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COUNTRY PROFILE

Hong Kong

MacauOur quarterly Country Report on Hong Kong and Macauanalyses current trends. This annual Country Profileprovides background political and economic information.

1997-98The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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ISSN 0269-7319

January 23rd 1998 Contents

Hong Kong

3 Basic data

4 Political background4 Historical background8 Constitution and institutions

10 Political forces12 International relations and defence

13 The economy13 Economic structure14 Economic policy17 Economic performance

20 Resources20 Population21 Education22 Health23 Natural resources and the environment

23 Economic infrastructure23 Transport and communications25 Energy provision26 Financial services28 Other services

30 Production30 Manufacturing31 Mining and semi-processing31 Agriculture and fishing32 Construction

33 The external sector33 Merchandise trade36 Invisibles and the current account37 Capital flows and foreign debt37 Foreign reserves and the exchange rate

41 Appendices41 Sources of information42 Reference tables

1

EIU Country Profile 1997-98 © The Economist Intelligence Unit Limited 1998

Macau

55 Basic data

56 Political background56 Historical background57 Constitution and institutions

58 The economy58 Economic structure59 Economic policy60 Economic performance

61 Resources61 Population62 Education62 Health62 Natural resources and the environment

63 Economic infrastructure63 Transport and communications64 Energy provision64 Financial services65 Other services

67 Production67 Industry68 Agriculture and fishing68 Construction

69 The external sector69 Merchandise trade70 Invisibles and the current account70 Capital flows and foreign debt70 The exchange rate

71 Appendices71 Sources of information71 Reference tables

2


Hong Kong

Basic data

Land area 1,095 sq km

Hong Kong Island 80 sq kmKowloon 47 sq kmNew Territories 794 sq kmOutlying Islands 174 sq km(Reclamation since 1851 60 sq km)

Population 6,502,100 (mid-1997 estimate)

Main regions Population in ’000 (mid-1996)

Hong Kong Island 1,340 Kowloon 2,020New Territories 2,900 Outlying Islands 60

Climate Sub-tropical

Weather in Victoria(altitude 33 metres)

Hottest months, July and August, 24-34°C; coldest month, March, 4-26°C;driest month, December, 46.6 mm average rainfall; wettest month, July,547 mm average rainfall

Languages English and Chinese (mainly Cantonese)

Measures UK imperial system changing to metric system. Local measures are used includ-ing: 10 fan=1 tsun (Chinese inch)=0.037 metres; 10 tsun=1 check (Chinesefoot)=0.371 metres; 10 tsin=1 leung (tael)=37.8 grams; 16 leung=1 kan(catty)=0.605 kg; 100 kan=1 tam (picul) = 60.48 kg

Currency 1 dollar=100 cents. Annual average exchange rate 1997: HK$7.74:US$1;HK$12.61:£1. Exchange rate mid-January 1998: HK$7.74:US$1, HK$12.64:£1

Time GMT +8 hours

Public holidays January 1st, Chinese New Year (three days in late January or early February),Good Friday, Easter Saturday, Easter Monday, Ching Ming Festival (one day,early April), Dragon Boat Festival (one day at the end of May or in early June),Hong Kong Special Administrative Region Establishment Day (July 1st),Sino-Japanese War Victory Day (August 17th), the day following ChineseMid-Autumn Festival (late September/early October), National Day (October1st-2nd), Chung Yeung (one day, second half of October), December 25th-26th.

Hong Kong: Basic data 3


Political background

Historical background

Colonisation by Britain:gunboat diplomacy

Until it was seized from China by the British navy in January 1841 at the heightof the first opium war (1839-43), Hong Kong Island was home to fewer than6,000 Chinese inhabitants, two-thirds of them farmers, one-third fishermen.The then foreign secretary, Lord Palmerston, referred to it famously, andlargely accurately, as “a barren island with hardly a house upon it”. Thereafterit grew rapidly as an entrepôt for trade between the Chinese empire, whichBritain prised open with its gunboats, and the rest of the world.

At the end of the second opium war in 1860, Britain extended its territorialholdings to include Kowloon, situated on the mainland peninsula facing HongKong Island, and Stonecutters Island. Rapid population growth soon robbedthe colony of land on which to grow food, while, in the aftermath of theSino-Japanese war (1894-95), Britain felt the need for a defensive zone fromwhich to protect it from attack by the other imperialist powers. In 1898 ittherefore forced China to cede the New Territories, ie the land north of Kowloonup to what is now the Shenzhen Special Economic Zone, plus 235 islands, on a99-year lease, expiring in June 1997. Except during the second world war, whenthe territory was occupied by Japan and many of its inhabitants fled to themainland, Hong Kong remained a colony ruled directly by the British crownthrough an appointed governor up to its retrocession to China on July 1st 1997.

The 1984 Sino-BritishJoint Declaration

On December 19th 1984 the prime ministers of the UK and China signed anagreement on Hong Kong, which laid down the terms of reversion of the wholeterritory to Chinese sovereignty in 1997. As the Chinese communist govern-ment had never officially recognised British sovereignty over Hong Kong, andas Hong Kong was dependent on China for basic resources such as water, therewas never any question that the UK would be able to hold on to it indefinitely,and, in any case, the lease on the New Territories covering 92% of the colony’sland area was due to expire in 1997. The UK was therefore concerned to ensurethat the transition would be as painless as possible for residents of Hong Kong,so that they would not feel it necessary to emigrate, thus irreparably damagingthe economy.

The main document of the 1984 Sino-British agreement is the Joint Declaration,in which the UK agreed to surrender Hong Kong to China in 1997 and Chinaagreed that Hong Kong would, under the guiding principle of “one country, twosystems”, become a special administrative region (SAR) of China, its capitalistway of life guaranteed for the following 50 years. Chinese leaders have sinceindicated that this period may be extended, perhaps indefinitely.

The Joint Liaison Group:1985-1991

A Sino-British Joint Liaison Group (JLG) was established in 1985 to implementthe agreement and supervise the transfer of sovereignty. The group itself doesnot have any powers and is due to be wound up on January 1st 2000. In its firstfew years it reached agreement on a number of subsidiary issues, includingtravel and identity documents, air traffic, shipping, civil service pensions, the

4 Hong Kong: Historical background


surrender of fugitive offenders and the localisation of UK legislation. JLG workslowed dramatically after the Beijing massacre in June 1989, and the Hong Kongpeople’s emotional response to that event soured the atmosphere. In the sameyear, when confidence in the territory was at a low ebb, the government an-nounced the Port and Airport Development Strategy (PADS), a massive pro-gramme of infrastructure investment. In July 1991 the Hong Kong and UKgovernments finally reached an agreement with Beijing approving the coreprojects in PADS, subsequently referred to as the Airport Core Programme (ACP).

1992-94: the Patten plan In July 1992 the then governor, Sir David Wilson, a Foreign Office sinologist,was succeeded by a former government minister and Conservative Party chair-man, Chris Patten, who had lost his seat in the April 1992 UK general election.In the first of his annual policy addresses, in October 1992, Mr Patten outlinedhis proposals for the elections for the three tiers of government between thenand 1997. They stretched the limits of the Basic Law (the mini-constitution forthe SAR that Hong Kong will become) to broaden the franchise. Mr Patteninsisted his proposals accorded with the Basic Law’s stipulations about the firstpost-1997 government. Hence, he argued, the “through train” on which legis-lators and civil servants could sit through the transfer of power—seen as animportant guarantee of a stable transition—could survive. The most importantreforms affected the Legislative Council (Legco) which would be elected in1995, and involved: increasing the number of directly elected seats; abolishingthe appointed seats; increasing the number of seats elected by functional con-stituencies and broadening the functional constituency electorate to 2.7m (toencompass almost the entire workforce); and filling an Election Committeeresponsible for electing ten Legco members with directly elected members ofdistrict boards. He also proposed that the geographical constituencies comprisesingle-seat constituencies; that the voting age be lowered from 21 to 18; andthat the appointed seats to the district boards be abolished.

China was furious. It was angered that the proposals were revealed withoutconsultation; at what it saw as the flouting of previous Sino-British under-standings on the issue; and at what it believed was a British attempt to rig theelections in favour of forces hostile to China. Months of Sino-British talksfailed to produce a compromise, and in July 1993 China established a Prelimi-nary Working Committee (PWC) in fulfilment of its threat to set up a “secondkitchen” if the UK insisted on implementing the Patten proposals. After severalmore rounds of fruitless talks, Mr Patten announced in December 1993 that hewould press ahead with his original proposals (although a watered-down ver-sion had already been tabled by the UK in the negotiations) for local andlegislative elections in 1994 and 1995.

The proposals all worked to expand Hong Kong’s electorate enormously: inaddition to lowering the voting age, they also abolished appointed seats in thedistrict boards, and introduced a first-past-the-post system for the 1994-95 localand legislative elections. As a goodwill gesture to China, the bill also removedthe ban on Hong Kong residents who were members of China’s rubber-stampparliament, the National People’s Congress (NPC), running for Legco. But themost controversial part of Mr Patten’s programme increased the number ofdirectly elected seats in the 60-seat Legco from 18 to 20, and broadened the

Hong Kong: Historical background 5


functional constituency electorate responsible for selecting 30 seats from110,000 to 2.7m. The Standing Committee of the NPC, as expected, votedunanimously on August 31st 1994 to abolish Hong Kong’s political structureon July 1st 1997.

The first polls to be held under Mr Patten’s electoral reforms were theSeptember 1994 district board elections. At just 33.1%, the turnout rate wasdisappointing, but the government was able to point to the record number ofpeople, around 700,000, who had voted as a sign of popular support for thegovernor’s reforms. As in the previous direct elections in 1991, the pro-democracy lobby won the most seats, but this time it lost ground to the emerg-ing pro-Beijing bandwagon.

1994-95: progress ontransitional issues

During the disagreements over future electoral arrangements, not a single majoragreement on the transition was reached. However, within weeks of the finalstage of the reforms being passed in June 1994, accord was finalised on thefuture of 39 sites in Hong Kong currently used by the British army. This wasfollowed in early November 1994 by the signing of the long-awaited financingagreement for the new airport. Then, in June 1995, Chinese and British negoti-ators finally reached agreement on what had become the most important out-standing dispute surrounding the transfer of Hong Kong’s sovereignty, thequestion of the Court of Final Appeal. However, the deal was only reached aftera climbdown by the governor over the start-up date of the court, which was notestablished until July 1st 1997 despite an agreement with China in 1991 that thecourt be set up before the handover. He was also forced to back down on the twoother major sticking points, namely, the composition of the court and its juris-diction. The Democratic Party, which had previously been among Mr Patten’sclosest allies, was outraged over the court agreement, as was the Hong Kong BarAssociation. Both feared that imprecise language in the agreement meant thatChina might assign sensitive cases involving “Acts of State” to pliable courts onthe mainland instead of to more independent courts in Hong Kong.

September 1995: Legcoelections

Despite China’s plans to disband Legco and replace it with a wholly unelectedbody on July 1st 1997, Beijing played an overt role in the September 1995Legco polls. As expected, the pro-democracy camp trounced the pro-Chinacandidates in the direct elections in geographical constituencies: theDemocratic Party won ten of the 20 seats, while members of smaller affiliatedparties and independents in the pro-democracy camp won five. The mainpro-Beijing party, the Democratic Alliance for the Betterment of Hong Kong(DAB), won just two seats; even its leader, Tsang Yok-sing, and two deputyleaders suffered defeat. The DAB fared better in the indirectly elected part of theelection, taking five seats. The Democratic Party won 19 seats in total, while itsallies, the Confederation of Trade Unions and the Association for Democracyand People’s Livelihood, won six. The pro-business Liberal Party, whose mem-bers in the outgoing Legco were mainly appointees or indirectly elected, lostground, winning just ten seats. The strong showing by the pro-democracylobby is likely to have reinforced in China’s mind the notion that Hong Kongis a centre of subversion that requires tight control, and to have strengthenedits intention to pursue its stated aim of dismantling Legco upon its resumptionof sovereignty.

6 Hong Kong: Historical background


1996: Hong Kong’s newpower structure

In December 1995 Beijing appointed the Preparatory Committee on HongKong (PC), charged with “managing” the transition to Chinese rule. One yearlater an 800-member Election Committee chosen by the PC appointed TungChee-hwa, a former shipping executive, as the first chief executive of the HongKong SAR, and also selected the provisional legislature which replaced Legcoon July 1st 1997. Continuity of administration was maintained by the reten-tion of top officials, including the chief secretary, Anson Chan, and the finan-cial secretary, Donald Tsang.

Important recent events

April 1990: The Basic Law of the Hong Kong SpecialAdministrative Region is enacted by China’s parliament, theNational People’s Congress (NPC).

September 1991: The United Democrats of Hong Kong(UDHK) win a landslide victory in the Legco elections.

July 1992: Chris Patten succeeds Sir David Wilson asgovernor of Hong Kong.

October 1992: In the first of his annual policy addressesMr Patten outlines his proposals for the elections for thethree tiers of government before 1997.

July 1993: China establishes a Preliminary WorkingCommittee in fulfilment of its threat to set up a “secondkitchen” if the UK insisted on implementing the Patten plan.

December 1993: Sino-British co-operation over HongKong’s political future breaks down over future electoralarrangements, as Mr Patten proceeds to legislate unilaterallyfor his reforms.

February 1994: The Legislative Council (Legco) votes infavour of the first “uncontroversial” stage of the electoralproposals put forward by the governor without China’sconsent.

June 1994: Legco approves the governor’s controversialproposals for the 1995 Legco elections by 30 votes to 29.

August 1994: The NPC votes unanimously to abolish HongKong’s district boards, municipal councils and LegislativeCouncil on June 30th 1997.

September 1994: The pro-democracy parties win the mostseats in the district board elections, the first to be held underMr Patten’s political reforms.

October 1994: The two main pro-democracy parties, theUDHK and Meeting Point, merge to form the Democratic Party.

June 1995: Agreement is reached with China on the Courtof Final Appeal (CFA); China and the UK agree on thefinancial support arrangements for the new airport andrailway link, nearly four years after the two sides signed theMemorandum of Understanding on the airport projects.

July 1995: The Democratic Party introduces a motion of noconfidence against the governor for “betraying the rule oflaw” over the CFA agreement, and it is defeated by 35 votesto 17.

September 1995: The pro-democracy movement winsanother clear victory in the Legco elections; the pro-ChinaDemocratic Alliance for the Betterment of Hong Kong (DAB)wins just seven seats in the 60-seat Legco.

December 1995: China names the 150-memberPreparatory Committee on Hong Kong.

March 1996: China presses ahead with its pledge to scrapHong Kong’s elected legislature and replace it with anappointed one, in a vote by the Preparatory Committee.

April 1996: The mainland regulatory agency, ChinaNational Aviation Corp (CNAC), and Citic Pacific pay SwirePacific HK$8.27bn (US$1.1bn) to buy control of the regionalcarrier, Dragonair, and to take control of Cathay PacificAirways out of British hands. The deal, at a big discount tomarket prices, is seen as being the shape of things to comefor big non-Chinese companies wishing to operate in theterritory and China after 1997.

September 1996: China and Britain approve a corporateasset swap at Hong Kong’s container port, enabling theninth terminal to be built without the participation of JardineMatheson, after a three-year deadlock. The Jardine group, inreturn, acquires berths at the eighth container terminal.

July 1st 1997: Hong Kong becomes a SpecialAdministrative Region (SAR) of the People’s Republic ofChina.

Hong Kong: Historical background 7


The 1997 handover: asmooth transition

The ceremony marking the end of British rule and the return of Hong Kong toChinese rule at midnight on June 30th 1997 was attended by China’s head ofstate, President Jiang Zemin, the Chinese prime minister, Li Peng, the Prince ofWales (representing the Queen), the British prime minister, Tony Blair, and thenew SAR chief executive. The rites were smoothly and peacefully conducted,with no untoward accident or incident. Protesters were kept at bay by a massivesecurity cordon, but a leading member of the Democracy Party, Martin Lee,accompanied by fellow ex-legislators, was allowed to proclaim “We shallreturn!” from the balcony of the Legco building after midnight.

Fears of heavy-handed interference by the central government in Hong Kong’saffairs proved unfounded in the second half of 1997, as did the associated fearsof a crackdown on political dissent. Troops of the People’s Liberation Army(PLA) entered Hong Kong in the morning of July 1st 1997 and installed them-selves quietly in the former headquarters of the British forces, where they havesince remained confined to barracks, maintaining a deliberately low profile.The Chinese government has taken every opportunity to demonstrate its“hands-off” approach to Hong Kong, persistently refusing to be drawn intocommenting on matters which it says are the concern of the Hong Konggovernment. Protesters have continued to air their concerns in the streetswithout harassment (although Taiwan flags are no longer allowed to be flownon October 10th, the national day of the Republic of China, which was de-posed on the mainland in 1949 but survives in Taiwan) and those few dissi-dents from the mainland who have stayed in Hong Kong remain at liberty. Thepress, which for several years has already been subdued in its criticism of Chinabecause of “self-censorship”, has not been fettered by legal restrictions.

Constitution and institutions

The chief executive: aregional autocrat

The chief executive is appointed by China’s central government after selectionby an Election Committee whose members are nominated by corporate bodies.It is constitutionally possible, although by no means a foregone conclusion,that a more popular form of election for the chief executive will be adoptedafter 2007. The term of office of the chief executive is five years and no individ-ual may serve for more than two consecutive terms.

Like the 28 British governors who preceded him, the first chief executive, TungChee-hwa, has strong policymaking and executive powers approximating tothose of a president. These powers are, however, limited from above by thecentral government in Beijing, to whom he reports directly, and from below bythe legislature.

Legco: not yet fully elected The Legislative Council (Legco) elected in September 1995 was dissolved onJuly 1st 1997, when it was replaced by a Provisional Legislative Council (PLC)appointed seven months earlier. The performance of the PLC has not been anymore impressive than one would expect given the method of its formation andits subsequent composition. It started its work officially in July 1997 by repeal-ing a series of laws which had been hastily passed in the final Legco session andhas since not been noted for taking strong legislative initiatives.

8 Hong Kong: Constitution and institutions


The first post-handover election to Legco will take place on May 24th 1998under rules embodied in an electoral law passed in September 1997 and whichare more restrictive than those that governed the 1995 polls. The number ofvoters in functional constituencies (comprising half the 60 Legco seats) hasbeen reduced from 2.7m to 180,000, disenfranchising workers in the enter-prises concerned and thereby ensuring that pro-business candidates will pre-dominate. In the 20 seats directly elected by geographical constituencies, themethod of election has been changed from first past the post to a system ofproportional representation. The remaining ten seats will be chosen by anElection Committee largely made up of representatives of functional constitu-encies. The new election rules virtually ensure that the Hong Kong DemocraticParty and other pro-democracy groups, which together won an overwhelmingvictory in the directly elected seats in the 1995 Legco election, will not com-mand a majority of votes in the 1998 Legco. A fully elected Legco is not inprospect before 2007, and even then its introduction is not guaranteed.

Local government:democracy diluted by

extra appointed members

Local government contains a greater element of democracy, but its powers arelimited to the provision of basic services. The 40-member Urban Council gov-erns the main urban centres, while the equivalent body in the New Territories,the Regional Council (established in 1986), has 36 members. The first fullydirect elections for both bodies were held in March 1995. In June 1997 theprospective chief executive, Tung Chee-hwa, appointed nine extra members tothe Urban Council and 11 to the Regional Council, including candidates whohad been defeated in the 1995 elections. The next tier of administration com-prises 19 district boards covering 145 constituencies throughout Hong Kong;since September 1994 all had been directly elected, but in June 1997 Mr Tungexpanded their numbers with 96 appointed members, again including candi-dates who had failed to win seats in the 1994 election. The overall results ofMr Tung’s changes have been a diminution of the influence of the Democratsin local government and a retreat from the recently established principle oflocal democracy and popular accountability.

