Battered by Sars and the fallout from the Iraq war, Hong Kong has managed to achieve something of a recovery in the second half of 2003 as its economy and stock market have bounced back strongly.
For Hong Kong, 2003 has proved to be a year of acute challenges, one in which the territory's already troubled economy was hit by severe acute respiratory syndrome (Sars), a lethal flu-like disease, and the fallout from the Iraq war on global trade and tourism. On the political front, increasing discontent with chief executive Tung Chee-hwa boiled over on July 1 when half a million people marched against the government's attempts to introduce a security bill that critics described as draconian.
However, 2003 has also been a year in which the territory's people reaffirmed some of their core values, displaying their respect for basic freedoms and the city's famous spirit of resilience. The economy and stock market bounced back strongly in the second half of the year.
Since the territory's handover to mainland China by its former British colonial rulers in 1997, Hong Kong's economy has struggled to recover its former glory. The Asian financial crisis in 1997/98, which sparked a 50 per cent fall in the territory's once mighty property market, was followed by the bursting of the global technology bubble in 2000 and the September 11 terrorist attacks in 2001.
Hong Kong has also been getting to grips with the problem of how to redefine its relationship with an increasingly prosperous mainland China. The territory's economy began 2003 on a firm note, growing 4.5 per cent in the first quarter. But this was undermined by the spread of Sars from Guangdong province across the border in March. GDP in the three months ended June 30 – the period when Sars was at its height – declined 0.5 per cent compared with a year earlier, or 3.7 per cent quarter-on-quarter. The fall was driven by a decline in tourist numbers of 58 per cent during the quarter, compared with 21 per cent growth in fullyear 2002, as mainland tourists cancelled trips to the territory and long-haul visitors stayed away.
Unemployment reached a peak of 8.8 per cent by mid-year as Sars hit the restaurant, tourism and entertainment sectors, which employ most of the territory's large numbers of unskilled workers. The outbreak forced the government to cut its forecasts for fullyear GDP growth for 2003 to about 2 per cent, compared with earlier forecasts of 3 per cent and against 2 per cent for 2002.
Trade, however, has remained on a steady upward trajectory throughout the past few years, driven by a boom in China's export industries. Trading volumes grew 11.9 per cent between January and August 2003 largely on the back of a 14.7 per cent rise in re-exports, comprised mostly of goods passing through Hong Kong on their way to and from China.
A key long-term challenge on this front is the rise of competition from lower-cost ports on the mainland. Hong Kong is still the world's busiest port, thanks to its middleman role in handling trade to and from China, but this role is diminishing. Today, it handles only about 30 per cent of the mainland's foreign trade compared with 55 per cent five years ago, prompting some to describe the ports sector as a 'sunset' industry.
Trade deal with the mainland
The economy may be helped by the Closer Economic Partnership Arrangement (Cepa), announced in 2003, a trade deal between the mainland and Hong Kong designed to provide companies from the territory with earlier and wider access to the giant market across the border. The pact will eliminate tariffs on 273 different products and facilitate investment in mainland China for 18 service sectors, including telecoms.
Once Cepa comes into effect in January 2004, 90 per cent of Hong Kong's exports to mainland China will be tariff-free, rising to 100 per cent by 2006. This compares with the current figure of 20 per cent. Some see the pact, however, as intended mostly to shore up sentiment in Hong Kong. It remains uncertain what benefits it will bring to the territory's service industries, which today contribute the bulk of its gross domestic product. Most of its manufacturing base shifted to the mainland 20 years ago.
Another brighter note for Hong Kong has been the growth of its role as an air-freight hub for southern China. Air cargo volumes have risen on average 10 per cent a year since 1997; as of August 2003, they were up 10.6 per cent against a year earlier despite the tough economic conditions.
As mainland factories move up the value chain into higher-end electronics and other products, the demand for reliable international air cargo services has grown. Hong Kong's international airport, Chek Lap Kok, has an edge over rival mainland facilities because the territory is able to negotiate airline treaties directly with foreign governments. Other Chinese cities still have to negotiate via the central government in Beijing.
The strength of the export sector has been in sharp contrast with Hong Kong's domestic economy, which has been depressed by a prolonged decline in the property market. However, signs of an upturn in real estate prices are beginning to emerge. Some analysts have forecast that the market, once a mainstay of the local economy, had bottomed out in 2003 and would rise by about 5 per cent in 2004.
Take-up of residential apartments was expected to rise to 27,000 units by 2005, according to investment bank Credit Agricole Indosuez, up from 20,000 in 2002, as GDP growth picks up. On the supply side, completions were expected to fall to 20,000 units by 2005 from 34,000 in 2002. Grade A office space, however, was expected to take longer to recover, with prices falling 12 per cent in both 2003 and 2004.
Any upturn in property prices would be good news for the government, which is keen to curb endemic deflation in the territory. September 2003 marked the 58th consecutive month of decline in the consumer prices index, the main indicator of inflation and deflation.
