3 July 2017
Economic and Trade Information on Hong Kong
- Hong Kong’s economy expanded by 4.3% in real terms in the first quarter of 2017, after growing by 2% in 2016. For 2017 as a whole, the economy is forecast to grow by 2-3%.
- The value of retail sales, in nominal terms, dropped by 0.7% year-on-year in January-May 2017, after the decline of 8.1% for 2016.
- The labour market conditions remain tight. The seasonally adjusted unemployment rate was 3.2% for the three-month period ending May 2017, compared with 3.4% for 2016.
- Consumer prices grew 1.1% year-on-year in January-May 2017, after increasing by 2.4% for 2016. Inflationary pressure should be contained in the near term.
- Hong Kong’s merchandise exports increased by 8.2% year-on-year in January-May 2017, after a marginal decrease of 0.5% in 2016. Hong Kong’s merchandise exports are projected to grow by 5% as a whole in 2017.
- The HKSAR Government and Ministry of Commerce signed the Investment Agreement and Agreement on Economic and Technical Cooperation under the framework of CEPA on 28 June 2017.
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
- Asia’s second largest recipient of foreign direct investment (FDI)
- Asia’s third largest source of FDI, after Japan and the Chinese mainland
1. Latest Developments
In the first quarter of 2017, Hong Kong’s economic growth accelerated to 4.3% year-on-year in real terms, from 2% for 2016. The growth of private consumption expenditure quickened to 3.7% year-on-year for the first quarter of 2017, from 1.8% for 2016. The investment expenditure increased by 6.4% year-on-year for the first quarter of 2017, after the marginal decline of 0.3% for 2016. As to the external sector, the growth of exports of goods accelerated considerably to 9.2% year-on-year for the first quarter of 2017, from 1.8% for 2016; while exports of services also increased by 2.6% year-on-year for the first quarter of 2017, after the decline of 3.2% for 2016. For the rest of 2017, the external environment is expected to improve further whereas domestic demand should continue to be supported by the largely stable income and favourable employment conditions. In the latest round of review in May 2017, the government maintained the forecast of Hong Kong’s economic growth for 2017 at 2-3%.
In January-May 2017, the value of retail sales, in nominal terms, declined by 0.7% year-on-year, after the decline of 8.1% for 2016. Yet the labour market conditions remain tight. The seasonally adjusted unemployment rate was 3.2% for the three-month period ending May 2017, compared with 3.4% for 2016. Meanwhile, Hong Kong’s consumer prices rose 1.1% year-on-year in January-May 2017, after increasing by 2.4% in 2016. Looking ahead, inflation pressure should remain contained in the near term, given the low imported inflation and moderate increases in local costs. In the latest round of review in May 2017, the government maintained its forecast of Hong Kong’s consumer price inflation at 2% for 2017.
In 2016, a total of 56.7 million visitors, equivalent to 7.7 times of the size of Hong Kong’s local population, were recorded, with those from the Chinese mainland accounting for 76% of the total. In January-April 2017, visitor arrivals to Hong Kong increased by 3.2% year-on-year, after dropping by 4.5% in 2016; those from the Chinese mainland increased 3.3% year-on-year, after falling by 6.7% in 2016. In 2016, total tourism expenditure associated to inbound tourism amounted to HK$296 billion, dropped 10.1% year-on-year.
The four pillar economic sectors of Hong Kong are: trading and logistics (22.3% of GDP in terms of value-added in 2015), tourism (5%), financial services (17.6%), and professional services and other producer services (12.3%). 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 8.9% of GDP in terms of value-added in 2015.
2. Budget and Government Initiatives
On 18 January 2017, the Chief Executive, C Y Leung, outlined plans in his 2017 Policy Address to develop the economy and improve people's livelihood. On economic development, Mr Leung said the National 13th Five-Year Plan and the Belt and Road Initiative would provide new opportunities for Hong Kong in areas such as financial and professional services, as well as innovation and technology. The government invited the Hong Kong Trade Development Council to strengthen overseas promotion of Hong Kong's financial services industry, and will expand its network of offices on the Chinese mainland and overseas to promote Hong Kong's strengths and advantages, with preliminary work under way to set up five new Economic and Trade Offices in India, Mexico, Russia, South Africa and the United Arab Emirates. On land and housing supply, the government will provide more than 380,000 residential units by changing land use and increasing development intensity in the medium and long-term. On improving people's livelihood, Mr Leung said that the pillar of the Mandatory Provident Fund should be enhanced to maximise protection for employees; social security should be strengthened to perform well the function of a safety net; the elderly should receive assistance to meet their medical expenses; and financial products should be developed to help the elderly make good use of assets to increase the stability of their post-retirement investment income.