The judiciary The judicial system remains the same as that which existed when Hong Kongwas a British colony, except insofar as the power of final adjudication now lieswith a new Court of Final Appeal in Hong Kong instead of with the PrivyCouncil in London. The basic principles of judicial independence and trial byjury, which contrast strongly with the arbitrary and politicised operation ofcourts in the rest of China, have been retained. Most existing judges have beenallowed to retain their posts; however, the chief justice of the Court of Final Appealand the chief judge of the High Court must now be Chinese citizens (which meansthat they must be ethnic Chinese) who are permanent residents of the SpecialAdministrative Region (SAR) with no right of abode in any foreign country.

Judges in the High Court, comprising the Court of Appeal and the Court ofFirst Instance, are appointed by the chief executive on the recommendation ofan independent commission composed of local judges, persons from the legalprofession and other “eminent persons”.

Hong Kong: Constitution and institutions 9


The Basic Law: HongKong’s post-1997

constitution

A Basic Law drafting committee, with members from both China and HongKong, was set up by China in 1985 to draw up a mini-constitution, known asthe Basic Law of the Hong Kong Special Administrative Region. The law wasenacted in April 1990 by the National People’s Congress in Beijing afterlengthy consultation and redrafting. The Basic Law ensures that Hong Kongwill be ruled until at least 2007 by a chief executive acceptable to China, withthe ultimate objective being the election of this post by universal suffrage.Only a minority of Legco seats are initially to be directly elected, and progresstowards an expanded and fully elected legislature will, as in the case of thechief executive, stretch well into the next century.

Under the Basic Law, the SAR has its own legislature, legal and judicial systemand full economic autonomy, while defence and foreign affairs are the respon-sibility of the central government in Beijing, although Hong Kong is still ableto participate in international organisations and agreements where appropri-ate. Hong Kong continues to function as an international financial centre, withno exchange controls, free convertibility of the Hong Kong dollar and freeinward and outward movement of capital. Existing freedoms (the rights of freespeech and assembly, to a free press, to freedom of religion, and to strike andtravel) are ensured by law, although the Provisional Legislative Council hasruled that demonstrations in favour of such causes as independence for Tibetor Taiwan may not be held. Business ownership, private property, the right ofinheritance and foreign investment are also protected by law.

Political forces

Political parties are intheir infancy

Political parties were discouraged by the colony’s political structure until theearly 1990s and were in any case illegal before 1990. Under British rule, boththe Executive Council (Exco) and the Legislative Council (Legco) were, at leastin theory, merely advisory bodies, and not the executive and legislative bodiesthat their names suggested. Before the 1991 Legco election, members wereeither appointed by the governor or selected by functional constituencies;consequently, as in pre-1832 Britain, there was no need for extra-parliamentarysupport organisations. Politicians were business people or professionals repre-senting sectional interest groups rather than professional politicians as suchand tended to eschew developed political ideologies. However, since directelections for some seats in Legco began in the early 1990s several politicalparties have been formed.

The pro-democracy parties The United Democrats of Hong Kong (UDHK) for a long time enjoyed thelargest following of Hong Kong’s fledgling political parties. In October 1994 theUDHK merged with the next largest pro-democracy party, Meeting Point, toform the Democratic Party, which also enjoys widespread support. Two seniormembers of the party, Martin Lee Chu-ming and Szeto Wah, have led protestsagainst repression in China, and the Chinese government has been adamantthat neither should be allowed any office in the post-1997 executive or thelegislature. The Democratic Party is a broad middle-class coalition united onlyon the issue of securing full democracy, although many in the business com-munity take its election rhetoric seriously and fear that it would like to tax

10 Hong Kong: Political forces


them in order to finance expanded welfare programmes. The other pro-democracy parties formed in the early 1990s are the Association for Democracyand People’s Livelihood and the Hong Kong Democratic Foundation. Frontier,led by Emily Lau, and the Citizens Party, centred around Christine Loh, are tworelatively new and already prominent, although small, pro-democracy group-ings, built up around former independent Legco members.

Pro-business parties The pro-business parties, quite inappropriately, use the word “liberal” in theirtitles. A loose grouping of 20 prominent gubernatorial appointees to Legco andExco, the Co-operative Resources Centre, formed itself into the Liberal Party inJuly 1993. The principal concern of the Liberal Party is to ensure “stability and

Main political figures

Tung Chee-hwa: The first chief executive of the SpecialAdministrative Region (SAR), a former member of Exco andshipping magnate. Frequently commended by Beijing for hishandling of major issues in Hong Kong, the hard-workingMr Tung is a largely transitional figure. If he is successful inkeeping his ambitious promise to build 85,000 flats a year hewill earn his place in the history books for more than justhaving been the SAR’s first chief executive.

Anson Chan: Chosen as chief secretary by the last Britishgovernor, Chris Patten, and retained by Tung Chee-hwa afterthe handover to preserve administrative continuity eventhough she had supported Mr Patten’s ill-fated democraticreforms against opposition from China.

Donald Tsang: Hong Kong’s first ethnic Chinese financialsecretary, appointed in September 1995. Committed to thefixed link between the Hong Kong and US dollars. Retainedafter the handover to maintain financial stability despite hisopposition to possible moves in the direction of increasedinterventionism.

Martin Lee Chu-ming: Barrister and chairman of theDemocratic Party; regarded as subversive by China.

Szeto Wah: One of the most senior members of theDemocratic Party; also regarded as subversive by China.

Emily Lau: A former independent member of Legco; vocalcampaigner for greater democracy and human rights.Founder and leader of Frontier, initially a non-party groupingbut now effectively a political party. Gave up her UKcitizenship in December 1997 in order to be eligible forelection to Legco in 1998.

Christine Loh: A former independent member of Legco;previously an appointed legislator, she was directly elected to

Legco in September 1995; campaigner for greaterdemocracy and women’s rights. On May 4th 1997 foundedthe Citizens Party, which is close to the Democrats andFrontier but focuses more strongly on “green” issues. Alsorenounced her UK citizenship in order to contest a Legcoseat in 1998.

Tsang Yok-sing: chairman of the Democratic Alliance forthe Betterment of Hong Kong (DAB). Sufferedembarrassment when, in September 1994, it was revealedthat he had applied to emigrate to Canada in 1989; failed towin a seat in the 1995 Legco election but was nonethelessappointed a member of the Provisional Legislative Council.Since the handover Mr Tsang has started to press fordemocratic reforms to Legco alongside his formerpro-democracy opponents.

Jiang Enzhu: the head of the New China News Agency(Xinhua). Mr Jiang, a former ambassador to the UK andwidely regarded as much more diplomatic than hispredecessor, Zhoo Nan, is charged with overseeing thedemotion of Xinhua from its former role as China’s de factoembassy in Hong Kong. His appointment as a Hong Kongrepresentative to the National People’s Congress despite hisactual status as a mainland representative in Hong Kongblatantly demonstrates the Chinese government’s low levelof understanding of democratic procedures.

Liao Hui: the director of the Hong Kong and Macau AffairsOffice of China’s State Council (cabinet), the body which wasformerly responsible for arranging for the smooth return ofthe territory to China and which now acts as a liaison officebetween the Tung administration and the centralgovernment. Mr Liao, a native of neighbouring Guangdongprovince, is the son of Liao Chengzhi, who carved outChina’s policy towards overseas Chinese communities inearlier decades.

Hong Kong: Political forces 11


prosperity”, ie to avoid upsetting China. This attitude of the pro-businessgroupings, and their tendency to ally with the pro-China groups which informer years were anathema to them, is now so commonplace that it hasceased to appear ironic. These groups fared badly in their first electoral test, theSeptember 1994 district board elections, and in the later 1995 Legco election.

Pro-China groups The Chinese Communist Party was technically illegal in British-ruled HongKong, where it operated underground since the 1920s, largely through tradeunions and front organisations. One of these, the Democratic Alliance for theBetterment of Hong Kong (DAB), formed in July 1992, has emerged as theleading pro-China group, having secured the endorsement of Chinese govern-ment leaders and 37 seats at the district board elections in 1994, second only tothe Democrats’ 75. On social issues, such as opposition to importation oflabour, the DAB often finds itself fighting on the same side as the DemocraticParty and its allies.

The pro-China groups performed less well in the September 1995 Legco elec-tion, winning just seven seats. Xinhua, the New China News Agency, thenChina’s de facto embassy in Hong Kong, assisted in the co-ordination of thepro-China parties’ election campaign. China also has many non-governmentalchannels of influence in Hong Kong, including pro-China newspapers such asthe Wen Hui Pao and Ta Kung Pao, as well as major corporate groups, includingthe Bank of China Group, China Resources and the China International Trustand Investment Corporation.

International relations and defence

China is in charge offoreign policy

The “high degree of autonomy” promised to the Hong Kong Special Adminis-trative Region (SAR) after the 1997 handover in the 1984 Sino-British JointDeclaration does not extend to security, defence and international relations,which are now the preserve of the central government in Beijing, althoughHong Kong is still allowed to maintain separate representation in many inter-national bodies, such as the World Trade Organisation and IMF, under the titleof “Hong Kong, China”.

The role of the People’sLiberation Army

British forces departed from Hong Kong and were replaced by the ChinesePeople’s Liberation Army (PLA) on July 1st 1997. As well as defending HongKong against potential external enemies, the PLA will be available for emer-gency use in the unlikely event of “turmoil”, which the Hong Kong govern-ment is unable to control. Defence-related costs are borne by China’s nationalbudget, not by Hong Kong. A Law on Troops Stationed in the Special Adminis-trative Region has been drafted, defining the functions, powers, managementand jurisdiction of the troops, and the relationship between the troops and theSAR. Apart from abiding by national laws, the troops will have to respect HongKong laws, not interfere with local affairs or engage in business activities.Troops will also receive in-depth political education, military training andeducation on Hong Kong’s basic social situation and existing laws. To date, PLAtroops have been conspicuous by their absence from the streets of Hong Kong.

12 Hong Kong: International relations and defence


The economy

Economic structure

Main economic indicators, 1996

GDP growth (%) 4.9

Consumer price inflationa (%) 6.0

Visibles trade balance (US$ bn) –15.5

Goods & services balance (US$ bn) 2.7

Exchange rate (HK$:US$) 7.734

Population (m) 6.31

a Consumer Prices Index (A)

Source: EIU.

Hong Kong’s economydepends on trade

Hong Kong is first and foremost a trading centre. It has virtually no naturalresource base, so is dependent on imports for raw materials, food and fuel. Thedomestic market, although increasingly important, is still limited by the size ofthe population, and growth depends on exports. The total value of foreigntrade in goods and services was equivalent to 284.2% of current-price GDP in1996, compared with, for example, 15.6% in Japan and 18.6% in the US.

Services have largelyreplaced manufacturing

Hong Kong differs from the other Asian newly industrialising countries. Al-though all four started out as low-cost labour-intensive manufacturing bases,Singapore, Taiwan and South Korea have all developed high-technology indus-tries, whereas Hong Kong has become a services centre, in particular for foreigndirect investment and companies doing business in China. The structure of theeconomy has therefore changed dramatically over the past decade: the manu-facturing sector, which in 1984 accounted for 24.3% of GDP, contributed 8.3%of GDP in 1995 and now employs only about 325,000 people. Banking, trade,tourism and other services, which together provide 83.8% of output and nearly65% of employment, have become far more important (see Economic infra-structure, and Production).

Comparative economic indicators, 1996

Hong SouthKong Singapore Taiwan Korea Japan US

GDP (US$ bn) 154 94 296 485 4,582 7,636

GDP per head (US$) 24,440 30,900 13,730 10,650 36,410 28,790

Consumer price inflation (%) 6.0 1.4 3.0 5.0 0.1 2.9

Current-account balance (US$ bn) 2.7a 14.3 10.5 –22.2 65.9 –148.7

Exports of goods (US$ bn) 173.7 126.0 114.8 128.3 400.3 614.0

Imports of goods (US$ bn) 193.3 123.7 96.6 143.5 316.7 803.2

Foreign tradeb (% of GDP) 284.2 265.4 71.3 56.1 15.6 18.6

a Goods and services balance. b Merchandise exports plus imports.

Sources: National sources; EIU.

Hong Kong: Economic structure 13


Economic policy

Positive non-interventionism

Since the second world war, the government has followed a policy of economicliberalism which was dubbed “positive non-interventionism” in the 1970s.Non-interventionism means keeping taxes low and not spending governmentrevenue on anything that might interfere with industry and commerce. Thegovernment restricts itself mainly to providing essential support services, suchas housing, education and, to a lesser extent, healthcare.

No control overmonetary policy

Since 1983, when political uncertainty led the Hong Kong government to pegthe Hong Kong dollar to the US dollar at US$1:HK$7.8, its ability to makeeconomic policy has been strictly circumscribed. Monetary and interest ratepolicy is in effect in the hands of the US Federal Reserve and, on occasion,currency speculators (see Foreign reserves and the exchange rate). This has leftthe government ill-equipped to deal with an inflation rate it admits is too highand has also contributed to surges of money into the stock and propertymarkets, where returns have traditionally been higher than the often negativereal interest rates paid on bank deposits (see box; see Reference table 2 forhistorical data on money supply and Reference table 3 for interest rates). Al-though the usefulness of maintaining the fixed link continues to be underconstant debate, there have been no real doubts about the government’s deter-mination to hold the rate, and, both before and after the handover, China haspledged to support the Hong Kong government’s defence of the link (seeForeign reserves and the exchange rate).

Labour and propertyproblems

Unlike Singapore and South Korea, the Hong Kong government has refrainedfrom promoting specific industries. Even the major utilities are largely in privatehands, generally being monopolies or oligopolies. In the same way, althoughthe government welcomes foreign investment and does not discriminate be-tween domestic and foreign business, it offers no specific incentives to attract it;nor are there any rules to exclude it from particular sectors. Yet Hong Kong’sgeographical location, excellent infrastructure and low-tax regime continue toattract high value added direct investment, particularly financial services, re-gional headquarters and companies doing business in China.

The operating environment has its problems, however. Labour issues havebecome increasingly problematic in recent years. Despite the recent rise in theunemployment rate, demand for skilled labour is still high, and many employ-ers still have great difficulty finding suitably qualified staff. Therefore, whilethe business community has called on the government to ease restrictions onimported labour, local union leaders, supported by political parties (includingboth the Democrats and the Democratic Alliance for the Betterment of HongKong), are constantly calling for a cessation of the imported labour pro-gramme, which has been retained by the incoming Special AdministrativeRegion (SAR) government.

The rising cost of commercial and residential space has been another majorproblem. Soaring property prices have eaten into the new affluence of thepopulation, particularly the “sandwich class” (the middle class unable to claimeither state housing or a business-related accommodation allowance), who find

14 Hong Kong: Economic policy


that owning their own homes is far beyond their reach. Property price inflationin both the residential and commercial sectors is also seen as a serious threat toHong Kong’s competitiveness as an international commercial hub. In early1994, with residential and commercial property having risen in price by about25-30% in the first quarter of the year and Hong Kong rentals as high asanywhere in the world, there were fears of a speculative bubble that could burstwith disastrous consequences. The government decided it was time to act, themain weapon in fighting the property bubble being an increase in land supplyfor residential development. New rules aimed at curbing speculation by mak-ing it harder to buy and sell unfinished flats were also introduced. The govern-ment’s measures coincided with the beginning of a series of interest rate rises,so property prices fell by as much as 40% over the 18 months from March 1994,before rising by 10-15% in the first half of 1996. The government partly relaxedits restrictions against pre-sales in December 1995.

Important policy events of recent years

October 1983: The Hong Kong dollar is pegged to the US currency at a rate ofHK$7.8:US$1.April 1994: The corporate profits tax rate is lowered from 17.5% to 16.5%.June 1994: The government announces its long-awaited measures to cool downthe chronically overheated property market.October 1994: A phased timetable for interest rate deregulation is introduced.January 1995: Plans for an old-age pension scheme are abandoned in the face ofopposition from China and the business community.February 1995: The mandatory provident fund bill is passed by Legco.July 1996: Exchange Fund approves new Public Mortgage Corporation.July 1997: Chief executive Tung Chee-hwa promises to build 85,000 housing unitsper year and increase home ownership from 50% to 70% of the population withinten years.

The 12-month moving average for property transactions was in the 9,000-unitrange in mid-1996, 75% of its level at the end of the boom in early 1994 andless than half its level at the peak in late 1991. A mini-boom ensued, withproperty prises rising steadily up to the third quarter of 1997, although, withrents failing to follow suit, yields on rented property declined.

An attack on the Hong Kong dollar in October 1997 prompted interbankinterest rates to rise. The consequent increase in mortgage interest ratesdepressed the residential property market, causing purchase prices and rents tofall markedly.

Fiscal policy The annual government budget presented by the financial secretary tends to belargely a non-event, sparking little enthusiasm. Nor, until recently, has it pro-voked any strong opposition. However, since 1990, as mentioned above, therise of political parties has forced the government to consider demands forincreased welfare expenditure. Current policies have allowed steady economicgrowth, which has enabled the government to increase spending on the physi-cal and social infrastructure while achieving a budget surplus every year since

Hong Kong: Economic policy 15


1985/86 (financial years April-March), except for 1995/96, when there was asmall deficit of HK$3.1bn (US$400m) as expenditure on construction of thenew airport peaked. In 1996/97 the budget surplus is estimated to have reachedHK$15.1bn. In recent years the construction of the new airport and its associ-ated transport links has absorbed an increasing portion of the governmentbudget, but this item will dwindle rapidly following the opening of the newairport in July 1998. Revenue is raised through a combination of direct andindirect taxes, land sales and utility charges. There are no import tariffs, butduties are levied on some commodities. Stamp duty earnings from propertyand stockmarket transactions have become an increasingly important revenuesource. (See Reference table 1 for a historical breakdown of government reve-nue and expenditure.)

Highlights of the 1997/98budget

As in the 1996/97 budget, tax cuts in the 1997/98 budget were limited toincreases in salary tax allowances which, in most cases, more than compen-sated for inflation. Corporate profits taxes were left unaltered. Tax concessionsare officially forecast to cost the government HK$3.1bn in lost revenue in1997/98 and HK$20bn up to 2000/01. Total public expenditure is projected torise by 6.9% in real terms, with the largest rises going to housing and theenvironment.

• An unusually high surplus of HK$32bn, double that of the previous fiscalyear, is expected in 1997/98, because of the admission of income from landtransactions as revenue following the handover and because, with the airportlargely completed, infrastructure spending will be greatly reduced.

• Following a major revaluation of rates in 1996/97, the government an-nounced in the 1997/98 budget that rateable values of domestic property hadrisen by 23% during the previous three years and non-domestic property valuesby 10%. However, to mitigate the effect of these rises the government reducedoverall rate percentage charges so that 28% of ratepayers now pay the same orlower rates than before, while 59% have to pay increases of 20% or less.

• Wine duty was slashed from 90% to 60% in the 1997/98 budget in order tohelp the tourism industry. Duties on tobacco products and on fuels were raised.

