Hong Kong’s Economic Standing Amid the Global Slowdown
By Dezan Shira & Associates
Posted: 22nd October 2012 08:43
Long known for its openness and dynamism, Hong Kong boasts one of the most advanced economies in Asia, and in the world. The city has been ranked the world’s most competitive economy for the second consecutive year by the International Institute for Management Development and the world’s freest economy for 18 consecutive years by Heritage Foundation. However, this open and free economy has left the city exposed to the global economic slowdown, and the road ahead is definitely challenging.
Economic overview for the first half of 2012
Hong Kong’s economy is highly dependent on international trade and finance, and with the severe external headwinds brought on from the global downturn, Hong Kong’s economy cooled significantly in the first half of 2012. The region’s real GDP in the second quarter of 2012 maintained a 1.1 percent growth, after a 0.7 percent growth in the first quarter. This slight year-on-year growth is largely a result of resilient domestic demand amid the global crisis.
In the second quarter, the unemployment rate decreased by 0.2 percent to 3.2 percent while the income of median household rose by 5.1 percent. Such strong increases in employment figures and income levels underscores the city’s private consumption (3.7 percent year-on-year growth in the real terms).
Government spending has also grown solidly in the meantime, providing policy stimuli to set off external factors. However, the current state of the global economic environment remains a disruption to the city’s development. For example, Hong Kong’s total goods exports shrank by 0.4 percent y-o-y in real terms in the second quarter (and recorded a 5.7 percent decrease in the first quarter) even against a relatively low 2011 base of comparison. This decline can largely be attributed to the sluggishness of the U.S. and European economies, since exports to the mainland and other Asian markets experienced growth over the same period.
Support from the Chinese central government
Hong Kong’s increasing integration with the mainland has helped the city make an initial recovery more quickly than many observers anticipated, and the Chinese central government this year has issued an array of supportive measures to support economic development in the region.
The central government is determined to promote and secure Hong Kong’s status as an international finance center. In June this year, the country’s Ministry of Finance (MOF) announced that it will issue RMB23 billion in sovereign bonds in Hong Kong, the largest of its kind. In another move, the central government has successfully persuaded all parties from the Association of Southeast Asian Nations (ASEAN), China, Japan and Korea (10+3) to allow Hong Kong to participate in the ‘10+3’ Foreign Exchange Reserve Fund individually under the “One Country, Two Systems” principle.
Promoting Hong Kong as an offshore RMB hub
As of the end of April 2012, Hong Kong held the largest amount of offshore RMB funds with total deposits at RMB67.4 billion. To further increase the city’s competitiveness against foreign rivals such as London and Singapore, the central government earlier this year allowed foreign investors to invest in RMB-denominated exchange trade funds in Hong Kong. Besides, the government will support third parties in using Hong Kong as a venue to settle trade and investments in RMB, and will further enrich offshore RMB products in Hong Kong, according to Xinhua news.
Strengthening cooperation under the CEPA framework
Since its implementation in 2004, the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) has greatly facilitated Hong Kong’s economy. So far, 1,741 products made in Hong Kong have been included in the scope of the zero tariff rate policy under the framework of CEPA. Over that same period, the value of goods imported from Hong Kong by the mainland totaled US$5.16 billion, with tariff relief standing at RMB29.3 billion.
A new supplement to the Mainland and Hong Kong CEPA was signed by the central government and the government of Hong Kong in June of this year, aiming to forge closer ties between Hong Kong and the mainland. The supplement is scheduled to take effect on January 1, 2013, introducing 43 service liberalization and trade facilitation measures while enhancing cooperation in the areas of finance, trade and investment facilitation.
Hong Kong economic outlook
The outlook for the global economy isn’t pretty; the euro zone recession and slackening U.S. economy continue to prevent sustainable market recovery, and this trend inevitably affects export activities in Hong Kong. However, the city is lucky to have the mainland to rely on. Mainland China has always been Hong Kong’s largest trading partner, and the economic growth there has greatly hedged the economic risks facing the city. Moreover, as China proactively expands its domestic consumption, Hong Kong’s exporters are provided with a great opportunity to develop the mainland market. If this favorable “mainland factor” can be properly utilized, the economic outlook for Hong Kong in the near future will continue to be optimistic.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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