On 22 February 2017, the Financial Secretary, Paul Chan, unveiled in the 2017-18 Budget a number of measures to strengthen the competitiveness of the Hong Kong economy and make Hong Kong an even more liveable city. These include examining facilitation measures to support the growth in transhipment, cross-boundary e-commerce and high value-added air cargo business in Hong Kong; exploring with the Chinese authorities ways to open up more channels for two-way cross-border RMB fund flows and two-way participation of investors in the bond market; providing funding for universities and industry to conduct research and development activities and to support start-ups; and striving to further improve air quality, water quality, green and blue assets and waste management. In additional to longer-term investments, Mr Chan also announced some measures to support SMEs such as extending the application period for the special concessionary measures under the SME Financing Guarantee Scheme to February 2018 to help enterprises tide over their liquidity needs.
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 co-operation 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 (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 on Trade in Services 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.
In June 2017, the Investment Agreement and the Agreement on Economic and Technical Cooperation (Ecotech Agreement) were signed under the framework of CEPA. The Investment Agreement expands the market access commitments to non-services sectors and introduces obligations on investment protection. The Ecotech Agreement consolidates and updates the economic and technical cooperation activities between Hong Kong and the Chinese mainland. It includes the cooperation in the economic and trade areas of the Belt and Road Initiative and Sub-regional Cooperation under the systemic framework of CEPA. 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 2017, global FDI inflows to Hong Kong amounted to US$108 billion in 2016, ranked fourth globally, behind only the Chinese mainland (US$134 billion) in Asia. In terms of outflows, Hong Kong ranked third with US$62 billion in Asia, after the Chinese mainland (US$183 billion) and Japan (US$145 billion).
According to a government survey, Hong Kong's total stock of inward direct investment was estimated at US$1,582 billion at the end of 2015. 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, Cayman Islands, Netherlands and Bermuda accounted for 35.1%, 7%, 6.3% and 4.6%, respectively, of the total stock of inward direct investment in 2015. Excluding tax haven economies, the Chinese mainland was the most important source of direct investment in Hong Kong (accounting for 26.5% of the total). Other major sources include Singapore (2.8%), the US (2.6%) and the UK (2.1%). The majority of the stock of investment was related to service industries including investment and holding, real estate, professional and business services; banking; and import/export, wholesale and retail trades.
For more information and assistance in establishing an operation in Hong Kong, contact InvestHK.
4. Trade Relations and Tax Treaties
Hong Kong is a founding member of the World Trade Organization (WTO) and has been participating actively in its activities. Also, Hong Kong is a member of the Asia-Pacific Economic Cooperation (APEC) and the Pacific Economic Cooperation Council (PECC). Hong Kong belongs, in its own right, to the Asian Development Bank (ADB) and the World Customs Organization (WCO). It is an associate member of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and relates, in varying degrees, to the United Nations Conference on Trade and Development (UNCTAD). Since April 1994, Hong Kong has been an observer of the Trade Committee of the Organization for Economic Cooperation and Development (OECD). On the other hand, Hong Kong has become a member of the Asian Infrastructure Investment Bank (AIIB) since June 2017.
In addition to CEPA, Hong Kong has signed free trade agreements with New Zealand, the member states of the European Free Trade Association (comprising Iceland, Liechtenstein, Norway and Switzerland) and Chile respectively; and is negotiating a free trade agreement with ASEAN countries, Macao, Georgia and Maldives, respectively. Besides, Hong Kong has signed Investment Promotion and Protection Agreements (IPPAs) with 19 economies, and concluded the negotiations with Bahrain, Mexico, Myanmar and the UAE, respectively; the IPPAs with Iran and Russia, respectively, are under negotiation. On the other hand, Hong Kong has entered into Comprehensive Double Taxation Agreements / Arrangement (DTAs) with some 30 jurisdictions while those with another 13 countries/territories are still under negotiation.
Latest Trade Performance
- The world's 6th largest exporter of merchandise trade
- The world's 15th largest exporter of commercial services
Hong Kong’s merchandise exports increased 8.2% year-on-year in January-May 2017, after a marginal decrease of 0.5% in 2016. In January-May 2017, Hong Kong's major export markets were the Chinese mainland, the EU, the US, ASEAN, India and Japan, which respectively made up 53.1%, 8.9%, 8.6%, 7.8%, 4.7% and 3.3% of Hong Kong's total exports; changes in exports to the above markets were +8.8%, +2.2%, +1.2%, +8.3%, +49.6% and +5.5%, respectively. Imports jumped 9.1% year-on-year in January-May 2017, after dropping by 0.9% in 2016. A visible trade deficit of US$23.1 billion, equivalent to 10.9% of the value of imports of goods, was recorded in the first five months of 2017. Hong Kong's trade performance is in part affected by outward processing activities in Guangdong where the majority of Hong Kong companies have extended their manufacturing base. In 2016, 27.6% of Hong Kong's total exports to the Chinese mainland were related to outward processing activities; the figures were 11.2% for domestic exports and 27.7% for re-exports.