Capitalism will survivefor at least 50 years

Although the Basic Law’s coverage of many politically related issues is some-what vague, the sections dealing with economic institutions are more specific,guaranteeing that Hong Kong will maintain its free-trade, free-enterprise, low-tax environment for at least 50 years. Provisions stipulate that:

• the Hong Kong SAR will have its own independent finances; the Hong Konggovernment will keep its revenue for its own use and not hand it over to thecentral government in Beijing; the central government will not levy taxes inHong Kong;

• government spending in Hong Kong must be kept within the limits ofrevenue and deficits must be avoided;

• the Hong Kong dollar will be retained and will continue to be backed by a100% reserve fund (the Basic Law does not mention any particular exchangerate regime, such as a fixed link to the US dollar);

16 Hong Kong: Economic policy


• the Hong Kong dollar will remain convertible and exchange controls maynot be imposed; the free flow of capital into and out of the SAR will be safe-guarded;

• Hong Kong will remain a free port, pursuing a free-trade policy, althoughtariffs may be lawfully imposed in unspecified circumstances.

Summary of government expenditure(HK$ m; real % change)

Revised Budgetestimate estimate % change in1996/97 1997/98 real terms

Economic 10,545 11,625 3.4

Security 24,735 25,595 –3.1

Social welfare 18,225 21,195 9.1

Health 25,050 28,215 5.7

Education 39,165 45,315 7.7

Environment 6,550 8,080 14.4

Community & external affairs 13,015 14,105 1.3

Infrastructure 24,180 28,135 8.1

Support 29,885 33,975 6.9

Housing 25,845 32,140 16.0

Total public expenditure 217,195 248,380 6.9Source: 1997/98 Budget.

Economic performance

Economic growth: highbut uneven

The economy of Hong Kong is strongly cyclical. In an economy so open toforeign trade, with the government normally choosing not to iron out cyclicalfluctuations, and with the well-known volatility of the Hong Kong public,booms and recessions tended until the 1990s to be comparatively violent. How-ever, the growth trend in the 1980s was upwards. Annual GDP growth averaged7.7% in real terms in the years from 1980 to 1988, although the actual ratesvaried from 0.4% in 1985 (when the appreciation of the US dollar severelydamaged Hong Kong’s export competitiveness) to 13% in 1987. A sharp slow-down in China in 1989-90 and the negative impact on confidence of the June1989 Beijing massacre trimmed the growth rate in those years, but between 1991and 1994 GDP growth recovered to the 4.5-6.5% range as China and the globaleconomy rebounded. (Reference tables 4-6 give various breakdowns of GDP.) In1995 a sharp slow-down in retail sales signalled a deceleration in real privateconsumption growth to only 2.5% year on year, pulling overall GDP growthdown to 3.9%. In 1996 merchandise exports slowed to single-digit growth, butdomestic demand recovered as private spending strengthened, so GDP growthrevived to 4.9% and is estimated to have risen to well over 5% in 1997.

Hong Kong: Economic performance 17


Gross domestic product(% real change)

Average1996 1992-96

GDP 4.9 5.3

Private consumption 4.3 5.7

Investment 12.2 10.2

Exports of goods & services 4.9 11.3

Regional comparisons Taiwan 5.6 6.24South Korea 7.1 7.1Singapore 7.0 8.6Sources: Census and Statistics Department, Quarterly Estimates of Gross Domestic Product, 2nd Quarter 1997; Estimates of Gross

Domestic Product 1961 to 1996; national sources.

Conditions favourinvestment

While these growth rates have been nowhere near as spectacular as in Chinaitself, they are impressive for a largely developed economy like Hong Kong.Important factors facilitating this growth have been low taxes (the corporatetax rate is 16.5%), the absence of customs and excise duties on almost all items,the convenient transport system and other excellent infrastructure facilities,and the non-interventionist approach of the government. These favourableconditions have enabled Hong Kong to attract high value added direct invest-ment, particularly financial services, regional headquarters and companies do-ing business in China. While some domestic industries, notably electronics,have continued to expand over the past decade, a large share of Hong Kong’smanufacturing capacity has been shifted over the border into China in order totake advantage of lower operating costs. The relative decline in Hong Kong’smanufacturing sector has been accompanied by the rapid development of itsservices industries, such as finance, business and catering, but particularlythose relating to trade, which have been facilitated by continuous upgradingand expanding of Hong Kong’s excellent container port—currently the busiestin the world in terms of throughput. (See Economic infrastructure, and Prod-uction, for a discussion of sectoral trends.)

Exports of services have, as a result, grown very rapidly, although they have inmost years continued to be outpaced by growth in merchandise exports. In realterms domestic exports have been virtually flat since 1988, but rapid overallexport growth has been sustained by the rising volume of re-exports, resultingfrom the export boom in neighbouring Guangdong and the sharp increase inindirect trade through Hong Kong between China and third countries. Sincethe mid-1990s, however, re-export growth has slowed markedly as factories inmainland China have increasingly been able to package their own goods andexport them through the mainland’s own rapidly expanding ports. While thisprocess reduces Hong Kong’s earnings from re-exporting goods from the main-land, it increases the revenue of Hong Kong-owned container terminals on themainland and also boosts transshipment business in Hong Kong waters. Mer-chandise import growth is largely determined by export growth since mostexports are destined for re-export or for incorporation into domestic exports,although growth in investment and private consumption also play a role.

18 Hong Kong: Economic performance


The economy is vulnerableto crises of confidence

Private consumption, which accounts for about 60% of GDP, is extremely vul-nerable to shifts in confidence: it slowed sharply in 1989, amid the crisis ofconfidence after the Beijing massacre, and soared in 1993 and the first quarter of1994, when the stock and property markets were booming. The private compo-nent of gross fixed capital formation is also greatly affected by the generalclimate of business confidence. Consequently, despite the fact that in a typicalyear public investment accounts for only about one-eighth of total fixed capitalformation, the government habitually initiates large infrastructure projects totry to revive confidence in the territory. Following the completion of HongKong International Airport in 1998 the government will embark on a majorrailway construction programme which is likely to begin in 1999 or 2000.

High wages growth Wages were bid up to high levels, by regional standards, by the intense demandfor labour (the unemployment rate has remained below 3% for most of the pastdecade) during the boom of the late 1980s, before temporarily stagnating in theensuing economic slow-down. In the year to March 1997 average earnings ofmanufacturing workers rose by 7.1% in nominal terms and 1.3% in real terms,as unemployment continued to fall from the high of 3.2% experienced in 1995to 2.8% in 1996 and 2.5% in the first quarter of 1997. Despite rapid across-the-board increases in wages, which have made a large contribution to the highrates of inflation over the past decade, income distribution is highly unequal:GDP per head rose to HK$189,182 (US$24,440) in 1996 and has overtaken thatof some developed OECD countries.

Inflation(%)

Average1996 1992-96

Consumer price inflation 6.0 8.1

Regional comparisons Taiwan 3.0 3.6South Korea 5.0 5.3Singapore 1.4 2.2Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; EIU.

Average monthly wage rates, Mar 1997(HK$)

Male Female Total

Manufacturing 11,063 7,763 9,171

Wholesale, retail & import/ export trade, hotels & restaurants 12,065 10,454 11,239

Transport services 12,693 11,366 12,354

Finance, insurance & real estate 9,860 12,434 10,719

Personal services 7,746 5,086 6,402

All selected industries 11,396 9,784 10,641Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

The mainsprings of inflation are both cost-push (the high cost of commercialspace and rising unit labour costs have added to the cost of services in partic-ular) and demand-pull, largely as a result of rising earnings, while importedinflation from China affects the lower income consumer price index especially

Hong Kong: Economic performance 19


because of the heavy weighting (currently 41.2%) given to food in its shoppingbasket. The Hong Kong currency’s fixed link to the US dollar has also made alarge contribution to the high level of asset price inflation in recent years. (SeeForeign reserves and the exchange rate; and Reference tables 7 and 8 for histori-cal data on inflation and wage increases.)

Competition fromSingapore

Hong Kong faces increasing competition from Asia’s other major entrepôt andfinancial centre, Singapore, which is moving ahead as an international foreignexchange centre and is pursuing more fund management business through taxincentives. Singapore also offers lower commercial rents and housing costs. Inan effort to capitalise on the uncertainty surrounding the transition of HongKong to Chinese sovereignty, Singapore stepped up its efforts during 1995-97to woo Hong Kong-based companies and citizens, even airing television com-mercials in the territory espousing the advantages of life in Singapore. News-paper advertisements urged Hong Kong residents to “look to Singapore forsecurity” when deciding where to deposit their money.

Resources

Population

Already over 6 million The total population of Hong Kong was estimated at 6,502,100 in mid-1997, afull 3% higher than a year earlier. The population grew at an average annualrate of 1% in 1984-93, but since 1994 annual growth rates have been faster.(Reference table 9 gives historical data on population, while Reference table 10gives data on the labour force.) The number of expatriates has grown partic-ularly rapidly in recent years, rising from 320,700 in December 1993 to 496,100at the end of June 1997, some 7.6% of the population. Filipinas, mostly dom-estic servants, make up the largest group. The rest consist of expatriate employ-ees and their dependants, together with a sizeable number of returned formeremigrants who have obtained passports from countries such as Canada.

Foreign citizens in Hong Kong, end-Jun 1997

Philippines 146,400

US 41,000

Indonesia 34,300

Canada 33,600

UK 31,400

Thailand 25,500

Japan 24,900

India 24,600

Australia 23,300

Malaysia 15,000

Total incl others 496,100Source: Immigration Department.

20 Hong Kong: Population


An ageing population The crude death rate is expected to rise as the age profile shifts upwards, butrising living standards, improved healthcare and moves to clean up the envi-ronment will counteract this tendency, and both the fertility rate and the crudebirth rate are set to fall rapidly, pulling down the rate of natural increase.However, these calculations could easily be upset by large migrations.

Population by age and sex, mid-1997(’000)

Male Female Total % of total

0-14 609.4 567.0 1,176.4 18.1

15-29 708.4 725.7 1,434.1 22.1

30-44 952.0 966.6 1,918.6 29.5

45-60 555.7 478.4 1,034.1 15.9

60+ 445.8 493.1 938.9 14.4

Total 3,271.3 3,230.8 6,502.1 100.0Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

People are moving tonew towns

There has been a marked shift of population from the overcrowded centralurban areas outwards, notably to new satellite towns in the New Territories.Overall population density was officially stated at 5,990 per sq km in 1996,ranging from 26,460 per sq km in the urbanised areas of Hong Kong Island,Kowloon and New Kowloon to 3,070 per sq km in the largely rural NewTerritories. The age distribution has changed markedly in the last decade; inmid-1997 18.1% of the population was under 15 compared with 23% in 1986,while in the same period the percentage of those aged over 65 rose from 8% to10.3%. The proportion of the population of working age (those between 15 and65) has risen from 69% to 71.6%, bringing the dependency ratio (the ratio ofyoung and old to those aged 15-64) down from 449 to 397 per 1,000.

Education

Education for all Free compulsory education between the ages of six and 15 is provided by thegovernment. There are also fee-paying schools which tend to use English as themedium of instruction, but international schools also offer teaching in French,German and Japanese. In 1995 the government announced plans to cut sub-sidies for international schools. This raised concerns that the move wouldaffect the development of international schools and make Hong Kong lessattractive to foreign investors whose staff might be based in the territory. Mostof the new primary schools are now being built in the burgeoning new towns.The majority of secondary school pupils are in Anglo-Chinese grammarschools, following courses leading to the Hong Kong Certificate of Educationexamination.

Language policy A growing number of schools are offering optional tuition in Putonghua (alsoknown as Modern Standard Chinese or Mandarin), the official language of thePeople’s Republic of China, but the government has been criticised for the slowpace of its introduction; a total of 619 of Hong Kong’s 1,400 primary andsecondary schools offered Putonghua as an optional subject in the 1994/95academic year, compared with 592 and 578 in the previous two years respec-tively. Another 19 secondary schools ran special Putonghua programmes

Hong Kong: Education 21


outside school hours. At the beginning of the 1996/97 academic year supple-mentary Putonghua classes offered at the main Hong Kong universities were allgreatly oversubscribed. If proposals currently before the Board of Education areintroduced, Putonghua lessons will become compulsory in all Hong Kongschools, but the poor availability of Putonghua teachers could be a majorproblem, at least initially. At the same time there is much concern about thefalling standard of English language in the territory, which is forcing com-panies to organise their own language training. The new Special AdministrativeRegion (SAR) government announced in 1997 that it would deregister a major-ity of schools currently registered as using English, on the grounds that thestandard of English used was inadequate. At the same time, plans were drawnup to introduce housing allowances for teachers of English coming to the SARfrom English-speaking countries in order to raise the standard of English teach-ing in local schools.

The explosion ofhigher education

Higher education has expanded rapidly. There are six universities: the HongKong University of Science and Technology; Hong Kong University; theChinese University of Hong Kong; Hong Kong Polytechnic University; the CityUniversity of Hong Kong; and Hong Kong Baptist University. A diminishinginterest in science, especially physics, has been evident among first-year stu-dents, despite local universities’ efforts to diversify the curriculum and relaxentrance requirements. Many top science students are apparently opting for abusiness degree instead. Students can apply for government grants to cover feesand for loans to cover living expenses.

Retraining the workers Demand for skilled labour is high, with many employers still finding itextremely difficult to find suitably qualified staff. Most of those who lost jobs inmanufacturing over the past decade have been able to find jobs in the growingservices sector, but it is becoming difficult for older, poorly educated people whohave worked in manufacturing for decades to learn new skills, despite thegovernment-funded Employee Retraining Board programme aimed at helpingunskilled workers aged 30 and above. Many are hesitant about registering forsuch schemes. The government also offers a variety of other technical trainingprogrammes. In 1982 it set up a Vocational Training Council (VTC) and aTechnical Education and Industrial Training Department to improve skill levelsthroughout industry. The VTC provides basic off-the-job training at 18 trainingcentres, while eight technical institutes provide more advanced courses.

Health

Subsidised medical care Medical care is not free, with the important exceptions of maternity and childcare and the accident and emergency services, but government subsidies keepcharges for treatment and hospital care low. There are three types of hospital inHong Kong: government, government-assisted and private. Government-runhospitals provide 95% of the hospital beds in Hong Kong.

Public hospitals becomemore popular

A Hospital Authority was set up in December 1991 to bring public hospitals intoone network. As the cost of private healthcare has escalated in recent years andthe public hospitals have improved facilities and opened luxury private and

22 Hong Kong: Health


semi-private wards which undercut private hospitals, more people are turning topublic hospitals. The proportion of patients attending private hospitals is re-ported to have fallen from 15% in 1992 to 8% in 1996. A total of 960,800patients were discharged from or died in Hospital Authority hospitals in 1996.

Natural resources and the environment

Land is scarce Hong Kong has virtually no mineral resources. Much of the territory’s vegeta-tion was lost through indiscriminate tree-felling during the Japanese occu-pation between 1941 and 1945, but it has been largely replaced through areforestation programme. Hong Kong is small and hilly, with several highpeaks; consequently, agricultural, or indeed any flat, land is scarce. Land hastherefore been extensively reclaimed from the sea for housing, offices, factoriesand major infrastructure projects such as the old Kai Tak airport and the newHong Kong International Airport. Despite high rainfall, Hong Kong is unableto meet its own domestic and industrial water requirements, so supplies arepiped in from the neighbouring Chinese province of Guangdong.

Pollution is increasing About 40% of the territory is protected by country parks (one of the highestproportions in the world), but the extremely high overall population densityputs pressure on the environment. Air, sea and noise pollution have increasedrapidly over the past decade, contributing to an 18.5% rise in respiratory dis-eases (excluding diseases such as lung cancer, which may also be linked topollution). Official figures estimate that air pollution will become 50% worseby 2000 if nothing is done to alleviate the problem. Such statistics, whichcommand much attention in the local media, are causing the increasinglyaffluent population to start to demand a higher quality of life, which is likelyto result in greater regulation, and enforcement of laws, governing environ-mental pollution of all kinds. The chronic problem of sewage disposal is at lastgradually beginning to be addressed through a long-term programme; mean-while, untreated sewage is depleting local fish stocks, which are already suffer-ing from overfishing. Environmentalist groups criticise the government forallegedly having failed to tackle these problems and in particular for not hav-ing set up a separate department of the environment. At present, the environ-ment portfolio is grouped together with those of planning and lands, acombination of responsibilities which, some have suggested, makes it difficultfor conservation and pollution control to be given full consideration whenplanning reclamation and civil engineering projects.

Economic infrastructure

Transport and communications

Public transport: excellentand expanding

Hong Kong’s transport and communications networks are among the best in theregion and are undergoing constant improvement. Public transport, especiallyrail, is excellent and the government is planning new schemes to improve itfurther, particularly through expanding rail services to the less central parts of

Hong Kong: Natural resources and the environment 23


the territory. The mainly underground Mass Transit Railway serves 38 stationsalong a total length of 43.2 km; by the end of 1996 it was used by an average of2.4m passengers on each working day, making it one of the most heavily usedcarriers in the world. An extension to provide a link to Hong Kong InternationalAirport is currently under construction and is scheduled for completion bymid-1998. The Kowloon-Canton Railway runs from Hung Hom to the Chineseborder and beyond to Guangzhou (Canton), and a light rail transit system,which is being continually extended, operates in the New Territories. In Decem-ber 1994 the transport secretary unveiled a new railway building programmethat will virtually double the size of the territory’s rail network by 2001. Theprogramme, which is expected to cost up to HK$56bn (US$7bn) in total, mostof which will be spent in the next few years, will add about 72 km to theterritory’s existing 75-km train network (excluding light rail).

Bus services are also very good. The government has granted franchises to fourbus companies. These are supplemented by public light minibuses and privatebuses, and by minibuses used mainly on contract for carrying tourists, factoryworkers, schoolchildren and commuters. There are nearly 30 km of tramwaytrack along the north side of Hong Kong Island and 18,126 taxis operating inthe urban areas, the New Territories and Lantau. However, as in other parts ofthe world, the roadbuilding programme has encouraged more people to drivecars. Only about 13% of households own a car, but there is one vehicle for each3.7 metres of road space (ie 268 vehicles per km), one of the highest ratios inthe world. Congestion is increasing, despite steady expansion of the road net-work and the addition of new tunnels, including the Western Harbour Cross-ing, the third road tunnel linking Hong Kong Island with Kowloon and theterritory’s first six-lane tunnel, which was opened in 1997. The governmenthas been trying to relieve the problem by improving public transport andimposing a punitive registration fee for private cars (accompanied by a compul-sory car inspection scheme for cars over six years old and a points system todisqualify offending drivers), but nevertheless ownership of private vehiclesgrew by some 11% per year between 1988 and 1996. Measures now underconsideration to try to ease the congestion include raising import duties oncars, increasing licence fees, abolishing tax benefits on company cars and elec-tronic road pricing (ERP). One ERP system has already been tried and rejectedin Hong Kong, but further research is expected to be carried out.

Two companies, the Hong Kong and Yaumatei Ferry Company and the StarFerry Company, provide most of the internal ferry services. In addition thereare a number of minor ferry services licensed to small operators.

The world’s busiestcontainer port

Hong Kong had the busiest container port in the world in 1996, handling13.2m twenty-foot equivalent units (TEUs). Throughput is well above thegovernment’s long-term forecasts and is resulting in an increasingly congestedport, especially given the three-year delay in building the ninth containerterminal which resulted from China’s opposition to the inclusion of JardineMatheson in the consortium originally engaged to complete the project. Fur-ther container terminals are to be built on Lantau, but the extent of furtherport development will be determined by the pace of merchandise trade expan-sion and is therefore uncertain.

