III. ECONOMIC TRENDS AND OUTLOOK A. Major trends and outlook Hong Kong's economy registered real GDP growth of 5.9 percent in 1993, according to revised HKG estimates. The per capita GDP of Hong Kong exceeded US$19,300 in 1993, and is continuing to grow. The unemployment rate for the year approximated 2 percent. Inflation, which dipped into single digits in 1992, moderated further to an 8.5 percent annual rate. Hong Kong's total exports grew by 13 percent in 1993. The growth of re-exports, which comprise more than three- fourths of Hong Kong's total exports, was on the order of 20 percent. Manufacturing within Hong Kong continued to decline in relative importance to the overall economy, accounting for 13 percent of GDP in 1993 in contrast to 24 percent in 1980. More and more firms in the toy, watch, and consumer electronics industries have shifted production facilities to southern China to take advantage of lower wages and cheaper land. The textile and apparel industries remain the backbone of Hong Kong's manufacturing sector employing 42 percent of the manufacturing workforce and accounted for US$11.4 billion, or 40 percent of Hong Kong's domestic exports in 1993. Hong Kong has become predominantly a service economy, with China and Southeast Asia as major markets. Services now account for more than one-third of total domestic exports of goods and services, up from one-fourth a decade ago. Services account for three-fourths of Hong Kong's GDP and employ some two-thirds of the work force. B. Principal Growth Sectors The Service Industries: Non-Financial (1) Tourism and Retail Sales Tourism is Hong Kong's largest earner of foreign exchange next to the textile and apparel industries. Tourism provided revenues of US$7.7 billion during 1993. Visitor arrivals exceeded 8.9 million in 1993, up 12 percent compared with 1992. Visitors from Taiwan totalled 1.8 million, from the PRC 1.7 millon and from Japan, 1.3 million. Visitors from the U.S. increased 9 percent to 755,000. Hotel room occupancy rates climbed to an average of 87 percent in 1993, up from 82 percent in 1992. The growth in tourism was reflected in retail sales, which increased by 7 percent in 1993. In the first five months of 1994, retail sales increased by 16 percent. Retailing sectors that enjoyed strong growth included clothing and footwear (up 31 percent) and consumer durables (excluding motor vehicles) up 13 percent. (2) Shipping and Port Activities Hong Kong enjoys perhaps the best natural deep-water port on the Chinese coast. Additionally, Hong Kong's port, road, air and communications infrastructure makes it an attractive place to do business, especially with respect to the China market. Hong Kong is the principal hub port for south China. It serves as a transit point both for exports and re-exports to China for processing or consumption and for re-exports to North America, Europe and elsewhere. In 1993, Hong Kong's container throughput totaled 9.3 million twenty-foot equivalent units (TEU), up 17 percent over 1992 and is projected to rise to 10.5 million TEUs in 1994. The majority of Hong Kong's outward-bound container cargo is generated in Guangdong province. In 1992, Hong Kong handled over 100 million tons of cargo, triple the amount of a decade earlier. With continued high economic growth and industrialization in China, the development of deep water ports at Yantian and Gaolan in south China should be complementary to Hong Kong over the medium term. Over the longer term increased competition should generate greater efficiencies in service. Hong Kong's container throughput will continue to experience double-digit growth through the turn of the century. Hong Kong projects it will require some 20 new container berths by the year 2006, providing new annual terminal capacity for 8 million TEU. There are currently eight terminals with 19 berths. The first of four container berths at Container Terminal 8 (CT8) became operational in September 1993. CT8 will have its 1.8 million TEU capacity entirely utilized by mid-1995. Efforts to move forward with construction of CT9, which the Hong Kong Government had hoped to have operational by mid-1995, remain stalemated over PRC concerns over the suitability of one of the consortium partners. (3) Airport Hong Kong's Kai Tak Airport is ranked second in the world in terms of cargo handled and fourth in terms of international passengers. In 1993 the single-runway airport handled more than 24 million passengers and 134,000 aircraft movements. This represents a 12 percent increase over 1992. Growth in demand over the next four years is projected to average 5 percent annually. To meet the increase in passenger and cargo traffic, the Hong Kong Government in late 1989 announced plans to construct a replacement international airport at Chek Lap Kok, offshore north of Lantau Island. In 1991, China and the United Kingdom signed a memorandum of understanding under which the U.K. agreed to consult with China on aspects of the program continuing through Hong Kong's return to Chinese sovereignty in 1997, including the level of airport-related debt for which the future Hong Kong Special Administrative