Hong Kong Economy Update

Hong Kong Economy Update - End of 2007

XinHua News reported the Gross Domestic Product (GDP) of Hong Kong grew by 6.3 percent in 2007. Reuters News also noted that it was much slower than the annual average of 7.7% over the past three years. However, ecomonists expect a slowdown in 2008 because of weakening demand from the United States, Hong Kong’s biggest export market after China.

Hong Kong thrives in China’s shadow

The bulk of Hong Kong’s re-export business relies on China. According to Reuters, Beijing’s decision in 2003 to allow its citizens to travel to Hong Kong gave the territory a much-needed boost as Chinese consumers started spending their new-found wealth. Moreover, in recent years, China has allowed yuan banking services in Hong Kong and the first yuan denominated bond is due to be sold from the territory soon.

In other industries too, from trade to supply-chain services, Hong Kong is having to cede market share to mainland cities. According to the news report, many multinational companies doing business with China through Hong Kong say business is becoming easier because the territory has a complete package of financial services within its central business district.

‘‘Hong Kong is probably 20 years ahead of China in terms of the quality of its judiciary and 20 years ahead in terms of the independence of its regulatory authorities, for example of financial markets,’’ said Mr Bob Broadfoot, managing director of Hong Kong-based Political and Economic Risk Consultancy Ltd.

Some of the threats to Hong Kong:

- The biggest threats to Hong Kong’s competitiveness are rising costs — office rents are among the highest in the world — and worsening pollution. These make it harder to attract foreign professionals. Hong Kong has the world’s highest average rents for expatriate workers, well above Tokyo, New York and London

- Problems with shortage of talent as the financial sector expands.

- A rising yuan could present a longerterm inflation threat since Hong Kong imports most of its food from China. The yuan, which rose above parity with the Hong Kong dollar in January for the first time in a decade, is expected to rise about 5-6% this year against the US dollar.

However, the ability to evolve and change is Hong Kong’s strength. The economy was struck by the Asian financial crisis in 1997-98 and later by Sars, but in the past three years it has expanded on average 7.6% a year, its fastest rate since the late 1980s.