24 Hong Kong: Transport and communications


New airport will relieveterminal congestion

In 1996, 29.6m passengers passed through Kai Tak international airport, a 7.8%increase on the 1995 figure. Further expansion of air traffic through Hong Kongwill be constrained until round-the-clock operations begin during the secondhalf of 1998 at the new Hong Kong International Airport currently underconstruction at Chek Lap Kok, north of Lantau Island. The airport will be fullyoperational on July 3rd 1998, three months behind the revised schedule, be-cause of delays in completing the airport railway. When the second runwaycomes on stream, probably in 2000, the airport will have the capacity to handle35m passengers and 3m tonnes of cargo per year. Kai Tak will be closed as soonas the new airport opens, eliminating the aircraft noise that is a regular nui-sance to hundreds of thousands of people living in nearby Kowloon. (Referencetable 11 contains transport statistics.)

Telecommunications:thriving despite limits on

competition

Telecommunications are excellent, and omnipresent. Steps were taken in 1995to introduce greater competition into the industry. In 1996 three companiesbegan to compete with Hong Kong Telecom in operating fixed line services inthe local market. The three companies are telecommunications subsidiaries ofWharf Holdings, New World Development and Hutchison Whampoa. Theservice provided by Hong Kong Telecom, which is controlled by the UK-basedCable & Wireless, offers free local calls, a line rental that is among the world’scheapest and one of the world’s most modern networks. There will therefore belimited scope for effective competition, especially as Hong Kong Telecom willretain its monopoly over lucrative international phone services until 2006,although other companies can tap this market through call-back services. Morecompetition is also being introduced into the market for cellular phone serv-ices: over 1.2m customers used cellular phones in 1996, an increase of 76% over1995, and nearly 1.1m customers used pagers.

Energy provision

All fuels are imported Hong Kong has no indigenous fuel supplies and imports all its hydrocarbons.Energy consumption per head stands at one of the highest rates in Asia. (Refer-ence table 12 contains national energy statistics.)

Electricity: massiveovercapacity

Electricity consumption increased by up to 10% in some years in the late 1980s,but the increases have slowed, or at times shown a year-on-year drop, since1990. As most of the territory’s manufacturing enterprises have been shifted toChina, consumption by commercial and domestic users has increased morerapidly (by 7.7% in 1996) than that of industrial users (whose usage fell by 1.4%in 1996). Two private companies, China Light & Power (CLP) and Hong KongElectric (HEC), supply electricity subject to prior government approval of theirfinancial plans, including tariff levels, but the formula has been criticised forencouraging overcapacity and causing higher power charges. Each has a mono-poly in its appointed area: CLP, through its three associated generating com-panies (Pepco, Kesco and Capco), supplies consumers in Kowloon and the NewTerritories, while HEC supplies consumers on Hong Kong Island and the nearbyislands of Ap Lei Chau and Lamma, where its power stations are situated. Muchof CLP’s electricity is generated in China: the Daya Bay nuclear power station,50 km along the Chinese coast, is a joint venture between the state-owned

Hong Kong: Energy provision 25


Guangdong Nuclear Investment Company and the Hong Kong Nuclear Invest-ment Company, a wholly owned subsidiary of CLP. The first of two 985-mwpressurised water reactors became operational in 1994, and 70% of its output ispurchased by CLP. Half of the output from the 300-mw Guangzhou pumpedstorage power station is also supplied to Hong Kong.

Gas supplies Total gas consumption increased at an average annual rate of 4.6% in 1996.More than half of total gas consumption is by domestic users, while industrialusers account for less than 4%. The Hong Kong and China Gas Companysupplies man-made town gas to Hong Kong Island, Kowloon and the NewTerritories. The other type of gas used is liquid petroleum gas (LPG), which issupplied in 15-kg cylinders or piped from bulk storage and vaporiser installa-tions. A Housing Authority directive adopted in 1987 as part of governmentplans to improve safety says LPG should not be considered unless town gas isnot available. The present regulations ban the installation of gas mains for LPGacross a road, and therefore, an LPG depot has to be built near a housingproject if piped LPG is to be supplied to households.

Consequently, town gas, which is produced from naphtha at Ma Tau Kok andTaipo, is now used by about 1.2m families, or 85% of domestic households,with a piped gas supply. However, its dominance could change in future years.During 1995 the Consumer Council proposed encouraging the use of naturalgas as a lower-cost, non-toxic alternative that would help to increase compet-ition. It has called on the government to conduct pilot schemes with naturalgas supply in newly developed areas such as Lantau. The nearest natural gas-field to Hong Kong is off Hainan Island in China. The 50-sq km field, whichhas estimated gas reserves of up to 100bn cu metres, was discovered in 1983.

Energy balance, 1996(m tonnes oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary production 0.0 0.0 0.0 0.0 0.1 0.1

Imports 18.0 1.5 4.2 1.9a 0.0 25.6

Exports –8.8 0.0 0.0 –0.1a 0.0 –8.9

Primary supply 9.2 1.5 4.2 1.8a 0.1 16.8

Losses & transfers –0.7 –1.5 4.2 –2.1 0.0 –8.5

Transformation output 0.0 0.5 0.0 3.0 0.0 3.5

Final consumption 8.5 0.5 0.0 2.7b 0.1 11.8

a Input basis. b Output basis.

Source: Energy Data Associates.

Financial services

A major financial centre Hong Kong ranks among the most important financial centres in the world.The growth of financial services has played a huge role in the development ofthe Hong Kong economy in the past decade. Together with insurance, realestate and business services, financial services contributed 24.5% of GDP in1994, compared with 16.0% in 1985, and in June 1996 employed 17.7% of the

26 Hong Kong: Financial services


labour force. Hong Kong offers the full range of financial institutions andservices, in which foreign companies play a very important role.

The Hong Kong MonetaryAuthority

There is no central bank, but in 1993 the government set up the Hong KongMonetary Authority (HKMA), formed by a merger between the Office of theExchange Fund and the Office of the Commissioner of Banking. The HKMAhas assumed some of the functions of a central bank, such as monetary man-agement and supervision of the banking sector, but it does not issue banknotes.In September 1996 Hong Kong was invited to join the Bank for InternationalSettlements, and is expected to be represented there by the HKMA chief execu-tive. Notes are issued by the Hongkong and Shanghai Banking Corporation—which owns HongkongBank and Hang Seng Bank—together with StandardChartered Bank and, since 1994, the Bank of China.

The banking system At the end of 1996 the 182 licensed banks in the territory had a total of 1,476branches. In addition, there were 62 restricted-licence banks. Together with124 “deposit-taking companies”, Hong Kong has 368 authorised banking insti-tutions. Of the licensed banks, 154 were incorporated outside Hong Kong atthe end of 1995. Since 1995 the HKMA has been the regulator for all threekinds of authorised institutions. All licensed banks are required to be membersof the Hong Kong Association of Banks (founded in 1981 to supervise bankingstandards and to regulate charges and deposit interest rates). A small number ofbanks with large branch networks dominate the market for retail bank deposits,while the other banks and financial institutions rely mainly on the interbankmarket for funds. (Reference table 13 contains data on licensed banks andassets and liabilities.)

Minimum regulation Government intervention in the financial system is kept to a minimum, butfinancial irregularities in the 1980s highlighted fundamental weaknesses andprompted new legislation under which a Securities and Futures Commissionwas established in 1989 to oversee the cleaning up and modernisation of thestock exchange. The Hong Kong Stock Exchange was merged in 1986 from fourpreviously existing exchanges and is developing as a major regional securitiestrading centre, attracting important international investors (helped by the ab-sence of restrictions on foreign ownership of shares) and providing more capi-tal for local industrial expansion. At end-June 1991, 310 companies with a totalmarket capitalisation of HK$805bn (US$104bn) were listed on the stock ex-change. At the end of December 1997 there were 658 companies with a marketcapitalisation of HK$3.2trn.

This rapid growth occurred despite the nervousness of some companies in therun-up to the transfer of sovereignty in 1997. Since 1984, when the Sino-Britishaccord assuring the return of Hong Kong’s sovereignty to China in 1997 wassigned and the Jardine group moved its legal domicile to Bermuda, an increas-ing number of Hong Kong companies have moved their domiciles in pursuit ofgreater legal security after the handover. By the end of 1995 more than half the542 companies listed on the Hong Kong Stock Exchange were domiciled inBermuda or the British West Indies, which, like Hong Kong have business-friendly tax regimes. Many companies have also obtained secondary listings onthe Singapore and London exchanges. Some companies are even delisting from

Hong Kong: Financial services 27


the Hong Kong market completely. In early 1995 five companies in the Jardinegroup, whose primary listing is on the London market, shifted their secondarylistings from Hong Kong to Singapore.

China listings on thestockmarket

Despite the outflow, the Hong Kong Stock Exchange aims to attract listings fromcompanies operating elsewhere in Asia. A major potential growth area comesfrom China’s thirst for international capital. In 1993 the Hong Kong market wasopened up to fund-raising by China-incorporated companies. By the end of1997 a total of 39 such listings, known as H-shares, were listed on the HongKong market. Many more were expected to be listed, but are having problemsmeeting the strict listing requirements, mainly because Chinese companies donot use internationally accepted accounting methods. Particular concern aboutpoor disclosure among Chinese companies followed the questioning (in 1995)by the Hong Kong Stock Exchange of Tsingtao Brewery about the loans it madewith the proceeds of its H-share listing and which it had not disclosed.

As investors soured on H-shares, they turned to the “red chips”, or Chinese-controlled companies, both those based in Hong Kong and those listed on thelocal exchange. CITIC Pacific is the best known of these, but others, includingGuangdong Investment, Cosco Pacific Shipping and Guangnan, have been bidup to multiples almost double the Hang Seng index average. Despite unevenresults, investors have been lured to what they think is more professionalmanagement and the promise of future asset injections by mainland parentcompanies. (Reference table 14 contains a variety of stockmarket indicators.)

Futures exchange The futures exchange of Hong Kong offers a limited range of products. Untilrecently these were limited to four commodities, namely gold, cotton, sugarand soybeans, and contracts based on the Hang Seng index and the Hong Konginterbank offered (interest) rate. Stock futures began trading in December 1994,although the market is all but non-existent. More successful have been thestock exchange’s options on 12 stocks which made their debut in September1995. The futures exchange trades in well-received foreign exchange futures,offering US dollar:yen and US dollar:Deutschmark contracts.

Government issues arepromoting the debt

market

The development of the local debt market has gathered pace in recent years,assisted by the rapid growth of government debt issues. Outstanding ExchangeFund bills and notes issued by the HKMA rose from HK$28.1bn at the end of1993 to HK$92bn at the end of 1996. Although the government consistentlyrecords budget surpluses and therefore has few debt-financing needs, issuingdebt assists the government’s monetary management, in particular by creatinga benchmark yield curve. In October 1996 the HKMA began to issue paper witha maturity of ten years, up from the previous maximum of seven years. Dailyturnover in Exchange Fund paper averaged HK$16bn in 1996.

Other services

Retailing The retail sector is extremely well developed, offering every type of store anditem imaginable, including international department store chains such as Sogoand Mitsukoshi of Japan, and Marks & Spencer of the UK, as well as world-class

28 Hong Kong: Other services


domestic retail chains such as Lane Crawford, Episode and Giordano. Shops areopen seven days a week and many do not close until 10 pm. In recent yearsHong Kong Island and the main shopping area of Kowloon, Tsim Sha Tsui,have witnessed the emergence of several massive shopping malls containingmultiscreen cinemas, department stores, designer clothing shops and inter-national retail chain stores as well as smaller specialist shops and restaurants.However, spiralling rents for retail space have been translated into rising pricesand, with the slow-down in consumer spending set in train by the rise ininterest rates that occurred in the last quarter of 1997, many retailers arestruggling to make money. Hong Kong is therefore no longer the “shopper’sparadise” it once was, at least not in terms of prices. (Data on retail sales aregiven in Reference table 15.)

Tourism Tourism remains a major industry in Hong Kong. Total tourism receiptsamounted to HK$82.5bn (US$10.7bn) in 1996, making it the largest foreignexchange earner, and for the first time surpassing domestic exports of appareland clothing. Nonetheless, there is concern about the territory’s potential forfurther growth, even for those tourists who are not put off by the territory’sescalating prices. There is also concern that the number of mid-range hotelrooms is not keeping pace with the growth in the number of potential users.Thousands of hotel rooms were lost in 1994-95 through the closure of hotels(in most cases to be replaced by more lucrative office developments), includingthe Hong Kong Hilton. Given the much higher returns that can be made fromcommercial space, the trend is likely to continue. This prompted the govern-ment in its 1996/97 budget to allow hotels to deduct the cost of refurbishmentover five years (down from 20 years).

Until 1997 growth in tourist arrivals held up fairly well, due to large increasesin the number of visitors from two of the main sources, China and Taiwan.This is partly because of the many visitors travelling between Taiwan andChina who have to pass through Hong Kong as there are almost no directflights between the two. However, Hong Kong needs to sustain the growth inarrivals from other countries: visitors from Taiwan tend to make their stay inthe territory shorter than their European and US counterparts, while visitorsfrom China tend to spend less. Hong Kong has not been so successful in thisrespect: its tourism industry suffered a downturn after July 1997, made worseby the regional financial crises and Hong Kong’s relatively high exchange rate.(Historical data on tourism are in Reference table 16.)

Tourism, 1996

Total visitor arrivals 11,702,735

Average stay (days) 3.7

Average spending (per head; HK$) 7,046

Hotel occupancy rate (av; %) 88Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Hong Kong: Other services 29


Production

Manufacturing

The manufacturing sector1996

Production (1986=100) 122

Establishments 27,412

Employment 325,068Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

From sweatshop tocontainer port

A lack of space and mineral resources meant that Hong Kong was never going todevelop either land-intensive or heavy industry. Instead the 1950s-70s werespent developing a range of labour-intensive consumer products: clothing andtextiles, fabricated metal products, printed products, and food and beverages.However, as wages starting rising in the 1980s, and as China opened its doors toforeign investment, manufacturers were able to adapt to increasing competitionfrom other low-cost producers by moving upmarket to more sophisticated,higher-quality products and by moving much of their productive capacity overthe border to the neighbouring Chinese province of Guangdong. Much of HongKong industry is now engaged in packaging, presenting, selling and shippinggoods produced in China at much lower wage rates than those in Hong Kong(see The external sector), so the real measure of Hong Kong’s continuing indus-trial growth is the rapid rise in re-exports of Chinese origin. In 1995 Hong Kongenterprises were estimated to employ 3m workers in Guangdong. (Referencetables 17 and 18 give historical data on manufacturing.)

Key sectors The textiles and clothing industry, on which Hong Kong’s industrialisationwas built, is still the territory’s most important industry and largest industrialemployer. Clothing manufacturers are prevented by quota restrictions frombasing their operations in China (see The external sector: Merchandise trade),but this is side-stepped by complex outward processing chains and, in somecases, by straightforward smuggling. Attempts to move the garment industryupmarket in recent years have had some success, as witnessed by Hong Kong’sgrowing reputation as an international fashion centre.

The electronics industry is the second major industry, and the largest recipi-ent of foreign investment, in Hong Kong. Now also the territory’s secondlargest export earner, the electronics industry has advanced rapidly from theassembly of radios to a wide range of sophisticated products, including semi-conductors, computer systems, television and video equipment and telecom-munications equipment, with development aided by the inflow of foreigncapital and advanced technology. There are fears that the industry is too relianton imported components (only 20% of the industry is made up of componentmakers). One often-quoted reason for Hong Kong’s failure to match the exportperformance of some other Asian economies in this sector is the inadequategovernment support for research and development in high-technology indus-tries. However, the electronics industry is seen as vital for Hong Kong’s future

30 Hong Kong: Manufacturing


growth, and since 1991 the government has actively supported researchthrough the establishment of the Hong Kong Research Council.

The plastics industry, which grew rapidly in previous decades, has been shrink-ing in the 1990s as output shifts into China. Hong Kong nonetheless remainsone of the world’s largest exporters of toys. The watches and clocks industry isalso important.

Factories are small The average manufacturing establishment is extremely small, typically housedon one or two floors of a high-rise building (“flatted factories”). In June 1997there were 315,374 people employed in 26,693 establishments, an average of11.8 employees per enterprise. The electronic parts and components industryemploys the largest number of people per enterprise with an average of 87.3,followed by the office machinery industry (52.7). This small average size ofmanufacturing enterprises, coupled with the absence of legislation protectingjobs or wages, enhances the ability of local exporters to respond flexibly tofluctuations in the business cycle and changes in taste.

Manufacturing job losses Shifting Hong Kong’s manufacturing base over the border into southern Chinahas resulted in the loss of well over 500,000 manufacturing jobs in the pastdecade. At the same time, nearly twice as many jobs have been created in thegrowing services sector. However, it is becoming more difficult for older, poorlyeducated employees, who have worked in manufacturing for many years, toadapt their skills to the services industries, despite the government-fundedEmployee Retraining Board programme. With the number of jobs being createdin the services sector also starting to slow, it is becoming increasingly difficultfor the sector to absorb those people losing their jobs in manufacturing.

Foreign investment:its key role

As in other sectors, foreign investment plays a key role in Hong Kong’s manu-facturing industries. The electronics sector was the largest recipient of foreigninvestment in 1993, accounting for 30% of the total, followed by electricalproducts, textiles and clothing, and food and beverage industries. The UnitedStates was overtaken by Japan as the largest source of foreign investment inHong Kong in 1990; next comes China, and then the UK and the Netherlands.Companies producing clothing, electronics and electrical products tend toexport the bulk of their output (mainly to the US and Japan), while companiesin the plastic products, food and beverages, textiles, and printing and publish-ing sectors sell heavily in the local market.

Mining and semi-processing

Nothing doing Hong Kong has virtually no mineral resources. Mining and quarrying activitiestogether account for only about 0.02% of GDP. The most important of suchactivities is cement production.

Agriculture and fishing

Most food is imported The agriculture and fishing sector accounts for about 0.1% of GDP. Less than10% of the territory’s land area is devoted to farming. The bulk of Hong Kong’s

Hong Kong: Mining and semi-processing 31


food is imported from China. Rice growing has largely disappeared, replaced bythe more lucrative intensive vegetable farming, and there is insufficient landfor extensive grazing, so the main animals reared for food are poultry and pigs.The government provides support services, including technical advice, devel-opment loans, a tractor ploughing service to help with land reclamation and avegetable marketing organisation.

Fishing and fish farming Hong Kong residents have a daily consumption per head of protein, much ofwhich is fish, of 107 grams, one of the highest in the world. Local marinefishing provides 53% of the fresh marine produce consumed in the territory,while pond fish farmers produce about 11% of the freshwater fish eaten. Boat-dwelling fishermen have in recent years moved onshore in increasing num-bers, as mechanisation of fishing has reduced the need for crew. In 1996 therewere 4,800 fishing junks of various sizes and designs, 4,400 of them motorised.Total estimated production from the two main sectors, marine capture andculture fisheries, was 192,100 tonnes, with a wholesale value of HK$2.5bn(US$323m). Fish ponds covering 1,130 ha are located in the north-westernNew Territories, although they are increasingly being crowded out by thedevelopment of new towns; they produced 5,100 tonnes of fish in 1995.

Construction

Booms and slumps The construction industry accounted for 5.4% of GDP in 1995 and in June1997 employed 81,658 persons or 3.5% of the labour force. The private sectoraccounts for about three-quarters of all investment in residential and non-residential building, while the public sector accounts for about 80% of otherconstruction activity. (For summary construction data see Reference table 19.)

The construction sector has been through a series of booms and slumps sincethe early 1980s, growing frenziedly in the wake of spiralling property prices atthe beginning of the decade then contracting sharply as, first, property pricescollapsed and then as infrastructure development slowed sharply after thecompletion of the Mass Transit Railway. From 1989 to 1991 residential con-struction flourished as demand for private housing soared, but activity cooledfollowing the imposition in November 1991 of curbs on property speculation.The property boom took off with a vengeance again in 1993.

