1. Latest Developments

Hong Kong has experienced strong and broad-based economic growth in recent years. Real GDP expanded by 7.5% in 2005, 6.9% in 2006 and 5.6% year-on-year in the first quarter of 2007. Domestic demand has resumed its growth momentum since the start of 2005, and is playing an important role in the current economic upturn. Following a 5.2% growth in 2006, private consumption perked up further by 5.6% in real terms in the first quarter of 2007, on the back of firmer employment prospects, mild increase in real wages and the gradually increasing asset prices. Fixed investment grew robustly at 7.9% in 2006, and 3.9% in the first quarter of 2007, with corporate spending on machinery and equipment being the main driver. As for the external sectors, exports of goods and services sustained a robust growth at 8.2% and 8.2% respectively in real terms in the first quarter of 2007, compared to 10.0% and 9.7% respectively in 2006. The government forecast a GDP growth at 4.5-5.5% in real terms for 2007 in the latest round of forecast exercise in May 2007.

Amid better consumer sentiment and improving employment prospects, retail sales grew by 7.3% in 2006 and another 9.4% in the first quarter of this year. After more than five years of deflation, consumer prices have been gradually edging up along with the solid economic recovery, rising by 2.0% in 2006 as a whole, and 1.6% year-on-year in the first four months of 2007. Meanwhile, Hong Kong continues to see signs of an improving labour market. The seasonally adjusted unemployment rate dropped to 4.3% in April 2007, from the peak of almost 9% in 2003.

Hong Kong's external sector showed robust growth in 2006, and the outlook remains optimistic for 2007. In 2006, tourist arrivals rose by 8.1% year-on-year (visitors from the Chinese mainland and the rest of the world rose by 8.4% and 7.8% respectively). Tourists from the Chinese mainland reached 13.6 million (54% of the total tourist arrivals), of which 6.6 million travelled under the individual visitor scheme. In the first quarter of 2007, tourist arrivals reached 6.6 million, up 6.6% year-on-year. As for the flow of goods, please refer to the section on Latest Trade Performance and Issues below.

The four pillar economic sectors of Hong Kong are: trade and logistics (28.6% of GDP in terms of value added in 2005), tourism (3.2%), financial services (12.7%), and professional services and other producer services (10.6%).

2. Budget and Government Initiatives

Fiscal balance has been restored for the fiscal year 2006/07, amid higher tax revenue from salaries and profits stemming from the better-than-expected economic growth, and government's restrained spending. While restoring a fiscal balance is no longer the main focus of fiscal policy, more focus is now placed on promoting the economy and employment, and improving people's livelihood. To name a few, the Financial Secretary has proposed to expedite the implementation of major infrastructure projects, which would create about 23,000 jobs for the construction industry in the fiscal year 2007/08; provide a seamless system for cargo movements and customs clearance; and allocate HK$900 million to help the disadvantaged and HK$20.3 billion for several tax relief and one-off rebate measures.

In his Policy Address delivered on 11 October 2006, the Chief Executive highlighted the government's new and ongoing initiatives for Hong Kong's economic development. On promoting Hong Kong's financial services, the government will amend the listing rules to enable well-established foreign enterprises to list in Hong Kong; prepare to launch new renminbi business in Hong Kong; study development of commodity futures market; and seek to attract offshore securities investment business of mainland insurance agencies. On trade and logistics, Hong Kong will enter into more arrangements with trading partners; introduce multiple entry permits for river trade vessels, streamline procedures and lower fees; expand air services network as well as the airport's air cargo and passenger capacity; and work with mainland authorities to enhance cross-boundary cargo flows. Besides, the government will earmark HK$100 million over five years for Hong Kong Design Centre to help trades and industries to improve designs and build brand names, and provide support to the cultural and creative industries.

On top of the provisions granted in earlier phases of the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA), further liberalisation measures were announced on 29 June 2006, covering ten services sectors: legal, construction, information technology, convention and exhibition, audiovisual, distribution, tourism, air transport, road transport, and individually owned stores. These measures, to be effective from 2007, are expected to help expand the business scope allowable in China for Hong Kong companies and lower the thresholds for them to set up business or provide services there. The CEPA was first concluded in June 2003, and supplemented with further liberalisation measures in subsequent years. At present, all products of Hong Kong origin, except for a few prohibited articles, can be imported into the mainland tariff free under the CEPA. There are also liberalisation measures spreading across 27 service areas.

3. Investment Flows

According to the UNCTAD World Investment Report 2006, Hong Kong was Asia's second largest destination for foreign direct investment (FDI) in 2005, with FDI inflows increased by 5.6% to US$36 billion. On a global scale, Hong Kong ranked the sixth. In terms of FDI outflows, Hong Kong was the second largest source of FDI in Asia. According to UNCTAD's Outward FDI Performance Index, which compares an economy's share of world outward FDI against its share of world GDP, FDI from Hong Kong was 10 times larger than would be expected, given its share of world GDP.

According to a recent government survey, Hong Kong's total stock of inward direct investment was estimated at US$520 billion at the end of 2005, corresponding to 293% of 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, Bermuda and Cayman Islands accounted for 31.3%, 6.7% and 1.6% of the total stock of inward direct investment in 2005. Excluding tax haven economies, the Chinese mainland was the most important source of direct investment in Hong Kong (accounting for 31% of the total), followed by the Netherlands (8.1%), the US (5.1%) and Japan (3.2%). The majority of the stock of investment was related to service industries including investment holding, real estate and business services; wholesale, retail and trading; banking, finance and insurance; and transport and communications.

(Last updated: 28 May, 2007)