27 Nov 2015
Economic and Trade Information on Hong Kong
- Hong Kong’s economy expanded by 2.5% year-on-year in real terms in the first three quarters of 2015, same as the rate for the full year of 2014. For 2015 as a whole, the economy is forecast to grow by 2.4%.
- Amid visibly slower growth in tourist arrivals and weaker tourist spending, the value of retail sales, in nominal terms, dropped 2.7% year-on-year in the first nine months of 2015, after a small decline of 0.2% in 2014.
- The labour market conditions remain tight. The seasonally adjusted unemployment rate was 3.3% for August-October 2015, close to the lowest level in 17 years.
- Consumer prices increased 3.2% year-on-year in January-October 2015, after increasing by 4.4% for 2014. Inflationary pressure should be contained in the near term.
- Hong Kong’s merchandise exports saw a year-on-year decrease of 1.7% in January-October 2015, after expanding by 3.2% in 2014. Exports are projected to be flat throughout 2015, as the world trade environment remains uninspiring.
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 2.5% year-on-year in real terms in the first three quarters of 2015, same as the rate for the full year of 2014, attributed mainly to the resilient domestic demand. Growth in private consumption expenditure accelerated to 5.2% year-on-year in the first three quarters of 2015, from 3.2% in the full year 2014. Investment expenditure gained 1.8% year-on-year in the first three quarters of 2015, compared with -0.2% in the full year 2014. The external sector, however, deteriorated during the first three quarters of 2015, with the total exports of goods falling by 2.2% year-on-year, after the 0.8% growth in the full year 2014. Exports of services also saw a marginal year-on-year decline of 0.1% in the first three quarters of 2015, after 0.9% increase in the full year 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 November, the government revised its forecast of Hong Kong’s economic growth to 2.4% for 2015 as a whole, from the range forecast of 2-3% in the August round.
Dragged by the visibly slower growth in tourist arrivals and weaker tourist spending, the value of retail sales, in nominal terms, dropped 2.7% year-on-year in January-September 2015, after a small decline of 0.2% in 2014. Yet the labour market conditions remain tight. The seasonally adjusted unemployment rate stood at 3.3% for August-October 2015, close to the lowest level in 17 years. Meanwhile, Hong Kong’s consumer prices rose 3.2% year-on-year in January-October 2015, after rising by 4.4% in 2014. Looking ahead, inflationary pressure will be contained in the near term, as the softening trend in global food and commodity prices should keep external price pressures in check, while local cost pressures will likely stay moderate.
In 2014, a total of 60.8 million visitors, equivalent to 8.4 times of the size of Hong Kong’s local population, were recorded, with those from the Chinese mainland accounting for 78% of the total. In January-September 2015, visitor arrivals to Hong Kong dropped 0.5% year-on-year, after rising by 12% in 2014, while those from the Chinese mainland saw a small year-on-year increase of 0.3%, after rising by 16% in 2014. In 2014, total tourism expenditure associated to inbound tourism amounted to HK$359 billion, an increase of 8.5% from the previous year.
The four pillar economic sectors of Hong Kong are: trading and logistics (23.9% of GDP in terms of value-added in 2013), tourism (5%), financial services (16.5%), 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 9.1% of GDP in terms of value-added in 2013.
2. Budget and Government Initiatives
The Chief Executive, C Y Leung, in his 2015 Policy Address delivered on 14 January 2015, unveiled new measures to boost the economy, increase housing supply and harness the potential of Hong Kong people. On the economic front, the government will continue to provide support to the pillar industries of trading, financial services, shipping, tourism and professional services, as well as emerging small industries with great potential. On housing, Mr Leung provided a comprehensive report on the concerted efforts being made to make available more land for housing and commercial development, and to achieve the government's 10-year housing target of 480,000 units. Besides, Leung also announced a series of initiatives in poverty alleviation, elderly care, environmental protection, health care, education and youth development, and a new five-prong strategy to address the challenges brought about by demographic change, including plans to extend the retirement age, nurture local manpower, attract talent from outside Hong Kong and help women and the underprivileged enter the workforce.
In the 2015-16 Budget announced on 25 February 2015, Financial Secretary John Tsang proposed a number of support and tax measures, and offered a range of initiatives to reinforce Hong Kong's long-term economic development. These include encouraging start-ups and technological enterprises by expanding the Microfinance Scheme and injecting HK$5 billion to the Innovation and Technology Fund; promoting cultural and creative industries by adding HK$200 million to the Film Development Fund; and augmenting the competitiveness of the pillar industries by earmarking HK$23 million in the coming three years for offering IP consultation, manpower training and other services to SMEs.
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.
On 18 December 2014, the Agreement on Achieving Basic Liberalization of Trade in Services in Guangdong was signed for implementation on 1 March 2015. The Agreement adopts a hybrid approach of positive and negative lists to set out the liberalisation measures in the Guangdong province applying to Hong Kong. The breadth and depth of liberalization surpass the previous measures for early and pilot implementation in Guangdong. 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 US$103 billion in 2014, behind only the Chinese mainland (US$129 billion) but ahead of the US (US$92 billion) and the UK (US$72 billion). In terms of outflows, Hong Kong ranked second with US$143 billion, after only the US (US$337 billion) but ahead of the Chinese mainland (US$116 billion), Japan (US$114 billion) and Germany (US$112 billion).