The government’s June 1994 measures to cool down the residential propertymarket (see The economy: Economic policy) triggered a slow-down in con-struction activity by property developers, and the prices achieved at thegovernment’s land sales slumped. The main thrust of government measuresagainst excessive price rises continues to be increases in the supply of land forresidential development. The government proposes, somewhat ambitiously, tobuild 85,000 flats a year over the next few years. The 1996-97 land use planannounced in May 1996 calls for the creation of 10,000 flats along the newairport railway. The number of public flats to be created for the Private SectorParticipation Scheme will be 10,000.

Non-residential construction, largely office, retail and industrial space, ac-counted for over 64% of the usable floor area of total construction given

32 Hong Kong: Construction


permission to commence in 1996. Demand for office space soared in 1992-94as foreign financial services firms poured in, anxious to cash in on the Chinaboom, and an increasing number of mainland companies established a foot-hold in the territory: the number of foreign registered businesses rose from2,828 at the end of 1991 to 3,956 at the end of 1994. The June 1994 coolingmeasures were aimed only at the residential sector, but confidence in thenon-residential sector was also affected. During 1994-95 numerous industrialand industrial/office sites or government land auctions were withdrawn be-cause no one was willing to pay the government’s minimum price. Propertyprices then rose again, but were hit by the interest rate rises needed to protectthe Hong Kong dollar peg in October 1997. These price falls may allow HongKong to gain a competitive advantage vis-à-vis Chinese cities, many of whichhave a glut of office space, as a place from which to run operations in China.With the planned closure of Kai Tak airport when the new airport currentlybeing built at Chek Lap Kok is completed, height restrictions on buildings inKowloon have been lifted, providing new opportunities for development. ThePeninsula Hotel was the first to take advantage of the change in regulations,adding a tower block (mainly offices) to the hotel.

Public constructionprojects

Public works as a proportion of total construction activity have grown partic-ularly rapidly over the past few years, because of Chek Lap Kok and associatedprojects such as the rail link. Public-sector non-building work accounted for29% of construction in 1993, compared with 18% in 1992. With the financingsupport arrangements for the airport and rail link having been finalised inmid-1995, tendering has begun for multi-billion dollar property developmentsalong the route of the rail link. The Mass Transit Railway Corporation has theright to develop on top of five stations: Central, Tung Chung, Tai Kok Tsui,Tsing Yi and Kowloon. Contracts have already been awarded for the TungChung, Tai Kok Tsui and Central stations, where the cost of the developmentsis expected to amount to more than HK$50bn (US$6.5bn).

The external sector

Merchandise trade

A bastion of free trade Trade is Hong Kong’s raison d’être and its lifeline. As a proclaimed bastion offree enterprise and free trade, the government imposes minimal restrictions onexports and imports. In stark contrast to Japan and the other Asian newlyindustrialising countries, Hong Kong has refrained from protecting and subsi-dising its industries in order to accumulate trade surpluses. In April 1986 HongKong was admitted in its own right as the 91st contracting party to the GATTand continues to enjoy membership of the World Trade Organisation, whichreplaced the GATT in 1995. (Reference table 20 gives historical data on overalltrade trends.)

Hong Kong: Merchandise trade 33


Merchandise trade, 1996(HK$ m)

Exports fob 1,397,917 Domestic 212,160 Re-exports 1,185,758

Imports cif –1,535,582

Trade balance –137,664

Balance with China –91,070

Balance with US 175,144

Balance with Japan –116,750

Balance with Taiwan –89,859Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Domestic exports by principal commodity, 1996(HK$ m, fob)

Apparel & clothing 69,447

Electrical machinery & apparatus 30,357

Textile yarn & fabric 13,693

Office machinery & data processing equipment 10,220

Watches & clocks 11,987

Telecommunications equipment 8,363

Jewellery 5,777

Printed matter 4,785

Plastics 2,350

Baby carriages, toys, games & sports goods 1,779Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

From domestic exports tore-exports

The main trend in Hong Kong’s trade over the past decade has been the switchfrom domestic exports to re-exports as companies have shifted their manufac-turing facilities from Hong Kong into China to take advantage of lower oper-ating costs. Although some domestic export industries, notably electronics,have expanded, far more new capacity has been installed in China, from whereproducts are imported into Hong Kong before being re-exported. Consequently,while the volume of domestic exports fell by 12.8% between 1992 and 1996, thevolume of re-exports rose by 67.4% during that time. The garment industry(textiles and clothing) remains the territory’s most important domestic exportindustry, accounting for 32.7% of domestic export earnings in 1996. In recentyears the garment industry has been one of the most active in shifting itsoperations across the border. However, as China’s Multi-Fibre Arrangement(MFA) quotas are already full, manufacturers have to be careful about movingoperations that can change the all-important country of origin of their products,particularly following the decision by the United States in 1994 to change therules of origin of its apparel imports from the place where the garment is cut(still mainly Hong Kong) to the place where the goods are assembled (usuallyChina for the Hong Kong industry). A WTO agreement harmonising assemblyrules is expected sometime in 1998; however, it is unlikely that this will havemuch effect on the US position, so it looks as though the shift in productionover the next few years will be confined to office operations, like book-keepingand clerical work with no impact on the country of origin of a company’s

34 Hong Kong: Merchandise trade


products. (Reference table 21 gives exports by main commodity sectors; Refer-ence table 22 breaks down re-exports.)

From re-exports totransshipment

A more recent trend has been a shift in China’s trade patterns away from re-exporting through Hong Kong to simple transshipment through the territory.The shift from re-exports, which require some processing such as final packag-ing and shipping documentation and cargo insurance in Hong Kong, to trans-shipments, which do not show up in the territory’s trade statistics, appears tobe the result of China’s greater maturity in product processing and auxiliaryservices as well as its improving port facilities, which are allowing more tradeto be conducted directly between China and overseas markets. Hong Kong’sTrade Development Council said in April 1996 that transshipments were worthabout 70% of Hong Kong’s re-exports. With the continued development ofChina’s shipping market and product-processing capability, the growth oftransshipments will probably rise in the long term, reinforcing Hong Kong’srole as a major control centre for trade servicing and financing.

Mercantilism denied Hong Kong relies on imported raw materials and semi-finished goods as inputsto its industry, and it also relies on imports for its consumer goods, capitalgoods, food and fuel. The government does not manage trade by direct inter-vention. Therefore, despite spectacular growth in total exports, Hong Kong hasnot accumulated huge trade surpluses, and occasionally runs up significant,but so far tolerable, deficits. (Reference table 23 gives imports by end-usecategory; Reference table 24 contains trade volume indices.)

The importance of China The direction of Hong Kong’s trade has veered markedly away from the US,traditionally its main market, and towards China. Between 1986 and 1996 theUS share of Hong Kong’s domestic exports fell from 41.7% to 25.4%, whileChina’s rose from 11.7% to 29%. China is now the source of 57.6% of HongKong’s re-exports and the buyer of 35.2% of them. Because of the re-exporttrade, China is easily the most important source of imports, and in 1995overtook Japan as the largest source of retained imports (although in the firsthalf of 1996, as Chinese exports slumped, Japan again became the largestsource of retained imports, providing about 17% of the total).

Main trading partners, 1996

Exportsa to: % of total Imports from: % of total

China 29.9 China 37.1

US 21.2 Japan 13.6

Japan 6.5 Taiwan 8.0

Germany 4.2 US 7.9

UK 3.3 Singapore 5.3

a Including re-exports.

Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

The increasing importance of Chinese trade is also resulting in changingtrading patterns with other countries in the region; in March 1995 Hong Kongovertook the US as Taiwan’s largest export market. Some 60% of Taiwan’sexports, particularly electronics and raw materials, to the territory were

Hong Kong: Merchandise trade 35


destined for China. (Reference table 25 gives data on export markets; Referencetable 26 breaks down re-exports by source and eventual destination; and Refer-ence table 27 gives figures for imports by supplier.)

Invisibles and the current account

Invisibles well in surplus No balance-of-payments figures are yet published (the first such statistics arecurrently scheduled to appear in 1999), but until 1996 Hong Kong ran a peren-nial surplus on invisibles, more than offsetting the deficit on visibles tradesince 1983. This overall deficit on visibles and invisibles trade (roughly equiva-lent to the current-account balance) was about US$2.6bn in 1996.

Exports of services have grown extremely rapidly over the past decade, causingthe invisibles surplus to widen to HK$121.7bn (US$15.7bn) in 1996. The mostimportant contributor to this surplus is transport, net receipts from which wereHK$46.2bn in 1994, the latest year for which detailed figures are available.Travel (including tourism) is the second largest source of services income, butwith business and personal travel by Hong Kong residents continuing to growrapidly, net income from this category was only about HK$6.7bn in 1993,whereas trade-related services, which include offshore trading and purchasingservices, brought in a net income of HK$28.5bn. Financial services, includingbanking and brokerage services, have recorded particularly rapid growth inrecent years, with gross receipts having more than doubled, from HK$6.1bn toHK$13.8bn, between 1990 and 1993. In recent years Hong Kong has competedfiercely with Singapore to be the premier Asian financial services hub outsideJapan. Hong Kong has a more diverse stock exchange, but Singapore has adistinct advantage in that it has a network of double taxation treaties with thedeveloped and developing worlds. Hong Kong, with its lower tax rate and itshistory as a merchandise trade hub, neglected tax treaties because it allowedthe segregation of onshore and offshore income. Now its competitive advan-tage is eroding as manufacturing moves out of the territory. European bankscomplain that repatriating profits made in Hong Kong can cost 50% in taxes intheir home countries compared with a much lower proportion if the profitscome from Singapore.

Services trade, 1996(HK$ m)

Exports of services 288,533

Imports of services –166,870

Services balance 121,663

Goods & services balance –16,001Source: Census and Statistics Department, Quarterly Report of Gross Domestic Product Estimates, Second Quarter 1997.

No figures are published for flows of investment income (interest, profits anddividends) or for transfer payments. With so many expatriates, particularlyFilipinas, working in Hong Kong and remitting funds home, it is likely thatthere is a net outflow. (See Reference table 28 for historical data on servicestrade.)

36 Hong Kong: Invisibles and the current account


Capital flows and foreign debt

Large flows, but no figures Hong Kong has in the past published no estimates of capital-account flows atall, partly because, as a UK colony, it was not subject to the strict reportingrequirements that are a condition of full IMF membership. Since Hong Kongbecame a Special Administrative Region (SAR) of China, its status within theIMF has not changed. However, Hong Kong’s decision to publish balance-of-payments data from 1999 will mean capital-account information becomesavailable.

Although there are no data on foreign direct investment (FDI) outflows, it isclear from other countries’ published sources that there has been rapid growthin both inward and outward FDI over the past decade. Hong Kong is the largestforeign investor in China, and investment in other Asian countries such asMalaysia, Thailand and Taiwan has also increased rapidly. Japan and theUnited States are important sources of inward FDI. Flows of portfolio invest-ment, in both directions, have also been strong.

Precise figures for Hong Kong’s external debt are not available for the yearsafter 1985. Total public and private foreign indebtedness is currently estimatedto be about US$20bn, well over half of it short-term trade financing, equivalentto just over one month’s export earnings. The debt-service ratio declined to justover 1% in 1993.

Foreign reserves and the exchange rate

A mountain of foreignexchange

Hong Kong has abundant foreign exchange reserves which are continuing togrow rapidly; at some US$79.1bn (at the end of November 1997), they areestimated to be the seventh largest foreign exchange holdings in the world(behind Japan, Germany, Taiwan, the United States, Singapore and China). Interms of foreign exchange reserves per head, Hong Kong’s reserves are secondonly to Singapore. The reserves, which are mostly US dollar-denominated secu-rities, are held in the Exchange Fund. (Reference table 29 gives historical dataon foreign reserves.)

Foreign reserves comparisons, end-1996

Total (US$ m) Per head (US$)

Hong Kong 63,833 9,941

Singapore 76,847 25,279

South Korea 34,037 747

Taiwana 88,038 4,100

US 64,040 240

Japanb 216,648 1,723

Germany 83,178 1,015

China b 139,901 113

a End-November. b End-October.

Sources: IMF, International Financial Statistics; Central Bank of China, Financial Statistics; Hong Kong Department of Census and

Statistics.

Hong Kong: Capital flows and foreign debt 37


Comparative economic indicators, 1996

0 100 200 300 400 500 600 700 800 900

China

South Korea

Taiwan

Indonesia

Thailand

Hong Kong

Malaysia

Singapore

Philippines

Vietnam

Macau

Gross domestic product$ bn

Sources: EIU estimates; national sources.

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Singapore

Hong Kong

Macau

Taiwan

South Korea

Malaysia

Thailand

Philippines

Indonesia

China

Vietnam

Gross domestic product per head$


0 1 2 3 4 5 6 7 8 9 10

Philippines

China

Indonesia

Macau

Hong Kong

Thailand

South Korea

Vietnam

Malaysia

Taiwan

Singapore

Consumer prices% change, year on year


0 2 4 6 8 10

China

Vietnam

Malaysia

Indonesia

South Korea

Singapore

Thailand

Taiwan

Philippines

Hong Kong

Macau

Gross domestic product% change, year on year


38


The Hong Kong dollar:fixed to the US dollar

The Hong Kong dollar has been linked to the US dollar at around HK$7.8:US$1(it has been trading nearer to HK$7.7:US$1 since 1992) since October 1983, theentire period that the definite prospect of transition to Chinese sovereignty hasbeen a potentially destabilising factor. During that time, it has never movedmore than 2% from the pegged rate and has so far proved able to withstandunpredictable political shocks, including the temporary panic induced by theBeijing massacre of June 1989 and the 1991 Gulf war. The peg is guaranteed bythe government, which undertakes, through its Exchange Fund, to redeem allcertificates of indebtedness (which note-issuing banks must deposit in foreigncurrency with the fund when bank notes are issued) on surrender of bank notesto the fund; the knowledge that the government is prepared to use the ampleforeign exchange reserves in the fund to defend the currency has usually beensufficient to deter speculative raids on the Hong Kong dollar. The last bout ofspeculation on a revaluation against the US dollar led to an undesirable influxof foreign funds in late 1987, but the government scotched it by introducingnew rules allowing banks to offer negative interest rates. Since then, there hasbeen no real doubt about the government’s determination to hold the rate.

Fixed link likely to remain Arguments for decoupling the Hong Kong dollar from the US dollar have beenheard frequently: in 1994 from some in the business community, who arguedthat one consequence of the peg, namely negative interest rates, had led tounacceptable asset price inflation, especially in the property market; and againin 1995 in the wake of pressure on the Hong Kong dollar following the finan-cial crisis in Mexico.

During the run-up to the handover and its immediate aftermath, the over-riding political importance of providing this basic element of stability for busi-ness planning deterred both the Patten administration and its Special Admin-istrative Region successor from abandoning it in favour of linking the currencyto a trade-weighted basket of currencies or allowing it to float freely. The HongKong Monetary Authority responded, for instance, to a speculative attack onthe currency in January 1995, after the Mexican peso’s collapse, by draininginterbank liquidity and driving up interest rates.

However, the political necessity for retaining the peg has largely disappearedafter the initial period of Chinese rule passed off without incident. A majorattack on the Hong Kong dollar in October 1997 caused the government toraise interest rates so high that for several months afterwards interbank ratessoared so that they were frequently above prime rate. The consequent damageto banking profits and to the property market constitutes much of the heavycost that the economy is paying to retain the fixed link to the US dollar. If thatcost becomes too heavy to bear, the government may well be forced, reluc-tantly, to consider an alternative exchange rate arrangement. (Reference table30 gives historical data on exchange rates.)

40 Hong Kong: Foreign reserves and the exchange rate


Appendices

Sources of information

National statistical sources Bob Howlett (ed), Government Information Services, Hong Kong 1997,1997

Government Secretariat, Budget Papers (annual)

Hong Kong Census and Statistics Department, Hong Kong Annual Digest ofStatistics

Hong Kong Census and Statistics Department, Hong Kong Monthly Digest ofStatistics

International sources Energy Data Associates, 1 Regent Street, London SW1Y 4NR

Select bibliography Edward K Y Chen, Mely C. Anthony, Economic Integration and Political Divergence: Hong Kong-China Relations in the Run-up to 1997, Asia Club Papers,Centre for Asian Studies, Hong Kong, June 1995

Maurice Collis, Foreign Mud, Faber and Faber, London, 1956

Robert Cottrell, The End of Hong Kong: The Secret Diplomacy of Imperial Retreat,John Murray, London, 1993

Ken Davies, Hong Kong after 1997, Economist Intelligence Unit SpecialReport, London, 1996

Economist Intelligence Unit, Asia-Pacific Regional Overview (quarterly),London, various issues

Economist Intelligence Unit, Business China (fortnightly), various issues

Economist Intelligence Unit, China Market Atlas, 1997 edition, Hong Kong,1997

Economist Intelligence Unit, Hong Kong Country Forecast (quarterly), London,various issues

Economist Intelligence Unit, Hong Kong Country Profile (annual), London, various issues

Economist Intelligence Unit, Hong Kong Country Report (quarterly), London,various issues

G B Endacott, A History of Hong Kong, Oxford University Press, Hong Kong,1973

Sonny Lo Shiu Hing, Donald Hugh McMillen, A Profile of the “Pro-China HongKong Elite”: Images and Perceptions, Issues and Studies, Vol 31 No. 6, HongKong, June 1995

Richard Yan-Ki Ho, Robert Haney Scott, Kie Ann Wong (eds), The Hong KongFinancial System, Oxford University Press, Hong Kong, 1991

Hong Kong: Sources of information 41


Donald Hugh McMillen & Man Si-Wai, The Other Hong Kong Report, 1994,The Chinese University Press, Hong Kong, 1994

Werner Menski (ed), Coping with 1997: The reaction of the Hong Kong people tothe transfer of power, Trentham Books and School of Oriental & AfricanStudies, London, 1995

Frank Welsh, A History of Hong Kong, HarperCollins, London, 1993

The World Bank, The Emerging Asian Bond Market (Background Paper), HongKong, The World Bank East Asia & Pacific Region, Washington, June 1995

Reference tables

Reference table 1

Government financesa

(HK$ m)

1992/93 1993/94 1994/95 1995/96 1996/97

RevenueDirect taxes 56,086 65,439 75,754 78,696 85,476Indirect taxes 40,727 47,165 42,889 41,849 54,291Other revenue 23,968 27,154 32,409 32,649 34,090Total revenue 120,781 139,758 151,052 153,194 173,857

ExpenditureActual expenditure 86,487 96,958 108,161 123,322 138,512Transfers to Capital Works Fund 12,198 35,286 15,500 11,500 6,390Transfers to other funds 3,340 2,960 23,600 21,035 7,030Total expenditure 102,025 135,204 147,261 155,857 151,932

a General revenue account.


Reference table 2

Money supply(HK$ m; year-end)

1992 1993 1994 1995 1996

Notes & coins 61,157 71,874 78,143 81,667 87,113

M1 155,557 187,608 185,334 190,471 217,460

M2 1,518,777 1,760,962 1,992,351 2,282,849 2,532,236

M3 1,574,265 1,820,562 2,070,831 2,363,963 2,611,636Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 3

Interest rates(%; end-period)

1992 1993 1994 1995 1996

Interbank rate (3-month) 4.19 3.63 6.31 5.88 5.50

Prime lending rate 6.50 6.50 8.50 8.75 8.50Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

42 Hong Kong: Reference tables


Reference table 4

Gross domestic product(HK$ unless otherwise indicated; % change year on year in brackets)

1992 1993 1994 1995 1996

GDP total, by expenditure, current prices 779,335 897,463 1,010,885 1,078,226 1,193,930(16.6) (15.2) (12.6) (6.7) (10.7)

GDP per head (HK$) 134,357 152,087 167,493 175,148 189,182(15.6) (13.2) (10.1) (4.6) (8.0)

GDP per head (US$) 17,320 19,660 21,670 22,640 24,440(15.9) (13.5) (10.2) (4.5) (8.0)

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; Quarterly Estimates of Gross Domestic Product, 2nd Quarter 1997.

