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.
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 1997–98 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.” In February 2009, the government announced an expansionary budget and in May supplemented this spending with a further HK$16.8 billion (1% of GDP) fiscal package. The authorities estimate that the discretionary policy measures taken since 2008–09, amounting to over 5% of GDP. In February 2010, Financial Secretary John Tsang budgeted HK$20.4 billion (US$2.6 billion) for the year starting April 1 to support growth. The stimulus package included personal income- tax rebates and property-rate waivers. The authorities have since been measured in their approach to deciding the pace of withdrawal of fiscal stimulus.
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 benefited from the Federal Reserve’s policy of slashing interest rates in 2008 and 2009.
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.
The economy, which relies on the financial sector and exports, was battered by the global economic crisis, with the economy contracting by 2.5% in the final quarter of 2008, leaving overall growth during the year at 2.5%, down from 6.4% in 2007. In the first quarter of 2009 the downturn intensified with the economy shrinking by 7.5%.
However, economic activity then began to respond to the huge stimulus package launched in China and the expansionary measures unveiled in the territory. It emerged from recession in the second quarter of 2009, and grew by 2.3% quarter-on-quarter in the final three months of 2009. Nevertheless, during the course of the year the economy contracted by 2.7%., the worst performance since 1988. However, this was far less than the 3.3% contraction the territory’s government had predicted in November 2009.
In the February 2010 budget, the government forecast GDP growth for Hong Kong of between 4% and 5% for 2010 as the economy recovers. But it also warned that major risks remained, including the possibility of a property bubble, as prices had risen sharply over the previous year. A 29% surge in house prices—pumped up by buyers from mainland China—raised fears that prices were rising too fast.
Hong Kong’s jobless total fell to a 15-month low in the first quarter of 2010, standing at 4.4%, down from a peak of 5.5% in mid-2009 following the global economic crisis. Other signs of recovery in 2010 included the news that retail sales rose at the fastest pace in more than 20 years in February.
The IMF’s country report on Hong Kong, released in December 2010 put 2010 growth at 6.75%, moderating to between 5% and 5.5% through 2011. Net exports have been buoyed by vigorous growth in the Chinese mainland and the ongoing global recovery, particularly across the Asia Pacific, the IMF said. There has also been an increase in consumer spending as labor markets improved and confidence returned to the economy. One concern is inflation, which has been driven upwards by higher costs for utilities and for some services such as tourism and transport.
The territory’s banks have come through the downturn in good order. The IMF pointed out that despite some compression of net interest margins the overall profitability of Hong Kong’s banks has risen through higher fees, greater trading volumes and investment flows. “Capital levels are well in excess of regulatory requirements, average loan to deposit ratios are low and liquidity ratios are very high,” the IMF said. The monetary base has expanded rapidly over the last few years as money has flowed into the region. This has pushed the Hong Kong dollar upwards in value. Domestic loans for investment in Hong Kong increased by 20% through 2010 and into early 2011, with about half the loans going to the property sector.
There has been some concern over the possible formation of a housing bubble in both mainland China and Hong Kong. Residential property prices in Hong Kong have grown at a rate that is way ahead of comparable countries in the region and are approaching their peak as far as the pricing of mass housing is concerned. However the authorities have tightened loan to value ratios and debt service rules and have increased transaction taxes to deter speculation. Some of the temporary stimulus measures introduced in response to the downturn continued into the March 2010 to March 2011 tax year and the government ran a deficit of 1.5% of GDP in the year to March 31, 2011. In his 2011–12 Budget, Hong Kong’s financial chief John Tsang said that the region’s economy would grow by between 4 and 5% in 2011 and that inflation would be around 4.5%. The relatively fragile economies of Europe and the US would make the year ahead a challenging time for exporters in Hong Kong and indeed, across Asia, he warned.
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.
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.
GDP growth: 5.5% (IMF, 2011)
GDP per capita: US$45,900 (2010 est.)
CPI: 4.5% (IMF, 2011 est.)
Key interest rate: 0.5% (December 31, 2010); Commercial bank: 5% (December 31, 2010 est.)
Exchange rate versus US dollar: HK$7.78 (2010)
Unemployment: 4.3% (2010 est.)
FDI: US$962.2 billion (December 31, 2010 est.)
Current-account surplus: US$18.07 billion (2010 est.)
Population: 7,122,508 (July 2011 est.)
Source: CIA World Factbook except where stated