Region (HKSAR) would be responsible. Work on transport links and land reclamation for the USD21 billion project is proceeding but it is doubtful the airport will be operational by the targeted June 30, 1997 completion date. After wrangling over the proportion of debt versus equity in the airport project for over two years, the UK and China appeared, by September 1994, close to agreement on an overall financing package that would allow remaining work to go forward. Property and Construction Markets Continued rapid economic growth, the influx of overseas staff, greater-than-average increases in the population growth rate in 1993, heightened property speculation and negative real interest rates are among factors that drove Hong Kong's property prices to dizzying heights by early 1994. Average prices for residential apartments increased 15-20 percent in 1993. Prices for "luxury" apartments (generally units over 1,000 square feet) were up 30 percent. Rents on these units hit HK$50 (US$6.41) per square foot by year-end 1993, up from USD1.50 per square foot two years earlier. Office rents in Hong Kong's Central and Admiralty business districts reached HK$60 (US$7.70) per square foot while vacancy rates in these districts declined from 1.9 percent to 1.4 percent. With Hong Kong gaining the unenviable reputation as having the highest rents, there was growing concern in early 1994 that an increasing number of multinational firms would move their regional headquarters to lower cost locations. In June 1994, the HKG introduced a package of administrative measures designed to cool the residential market. In the short term, the measures are intended to curb speculation; longer term, to increase new home supply through accelerated construction. In August, the government announced that the short-term measures seemed to be having their desired effect. Average prices of flats were down 10-30 percent since March and agreements for sale and purchase of property were also down. Demand for office space continued to be strong, however, and the HKG was examining measures to cool commercial prices. As work on major infrastructure projects accelerated, public sector building and construction output has risen sharply. According to Hong Kong Government statistics, the gross value of public sector construction rose by 39 percent in the first quarter of 1994 compared to the same period in 1993. The gross value of construction work performed at private sector sites was also up 19 percent for the first quarter of 1994 compared to the same period in 1993. Infrastructure investment in the next decade in Hong Kong is projected to exceed HKD350 billion (USD45 billion). This investment -- in the new Chek Lap Kok airport, in port facilities, transportation links, power generation, telecommunications and other areas - will strengthen substantially the territory's efficient, but strained infrastructure. C. Government Role in the Economy The Hong Kong Government pursues an essentially "laissez faire" approach to economic policy. Government intervention with the private sector is minimal. Hong Kong's fiscal policy stresses the predominant role of the private sector while limiting government interference and the role of the public sector. Hong Kong has consistently supported an open multilateral trading system. The Government was a firm proponent of the recent Uruguay Round of trade talks in the GATT and looks forward to participating in the new World Trade Organization. Hong Kong maintains no dumping laws, nor countervailing duty laws, nor import quotas or tariffs. It urges similar open trade policies on its neighbors and trading partners. The tax rate in Hong Kong is relatively low. The top personal income tax rate is 15 percent; the government has just lowered the business profits tax to 16.5 percent. There are no taxes on capital gains, dividends, or interest. This low tax rate induces foreign investment to flow into Hong Kong. The Government estimates it will realize a US$1.95 billion budget surplus for FY 1994-95, with fiscal reserves on the order of US$17.5 billion. Hong Kong Government-funded core projects including those related to Chek Lap Kok replacement airport and environmental protection have further fueled the development of Hong Kong's economy. Although the Hong Kong Government is spending heavily on projects of this nature, the financial structure is fit. In the 1993 fiscal year which ended March 31, 1994, government expenditure accounted for about 19 percent of GDP. Government expenditure has never exceeded 20 percent of GDP. Prudent fiscal management and strong reserves have obviated the need for the Hong Kong Government to incur debt. D. Balance of Payments Situation (1) Exports Growth in external trade slowed during 1993, due to weak demand from Hong Kong's major trading partners in Europe, North America and Japan. Total exports grew 13 percent to US$135 billion in 1993. This rate, while impressive, was below the 21 percent increase registered in 1992. As Hong Kong manufacturers have shifted production across the Chinese border, domestic exports - those wholly produced in Hong Kong - have continued to