Reference table 5

Gross domestic product by expenditure(HK$ m; constant 1990 prices; % change year on year in brackets)

1992 1993 1994 1995 1996

Private consumption 386,519 415,618 443,571 450,657 472,265(7.7) (7.5) (6.7) (2.5) (4.8)

Government consumption 52,789 53,935 56,057 58,526 61,056(13.2) (2.2) (3.9) (4.4) (4.4)

Fixed investment 183,480 190,259 220,171 242,963 272,667(9.2) (3.7) (15.7) (10.4) (12.2)

Stockbuilding 8,453 2,224 20,058 40,103 12,921(107.1) (–73.7) (801.9) (64.6) (–84.8)

Exports of goods 899,418 1,021,022 1,127,276 1,262,522 1,322,954(19.8) (13.5) (10.4) (12.0) (4.8)

Exports of non-factor services 164,801 177,984 189,602 198,750 210,281(10.6) (8.0) (6.5) (4.8) (5.8)

Imports of goods 938,058 1,057,538 1,206,013 1,371,848 1,430,864(22.2) (12.7) (14.0) (13.8) (4.3)

Imports of non-factor services 107,055 113,281 123,216 125,636 128,066(9.7) (5.8) (8.8) (2.0) (1.9)

GDP 650,347 690,223 727,506 756,037 793,214(6.3) (6.1) (5.4) (3.9) (4.9)

Sources: Census and Statistics Department, Estimates of Gross Domestic Product 1961 to 1996; Quarterly Estimates of Gross Domestic Product, 2nd Quarter 1997.

Hong Kong: Reference tables 43


Reference table 6

Gross domestic product by sector(HK$ m; current prices; % of total in brackets)

1991 1992 1993 1994 1995

Agriculture & fishing 1,441 1,468 1,612 1,596 1,453(0.2) (0.2) (0.2) (0.2) (0.1)

Mining & quarrying 222 205 197 249 317(0.0) (0.0) (0.0) (0.0) (0.0)

Manufacturing 97,223 99,764 92,582 87,354 84,770(15.4) (13.6) (11.2) (9.2) (8.3)

Electricity, gas & water 13,521 15,637 17,591 22,175 23,578(2.1) (2.1) (2.1) (2.3) (2.3)

Construction 34,659 37,337 43,089 46,325 54,761(5.5) (5.1) (5.2) (4.9) (5.4)

Wholesale, retail, trade, hotels & restaurants 163,284 190,760 224,462 249,167 270,521(25.9) (26.1) (27.0) (26.2) (26.6)

Transport, storage & communications 60,604 71,227 78,993 92,109 101,357(9.6) (9.7) (9.5) (9.7) (10.0)

Financing, insurance & real estate 143,296 178,923 214,550 254,346 249,391(22.7) (24.4) (25.8) (26.8) (24.5)

Community, social & personal services 94,293 110,703 130,408 151,293 176,808(14.9) (15.1) (15.7) (15.9) (17.4)

GDP at factor cost (incl others) 631,514 732,120 830,169 950,172 1,016,111Sources: Census and Statistics Department, Estimates of Gross Domestic Product 1961 to 1996; Quarterly Estimates of Gross Domestic Product, 2nd Quarter 1997.



Reference table 7

Prices1992 1993 1994 1995 1996

Consumer prices (A)a

Index (1989/1990=100) 125.2 135.9 146.9 159.7 169.3 % change 9.3 8.5 8.1 8.7 6.0

Consumer prices (B)b

Index (1989/1990=100) 125.1 136.0 147.7 161.3 171.9 % change n/a 8.7 8.6 9.2 6.6

Consumer prices (Hang Seng)c

Index (1989/1990=100) 125.1 137.0 150.7 165.1 176.7 % change n/a 9.5 10.0 9.6 7.0

Consumer prices (composite) Index (1989/1990=100) 125.2 136.2 148.2 161.7 172.2 % change n/a 8.8 8.8 9.1 6.5

Domestic export prices Index (1990=100) 102.9 103.2 104.8 107.3 107.6 % change 1.0 0.3 1.6 2.4 0.3

Re-export prices Index (1990=100) 103.0 102.4 103.9 107.5 107.0 % change 0.8 –0.6 1.5 3.5 –0.5

Import prices Index (1990=100) 102.1 101.5 104.3 109.5 108.1 % change 0.2 –0.6 2.8 5.0 –1.3

Terms of trade Index (1990=100) 101.4 101.6 100.3 98.7 99.7 % change 0.7 0.2 –1.3 –1.6 1.0

a Households spending up to HK$10,000 per month. b Households spending between HK$10,000 and HK$17,499 per month. c Householdsspending over HK$17,500 per month.


Reference table 8

Nominal wage indices(Sep 1992=100; Mar)

1995 1996 1997

All industries 126.6 134.3 142.4 % change 9.0 6.1 6.0

Manufacturing 122.4 129.3 138.1 % change 6.3 5.6 6.8Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 9

Population1993 1994 1995 1996 1997

Population total (m; mid-year) 5.919 6.035 6.156 6.311 6.502 % change 1.8 2.0 2.0 2.5 3.0

Crude birth rate (per ’000) 112.0 11.9 11.2 10.1 n/a

Crude death rate (per ’000) 5.2 5.0 5.1 5.1 n/a

Infant mortality rate (per ’000) 4.8 4.5 4.6 4.1 n/aSource: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.



Reference table 10

Labour force(% unless otherwise indicated)

1992 1993 1994 1995 1996

Labour force (’000) 2,793.0 2,873.0 2,929.0 3,000.7 3,093.8

Participation ratesMen 78.0 78.1 77.2 76.6 76.0Women 46.2 46.5 46.9 47.6 47.8

Numbers unemployed (’000) 54.6 56.9 56.2 95.6 86.1

Unemployment rate 2.0 2.0 1.9 3.2 2.8

Share of employmentConstruction 2.1 1.9 2.1 2.2 2.6 (no.) 59,485 55,852 63,068 68,525 81,676Manufacturing 20.2 16.8 14.2 12.2 10.5 (no.) 565,137 483,628 423,015 375,766 325,068Financial services 11.3 11.8 12.4 12.3 12.8 (no.) 314,532 338,093 369,594 378,244 395,903Trade, restaurants & hotels 32.8 33.0 34.4 33.2 34.1 (no.) 914,831 948,881 1,021,890 1,018,198 1,056,136Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 11

Transport statistics1992 1993 1994 1995 1996

RoadMotor cycles (no.) 18,678 19,219 20,399 21,031 22,650Passenger cars (no.) 237,035 259,874 279,420 285,467 293,381Taxi (no.) 17,537 17,639 17,856 17,841 17,789Goods vehicles (no.) 119,556 120,415 121,325 117,928 116,791

RailPassenger train departures (no.) 1,654 1,973 1,970 1,868 1,877Cargo loaded (tonnes) 368,992 365,489 345,206 315,742 255,054

AirPassenger arrivals (’000) 8,439 9,339 9,890 10,631 11,692Cargo loaded (tonnes) 534,288 626556 686,722 772,230 829,586Aircraft landings (no.) 60,488 67,548 71,643 75,053 79,401

SeaVessel departures (no.) 27,825 33,372 37,028 41,605 41,076 ’000 NRT 131,013 150,282 161,699 172,489 182,064Outward cargo handled (’000 tonnes) 24,524 27,873 34,274 40,127 39,145Inward cargo handled (’000 tonnes) 58,923 68,226 76,672 87,048 86,694Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.



Reference table 12

National energy statistics

1992 1993 1994 1995 1996

ElectricityTotal electricity sales (terajoule) 112,017 116,012 111,382 112,817 115,790 of which: domestic (%) 19.4 20.8 23.2 24.0 25.2 commercial (%) 42.8 45.8 51.6 53.1 55.7 industrial (%) 21.6 19.2 19.2 17.9 17.2 street lighting (%) 0.2 0.2 0.3 0.3 0.2 export to China (%) 15.9 14.0 5.7 4.7 1.6

GasTotal gas sales (terajoule) 18,207 19,198 20,727 21,972 22,989 of which: domestic (%) 50.3 50.3 51.2 51.9 52.1 commercial (%) 45.2 45.1 44.4 43.6 43.9 industrial (%) 4.5 4.6 4.4 4.4 4.0Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.



Reference table 13

Banking statistics(HK$ m)

1992 1993 1994 1995 1996

All authorised institutions 367 371 380 380 368

Licensed banks: 164 172 180 185 182 Incorporated in Hong Kong 30 32 32 31 31 Incorporated outside Hong Kong 134 140 148 154 151

Restricted-licence banks 56 57 63 63 62

Deposit-taking companies 147 142 137 132 124

Assets of all authorised institutionsLoans to customers: 2,470 2,857 3,265 3,739 3,913 Inside Hong Kong 999 1,179 1,389 1,554 1,801 Outside Hong Kong 1,421 1,626 1,819 2,129 2,052 Others 50 52 56 56 61Interbank lending: 2,772 2,659 3,351 3,270 2,990 Inside Hong Kong 561 561 713 736 772 Outside Hong Kong 2,211 2,098 2,637 2,534 2,218

Negotiable certificates of deposit 27 35 59 101 141

Bank acceptances & bank bills of exchange 49 51 56 69 90

FRN & commercial paper 83 85 111 153 189

Securities & investments 211 250 322 313 347

Other assets 121 126 157 195 237

Total assets 5,733 6,063 7,321 7,839 7,907 of which: foreign currency 4,438 4,516 5,347 5,779 5,403

LiabilitiesDeposits from customers 1,503 1,723 1,942 2,209 2,433

Interbank borrowing: 3,864 3,917 4,790 5,000 4,705 Inside Hong Kong 560 558 711 736 769 Outside Hong Kong 3,304 3,359 4,078 4,263 3,936

Negotiable certificates of deposit 35 54 100 132 180

Other liabilities 331 369 489 498 589

Total liabilities 5,733 6,063 7,321 7,839 7,907 of which: foreign currency 4,441 4,503 5,346 5,687 5,347Source: Hong Kong Monetary Authority, Annual Report 1996.

Reference table 14

Stockmarket indicators(year-end)

1992 1993 1994 1995 1996

Hang Seng index (31st July 1964=100) 5,512 11,888 8,191 10,073 13,451 Finance subindex 5,133 10,138 7,389 9,847 13,809 Utilities subindex 7,039 12,979 9,739 10,003 9,892 Properties subindex 8,385 22,239 13,523 17,572 26,376 Commerce & industry sub-index 4,098 8,808 6,176 7,550 9,973

Stockmarket turnover (HK$ m) 700,578 1,217,213 1,137,414 826,801 1,412,242

Market capitalisation (HK$ bn) 1,332.2 2,975.4 2,085.2 2,348.0 3,476

Average price earnings ratio (Hong Kong Index) 13.1 21.6 10.7 14.2 n/aSource: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.



Reference table 15

Retail sales(Oct 1989-Sep 1990=100)

1992 1993 1994 1995a 1996 a

Total retail sales value 141.5 159.5 178.5 101.1 107.5 % change 17.8 12.7 11.9 n/a 6.3

Motor vehicles & parts 191.8 193.9 186.0 87.3 87.9

Other consumer durable goods 140.8 164.5 179.9 99.8 107.2

Supermarkets 127.9 140.6 155.9 101.3 109.0

Total retail sales volume 124.3 132.9 140.6 99.7 101.3 % change 12.1 6.9 5.8 n/a 1.6

a(Oct 1994-Sep 1995=100).


Reference table 16

Tourism1992 1993 1994 1995 1996

Total visitor arrivals (’000) 8,010.5 8,937.5 9,331.2 10,200.0 11,702.7 of which from: China 1,149.0 1,733.0 1,943.7 2,243.2 2,311.2 Taiwan 1,640.0 1,777.3 1,665.3 1,761.1 1,821.3 Japan 1,324.4 1,280.9 1,440.6 1,691.3 2,382.9 South-east Asia 1,236.0 1,239.5 1,196.8 1,264.4 1,446.2 Europe 936.8a 1,046.1a 1,140.1 1,136.6 1,181.6 US 694.3 755.7 776.0 748.9 751.3 % change in total visitor arrivals 17.9 11.6 4.4 9.3 14.7

Total revenue (HK$ m) 46,699 58,303 62,512 72,939 82,462 % change 21.9 24.9 7.2 16.7 13.1

Hotel rooms (no.) 33,534 34,044 33,490 33,052 33,536

Occupancy rate (av; %) 82 87 85 85 88

Per head spending (HK$) 6,684 6,684 6,699 7,151 7,046

Average stay (days) 3.38 3.84 3.91 3.87 3.70

a Western Europe.




Reference table 17

Manufacturing production(volume indices; 1986=100)

1992 1993 1994 1995 1996

Food, beverages & tobacco 155 159 161 161 159

Clothing excl footwear 111 113 113 115 110

Textiles 125 116 115 111 104

Paper products & printing 235 265 272 273 264

Chemical, rubber & plastic products 81 73 67 63 63 Plastics 65 55 45 38 36

Basic metals & metal products 106 96 95 94 85

Electrical machinery etc 156 160 165 180 170 Consumer electronics 127 117 117 116 103

Machinery, equipment & apparatus 205 231 239 274 275

Miscellaneous 97 88 84 81 83

Total manufacturing output 126 125 125 126 122Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 18

Miscellaneous manufacturing statistics

1992 1993 1994 1995 1996

Establishments (no.) 42,411 36,847 33,863 30,761 27,412

Total manufacturing, employment (no.) 565,137 483,628 423,015 375,766 325,068

Workers per establishment (no.) 13 13 12 12 12

Work stoppages (no.) 6 2 0 1 0

No. of working days lost 337 434 0 25 0Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 19

Construction statisticsa

1992 1993 1994 1995 1996

Buildings completed (no.) 827 1,215 1,277 1,058 986 Residential 368 665 862 670 608 Residential/commercial 131 125 120 109 97 Commercial 81 82 80 60 65 Industrial 67 73 41 63 51 Other 180 270 174 156 165

Usable floor area (’000 sq metres) 3,099 3,080 2,895 2,162 1,834 Residential 955 1,427 1,255 885 769 Non-residential 2,144 1,653 1,640 1,277 1,065

Value of construction work by building & civil engineers (HK$ m) 67,741 75,338 89,172 99,807 116,290

a Private sector only.




Reference table 20

Trend of foreign trade(HK$ m)

1992 1993 1994 1995 1996

Exports (fob) 924,953 1,046,250 1,170,013 1,344,127 1,397,917 Domestic 234,123 223,027 222,092 231,657 212,160 Re-exports 690,829 823,224 947,921 1,112,470 1,185,758

Imports (cif) –955,295 –1,072,597 –1,250,709 –1,491,121 –1,535,582

Balance –30,342 –26,347 –80,696 –146,994 –137,664Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 21

Domestic exports by main commodity section(HK$ m, fob)

1992 1993 1994 1995 1996

Apparel & clothing 77,156 71,857 73,086 73,801 69,447

Electrical equipment & machinery 20,138 22,668 24,815 31,889 30,357

Textile yarn & fabric 17,226 16,180 15,038 14,030 13,693

Office machinery 15,239 13,810 13,483 13,297 10,220

Watches & clocks 15,476 13,161 13,196 13,620 11,987

Telecommunications equipment 10,991 12,095 10,990 10,065 8,363

Jewellery, goldsmiths & silverwares 5,047 5,303 5,229 5,711 5,777

Printed matter 4,414 4,447 4,520 4,937 4,785

Plastic articles 4,064 3,480 3,201 3,011 2,350

Baby carriages, toys, games & sporting goods 4,159 3,338 2,715 2,635 1,779

Total domestic exports 234,123 223,027 222,092 231,657 212,160Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 22

Re-exports by end-use categorya

(HK$ bn; fob)

1992 1993 1994 1995 1996

Foodstuffs 14,357 13,823 17,102 19,534 22,374

Consumer goods 376,844 447,449 498,437 546,247 573,095

Raw materials & semi-manufactures 187,303 214,871 264,288 336,550 348,548

Fuels 4,274 6,136 6,513 10,014 13,059

Capital goods 108,051 140,945 161,582 200,125 228,682

Total 690,829 823,224 947,921 1,112,470 1,185,758

a SITC R2-based.




Reference table 23

Imports by end-use category(HK$ m, cif)

1992 1993 1994 1995 1996

Consumer goods 394,543 454,793 514,173 562,415 572,995


Capital goods 167,798 199,408 228,851 297,878 323,972

Foodstuffs 45,351 45,042 53,389 61,158 65,227

Fuels 17,653 18,254 22,528 26,595 32,537

Total 955,295 1,072,597 1,250,709 1,491,121 1,535,582Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 24

Trade volume indices(1990=100)

1992 1993 1994 1995 1996

Total exports 140.6 159.6 176.2 197.4 206.8 Domestic exports 100.6 96.1 93.9 95.7 87.7 Re-exports 162.4 194.3 221.2 252.9 271.9

Imports 145.5 164.1 187.1 212.8 222.0Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 25

Domestic exports by main destination(HK$ m; fob)

1992 1993 1994 1995 1996

China 61,959 63,367 61,009 63,555 61,620

US 64,600 60,292 61,419 61,250 53,860

Singapore 10,360 11,344 12,225 12,236 10,009

Japan 10,997 9,677 10,455 11,877 11,335

Germany 15,956 13,969 12,811 12,178 11,388

UK 12,541 10,771 10,292 10,941 10,597

Taiwan 6,500 6,261 6,076 7,971 6,705

Netherlands 4,878 4,520 4,775 5,152 4,674

Canada 5,018 4,734 4,173 4,324 3,885Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.



Reference table 26

Re-exports(HK$ m)

1992 1993 1994 1995 1996

By originChina 403,782 474,007 545,831 636,392 683,514Japan 84,966 109,949 121,936 130,511 129,292Taiwan 54,442 64,649 72,060 83,307 82,177US 32,113 37,424 43,678 55,636 62,192South Korea 19,391 21,685 27,444 37,615 38,049Singapore 8,269 11,836 15,069 21,678 25,464Germany 9,134 14,256 14,588 14,886 16,448UK 7,404 8,426 8,983 10,661 12,392

By destinationChina 212,105 274,561 322,835 384,083 417,752US 148,500 180,349 210,077 230,997 242,342Japan 37,465 44,156 54,745 70,081 80,154Germany 33,103 40,798 41,617 45,770 47,216UK 20,591 24,536 27,318 32,257 35,991Singapore 13,866 17,143 20,346 26,011 28,388Taiwan 26,156 21,910 22,416 27,758 26,638South Korea 13,588 15,538 16,483 19,292 20,091Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 27

Imports by major source(HK$ m)

1992 1993 1994 1995 1996

China 354,348 402,161 470,876 539,480 570,442

Japan 166,191 178,034 195,036 221,254 208,239

Taiwan 87,019 93,968 107,310 129,226 123,202

US 70,594 79,419 89,343 115,078 121,058

Singapore 39,087 47,835 61,968 78,027 81,495

South Korea 44,155 48,220 57,551 73,268 73,302

Malaysia 12,825 15,855 20,147 28,797 33,994

Germany 21,911 24,918 28,660 32,038 33,884

UK 19,221 21,438 25,405 30,448 33,264Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Reference table 28

Trade in services(HK$ m)

1992 1993 1994 1995 1996

Exports of services 189,352 215,577 240,668 265,637 288,533

Imports of services –114,242 –122,994 –144,067 –160,636 –166,870

Services balance 75,110 92,583 96,601 105,001 121,663Source: Census and Statistics Department, Estimates of Gross Domestic Product.



