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Economy
Hong Kong's economic growth has been hit by the Asian financial crisis, and will continue to be affected in the short to medium term. As the Chief Executive Mr Tung Chee Hwa commented on May 29, 1998 : "Hong Kong is now in the depths of a major economic adjustment, the result of which will be painful." Sustained speculative attacks on the Hong Kong Dollar in October last year have led to higher interest rates, which in turn have caused a sharp fall in property prices and hurt business. The economy declined by around 2% in real terms in the first quarter of 1998 - the lowest figure in 13 years - after growing by 2.7% in the fourth quarter of 1997 and recording an annual growth of 5.3% for 1997 as a whole. GDP growth for 1998 is likely to be meagre. The fallout has been painful. Tourism, retail, hotels and housing sectors have all suffered. Interest rates are high. Unemployment has edged up. The stock market remains unsettled. There is an up-side-lower housing prices and rents will help Hong Kong regain its competitive edge. Inflation has dropped and is likely to continue falling. The Hong Kong Dollar has remained rock solid in the face of speculative attacks. Imports from East Asia are cheaper. Measures were announced by the government on May 29 to stimulate the tourism industry, stabilise the property market, improve the liquidity of banks and increase the efficiency of the financial system. These were in addition to a wide range of economic stimuli announced in the 1998/99 Budget in February, including the biggest tax concessions in Hong Kong's history for individuals and business and massive spending on infrastructure. Despite the turmoil, the Asian financial crisis has highlighted how Hong Kong is different from other markets in a number of important ways:
As the Asian Wall Street Journal commented on June 2: "It is important to remember that Hong Kong is a thriving financial centre, not a domino." The crisis also presented the government and financial market regulators with an unexpected opportunity to critically test and review those systems under battle conditions, and in particular to look closely at the currency defence mechanisms and the operation of the securities and futures markets. The Hong Kong and US Dollars have been linked since 1983 through a currency board system under which inter-bank interest rates rise automatically when there is selling pressure on the Hong Kong Dollar. This makes it difficult to speculate against the Hong Kong Dollar because inter-bank rates can become so high that selling Hong Kong Dollars becomes too costly. Unlike elsewhere, the Hong Kong Monetary Authority (HKMA) does not print money to ease temporary pain while storing up greater troubles later. Every Hong Kong Dollar issued is backed by the equivalent in US Dollars at the linked exchange rate of HK$7.80 to US$1. Currently the Hong Kong Dollar is backed eight times by US Dollars held with the HKMA. A report of the review released in April 1998, found that the banking system and the currency defence mechanisms were basically sound but could be fine-tuned in several areas. The review found that: The linked exchange rate system had served Hong Kong well in maintaining currency stability and must be preserved. It found that the HKMA should continue its practice of leaving the foreign exchange market very much alone except when it needed to establish a passive presence if there was a risk of instability. For the banking sector, the emphasis will be on ensuring banks prudently manage risks and pay special attention to the quality of assets so as not to be over-exposed to areas which are interest-rate sensitive. (Hong Kong's banking sector, nevertheless, is strong with capital adequacy ratios of locally incorporated banks averaging 17% and bad debt ratios of less than 2%.) Several areas needed fine-tuning within the securities and futures market, including:
On May 29, the government announced that the Hong Kong Mortgage Corporation (HKMC) would streamline the purchase programme for residential mortgages. This would provide banks with greater certainty on the amount of loans they could sell to the HKMC within a specified period and should also give them greater assurance about the availability of liquidity. It was also announced that the HKMA and major market participants were working closely on how to kick-start the development of a HK Dollar repo market. This would make fuller use of the liquid assets in Hong Kong's banking system - some US$138 billion - as well as facilitate interbank lending because of the security of such high-quality collateral. The collapse of the investment house Peregrine, the broker-related finance company CA Pacific Finance Limited and the brokerage Ming Fung Group were the most high-profile casualties of the financial turmoil. Peregrine's failure was primarily due to its substantial exposure to certain fixed income investments in the region and was not related to the group's business under supervision by the SFC in Hong Kong. The closure of CA Pacific Finance Limited highlighted a regulatory loophole which has led to a review on the regulation of share margin financing activities with a view to strengthening protection for investors and enhancing prudential regulation of such companies. The collapse of Ming Fung in May was the largest failure of a brokerage in the 12-year history of the unified stock exchange. The group's managing director was arrested for alleged theft stemming from losses incurred on futures trading. The Securities and Futures Commission has applied to wind up the group to protect the group's assets and to facilitate orderly return of the assets to potential creditors. Hong Kong was the world's 8th-largest trading entity in goods in 1997 - the 5th-largest if the European Union is taken as a single market. Total trade in goods in 1997 reached $3,071 billion (US$396.7 billion), an increase of 4.7% over 1996. Hong Kong accounted for 3.6% of the world's total merchandise trade in 1997, about the same share as 1996. Hong Kong was the world's 11th largest services trading entity in 1996. Other world trade figures for 1997:
Total trade in goods for the first four months of 1998 decreased 3.5% year-on-year. Hong Kong has been shielded somewhat from the fallout of the Asian crisis by its trading partner make-up - the Mainland of China accounts for 36% of all Hong Kong trade while other major trading partners are the USA, Japan, Taiwan, Singapore, Germany, South Korea and the United Kingdom. Hong Kong is still, by far, the most popular destination in Asia (excluding the Mainland) and one of the most popular destinations in the world. In 1997, some 10.4 million people visited Hong Kong, compared with a record 11.7 million in 1996. However, the tourist industry has been hit by the fallout from the economic crisis. Arrivals in the first four months of 1998 are down 24% over 1997. Arrivals from within Asia are down about 26% compared with 1997. The biggest drop came from Japanese and South Korean tourists, down about 58% and 65% respectively over the same period, year-on-year. To counter the drop, the Hong Kong Tourist Association has launched a series of initiatives to lure back visitors through special deals and promotions. In May, the HKTA launched a $173 million (US$22 million) new destination campaign promoting Hong Kong as the 'City of Life' - dynamic and diverse, full of energy, colour and excitement, offering value for money and so much to see and do in so little time and space. New measures announced by the government at the end of May will simplify entry requirements for visitors from Taiwan, as well as increase by more than 130 000 a year the Hong Kong Group Tour Scheme quota for visitors from the Mainland. This will hopefully lead to higher tourism receipts from these two major source markets, which will in turn boost the retail, hotel and catering sectors. The 1998/99 Budget also contained government help through:
Hong Kong's new state-of-the-art airport, with two runways and 24-hour operation, is expected to stimulate the tourism industry. It will provide increased capacity, greater flexibility in airline scheduling and scope to introduce new services to and from Hong Kong. Hong Kong's unemployment rate hit a 14-year high of 3.9% in the three months from February to April 1998 as the fallout from the Asian crisis began to bite, particularly in the construction and consumption-related sectors such as retail and restaurants. Several big-name stores have either closed or laid off staff. While not high by world standards, the number of jobless is causing considerable concern in Hong Kong, where an unemployment rate of around 2% or lower is regarded as the norm. A top-level Task Force on Employment, headed by the Financial Secretary, met for the first time on June 3 and announced that at least 100 000 job vacancies would come on line over the next 18 months. One problem is job mismatch - at the end of May there were more than 120 000 unemployed but there were also 50 000 job vacancies in the labour market. The government is looking at ways to address this problem through training, retraining and the strengthening of job matching and employment services. Efforts are being made by the Employees Retraining Board to develop special tailor-made retraining programmes to match job vacancies. The Vocational Training Council is running a new Business Starter Programme to help potential owner-managers set up small businesses. It is also providing skills upgrading and new training courses in a wide range of areas - from printing and electronics to insurance and information technology. Small and medium enterprises will receive help through the Pilot Credit Guarantee Scheme for which a $500 million (US$64 million) capital injection has been granted to the Hong Kong Export Credit Insurance Corporation to enable businesses to obtain financing from lending institutions. Looking ahead, overall employment prospects are positive. There are various new growth areas which will generate substantial employment opportunities: Infrastructure development : The HKSAR will spend $235 billion (US$30 billion) over the next five years on new railways and roads, reclamations and housing. This will generate employment opportunities in the construction and related sectors. For example, about 13 000 jobs will be created by the end of 1999 on the KCRC West Rail and MTRC Tseung Kwan O extensions. New Hong Kong International Airport : About 6 000 new jobs to come on line during initial opening phase. Liberalisation of the telecommunications market: Thousands of jobs to be created at the technical, managerial and professional level as well as those supporting the building of telecommunications infrastructure, such as sub-contractors, engineers and construction workers. Mandatory Provident Fund (MPF) Scheme: Significant employment opportunities expected in the financial services sector, with additional jobs in banks, trustees and insurance companies. During the past year, Hong Kong finalised plans to introduce a Mandatory Provident Fund (MPF) Scheme as a long-term measure to provide retirement benefits for employees and the self-employed. The MPF Scheme will have far-reaching and positive effects in several areas. It will add a new breadth and depth to the capital market and strengthen Hong Kong's position as an international financial centre. Contributions to the MPF will amount to about $10 billion (US$1.3 billion) a year and increase to about $60 billion (US$7.7 billion) annually when the system matures.
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