In response to an improving global trade environment, Hong Kong’s export performance has been above par thus far since 2017. Yet growth of Hong Kong exports is expected to moderate in the second half of this year amid a higher comparison base. As such, Hong Kong exports are projected to grow by 5% in 2017. Undercurrent of US protectionism, political uncertainties in the EU, renewed faltering of emerging markets and heightened geopolitical tensions are the major downside risks.
Economic Relations with the Chinese Mainland
- The most important entrepôt for the Chinese mainland
- The largest foreign investment source of the Chinese mainland
- The key offshore capital-raising centre for Chinese enterprises
- The Chinese mainland as Hong Kong's largest source of external investment
Hong Kong is so far the most important entrepôt of the Chinese mainland. According to the HKSAR government statistics, in 2016, 59% of re-exports were of China origin and 54% were destined for the Chinese mainland. According to China's Customs statistics, Hong Kong is the second largest trading partner of the Chinese mainland after the US, accounting for 8.3% of its total trade in 2016.
Hong Kong is the largest source of overseas direct investment in the Chinese mainland. By the end of 2016, among all the overseas-funded projects approved in the Chinese Mainland, 44.7% were tied to Hong Kong interests. Cumulative utilised capital inflow from Hong Kong amounted to US$913.7 billion, accounting for 51.8% of the national total.
The Chinese mainland, on the other hand, is a leading investor in Hong Kong. According to the HKSAR Census and Statistics Department, the stock of Hong Kong's inward investment from the Chinese mainland amounted to US$419 billion at market value or 26.5% of the total at the end of 2015.
As of December 2016, there were 11 licensed banks and seven representative offices, incorporated in the Chinese mainland, operating in Hong Kong. Big lenders including the Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank have opened their branch operations in Hong Kong. Mainland commercial banks including Bank of Beijing, Bank of Dongguan, China Bohai Bank, China Guangfa Bank, Hua Xia Bank and Ping An Bank have representative offices in Hong Kong.
Hong Kong is also a key offshore capital-raising centre for Chinese enterprises. As of December 2016, 1,002 mainland companies were listed in Hong Kong, comprising H-share, red-chip and private companies with total market capitalisation of around US$2 trillion, or 63% of the market total. Since 1993, mainland companies have raised more than US$500 billion via stock offerings in Hong Kong.
In November 2014, Shanghai-Hong Kong Stock Connect was launched to establish mutual stock market access between Hong Kong and Chinese mainland, a significant breakthrough in the opening of China’s capital markets. In December 2016, Shenzhen-Hong Kong Stock Connect, with similar programme principles and design, was launch to further facilitate two-way investment flows and consolidate Hong Kong’s development as the global offshore RMB business hub.
In July 2017, the mutual bond market access between Hong Kong and the Chinese mainland (Bond Connect) was launched to promote the development of the bond markets in the two places.
Hong Kong as a Regional Centre
- A popular venue for hosting regional headquarters or representative offices
- A leading telecommunications hub for the Asia-Pacific region
- A premier offshore RMB centre
- The world's busiest airport for international cargoes
- One of the world's busiest container ports
- The fourth largest stock market in Asia, the eighth largest in the world
- The second largest foreign exchange market in Asia, the fourth in the world
Hong Kong is a popular venue for hosting regional headquarters or representative offices for multinational companies to manage their businesses in the Asia Pacific, particularly the Chinese mainland. Based on a government survey, as of June 2016, there were 3,731 regional headquarters (RHQs) and regional offices (ROs) in Hong Kong representing their parent companies located outside Hong Kong, dropped 2% from the previous years. Of these companies, 77% were responsible for business in the Chinese mainland, confirming Hong Kong's role as a conduit for doing business with the mainland. These companies came from diverse countries and sectors. The US had the largest number of RHQs/ROs in Hong Kong (21%), followed by Japan (18%), the UK (9%) and the mainland (8%). Most of the RHQs/ROs in Hong Kong were in I/E trade, wholesale and retail (50%). Others are in professional, business and education services (17%), finance and banking (14%), and transportation, storage and courier services (8%).
Hong Kong is an important banking and financial centre in the Asia Pacific. As at end-2016, there were 195 authorised institutions and 54 representative offices in Hong Kong. Total loans provided by the authorised institutions to finance international trade and other loans for use outside Hong Kong totalled US$58.3 billion and US$305.5 billion respectively. According to the Bank for International Settlements, Hong Kong is the second largest foreign exchange market in Asia and the fourth largest in the world in 2016, with the net daily average turnover of forex transactions reaching US$437 billion.