Reference table 29

Foreign exchange reserves

1992 1993 1994 1995 1996

US$ bn 35.2 43.0 49.3 55.4 63.8Sources: Hong Kong Monetary Authority, 1995 Annual Report; HKMA Website.

Reference table 30

Exchange rates(HK$ per unit of currency unless otherwise indicated; annual averages)

1992 1993 1994 1995 1996

US$ 7.741 7.736 7.728 7.736 7.734

¥100 6.12 6.99 7.58 8.28 7.12

DM 4.97 4.68 4.78 5.41 5.14

SDR 10.906 10.803 11.071 11.742 11.225

M$ 3.05 3.01 2.96 3.09 3.08

South Korean W100 0.99 0.96 0.96 1.00 0.96

S$ 4.76 4.8 5.08 5.47 5.49

Thai baht 0.309 0.310 0.311 0.312 0.307

NT$ 0.291 0.279 0.283 0.284 0.274

Trade-weighted effective exchange rate index (1983=100) 111.1 113.2 126.8 121.8 125.0Source: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.



Macau

Basic data

Land area 20.96 sq km

Population 415,850 (official end-1996 estimate)

Main regions Macau peninsula 7.84 sq km

Taipa Island 5.79 sq kmColoane Island 7.82 sq km

Climate Sub-tropical

Weather Coldest months, January and February, 15°C; hottest months, July and August,29°C; 1,900 mm average rainfall, wettest in summer, relative humidity 65-85%

Languages Portuguese and Chinese (Cantonese), both now official

Measures Metric system. Some local (Chinese) units are used including:

1 tael=37.8 grams; 1 cata=16 taels=0.605 kg; 1 pico=100 cata=60.48 kg

Currency 1 pataca=100 avos. Annual average exchange rate 1997: MPtc8.0:US$1;MPtc13.0:£1. Exchange rate mid-January 1998: MPtc8:US$1;MPtc13.0:£1

Time GMT +8 hours

Public holidays In addition to many of the Hong Kong public holidays, Macau also observesholidays on April 25th, June 10th, October 5th, November 1st, December 1st,8th and 24th

Macau: Basic data 55


Political background

Historical background

First established as a Portuguese trading post in the 16th century, Macau wasannexed by Portugal from China in the 19th century and declared a Portugueseprovince. In 1949 the Chinese communist government repudiated as unequalthe treaty by which the territory was ceded to Portugal. In the late 1960s,during the cultural revolution in China, Macau is believed to have saved itselffrom (at most) annexation or (at least) severe riots by a promise to ban theactivities of strongly pro-Taiwanese elements. The authorities are still keenlyaware of the need to avoid provoking the displeasure of the Chinese govern-ment, and protests against the Beijing massacre in June 1989 were more mutedthan in Hong Kong.

The post-revolutionary government of Portugal in 1974 offered Macau back toChina, which turned down the offer, presumably because it wanted to settlethe future of Hong Kong first. Portugal and China established diplomatic rel-ations in 1979. Since that date the territory has been described as “Chineseterritory under Portuguese administration”, and the governor is able to claim,not wholly inaccurately, that Macau has never been a Portuguese colony.

The joint declaration A joint declaration on the future of Macau was signed between Portugal andChina in early 1987 after a year of secret diplomacy. Unsurprisingly, the declar-ation mirrors the Hong Kong agreement. Under the guiding principle of “onecountry, two systems” Macau becomes a Special Administrative Region (SAR) ofthe People’s Republic of China on December 20th 1999. Under the accordMacau will retain its existing social and economic system, laws, rights andfreedoms, while foreign affairs and defence will be handled by Beijing. Macauwill stay a free port, the currency will remain convertible and there will still beno exchange controls.

Progress towardsChinese rule

Although there is no direct reference to gambling in the joint declaration (andChinese descriptions of Macau usually ignore its existence), the presentPortuguese administration understands the agreement to guarantee the con-tinuation of gambling after 1999. Until then Macau is to be governed under theOrganic Statute passed in 1990, which guarantees the temporary continuationof existing constitutional arrangements. Although China has on one occasionlost its equanimity over Macau’s sluggish progress towards 1999, Macau has, inthe mid-1990s, continued to receive praise from China for its compliant attitudeover future political arrangements. To some extent, the territory has benefitedfrom the constitutional wrangling in Hong Kong. It has not had to endure yearsof negotiations to arrive at the transitional agreements; both the joint declar-ation signed by Portugal in 1987 and the Basic Law, which will govern Macauafter the handover, are virtually identical to their Hong Kong counterparts.

Macau is still on the“through train”

Macau was used by China as a role model for Hong Kong in the period leadingup to its transition to Chinese rule in 1997, when Chinese officials consistentlyspoke highly of Macau for trying to achieve a smooth transition to Chinese rule

56 Macau: Historical background


and praised the excellent co-operation between the Chinese and Portuguesegovernments. China has assured civil servants that they may retain their postsand their pensions after 1999 and has also confirmed that the reorganisedlegislative and municipal bodies can board the through train and remain inplace post-1999. This concept was originally designed in relation to HongKong’s transition to China, but was derailed in Hong Kong when the lastgovernor, Chris Patten, went ahead with his plans for electoral reform withoutChina’s consent.

Constitution and institutions

The governor Executive and legislative power is held by the governor, who is appointed bythe Portuguese president to represent Portugal in Macau. The present incum-bent, General Vasco Joaquim de Rocha Vieira, took office in 1991 after theresignation of his predecessor, Carlos Melancia, following allegations of cor-ruption, of which he was cleared by a Portuguese court in August 1993. Thegovernor is assisted by five secretaries (administration and justice; welfare,education and culture; economic affairs; public works and housing; and specialprojects) and a commander-in-chief of the security forces, who has hithertobeen a colonel seconded from the Portuguese army, and is advised by a ten-member Consultative Council.

The legislature The legislative organ of the territory is the Legislative Assembly, a 23-memberbody comprising eight directly elected members, eight members representingfunctional constituencies and seven members appointed by the governor. InFebruary 1984 the Portuguese president, Ramalno Eanes, dissolved it at thegovernor’s request, following a dispute between the governor, Vasco Almeida eCosta (who was appointed in 1981) and the assembly (then dominated byMacanese—Macau-born Portuguese-speaking Eurasians) about the extension ofthe electoral system. New elections were held in July 1984, with all Chinese,Portuguese, Macanese and foreign residents enjoying equal voting rights. Pre-viously, Chinese residents could vote only after five years’ residence in Macau.In the last election, held in September 1996, pro-business groups won four ofthe eight directly elected seats, while representation of the pro-China partiesdropped from four seats to three and the number of pro-democracy repre-sentatives fell from two seats to one. Unlike in Hong Kong, the legislature’sterm will straddle the handover of sovereignty to China, and has even beenextended from its normal four-year term until 2001. The Legislative Assemblyis responsible for general law-making, including taxation, passing the budgetand socio-economic legislation. The territory is governed by Portuguese lawand the Organic Law of Macau, which accords it its administrative, economicand financial autonomy. The city of Macau and the islands of Taipa andColoane each have a municipal council.

The civil service The upper reaches of the civil service are still largely filled by Portuguese expa-triates on fairly short tours of duty, and the government is deeply worried thatthere will be nobody to staff its offices after the handover in 1999. Conse-quently, it is trying desperately to train locals, for example by sending them toattend courses at the University of Macau, the local university, but it still expects

Macau: Constitution and institutions 57


only “70% success” by 1999. China intermittently criticises the Portuguesegovernment for its sluggish progress in localisation of official posts, which con-trasts strongly with the pre-handover success of localisation in Hong Kong.

The judiciary The judicial system was granted formal autonomy in 1993, before which it wasadministered directly from Portugal. As with the civil service, Macau’s localisa-tion policy has been progressing extremely slowly in the legal system: nearly allof the 27 judges in Macau are ethnic Portuguese and do not speak Chinese, andthere are very few bilingual lawyers to implement localisation in the judiciary.Therefore, graduates in mainland Chinese law and bilingual graduates inPortuguese law are to be imported from China. New judges will be selectedfrom trainees passing a course at the Centro do Formação de Magistrados deMacau judicial training centre.

Main political figures

General Vasco Joaquim de Rocha Vieira: governor since April 1991.Edmund Ho: pro-China, indirectly elected member of the Legislative Assembly andpotential candidate for the role of the Macau Special Administrative Region’s firstchief executive in 1999.Alexandre Ho: leader of the pro-democracy Associação de Amizade, whoserepresentation in the Legislative assembly fell from three to one after the 1992elections; viewed by some as a spent force.Ng Kuok Cheong: grass-roots activist.Liao Hui: the director of the Hong Kong and Macau Affairs Office of China’s StateCouncil (cabinet), which is responsible for arranging a smooth return of the enclaveto China.

The economy

Economic structure

Main economic indicators, 1996

GDP growth (%) –0.3

Consumer price inflation (%) 4.8

Visibles trade balance (US$ m) –4.0

Exchange rate (MPtc:US$) 7.99

Population (’000) 415.9Source: EIU.

Macau’s manufacturing base continues to be eroded by cheaper labour inChina and South-east Asia, making the economy increasingly dependent ongambling and tourism. The proximity to China should offer promising newopportunities in the services sector, especially transport, banking and insur-ance, but they have yet to materialise. The government does not have enoughinformation to produce GDP estimates on a production basis, so a full sectoralbreakdown is not available. Partial information suggests that the popular char-

58 Macau: Economic structure


acterisation of Macau as the Las Vegas of the East is a slight exaggeration, butgambling does contribute about 30% of GDP and around half of the govern-ment’s current revenue. Manufacturing output, largely textiles and clothing,probably accounts for about a third of GDP. Fishing is still an important sourceof food, but makes a negligible contribution (0.4%) to GDP. A constructionboom was largely responsible for a surge in economic growth in 1992.

On an expenditure basis, Macau, like Hong Kong, is heavily dependent on theexternal sector, although domestic demand has been an important factor insustaining economic growth in the 1990s. In 1996 exports of goods and serv-ices accounted for 70.3% of current-price GDP, while private consumptionexpenditure contributed 32%.

Economic policy

A more interventionistapproach

Governments in Macau traditionally interfered only minimally in the eco-nomic management of the territory. Then, with the appointment of VascoAlmeida e Costa as governor in 1981, the authorities took a more intervention-ist approach, aimed at promoting economic diversification, foreign investmentand the development of the territory’s feeble infrastructure. Recent develop-ments in this area have included the construction of large container port,which opened in 1991, and an international airport which opened for servicein December 1995.

Budget surpluses Macau’s budgets are a model of sound finance, with constant surpluses testify-ing to the government’s frugality, although the surpluses have dwindled mark-edly from around MPtc1.8bn (US$225m) per year in 1992-93 to a mereMPtc24.2m in 1996. (Reference table 1 gives a breakdown of government reve-nue and expenditure.) Gambling tax receipts are the largest item of revenue,but it is no longer possible to determine their precise contribution, since thegovernment has ceased regular publication of a separate figure for them. Directtaxes are low. As in Hong Kong, income tax ranges up to only 15%, but there isalso a salaries tax which can take another 10%; other taxes include an urbanhousing tax, a profits tax and a business tax on industrial enterprises. Taxevasion is thought to be fairly widespread.

Imports are free of duty although subject to a consumption tax. There are noexchange controls. To attract investment the government offers generous fiscalincentives, such as carryover of deduction of profits reinvested and accelerateddepreciation.

Interest rates follow HongKong’s lead

As far as monetary policy is concerned, Hong Kong is widely regarded as theengine of this car, and interest rates in Macau follow those in Hong Kong witha 24-hour delay and only an occasional slight differential. This works well solong as similar trends affect both territories, as has largely been the case inrecent years. In any case, industrial investment and production plans are prob-ably at least as interest-rate-inelastic as are those in Hong Kong. (Referencetable 2 gives data on money supply.)

Macau: Economic policy 59


Economic performance

Real GDP growth averaged 5.2% in the period from 1992 to 1996, but theeconomy actually contracted by 0.3% in real terms in 1996. A constructionboom pushed up GDP growth to an unusually high 10.6% in 1992, but thescale of the boom and the subsequent slow-down meant that growth in privateinvestment slowed sharply beginning in 1993. A surge in public investmenthelped to sustain GDP growth earlier in the decade, but, following completionof the new airport, fixed investment fell by 8.8% in 1995 and then plunged bya further 16.9% in 1996. Private consumption growth was halved between1992 and 1996 as the property glut continued. (Reference tables 3 and 4 givehistorical data on GDP.)

Gross domestic product(% real change)

1996 1992-96

GDP –0.3 5.2 Private consumption 4.1 5.9 Investment –16.9 2.3 Exports of goods & services 0.5 4.0

Regional comparisonHong Kong 4.9 5.3Taiwan 5.7 6.3Singapore 7.0 8.6Sources: Census and Statistics Department, Macau in Figures; national sources.

Employment and wages The government estimates that 66.7% of the population were economicallyactive in 1996, suggesting a workforce of 277,372, but this figure can be only acrude approximation considering the large number of outside workers onshort-term contracts. Manufacturing, hotels and restaurants, and public, pri-vate and personal services are the largest employers. Less than 0.1% of thelabour force is employed in primary industries of all kinds. Wages are wellbelow half those in Hong Kong, and there are no laws requiring employers topay minimum wages or welfare charges. In 1984 the territory’s first labour lawbanned the use of child labour and prescribed a six-day working week andminimum annual leave, but there is little real regulation of the myriad smallfactories that spring up overnight and disappear just as quickly. The large andfluctuating proportion of the labour force commuting from China reflects thegovernment’s reluctance to permit permanent settlement in Macau.

Inflation After reaching a low of 1.9% in 1986, the inflation rate as measured by theannual change in the consumer price index (CPI) rose steadily into doublefigures, averaging 9.6% in 1991. It has since eased down jerkily to 4.8% in 1996as economic growth slowed to a halt. Food costs and the cost of services, whichhave the two largest weightings in the basket of goods that is used to calculatethe CPI, tend to be the main factors fuelling inflation; and in 1995 heavyspending on opening the new airport probably played a part as well, temporar-ily pushing the annual inflation up to 8.6%. (Reference table 5 gives historicaldata on inflation.)

60 Macau: Economic performance


Resources

Population

The population at the end of December 1996 was officially estimated at415,850. (Other sources suggest a figure well above 500,000.) Macau is evenmore overcrowded than Hong Kong, with a population density of 19,387 persq km at the end of 1996, and well over double that density in Macau City.More than 95% are Chinese, and most of the rest are Portuguese-speakingMacanese (Eurasians). In 1989 Chinese was made an official language alongsidePortuguese, and the laws are gradually being translated into Chinese. Thismove is intended to facilitate the development of an indigenous civil service.Most people speak Cantonese, with English as the main second language.(Reference table 6 gives various demographic indicators; Reference table 8 givesa division of the labour force.)

A large floatingpopulation

One-quarter of the population is under the age of 15, and this age distributionreflects a low death rate of only 3.4 per 1,000 combined with a high crude birthrate of 13.2 per 1,000 in 1996. There is a large floating population of touristsand of workers, who commute on a daily basis or are housed in controlledlodgings in Macau. The latter are strictly regulated to prevent permanent settle-ment; an employer must apply to the government for permission to import aspecified number of workers from China for a fixed period, and it is grantedonly if he can demonstrate that output has fallen recently because of a decreasein the number of staff employed. Illegal immigration from China rose tempo-rarily in 1986 because of rumours about a change in policy, but since then it isbelieved to have stabilised following a wave of repatriations that peaked in1989. Between 15 and 20 illegal immigrants are arrested and returned each day.

Concern about the huge number of vacant flats in the enclave has promptedthe government to devise a scheme to attract migrants to Macau. Foreignerscan buy a resident’s permit for MPtc2m (US$250,000) and the government ishoping that these new arrivals will take up much of the unsold properties.There are understood to be 100,000 Portuguese passport holders in Macau,each of them having full right of abode in Portugal, but this figure is only anestimate.

Population by age and sex, end-1996(’000 unless otherwise indicated)

Population 415.9 Males 200.1 Females 215.7

Population growth (%) 0.2

Population by age group (%) 0-14 25.3315-64 67.2265+ 7.46Source: Census and Statistics Department, Macau in Figures.

Macau: Population 61


Education

Primary education starts at age six and lasts for six years, while secondaryeducation starts at age 11 and lasts for up to five years. The main tertiaryeducation institution is the University of Macau (formerly the University ofEast Asia), established in 1981 on Taipa, which offers courses in business andeconomics as well as liberal arts. The languages of instruction are Cantonese,English and Portuguese. It is, however, small, beyond the means of most of thepopulation, and until recently catered largely for students from Hong Kong.(Reference table 7 gives historical data on educational enrolment.)

Technical education is inits infancy

The workforce is largely unskilled or semi-skilled, and technical education is inits infancy; the first 600 pupils entered secondary technical school in 1987(enrolments rose to 1,163 by 1996), and a smaller number of adults are under-going formal part-time industrial training. There is also a hotel catering acad-emy and there is probably a significant amount of unrecorded in-service stafftraining in hotels.

Health

There are two hospitals, one for Chinese and one for Western medicine.In 1996 there was one doctor for every 517 inhabitants, one nurse for every456 inhabitants and 428 inhabitants for every hospital bed. The infant mortal-ity rate was a commendably low 4.8 deaths per 1,000 live births in the first 12months of life.

Natural resources and the environment

The tiny territory of Macau is situated on the southern coast of China, 60 kmsouth-west of Hong Kong. It consists of Macau City, joined to Zhuhai SpecialEconomic Zone in the Chinese province of Guangdong by a narrow isthmus,and the islands of Taipa (linked to the city by a two-lane bridge) and Coloane(linked to Taipa by causeway). The waters around Macau are China’s ownterritorial waters, patrolled by the Chinese navy, and the territory is dependenton the Chinese mainland for fuel, water and most food. The total land area hasbeen enlarged by over 50% since 1912 by extensive land reclamation, which isstill continuing, and is currently about 21 sq km, of which 7.84 sq km is MacauCity. By the time Macau is handed back to China in 1999, the land area will bealmost twice as large as that originally ceded to Portugal. It will have grownfrom 12 sq km to 23.5 sq km, because of reclamation off the peninsula itself,off the nearer outlying island, Taipa, to accommodate the new airport, and alonger-term plan to reclaim the land around the causeway linking Taipa withthe further island, Coloane.

62 Macau: Education


Economic infrastructure

Transport and communications

The new airport Until recently access to Macau was by ferry, hydrofoil, jetfoil and helicopterfrom Hong Kong and, for travellers from China, by road or ferry. (Varioustransport and communications statistics are given in Reference table 9.)

The picture changed dramatically in December 1995 when a new internationalairport, costing US$1bn and built on reclaimed land on Taipa, opened for com-mercial flights. The airport is officially forecast to handle 5.9m passengers and280,000 tonnes of cargo by 2009, but is unlikely to meet this projection, largelybecause its airport is still seen as a convenient way to fly from Taiwan to Chinawithout changing planes. Just 414 flights landed at Macau in March 1996, andpassenger arrivals by air totalled just 159,000 in the year to June 1996 (allarrivals until November 1995 were by helicopter). Further extensions will allowa maximum capacity of 12m passengers per year. Unlike Hong Kong’s existingairport, Kai Tak, Macau’s airport is open 24 hours a day. The airport is a jointventure between Chinese and local companies, designed to service the whole ofsouthern China, as well as to enable tourists to fly direct to Macau (thus avoid-ing the rival temptation of Hong Kong). The increased flow of traffic from theairport is accommodated by a new bridge between Macau City and Taipa along-side the existing bridge which opened in 1994. Macau will also benefit from newrailway and motorway links to Zhuhai being built inside China.

