It was on July I, 1997 that Hong Kong returned to the embrace of the People's Republic of China. In the six years that have passed since then, its economic development and prospects for continuing growth have been in the spotlight. The eyes not just of the central government but also of the world have been on the new Hong Kong Special Administrative Region (HKSAR).
The 1997 Asian Financial Crisis wreaked its havoc on the Hong Kong economy and impacted on real estate and the stock market. This is a Pearl of the Orient that may have lost some of the richness of its sheen.
Negative Growth
According to statistics released by the government of the HKSAR, the Hong Kong economy has registered two consecutive years of negative growth. Technically, Hong Kong is in recession and recovery seems some way off.
The regional government had originally set a 3 percent GDP growth target for 2003 but has now had to lower its expectations in the face of the SARS outbreak. Some 2.5 percent or less is now being predicted by those in the know.
There is general agreement in the media that much of the economic downturn can be attributed to weak domestic demand. In Hong Kong, domestic demand accounts for some 55 percent of the economy. With domestic demand continuing its slide, industry insiders are of the opinion that Hong Kong is now in the grip of deflation.
Moreover, that time-honored growth engine of the Hong Kong economy, the real estate market, has seen prices dropping continuously. More and more households are falling into a negative equity trap.
Property values are down over 60 percent from the top of the market in 1997. A house bought for HK$2 million in the booming real estate market of 1997 might now be priced around 800,000. Homeowners have had to watch the value of their homes shrink while their mortgage loans have kept their values.
On June 17, the regional government released its latest statistics on unemployment. This has become a real headache for the regional administration and was up from March to May with 290,000 unemployed representing a new high of 8.3 percent.
Financial Center Status in the Balance
As the economy deteriorated, tax revenues fell and the regional administration found itself having to make cuts in social and public expenditure as its financial deficit went up and up. Figures released in March showed a record deficit of HK$70 billion for the fiscal year 2002/03.
Financial Secretary Anthony Leung originally anticipated a financial deficit of about HK$68 billion for 2003/04 but had to adjust this upwards due to SARS.
Government officials and industry insiders have been warning that Hong Kong's financial system may suffer a fundemental setback if the financial deficit cannot be reversed soon.
Increasingly Hong Kong listed companies are being taken back into private ownership pulling significant capitalization value out of the market. This may well reflect investors' shrinking confidence in the stock market. If the trend continues into the longer term, Hong Kong's status as a world class center for finance and investment will hang in the balance.
Operational Center Status Challenged
Hong Kong and the mainland are in different phases of their economic development and are also differentiated by specialization and cost-effectiveness. Many of the manufacturing enterprises that once powered Hong Kong's economic growth have relocated to the mainland.
With its new reliance on the service industries, Hong Kong finds its competitive edge fading. As transnational corporations move their operational headquarters to Beijing and Shanghai, Hong Kong sees its standing as a regional operational center eroded.
The regional administration has now committed itself to reinvigorating the hi-tech manufacturing sector, building a digital port and funding a sci-tech research program. Its aim is to strengthen Hong Kong's commercial advantage and effectiveness and transform it into a vibrant regional economic hub.
SARS Impacts on a Shopping Paradise
The service sector is a pillar of economic growth contributing 89 percent to Hong Kong's GDP growth. SARS was to hit hardest and most directly at tourism, catering, retailing, entertainment and aviation. Businesses in these sectors found themselves having to virtually suspend their operations for a while.
At the end of March, the World Health Organization issued its first global travel advisory warning against "any non-essential visit to SARS afflicted regions including Hong Kong". This was to deal a particularly heavy blow to Hong Kong's aviation and tourism industries. So far they are showing little sign of recovery.
Facilitating Change
Given that Hong Kong is a mature economic entity, the biggest problem for the administration is how to stimulate a renewed vigor and facilitate a restructuring of its economic systems.
The administration has risen to the challenge with the launch of a three-pronged plan bringing together measures to promote crisis management, confidence building and economic development.
The most pressing problems will be addressed first with the introduction of Hong Kong's largest ever employment creation initiative designed to maintain stability in the markets and in society itself.
The administration will also bring a focus to bear on long-term economic goals with policies aimed at pursuing a stable macro economy. It is committed to move out of financial deficit and balance the books by fiscal year 2006/07.
The WHO removal of Hong Kong from the SARS warning list has been viewed by the local media as marking the beginning of the process of the rejuvenation of the Hong Kong economy. The tourism industry will be in pole position and act as a bellwether for the local economy as a whole. The regional administration has been quick to bring in measures aimed at helping tourism lead the way to recovery.
The Mainland a Driver for Change
Hong Kong's economic prospects will depend on successful interaction with the mainland in such areas as finance, logistics and tourism and on cooperation in developing new business opportunities. The Hong Kong economy is set to gain from its juxtaposition to rapid mainland development.
There has been a timely strengthening of strategic cooperation between the mainland and the HKSAR. Much will be gained from economic integration with the Pearl River Delta and regional cooperation with the Yangtze River Delta.
Notably, the Mainland/Hong Kong Closer Economic Partnership Arrangement (CEPA) which cut tariffs and non-tariff trade barriers was signed on June 30.
The CEPA brings advances in three main areas:
a new zero tariff on many Hong Kong products
the opening up of the mainland to the Hong Kong services sector
measures to facilitate investment
Tung Chee Hwa, chief executive of the HKSAR, said: "I believe the CEPA will be conducive to economic recovery and bring a new dynamism to Hong Kong."
External Economic Influences
Hong Kong is fully integrated into the international business community and so is exposed to external influences on top of the internal challenges of economic restructuring. It cannot hope to be immune to the influence of any downturn pervading the US, European and Japanese markets. The past two years have been marked by a slowdown in the global economy generally and particularly in the US. Hong Kong could not escape this economic sluggishness and quickly fell into the grip of recession.
Factors like the Iraq War, which brought uncertainty to the global economy, are already receding. There is a new optimism about US economic growth in the second half of 2003. Hong Kong must take advantage of this window of opportunity.
(The author, Zhang Yuncheng, is a research fellow with the China Institute of International Studies)
(China.org.cn translated by Alex Xu, July 3, 2003)