Since the introduction of the Pilot RMB Trade Settlement Scheme by the Central Government in July 2009, Hong Kong has succeeded in expanding its RMB business by offering a number of RMB-denominated financial products and services, including trade finance, stocks, bonds and funds. Since the debut of the scheme, banks in Hong Kong had handled RMB trade settlement totalling RMB21 trillion as of October 2015, which represented some 70% of the world’s total. RMB deposits in Hong Kong, excluding RMB certificates of deposits, totalled RMB628 billion as of November 2016, more than tenfold the level seen in July 2009.
As at the end of December 2016, Hong Kong's stock market ranked the fourth largest in Asia and the eighth largest in the world in terms of market capitalisation. There were 1,973 companies listed on HKEx, including 260 companies on the Growth Enterprise Market and the total market capitalisation of Hong Kong's stock market reached US$3.17 trillion.
Hong Kong is a leading telecommunications hub for the Asia-Pacific region. Residential fixed line and household broadband penetration rates have exceeded 90% and 85% respectively. Mobile subscribers in Hong Kong have exceeded 17 million, of which over 90% were 2.5G and 3G/4G mobile subscribers, more than doubled the total population in Hong Kong. There are now 44,000 public Wi-Fi access points.
Hong Kong is a favourite place in the world to do business and host major conferences. Over 300 international conventions and exhibitions are held in Hong Kong each year. To name a few, in December 2005, Hong Kong hosted the sixth session of the WTO ministerial conference where a Hong Kong declaration was concluded. In December 2008, Hong Kong played host to the first Clinton Global Initiative international meeting outside the US.
The Hong Kong-Zhuhai-Macao Bridge (HZMB) consists of three parts, including the main bridge, boundary crossing facilities of Hong Kong, Zhuhai and Macao, and link roads of the three places. The HZMB is of special strategic value in further enhancing the economic development of Hong Kong, Macao and the Western Pearl River Delta region (Western PRD). It will significantly reduce the cost and time for travellers and for the flow of goods between Hong Kong and the Western PRD, accelerating the economic integration of the PRD and its neighbouring provinces, and increasing its competitiveness. Construction of the project has started in December 2009 for completion in 2017.
Meanwhile, the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link (XRL) will be 26-km long, running from the terminus in West Kowloon to Shenzhen, Dongguan and Guangzhou with significantly reduced journey time. More importantly, it will become part of the 16,000 km national high-speed rail network now being developed in full steam, fostering closer economic ties between Hong Kong and the mainland. Upon completion of the railway, the travelling time from Hong Kong to Beijing and Shanghai will be shortened to about 10 and 8 hours respectively. Construction of the project has commenced for completion in 2018.
Besides the cross-boundary endeavours, the government has undertaken other large-scale infrastructure projects to improve the local transportation system, promote long-term development for arts and culture, and provide quality living space to citizens. As to the extension of the mass transit railway system, the West Island Line, the Kwun Tong Line Extension and the South Island Line (East) have been opened; while the Shatin to Central Link is expected to complete in 2021. The government has also announced the Railway Development Strategy 2014, providing a framework for planning the further expansion of Hong Kong's railway network up to 2031 to cover areas inhabited by about 75% of the total population and about 85% of job opportunities. Besides, a cruise terminal has been developed at the former Kai Tak Runway, with two alongside berths, well equipped with supporting facilities to accommodate the concurrent berthing of two mega cruise vessels (with gross tonnage of up to 220,000).
As the busiest cargo gateway and one of the 10 passenger airports in the world, the Hong Kong International Airport needs an expansion since the existing two-runway system will reach its full capacity soon, according to the Hong Kong Airport Authority. The construction of the Three-runway System has started in 2016 for completion in 2024, with the commissioning of the new runway expected in 2022.
Turning to the port, the government has released findings of the Study on the Strategic Development Plan for Hong Kong Port 2030 and the Preliminary Feasibility Study for Container Terminal 10 at Southwest Tsing Yi. The findings reveal that container throughput in Hong Kong will continue to see growth in the coming years. In order to cope with a projected future increase in throughput up to 2030, it is necessary to enhance the handling capacity of the existing container terminals and related infrastructural facilities, which include upgrading Stonecutters Island Public Cargo Working Area to a modern container handling facility for ocean-going or river trade vessels, enabling the River Trade Terminal to become a terminal for both ocean-going and river trade vessels, providing additional barge berths at the Kwai Tsing Container Terminals to relieve congestion caused by the increase of river cargo throughput, and making better use of land and other facilities around the terminals to enhance operational efficiency and accommodate future growth in transhipment.