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Hong Kong Remains Competitive in Services

Hong Kong will be able to maintain its long-term competitiveness in the services sector despite the challenge of a more expensive operation cost than neighbouring countries, a Hong Kong Trade Development Council (TDC) research report says.

TDC has conducted a series of studies on Hong Kong economy's long-term competitiveness since the outbreak of Asian economic crisis. Starting with the concept that Hong Kong is a metropolitan economy, the studies investigate the historical development of its manufacturing sector, the changing competitive position of its services industry, the rise of offshore trade and investment as well as its vital role in the Chinese mainland's economic reforms and efforts to integrate with the world economy.

According to the latest report, entitled "Hong Kong's Competitiveness in Services", Hong Kong is an expensive place to do business when compared with neighbouring Asian countries but not among other major international business centres.

It says the recent depreciation of Asian currencies has widened the cost gaps as the Hong Kong dollar remains pegged against the US dollars.

Hong Kong's cost disadvantage has been partially offset amid the recent adjustment of the local economy, "not so much against other developing Asian economies, but definitely against other major business cities."

"The recent adjustments in the local economy have led to a sharp and substantial fall in property prices and rentals, by as much as 40 to 50 per cent since mid-last year. The prevailing higher unemployment rate also suggests that wages escalation of local employees will abate," the report says.

In addition, Hong Kong's travel costs and telecommunications expenses are not particularly high by international standards and corporate tax is the lowest among all major business centres.

The report says that it would be too simplistic to conclude that Hong Kong has lost all its competitiveness in services due to perceived high cost of doing business here.

"In producer services, services provided to business rather than consumers, the cost factor is relatively less critical. What is important is the package of services provided and the ability to continuously innovate and improve efficiency."

It says Hong Kong's overall competitiveness depends on a whole array of factors other than cost, some of which are difficult to quantify. "It possesses almost all the conceivable favourable economic, legal and political attributes ?V excellent international network,liberal regulations, simple and low taxes, free flow of information and high-quality physical and communication infrastructure."

The uniqueness of Hong Kong has attracted a critical mass of business firms of all kinds, particular those from high value-added services industries.

By the end of 1996, services-related foreign investment accounted for HK$561.3 billion, or 92 per cent of total foreign direct investments in the SAR.

The services sector is also the largest contributor of Hong Kong economy, accounting for 84.4 per cent of 1996's GDP (gross domestic product). In the New York Region, services sector made up 84.7 per cent of its GDP while Greater London was 82.1 per cent, and Greater Tokyo was 74.2 per cent in the same year.

Hong Kong's excellent business services underpin the SAR's success as the world's eighth largest trading entity and ninth largest exporter of services.

The report also studied the opportunities and challenges of the five key services sector in Hong Kong - financial, trading, telecommunication, infrastructure and tourism.

In the financial sector, it says some financial centres will continue to thrive and they might lose certain types of 'commoditised' activities to lower-cost locations.

"However, those centres that thrive will increasingly take business away from rival centres. In short, the world will get by with just a handful of financial centres in future, perhaps one in each time zone. Hong Kong appears to be the likeliest in the Asian Region."

In the trading sector, it says, Hong Kong's sea cargo would inevitably have to handle a diminished share of this region's total port cargo as the result of a diversion in cargo flows. But neighbouring airports would not pose any serious threat to Hong Kong's air cargo handling in foreseeable future. "Not only are they much smaller in size, their international connections and routes are also far inferior. Their supporting services and infrastructure as well as efficiency in cargo handling are nowhere near so good as in Hong Kong," the report says.

The report also noted that Hong Kong is well placed to maintain its present competitive advantage in being the premier information hub in the region while information technologies have become increasingly important to telecommunications users, embodied in services ranging from variable bandwidth-on-demand to intelligent services.

On infrastructure sector, "no other Asian economy has created the enabling environment that the Hong Kong infrastructure industry enjoys. The level of economic growth, access to project capital, the importance accorded to rule of law and administrative stability has attracted, and continues to attract, overseas infrastructure companies that have combined with local companies to create a unique Asian industrial phenomenon."

The tourism industry has been one of the hardest-hit sectors of the economy amidst the Asian financial turmoil. The study said "the continued success of Hong Kong as a business centre is of paramount importance to the long-term health of the tourism industry."

The report says Hong Kong could remain competitive as a leading services centre in the region, but the high-cost business environment is a major challenge.

It believes Hong Kong's services companies, those being developed through intense competition in domestic market, have the potential to challenge major international players in taking advantage of the global liberalisation of services.

This new report is available for sale at the TDC Head Office or any SME Service Station, or it can be purchased through the CyberBookshop section in TDC website.

Nevertheless, the study says that once confidence is restored to the region, Hong Kong's services sector will rebound to lead the recovery of the economy.

For press enquiries, please contact Cheung Lai Kuen of TDC's Media & Corporate Communications Department, tel: 2584 4333.

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Content provided by Hong Kong Trade Development Council