The latest economic and trade information on Hong Kong
Hong Kong’s economy expanded by 2.4% in real terms in 2015, compared with the growth of 2.6% for 2014. For 2016, the economy is forecast to grow by 1-2 %
Amid the visible decline in tourist arrivals, the value of retail sales, in nominal terms, dropped by 13.6% year-on-year for January-February 2016, after the decline of 3.7 % for 2015.
The labour market conditions remain tight. The seasonally adjusted unemployment rate was 3.4 % for the three-month period ending March 2016, compared with 3.3 % for 2015.
Consumer prices increased 2.9 % year-on-year in January-March 2016, after increasing by 3 % for 2015. Inflationary pressure should be contained in the near term.
Hong Kong’s merchandise exports dropped 6.8 % year-on-year in January-March 2016, after falling by 1.8 % in 2015. For 2016 as a whole, exports are projected to level off at the 2015 level amid the sluggish global demand.
Current Economic Situation
– The world’s freest economy
– The world’s most services-oriented economy, with services sectors accounting for more than 90 % of GDP
– The world’s second largest recipient of foreign direct investment (FDI), after Chinese mainland
– The world’s second largest source of FDI, after the US
1. Latest Developments
Hong Kong’s economy expanded by 2.4 % in real terms in 2015, slowed from 2.6 % for 2014, with remarkable resilience in the domestic sector. In 2015, growth in private consumption expenditure accelerated to 4.8 % in real terms, from 3.3 % in 2014, while investment expenditure dropped 2.2 % in real terms, compared with -0.1 % in 2014. The external sector, however, deteriorated amid an austere external environment. In 2015, exports of goods and services fell 1.7 % and 0.6 %, respectively in real terms, against the growth of 0.8 % and 1.1 %, respectively in 2014. Looking ahead, the external environment remains challenging and the major impetus to overall economic growth will continue to count on domestic demand. In the latest round of review in February, the government forecast Hong Kong’s economic growth at 1-2 % for 2016.
Dragged by the visible decline in tourist arrivals, the value of retail sales, in nominal terms, dropped 13.6 % year-on-year for January-February 2016, after the decline of 3.7 % for 2015. Yet the labour market conditions remain tight. The seasonally adjusted unemployment rate stood at 3.4 % for the three-month period ending March 2016, compared with 3.3 % for 2015. Meanwhile, Hong Kong’s consumer prices rose 2.9 % year-on-year in January-March 2016, after a 3 % increase in 2015. Inflationary pressure should remain limited in the near term, given the muted global inflation and soft international commodity prices, while local cost increases will likely be restrained by the subpar economic conditions and the retreat in rental cost pressures. In the latest round of review in February, the government forecast consumer prices to increase by 2.3 % for 2016.
In 2015, a total of 59.3 million visitors, equivalent to 8.1 times of the size of Hong Kong’s local population, were recorded, with those from the Chinese mainland accounting for 77 % of the total. In January-February 2016, visitor arrivals to Hong Kong dropped 13.6 % year-on-year, after falling by 2.5 % in 2015; those from the Chinese mainland declined by 18 % year-on-year, after falling by 3 % in 2015. In the first half of 2015, total tourism expenditure associated to inbound tourism amounted to HKD 166 billion, dropped 1.6 % year-on-year from the previous year.
The four pillar economic sectors of Hong Kong are: trading and logistics (23.4% of GDP in terms of value-added in 2014), tourism (5.1%), financial services (16.6%), and professional services and other producer services (12.4%). On the other hand, the six industries which Hong Kong has clear advantages for further development are cultural and creative, medical services, education services, innovation and technology, testing and certification services and environmental industries, which together accounted for 9.2% of GDP in terms of value-added in 2014.