According to a government survey, Hong Kong's total stock of inward direct investment was estimated at US$1,344 billion at the end of 2013, some 4.9 times of its GDP in that year. 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 and Bermuda accounted for 33.7%, 6.6% and 5.9% of the total stock of inward direct investment in 2013. Excluding tax haven economies, the Chinese mainland was the most important source of direct investment in Hong Kong (accounting for 31.9% of the total). Other major sources include the US (3.3%) and Singapore (2.2%). 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).
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. Besides, Hong Kong has signed Investment Promotion and Protection Agreements (IPPAs) with 17 economies, and concluded the negotiations with Canada, Bahrain and Myanmar; IPPAs with Russia and the UAE 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 14 countries/territories are still under negotiation.
Latest Trade Performance
- The world's 8th largest trading economy
- The world's 15th largest exporter of commercial services
Hong Kong’s merchandise exports saw a year-on-year decrease of 1.7% in January-October 2015, after expanding by 3.2% in 2014. For January-October 2015, Hong Kong's major export markets were the Chinese mainland, the US, the EU, ASEAN and Japan, which respectively made up 54%, 10%, 9%, 8% and 3% of Hong Kong's total exports. During the period, changes in exports to the above markets were -2.5%, +1.2%, -3%, +6.5% and -2.8%, respectively. Imports decreased by 3.6% year-on-year in January-October 2015, after increasing by 3.9% in 2014. A visible trade deficit of US$46.4 billion, equivalent to 10.8% of the value of imports of goods, was recorded in January-October 2015. 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 2014, 29.3% of Hong Kong's total exports to the Chinese mainland were related to outward processing activities; the figures were 15.5% for domestic exports and 29.5% for re-exports.
Hong Kong’s merchandise exports are projected to be flat throughout 2015, as the world trade environment remains uninspiring. Spectre of deflation, divergent policy directions of major central banks, volatile exchange rate movements and nagging geopolitical tensions are potential threats to the export outlook. On the supply side, Hong Kong exporters have to live with a challenging production environment on the Chinese mainland, especially in the Pearl River Delta, which include the rising input costs.
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 2014, 60% 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 8.7% of its total trade in 2014.
Hong Kong is the largest source of overseas direct investment in the Chinese mainland. By the end of 2014, among all the overseas-funded projects approved in the Chinese mainland, 44.5% were tied to Hong Kong interests. Cumulative utilised capital inflow from Hong Kong amounted to US$745.9 billion, accounting for 49.3% 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$428 billion at market value or 31.9% of the total at the end of 2013.
As of February 2015, there were 11 licensed banks and five representative offices, incorporated in 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, Bank of Bohai, China Guangfa 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 2014, 876 mainland companies were listed in Hong Kong, comprising H-share, red-chip and private companies with total market capitalization of US$1.9 trillion, or 60.1% of the market total. Since 1993, mainland companies have raised more than US$400 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. The development is a significant breakthrough in the opening of China’s capital markets as well as a landmark in the internationalisation of Renminbi, which has also illustrated Hong Kong's strategic position in China’s economic and financial reforms.
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 second largest private equity centre in Asia
- The third largest stock market in Asia, the sixth largest in the world
- The third largest foreign exchange market in Asia, the fifth 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 2015, there were 3,798 regional headquarters (RHQs) and regional offices (ROs) in Hong Kong representing their parent companies located outside Hong Kong, increased 4.4% from five years ago. Of these companies, over 70% 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 (51%). Others are in professional, business and education services (18%), finance and banking (12%), and transportation, storage and courier services (8%).
Hong Kong is an important banking and financial centre in the Asia Pacific. As at end-2014, there were 203 authorised institutions and 63 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$69.6 billion and US$282.2 billion respectively. According to the Bank for International Settlements, Hong Kong is the third largest foreign exchange market in Asia and the fifth largest in the world, with the net daily turnover of forex transactions reaching US$275 billion in 2013.
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, the related cross-border remittances totalled over RMB15 trillion and RMB customer deposits in Hong Kong had surged to RMB1 trillion as at end-2014. In 2014, issuance of RMB bonds in Hong Kong (Dim Sum Bonds) reached RMB197 billion.
As at the end of September 2015, Hong Kong's stock market ranked the third largest in Asia and the seventh largest in the world in terms of market capitalisation. There were 1,816 companies listed on HKEx, including 211 companies on the Growth Enterprise Market and the total market capitalisation of Hong Kong's stock market reached US$2.97 trillion. Hong Kong is also the second largest private equity centre in Asia, managing about 19% of the total capital pool in the region as at end-2014.
Hong Kong is a leading telecommunications hub for the Asia-Pacific region. Residential fixed line and household broadband penetration rates have exceeded 100% and 80% respectively. Mobile subscribers in Hong Kong have exceeded 17 million, of which over 70% were 2.5G and 3G/4G mobile subscribers, more than doubled the total population in Hong Kong. There are now over 30,000 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 has been opened; the Kwun Tong Line Extension and South Island Line (East) are expected to complete in 2016 while the Shatin to Central Link are 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 new 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 (HKIA) is expected to reach its full capacity in the next few years. The Executive Council has approved the expansion HKIA into a three-runway system. The Airport Authority is moving ahead with planning work with the aim of starting construction in 2016 for completion in 2023.
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.