The problem, which began with the depreciation of currencies in neighbouring countries during the Asian financial crisis, is now considered to be structural. Hong Kong's currency board system, under which the exchange rate is fixed at about HK$7.8 to the US dollar, means the territory must adjust to changes in its international competitiveness by means of price shifts. Many believe that, as China opens up following its entry to the World Trade Organisation in 2001, prices in Hong Kong will have to continue to fall to make up for competition from the mainland.
To remain competitive, the territory is also trying to provide more sophisticated professional services to mainland industries. However, only 13 per cent of Hong Kong's workers have university degrees, about half the average for the developed world. Large numbers of unskilled or low-skilled workers will need to retrain or risk long-term unemployment.
One area of hope for job creation is tourism. Mainland visitors, once a rarity, are arriving in ever-increasing numbers to sample the territory's capitalist lifestyle and to shop for expensive goods. In August 2003, visitor arrivals reached 1.6m, up 9.6 per cent compared with a year earlier. Mainland visitors during that month numbered a record 946,122, up 43 per cent from a year earlier. Cumulative arrivals, however, for January to
August remained down 14 per cent at 8.9m, due to Sars. The government hopes that a joint venture with Walt Disney to build a US$2.9bn theme park, planned to open in 2005/06, will further boost visitor arrivals.
The territory's stock exchange remains Asia's second largest internationally accessible market after Tokyo. After suffering heavily due to the Iraq war and the early stages of the Sars outbreak, the market staged a sharp comeback and was up 27 per cent by early October compared with the beginning of the year. Market capitalisation by the end of September was HK$4.7bn, an increase of 42 per cent year-on-year. There were 31 new issues in the nine months to end-September on the main board, bringing to 838 the total number of listed companies.
The stock market remains an important channel for the mainland's flagship stateowned enterprises to raise international capital, despite difficulties in 2002 with the initial public offering of China Telecom, the fixedline carrier for southern China. The company had to cut its offering to a third of its original target of nearly US$4bn because of low investor interest. In 2003, however, the market showed signs of bouncing back with the IPOs of three Chinese insurers, including a planned US$3bn offering by industry leader China Life.
While the market has recovered, Hong Kong's budget deficit remains of concern, consistently overshooting government targets and prompting speculation that the pegged exchange rate could come under pressure in the longer term. The government has proposed the privatisation of the airport and other state-run companies as well as securitising income from its cross-harbour tunnels and other facilities to help plug the gap.
The deficit was forecast to reach HK$80bn (US$10.3bn) in 2003/04, up from HK$61.7bn, or 4.9 per cent of GDP, in the fiscal year ended March 2003. The government still has one of the strongest financial positions in the world, with fiscal reserves of nearly HK$300bn. However, it has been forced to abandon earlier promises of restoring the budget to balance by 2006/07.
Beijing has continued to be largely successful in honouring its pledge to maintain the 'one country, two systems' model under which Hong Kong has significant autonomy to run its own affairs. Since the handover from the UK in 1997, Chinese officials have for the most part been careful not to interfere in matters that fall outside the scope of defence or foreign affairs, the two areas in which the Hong Kong government is obliged to defer to Beijing.
There has been much criticism, however, of the territory's awkward political system and of its chief executive, Tung Chee-hwa. A former shipping tycoon, Tung was favoured by Beijing to lead Hong Kong after the handover. He began a second five-year term in July 2002, after being re-elected unopposed by an 800-strong committee consisting mostly of conservative businessmen.
The government has been accused of introducing creeping new restrictions on human rights and freedom of speech through its attempt to introduce an anti-subversion law. Hong Kong is required to implement the legislation as part of Article 23 of the Basic Law, the mini-constitution that defines its autonomy, and the government has insisted the law will not impinge on the territory's freedoms. However, it was forced to withdraw the bill after mass protests on July 1, the sixth anniversary of the handover. The controversy over the bill, and the government's handling of Sars, have hurt Tung's popularity ratings. A poll released by the University of Hong Kong last month found that only 45.5 per cent of the population supported him.
Such issues aside, Hong Kong remains for the most part a cosmopolitan and open society. The government's stated aim is that the territory should become Asia's leading world city. Of a total population of nearly 7m, around 7 per cent are expatriates or domestic helpers from abroad.
Hong Kong has retained its strong legal system and regard for the rule of law and remains one of the easiest places in Asia in which to do business. It has the highest concentration of regional corporate headquarters in Asia. According to a government survey, it was home to 948 regional headquarters for international companies at the end of 2002, compared with 944 a year earlier. The city is ranked the eighth largest trading entity in the world and Chek Lap Kok is one of the world's largest and most impressive airports.
The territory's economy is predominantly driven by services, with this sector accounting for 85 per cent of GDP and four out of every five jobs. The contribution of manufacturing to GDP has declined, from 24 per cent in 1980 to about 7 per cent today. Over the past two decades, nearly all production facilities have been lured by lower costs across the border into southern China, where Hong Kong firms now employ 5m people.