decrease in importance. Domestic exports declined 5 percent in 1993. Hong Kong's domestic exports to the United States declined 6.7 percent to US$7.8 billion while domestic exports to China grew 2.3 percent to US$8.2 billion. Hong Kong's total exports to the U.S., including domestic exports and re-exports, increased by 12.9 percent. (2) Imports Imports in 1993 grew by 12 percent to USD 139 billion. This compares with a 23 percent increase in imports in 1992. China was the largest supplier, with 37 percent of the total, followed by Japan (17 percent), Taiwan (9 percent) and the U.S. (7 percent). On a per capita basis, Hong Kong spent an average of US$1,845 on American imports. E. Trade and Investment Barriers Trade Barriers For Hong Kong, "trade barriers" is almost an oxymoron. The barriers in place pale in significance when compared to the barriers to trade of any of the neighboring countries. The lack of official trade barriers is best indicated by the behavior of the Hong Kong Government itself. In 1992, the Government Supplies Department bought US$89 million in goods and services from the United States. This gives the U.S. a 30 percent market share with the Hong Kong Government. Non-tariff barriers are also minimal. Practices such as labeling requirements, standards, etc. are not used to exclude U.S. competitors from the market. Major Investment Barriers Hong Kong imposes no scheme of incentives or disincentives on foreign companies in the area of investment. There is no government policy designed to limit the activities of foreign investors or channel their efforts into specified projects or sectors. Foreign investment in Hong Kong is not restricted to the industrial sector but freely flows into services, franchises, restaurants, the entertainment industry, and the ownership of property, both residential and commercial. Foreign broadcasters face some restrictions. U.S. trained doctors, nurses and psychiatrists face burdensome certification requirements in order to practice medicine. Foreign lawyers are not allowed to practice Hong Kong law but under new legislation, foreign law firms may now hire local lawyers, which allows them to become "full service" firms. For details, see Section VII Investment Climate. Foreign interests are freely allowed to incorporate their operations in Hong Kong, to register branches of foreign operations, or to set up representative offices. There is no restriction on the ownership of such operations. Company directors are not required to be citizens of, or resident in Hong Kong. Reporting requirements are straightforward and not onerous. There is no distinction in law or practice between investment by foreign controlled companies and those controlled by local interests. There are no disincentives to foreign investment such as limitations on the use or transfer of foreign currency, or any system of quotas, performance requirements, bonds, deposits, or other similar regulations. F. Labor Force Hong Kong's booming economy has resulted in shortages of labor in some critical industries, including construction, manufacturing and some service trades. The low unemployment rate has put upward pressure on wages and accelerated job switching. The government has instituted a labor importation scheme to bring in additional workers. The Hong Kong Government also expects up to 60,000 people of various skills and professions to emigrate in 1994. However, this "brain drain" is being offset in large part by the arrival of many expatriates and return of many overseas Chinese attracted by Hong Kong's booming economy. G. Major Local and Third Country Competitors in Specific Sectors Hong Kong is a totally open market with competition in every sector. British firms control major trading interests and have garnered the bulk of the contracts on the new airport while Japanese firms are well established in the retail sector. H. Infrastructure Situation Re: Goods/Service Distribution Hong Kong has excellent port, airport, roads and telecommunications infrastructure. Due to Hong Kong's rapid growth, however, the airport and the port are operating at over capacity and cannot expand until new facilities come on line which will take several years. I. Major Infrastructure Projects Underway The following is a list of major projects underway in Hong Kong. The airport authorities are currently evaluating bids for the major contracts but once the contract is awarded, there may be opportunities for subcontractors. Project Approximate Contract Amount Chek Lap Kok Airport - Passenger Terminal US$2 billion Chek Lap Kok Airport - Air Cargo US$300 million Chek Lap Kok Airport - Aircraft Maintenance US$300 million Chek Lap Kok Airport - Aviation Fuel Service System US$150 million Expressway - Route 3 US$1 billion Strategic Sewage Disposal Scheme - Phase 1 US$500 million Airport Railway - Tsing Yi Tunnels & x Lantau Tunnels US$600 million New Hospital Construction US$220 million Macau Airport Expansion Phase 2 US$80 million Central Medical Incinerator Plant (BOT) US$25 million Refuge Transfer Stations (3 stations) US$450 million Landfill Restoration Project US$100 million Western Tunnel US$1 billion