2. Budget and Government Initiatives
On January 13, 2016, the Chief Executive, C Y Leung, announced a broad range of initiatives in the 2016 Policy Address to develop the economy, enhance education and improve health care. Innovation and technology would receive a big boost, with nearly USD 5 billion in funding for a variety of initiatives. More importantly, Leung placed strong emphasis on Hong Kong’s roles in Belt and Road Initiative (BRI) and the National 13th Five-Year Plan. He affirmed that Hong Kong would serve as a platform for capital formation and finance; trade and logistics; professional and infrastructure services under BRI. The government would set up a steering committee, chaired by himself, for formulating strategies and policies for Hong Kong’s participation in BRI; plus a Belt and Road Office responsible for taking forward related studies, liaison with the central ministries, provincial and municipal authorities, and other co-ordination work. Also, Hong Kong would continue to pursue free-trade agreements, investment promotion and protection agreements, avoidance of double-taxation agreements and air services agreements with major trading partners along the Belt and Road. On education, Leung announced a free, quality kindergarten-education policy from the 2017/18 school year.
In health care, the government would work with the Hospital Authority to implement a USD 200 billion, 10-year development plan.
In the 2016-17 Budget announced on 24 February 2016, Financial Secretary John Tsang unveiled a number of relief measures to help business and residents weather a weakening economy and to stimulate consumption, which include reducing salaries and profits tax for 2015-16 by 75 % subject to a ceiling of USD 20000 and enhancing the “SME Financing Guarantee Scheme”. Responding to the new economic order (i.e. emerging markets playing more important roles; breakthroughs in IT development), he proposed various funding schemes and initiatives to encourage the applications of R&D results and fintech, nurture start-ups and assist industries in finding new markets such as setting up the Innovation and Technology Venture Fund and strengthening promotion effort relating to the Belt and Road Initiative. Besides, land resources, education, social welfare and healthcare services are also the focus of the 2016-2017 Budget.
The Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA) was firstly concluded in 2003. Thereafter, the two sides broadened and enriched the content of CEPA and signed ten Supplements between 2004 and 2013, expanding market liberalisation and further facilitating trade and investment for the economic cooperation of the two places. At present, all products of Hong Kong origin, except for a few prohibited articles, can be imported into the mainland tariff free under CEPA. Hong Kong service suppliers enjoy preferential treatment in entering into the mainland market in various service areas. There are also agreements or arrangements on mutual recognition of professional qualification.
In December 2014, the Agreement between the Mainland and Hong Kong on Achieving Basic Liberalisation of Trade in Services in Guangdong (the Guangdong Agreement) was signed under the framework of CEPA, enabling early realisation of basic liberalisation of trade in services with Hong Kong in Guangdong. On the basis of the Guangdong Agreement, the Agreement signed in November 2015 further enhances the liberalisation in both breadth and depth, including extending the implementation of the majority of Guangdong pilot liberalisation measures to the whole Mainland; reducing the restrictive measures in the negative list; and adding 28 liberalisation measures in the positive lists for cross-border services as well as cultural and telecommunications services. Details and new developments about CEPA, including our analysis of its impacts on Hong Kong, can be found here.
3. Investment Flows
Hong Kong is a highly attractive market for foreign direct investment (FDI). According to the UNCTAD World Investment Report 2015, global FDI inflows to Hong Kong amounted to USD 103 billion in 2014, behind only the Chinese mainland (USD 129 billion) but ahead of the US (USD 92 billion) and the UK (USD 72 billion). In terms of outflows, Hong Kong ranked second with US$143 billion, after only the US (USD 337 billion) but ahead of the Chinese mainland (USD 116 billion), Japan (USD 114 billion) and Germany (USD 112 billion).
According to a government survey, Hong Kong’s total stock of inward direct investment was estimated at USD 1.488 billion at the end of 2014. One distinct feature of such direct investment was the indirect channelling of capitals from non-operating companies in tax haven economies. Against this background, British Virgin Islands, Netherlands, Bermuda and Cayman Islands accounted for 35.5 %, 6.4 %, 5.3 % and 3.4 %, respectively, of the total stock of inward direct investment in 2014. Excluding tax haven economies, the Chinese mainland was the most important source of direct investment in Hong Kong (accounting for 30.1 % of the total). Other major sources include the US (3.3 %) and Singapore (2.7 %). The majority of the stock of investment was related to service industries including investment and holding, real estate, professional and business services; import/export, wholesale and retail trades; and banking.