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Home > Country Profiles > Hong Kong

Country Profiles

Hong Kong - Economy

Whitaker's Almanack Version

Economy and Trade

A former British colony, Hong Kong became a special administrative region (SAR) of China in 1997, when Britain’s 99-year lease of the New Territories, north of Hong Kong Island, expired. During the 150 or so years of the United Kingdom’s rule, Hong Kong was transformed from a fishing and farming community into one of the world’s major cities and financial centers. China has been keen to preserve Hong Kong’s prosperity, and the SAR is governed under the principle of “one country, two systems,” under which it retains a high degree of autonomy. China has also pledged to preserve Hong Kong’s economic and social systems for 50 years from 1997.

China controls Hong Kong’s foreign and defense policies, but the SAR has its own currency and customs status. Hong Kong’s constitution, the Basic Law, allows for the development of democratic processes. However, Beijing can veto changes to the political system, and, according to the BBC, “pro-democracy forces have been frustrated by what they see as the slow pace of political reform.” Hong Kong’s economy, once based on manufacturing, is now reliant on services. As well as being a major corporate and financial center, the port of Hong Kong channels many of China’s exports to the outside world. In 1997, the International Monetary Fund (IMF) reclassified the territory as an advanced economy.

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Economic Policy over 12 Months

Hong Kong’s open economy is dependent upon global trade, and the intermediation of capital. Consequently, economic policy has focused heavily on improving structural and institutional arrangements to maintain the territory’s competitive advantage. The government has thus concentrated on improving skills, maintaining liberal policies, and containing business costs, rather than on short-term macroeconomic policies. However, the authorities have acted decisively to boost the economy during times of economic difficulty, such as the Asian 1997–1998 financial crisis. This has also proven true during the current global economic malaise.

Hong Kong entered the downturn better placed than many other economies. The IMF, in its December 2008 annual assessment of the economy, said: “The authorities’ sound economic policies and steady strengthening of financial-sector regulation, and supervision in recent years have provided valuable protection in dealing with the consequences of the global financial turmoil. In addition, the various steps that the authorities have taken in recent months have bolstered stability, and buttressed the economy’s resilience to spillovers.”

In the latter part of 2008, the Hong Kong government implemented a range of measures to stimulate domestic demand, including a sizable fiscal package, and sought to boost liquidity in financial markets. The IMF said that the “well-targeted infrastructure investments should boost the economy’s potential by further increasing skill levels and productivity.”

The IMF also commended the management of the country’s financial sector, which appears to have avoided the worst excesses (in terms of exposure to toxic debt) of its counterparts in Western economies. The IMF said that the SAR’s banks had “managed risk prudently and provisioned for losses,” and that they were “well positioned” to handle the effects of the global economic downturn.

The decision to peg the Hong Kong dollar to the US dollar in 1983 meant that the Hong Kong authorities relinquished their ability to control interest rates and the money supply. Thus, fiscal policy is of much greater importance in Hong Kong than in other economies. However, according to the IMF’s December 2008 report, the peg is a “simple, transparent, exchange-rate arrangement that has, over the past 25 years, provided an anchor for monetary and financial stability in Hong Kong SAR.” Fortunately, during the current global economic downturn, the business cycles in Hong Kong and the United States have also been synchronized, and thus Hong Kong has benefited from the Federal Reserve’s policy of slashing interest rates in 2008 and 2009.

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Economic Performance over 12 Months

Hong Kong endured six years of deflation, which began in 1997, before the economy embarked on a five-year-long period of expansion in mid-2003, buoyed by the rapid growth of the mainland Chinese economy. The SAR enjoyed average annual growth of more than 7% during the four years ending in 2007. According to the IMF report published in December 2008, in 2008 unemployment fell to the lowest point in more than a decade, while rising disposable incomes propelled private consumption, and productivity growth was high.

However, the IMF pointed out: “As one of the most open economies in the world and with its focus on financial and trade services, [the] Hong Kong SAR is highly exposed to the unfolding crisis in international financial markets, and to the slowdown in the global economy. There are now clear signs of economic deceleration.” The economy began to falter in the first half of 2008. Net exports of goods and services fell during this period, “as the terms of trade worsened and demand from the European Union, Japan, and the United States weakened,” according to the IMF.

Thus, while GDP grew by 7.3% year on year in the first quarter of 2008, this fell to 4.3% and 1.7%, respectively, in the second and third quarters, and in the last three months of the year the economy contracted by 2.5%, leaving overall growth during the year at 2.5%. The economy’s descent steepened in early 2009 as domestic demand came under pressure. Retail sales of valuables and consumer durables began falling in September 2008, and this process continued into 2009.

The unemployment rate climbed to 5% in the three months ending February 2009, from 4.1% in the last three months of 2008. Analysts feared that if the rate of job losses continued at the same pace, the unemployment rate would surpass its June 2003 peak of 8.5% by the end of 2009. Certainly, the outlook for the rest of the year appears grim. In March 2009, Credit Suisse warned that Hong Kong’s economy would contract by around 4% in 2009. Hong Kong’s economic fortunes are highly dependent on southern China, and the neighboring province of Guangdong, which exports much of its output via the SAR. Beijing’s huge US$580 billion stimulus package will help to offset the impact of plummeting global demand on Guangdong, but these measures will take time to work their way through to Hong Kong.

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Support for Inward Investment and Imports

The government actively encourages investment in Hong Kong, and the territory offers many advantages to investors, including very low taxes and a world-class infrastructure. According to the government, the Heritage Foundation/Wall Street Journal in the United States, and the Cato and Fraser Institutes of Canada have consistently rated the SAR as the world’s freest economy. A government agency, Invest in Hong Kong, provides support to foreign investors. Information can be found on its website.

For more information on importing goods into Hong Kong, see the guide published by Invest in Hong Kong.

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Tax Exemptions

Hong Kong operates a low and simple tax regime. The profit tax rate is the same for foreign and local companies, a low 16.5%. The actual tax bill is often even less after various deductions and depreciation allowances. There is no capital gains tax in Hong Kong. The Inland Revenue Department publishes a detailed guide to the tax system; see its website for more information.

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Statistics

GDP growth: 2.5% (2008, government figures)

GDP per capita: US$22,000 (2008 est.)

CPI: 0.8% (February 2009, government figures)

Key interest rate: 0.5% (March 2009)

Exchange rate versus dollar: Hong Kong dollars (HKD) per US dollar—7.751 (2008)

Unemployment: 5.0% (Dec 2008–Feb 2009, government figures)

FDI: US$1.235 trillion (2008, est.)

Current-account deficit/surplus HK$238.4 billion (government figures)

Population: 7,008,900 (end 2008, government figures)

Source: CIA World Factbook except where stated

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Further reading on Hong Kong

Websites:

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