54 380.90 358.70 346.78 296.03 337.91 Exchange holdings End-Qtr Foreign exchange US$ bn 67.60 88.14 92.80 96.80 96.48 88.37 89.60 89.51 88.52 Exchange rate HK$:US$ 7.749 7.739 7.750 7.747 7.749 7.748 7.747 7.749 7.756

Note. Annual figures of most of the series shown above will be found in the Country Profile. a Medium-income group. b Hang Seng Index. c Deposit-taking companies. Unadjusted for foreign currency swap deposits. d Merchandise.

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; IMF, International Financial Statistics.

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 46 Quarterly indicators and trade data

Hong Kong: foreign trade (HK$ m) Domestic exports fob Re-exports fob Imports cif Jan-Dec Jan-Jul Jan-Jul Jan-Dec Jan-Jul Jan-Jul Jan-Dec Jan-Jul Jan-Jul Main commodities 1998 1998 1999 1998 1998 1999 1998 1998 1999 Live animals 0 0 0 52 34 14 3,542 1,991 2,078 Meat & products 8 4 3 5,724 3,388 3,321 12,606 6,980 6,850 Fish & preparations 265 191 102 2,315 1,353 1,359 12,440 7,645 6,779 Cereals & products 189 109 104 530 295 259 3,541 2,021 1,905 Fruit, vegetables & products 51 30 23 4,220 2,463 2,258 12,348 7,578 6,889 Beverages, tobacco & mnfrs 1,590 1,121 532 8,017 4,950 3,996 12,028 6,847 6,281 Hides & skins, undressed 23 13 3 2,260 1,235 1,432 3,499 2,078 1,793 Textile fibres & waste 40 27 21 4,606 2,763 1,679 6,472 3,809 2,425 Metal ores & scrap 1,161 713 563 2,998 2,072 1,150 2,757 1,955 890 Mineral fuels & lubricants 613 320 331 9,503 7,380 2,773 24,795 15,370 15,632 Chemicals 6,753 4,155 3,202 66,565 39,493 36,839 91,219 54,756 49,498 Leather & manufactures 260 173 77 12,984 7,386 7,294 15,949 9,024 8,851 Paper & manufactures 2,319 1,451 833 14,473 8,522 7,750 22,278 13,659 12,312 Textile yarn, cloth & mnfrs 10,767 6,343 5,632 90,234 54,325 48,473 104,439 63,338 55,443 Non-metallic mineral mnfrsa 606 360 307 19,952 11,416 11,738 35,496 21,172 22,518 Iron & steel 157 98 74 17,006 10,800 7,626 27,415 17,759 12,491 Non-ferrous metalsb 1,571 894 1,123 14,410 7,985 6,979 25,357 16,100 11,398 Metal manufactures 2,362 1,542 922 20,623 11,620 11,814 22,746 13,175 12,176 Machinery incl electric 46,393 28,167 21,890 393,664 222,796 224,486 511,240 299,548 276,007 Transport equipment 78 52 34 13,736 9,516 6,158 51,574 35,817 15,203 Travel goods, handbags etc 227 148 111 33,620 20,341 19,994 25,941 15,686 15,658 Clothing 74,874 40,988 39,407 96,799 53,026 52,890 110,744 60,803 60,632 Footwear 25 15 26 51,913 32,445 28,274 44,982 27,947 24,298 Scientific instruments etc 18,447 10,351 9,099 71,531 40,550 38,982 72,219 42,478 39,831 Miscellaneous manufactures, incl plastic products 14,892 8,816 7,635 155,544 84,176 84,410 107,691 60,670 60,326 Total: merchandise 188,454 108,905 94,342 1,159,195 666,939 636,715 1,429,092 847,078 761,254 gold & specie 1,992 0 610 4,826 1,644 526 17,611 15,252 7,138 continued

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 47

Domestic exports fob Re-exports fob Imports cif Jan-Dec Jan-Jul Jan-Jul Jan-Dec Jan-Jul Jan-Jul Jan-Dec Jan-Jul Jan-Jul Main trading partners 1998 1998 1999 1998 1998 1999 1998 1998 1999 UK 10,058 5,543 5,297 42,259 22,280 23,149 29,672 18,128 15,154 Belgium-Luxembourg 513 268 321 7,438 4,535 4,219 7,634 4,800 5,066 France 3,171 1,762 2,038 21,316 11,880 12,214 23,492 14,470 8,603 Italy 1,223 765 552 13,309 7,649 7,706 23,500 14,488 11,842 Netherlands 4,736 2,778 2,432 20,333 11,197 10,516 12,205 7,444 5,989 Germany 9,805 5,475 4,914 42,161 24,061 22,953 32,639 20,935 16,143 Switzerlandc 1,405 808 683 7,196 3,936 3,912 13,896 8,126 8,776 US 54,842 30,038 27,028 259,856 144,473 143,475 106,537 64,361 54,831 Canada 3,598 2,133 1,727 17,817 9,699 10,068 9,246 5,597 4,523 UAE 494 288 195 7,851 4,767 3,659 1,871 1,042 1,233 Saudi Arabia 96 52 34 3,426 1,880 1,810 1,601 972 1,011 China 56,066 33,785 28,212 407,366 243,681 219,117 580,614 328,293 326,078 Indonesia 676 395 412 3,357 1,835 2,707 14,035 8,553 6,657 Japan 6,435 4,013 3,198 64,194 36,676 36,099 179,947 111,233 88,428 Malaysia 1,821 1,111 1,058 8,735 5,060 5,009 32,479 19,253 16,164 Philippines 1,991 1,213 1,291 11,081 6,306 6,074 10,248 5,894 6,046 Singapore 5,103 3,150 1,991 25,625 14,064 15,921 61,457 38,451 32,512 South Korea 1,563 864 909 12,241 104 209 68,837 41,484 35,929 Taiwan 6,505 3,786 2,878 27,368 16,156 15,492 104,075 61,815 55,605 Thailand 1,598 979 752 9,809 5,694 5,864 22,234 13,284 12,702 South Africa 293 175 113 4,294 2,558 1,956 3,220 1,930 2,102 Australia 1,639 979 744 16,259 9,012 8,810 14,560 9,065 6,756 Total: merchandise 188,454 108,905 94,342 1,159,195 666,939 636,715 1,429,092 847,078 761,254 gold & specie 1,992 0 610 4,826 1,644 526 17,611 15,252 7,138 a Including precious stones. b Including precious metals. c Including Liechtenstein.

Source: Census and Statistics Department, Hong Kong External Trade.