Port improvements Once the main Chinese port, Macau was bypassed in the last century becausethe surrounding waters were too shallow to provide a harbour for ocean-goingcargo vessels, as could Hong Kong. The first phase of a new port, Kao-ho onColoane, began operating in 1991, handling both container and oil tankertraffic. The Macauport company, in which the government holds a 32% stake,is considering developing phase two of the project which would be built on29 ha of mostly reclaimed land. A new ferry terminal, capable of handling 30mpassengers per year, was inaugurated in November 1993.

Telecommunicationsinvestment

The telecommunications service has expanded rapidly in recent years with aMptc1bn (US$125m) investment programme by a UK-based company, Cable &Wireless. In 1996 50,485 new telephone lines were installed, taking the num-ber of telephones up to 206,154 by the end of the year, equivalent to496 telephones for every 1,000 people. The Macau authorities plan to intro-duce cable and satellite television into the enclave, but will first have to gainapproval from the Sino-Portuguese Joint Liaison Group. The proposal involvessetting up a cable TV station with at least 20 channels, including Macau TV’sCantonese and Portuguese channels, Portuguese TV’s international servicechannel and one or more of the channels operated by the Chinese Central TVStation. The monopoly contracts have to be approved by China as they willremain in force after 1999 (they will be awarded for 15, 20 or 25 years).

Macau: Transport and communications 63


Energy provision

Macau generates most of its own electricity (87.1% in 1996); by 1995 it had aninstalled capacity of 366.8 mw. In 1996 net imports were only 174m kwh,compared with net output of 1.3bn kwh. However, it is entirely dependent onimports of fuel oil, petrol and gas from China and Hong Kong. (Nationalenergy statistics are given in Reference table 10.)

Energy balance, 1996(m tonnes oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary production 0.00 0.00 0.00 0.00 0.00 0.00

Imports 0.50 0.00 0.00a 0.05a 0.00 0.55

Exports 0.00 0.00 0.00 0.00a 0.00 0.00

Primary supply 0.50 0.00 0.00 0.05a 0.00 0.55

Losses & transfers –0.33 0.00 0.00 –0.06 0.00 –0.39

Transformation output 0.00 0.00 0.00 0.13 0.00 0.13

Final consumption 0.17 0.00 0.00b 0.12b 0.00 0.29

a Input basis. b Output basis.

Source: Energy Data Associates.

Financial services

Macau aims to establish itself as a financial centre by deepening and broaden-ing the range of financial services on offer. However, the existing bankingsector is simple, with none of the attributes of a modern financial centre suchas an independent capital market. Together with insurance and business serv-ices, financial services employed 6.6% of the labour force in 1996.

The monetary authorities Before 1980 the Banco Nacional Ultramarino (BNU) was responsible for issuingcurrency, holding deposits of government departments and managing thegovernment’s foreign exchange reserves. In 1980 the government created theInstituto Emissor de Macau (IEM) to take over these functions and, in addition,to supervise the banking sector (which had previously been overseen directlyby government departments) and insurance (hitherto unsupervised). The IEMwas also to advise the government on economic and monetary matters. TheBNU complained that the government had broken a contract, valid until 1991,giving it financial benefits in return for issuing notes, so the government agreed anew contract, to run from 1980 to 1995, under which the BNU would be the soleagent issuing notes and acting as government banker on behalf of the IEM. Inreturn, the BNU obtained highly lucrative preferential treatment from the govern-ment in its role as a private bank. The BNU thus has the capacity to support thebanking system in an emergency and is regarded as its “spare wheel”.

In July 1989 the IEM was transformed into the Monetary and Foreign ExchangeAuthority of Macau (the Portuguese acronym is AMCM), which retains thepowers of the IEM, minus those already returned to the BNU. The BNU mustnow deposit the foreign exchange equivalent of its note issue with the AMCM,

64 Macau: Energy provision


which thus performs the functions of a central bank (but both China andPortugal would object to its being called that). In return, the BNU is allowed tohold a specified quantity of government deposits, supposedly at sight,although they may be untouched for months, at an interest rate of 0%. Thesituation is expected to remain unchanged up to 1999, after which it is quitelikely that the BNU will take on the role of a foreign bank, issuing notesalongside the Bank of China (which started issuing notes in October 1995).Some people feel that the concentration of power in the AMCM (as comparedwith the dispersion of financial power in Hong Kong) will give the MacauSpecial Administrative Region more real autonomy within China.

Foreign participation A new banking ordinance was passed in July 1992, allowing the establishmentof development banks, and the sector was opened up to foreign competition.In 1983 six major international banks were granted full banking licences, andthree Portuguese banks were granted offshore banking licences. The foreignbanks agreed to co-operate with the BNU to establish a local interbank moneymarket, which has flourished. There are two affiliates of the Bank of Chinaamong the local banks, and these are building close relationships with invest-ors in the Zhuhai Special Economic Zone. In December 1995 there were 21banks, eight of them local and the other 13 incorporated abroad (in Portugal,France, the United States, Germany, China and Hong Kong). The authoritiesare trying to attract more foreign banks, in particular the Japanese. Macau hasgranted a banking licence to a Taiwan bank, the Taipei Business Bank. TheBank of China currently dominates the sector, controlling 31% of the bankingsystem’s MPtc122bn (US$15.3bn) assets at the end of 1995.

Assets of leading banks, 1995(MPtc bn; end-year)

Bank of China 37.9

Tai Fung Bank 14.0

Banco Portugues do Atlantico 12.2

Banco National Ultramarino 10.9

Seng Heng Bank 8.8

Banco Comercial de Macau 7.2

Banco Luso Internacional 4.8

Weng Hang Bank 4.2

Banco Totta & Acores 4.0

Banco Comercial Portugues 4.0

Hong Kong Bank 3.9Source: Monetary and Foreign Exchange Authority of Macau.

Other services

The main services offered by Macau are gambling and tourism. Despite majorefforts to attract tourists to Macau for long stays, it is still thought of either as agambling centre, a great eating-out place for weekenders from Hong Kong or assomewhere that can be explored in a day. Consequently, the average length ofstay in hotels is only 1.3 days: of the 7.8m visitors in 1994, only 2.2m spent anight in Macau. In 1988 the government completed its first visitor survey,which showed that 20% of visitors from Hong Kong pass straight through to

Macau: Other services 65


Zhuhai without stopping to spend money in Macau. (Historical data on tour-ism are set out in Reference table 11.)

Hotel capacity has doubled Rapid construction growth has resulted in a doubling of hotel capacity in the1990s; at the end of 1996 there were was a total capacity of 8,545 rooms, 7,719of them in hotels, 46 in inns (pousadas) and 780 in guest houses (pensões). Withso many hotels being built and the number of tourist arrivals growing moreslowly in 1992-94 and then falling in 1995-96, the overall hotel occupancy ratewas 64% in 1996, only a slight improvement on the 60% recorded in 1995.Occupancy rates are estimated to have fallen markedly in 1997 as open gangwarfare involved killings in the streets and even in major hotels and restau-rants, discouraging tourists (especially the Hong Kong weekend gamblers whomake up the overwhelming majority of arrivals) from coming to Macau.

Tourism, Jan-Jun1997

Total visitor arrivals 3,947,695

Average stay (days) 1.31

Occupancy rate (av; %) 57.4Sources: Census and Statistics Department, Macau in Figures; Macau Economic Services, Economic Studies.

About 72.5% of all visitors in 1995 arrived from Hong Kong. Excluding HongKong residents, visitors from nearby China, Taiwan and Japan make up thelargest group of arrivals. The government hopes that the new airport will givethe tourism industry a badly needed boost and is trying to promote Macau as avenue for regional conferences and exhibitions. In 1996 arrivals from Taiwanwere up 36.1% in comparison with 1994, the last full year before the airportwas opened, and those from China were up by 146.5%, but it was not clear howmany of these people stopped in Macau to spend money and how many weresimply transit passengers.

The gambling franchiseagreement

The gambling syndicate which operates Macau’s casinos is headed by a promi-nent Hong Kong-based businessman, Stanley Ho. The syndicate, the Sociedadede Turismo e Diversões de Macau, operates nine casinos in the enclave and hasinterests in greyhound- and horse-racing, lotteries, property, the new inter-national airport and Air Macau. The government rightly claims that the gam-bling franchise agreement enables it to keep other taxation low. The 1995government budget estimated that the company would pay about MPtc5bn(US$625m), or 30% of its gross takings, in monopoly franchise tax in 1995 andwould therefore contribute 51% of the government’s current receipts and 40%of total revenue. The company is also obliged to contribute HK$12bn over 15years to Macau’s infrastructure development under an agreement signed in 1986.

Mr Ho’s gambling concession does not expire until 2001, and although that istwo years after the handover, Beijing was not consulted before the concessionwas awarded. There is, therefore, a good chance that the concession will berenegotiated ahead of 1999 (probably to give the government a larger share ofthe takings), in order to avoid any bad press for China if it tries to alter theconcession after the handover. Competition between groups striving to gain therenewed franchise is believed to be behind the spate of public killings whichtook place in 1997 and which appear likely to continue up to the handover.

66 Macau: Other services


Production

Industry

Macau’s attractiveness as a manufacturing base for low-cost, labour-intensiveproduction was undermined by the development of the Chinese special eco-nomic zone of Zhuhai to the west. The large wage differentials between Zhuhaiand Macau mean that the enclave cannot compete in the manufacturing ofmass-produced low-value products. Consequently, the number of factories hasdwindled over the past decade, and many of those that remain have switchedto high-value, small-volume manufacturing with tight delivery schedules.

The industrial sector, 1996

Exports of textiles & clothing (MPtc m) 12,760.0

Exports of toys (MPtc m) 263.6

No. of manufacturing establishments 1,265 of which: textiles 131 garments 378 electrical machinery & appliances 17 plastic products 16

% of total employment 20.6Sources: Census and Statistics Department, Macau in Figures; Macau Economic Services.

Precise figures for industrial production are not published by the government,so the scale of operation is largely indicated by employment levels and exportstatistics. Imports of capital goods are also a good indicator of private andpublic capital investment; the value of these fell between 1991 and 1993, thenrose in 1994-5 before slumping by 28.6% in 1995 after completion of theairport. Imports of raw materials and semi-manufactures, which are also auseful guide to the level of manufacturing activity, rose in 1996 by 4.3% afterhaving fallen 5% the previous year.

Textiles and clothing Despite constant attempts to diversify away from textiles and clothing, thisbranch of industry still contributes the bulk of all manufacturing output. In1996 there were 1,265 licensed manufacturing establishments, 131 of whichwere textiles and 378 clothing factories, which together contributed 80.3% oftotal export value. Many firms in this branch of industry are very small; thefigures in the 1986 census of industry indicated an average of fewer than65 employees per establishment. Having bumped against the ceiling of GeneralSystem of Preferences quotas in Macau’s main market, the United States, thereis a desire to diversify to other products and other markets, but little action asyet. With the phasing out of the Multi-Fibre Arrangement, the textiles industryis heading for difficult times which could have major implications for employ-ment. Over the past decade, employment in manufacturing has fallen from45% to 21.7% (in 1996) of the working population, with textiles by far thelargest employer.

Macau: Industry 67


The second largest export industry is footwear, which contributed 1.9% ofexport earnings in 1996, closely followed by toys, which comprised 1.7%.Artificial flowers, leather goods, ceramics, electronics and optical goods are alsoproduced for export.

Agriculture and fishing

Only 2% of Macau’s area is cultivated, mainly by vegetable growers. There is asmall livestock industry devoted to cattle, pigs, chickens and ducks. The rearingof pigs is declining because it is more land-intensive than poultry farming.Fishing, mostly for crustaceans, is quite important, and some of the catch isexported to Hong Kong. There is a large fish market. The majority of Macau’sfood requirements are met by imports, mostly from China.

Construction

As mentioned above, GDP estimates on a production basis are not available,but the surge in real growth in fixed investment by 36.9% in 1992 was un-doubtedly a reflection of the rapid expansion of construction activity, partic-ularly residential and commercial property development, and public works.(Historical data on construction are given in Reference table 12.)

Property prices have fallen Property speculation (fuelled largely by mainland funds) in housing in 1992and offices in 1993 drove up prices which have subsequently tumbled. In early1995 residential property prices were estimated to have fallen by about 20%since their 1992 peak, and the enclave was estimated to have a glut of about30,000 vacant units. Gross floor area completed rose 56.3% in 1996. Propertyprices show no sign of rising given the vastly increased supply and the reduc-tion in private consumption.

Major projects are planned Much of the construction growth over the past decade has reflected massiveland reclamation, including the expansion of Taipa Island to accommodate thenew international airport, which opened in December 1995. The ambitiousNam Van Lakes project plans to increase the land area of the Macau peninsulaby 20% by the time the four-stage development is completed in 1999. Ulti-mately it is intended to join Taipa with Coloane, by reclaiming land from thesea on either side of the causeway currently joining them. The US$1.5bnscheme, if completed, will involve the construction of 16m sq feet of hotels,offices and flats and a six-lane highway. It is estimated it would provide livingand working accommodation for up to 60,000 people. Understandably, in viewof the glut of vacant units arising from the 1992 and 1996 construction booms,questions have been raised about the viability of the project.

68 Macau: Agriculture and fishing


The external sector

Merchandise trade

Foreign trade, 1996(MPtc m)

Exports fob 15,898.5

Imports cif 15,930.7

Trade balance –32.2

Balance with China –2,551.0

Balance with US 684.0

Balance with EU 396.7

Balance with Hong Kong –367.9Source: Macau Economic Services (based on Foreign Trade Statistics from the Macau Statistics and Census Department).

The trade deficit that appeared in 1991 and increased between 1992 and 1994declined in 1995 as import growth slowed. Nonetheless the deficit is likely towiden again in the years ahead unless there is major investment in modernisa-tion of the export industries. The largest bilateral trade deficit is with HongKong, while Macau manages to run a large surplus with the United States.(Historical data on the direction and composition of merchandise trade aregiven in Reference tables 13-17.)

Export diversification in the 1980s only had shortlived success. For a whilenon-textiles products assumed greater importance, reaching 30% of total ex-ports in 1985. However, since then the main alternatives, namely toys andartificial flowers, have largely relocated across the border, and textiles andgarment exports have regained their traditional pre-eminence, contributing77.6% of export earnings in 1995. Textiles and apparel are still locked in byMulti-Fibre Arrangement (MFA) origin requirements, and, more worryingly,some 80% of its products go to just two destinations; the US and the EU, withthe major part subject to bilateral restraints. With the phasing out of the MFA,Macau’s textiles industry could face difficulties. Apart from clothing and tex-tiles, the other main export categories are toys, electronics and footwear. Earn-ings from toy exports resumed their long-term decline in 1995, while footwearexports have continued to show a steady increase. Electronics have shown thebest performance in recent years, but fell sharply in 1995 as demand in the USand the EU proved disappointing, especially for computer components.

Exports by product, 1996(MPtc m)

Textiles & garments 12,760

Footwear 302

Toys 264

Electronics 173

Others 2,400

Total 15,899Source: Macau Statistics and Census Department, Foreign Trade Statistics.

Macau: Merchandise trade 69


Macau’s largest customer is the US, followed by the EU, although exports toChina have recorded the most rapid growth in the 1990s. Imports from allsources have grown fast in recent years. Hong Kong remains the largest sup-plier, but China and Japan are moving up.

Main trading partners, 1996

Exports to: % of total Imports from: % of total

US 40.3 Hong Kong 29.0

EU 33.7 China 24.0

Hong Kong 10.6 EU 13.7

China 8.0 Japan 9.0Source: Macau Economic Services (based on Foreign Trade Statistics from the Macau Statistics and Census Department).

Macau will after, its reversion to China, remain a member of the World TradeOrganisation.

Invisibles and the current account

Although balance-of-payments figures are not published, it is likely that in1995 the Mptc354m (US$44.3m) deficit on merchandise trade was more thanoffset by a substantial invisibles surplus. Nor are any figures published forinvestment income (interest, profits and dividends) and outflows, or for trans-fer payments.

Capital flows and foreign debt

Macau publishes no estimates of capital-account flows at all.

OECD figures put total external debt at US$1,788m as of the end of 1991,14.3% up on that outstanding at the end of 1990 and 124.1% above theUS$798m low reached in 1984 after several years of decline. Of the total,short-term debt represented 94.9% at the end of 1991. Debt service stood atUS$106m in 1991, with about 98% attributed to interest payments (reflectingthe high short-term component of debt), according to OECD figures. A largeproportion of finance for Macau is raised in Hong Kong.

The exchange rate

The local unit is the pataca (MPtc), divided into 100 avos. The pataca is tied tothe Hong Kong dollar, which is also legal tender (and is the currency used inthe casinos), and trades at a rate of MPtc103:HK$100. The pataca thus moves inline with the US dollar, at a pegged rate of roughly MPtc8:US$1. The pataca isnot convertible abroad, except in China and Portugal, where governmentalagreement has been relatively easy to obtain. (Historical data on exchange ratesare given in Reference table 18.)

70 Macau: Invisibles and the current account


Appendices

Sources of information

National statistical sources Census and Statistics Department, Boletim Mensal (monthly), (Portuguese andChinese)

Census and Statistics Department, Boletim Mensal de Comércio Externo(monthly), (Portuguese and Chinese)

Census and Statistics Department, Macau in figures (annual)

Census and Statistics Department, Quarterly Economic Bulletin

Census and Statistics Department, Yearbook of Statistics

Instituto Emissor de Macau, Annual Report

Macau Economic Services, Economic Studies

Reference tables

Reference table 1

Government finances(MPtc m)

1992 1993 1994 1995 1996a

Revenue 10,699.8 12,202.3 12,811.2 16,191.0 8,889.3 Recurrent receipts 9,191.3 9,356.6 10,000.2 8,558.2 8,446.8 Capital 26.7 306.0 77.9 77.9 103.3 Reimbursements 40.2 7.4 8.6 35.2 19.2 Funds from previous fiscal years 0.0 396.7 0.0 2,081.6 0.0 Autonomous bodies’ receipts 1,441.6 2,135.6 2,724.5 5,438.0 320.0

Expenditure 8,894.0 10,420.0 11,251.3 15,472.2 8,865.1 Current 5,646.7 5,984.9 6,826.8 6,106.6 6,524.0 Capital 1,805.7 2,299.5 1,700.0 3,928.0 2,021.2 Autonomous bodies’ expenditure 1,441.6 2,135.6 2,724.5 5,437.6 320.0

Balance 1,805.8 1,782.3 1,559.9 718.8 24.2

a Provisional data.

Source: Macau Economic Services, Economic Studies.

Reference table 2

Money supply(MPtc m; year-end)

1992 1993 1994 1995 1996

Money supply (M2) 50,375.3 53,956.1 61,018.8 69,284.4 74,744.3

Net foreign assets 32,105.6 28,262.8 32,583.3 39,256.6 43,206.7Source: Macau Economic Services, Economic Studies.

Macau: Sources of information 71


Reference table 3

Gross domestic product(MPtc m unless otherwise indicated)

1992 1993 1994 1995 1996

GDP total, by expenditure, current prices 42,106 47,698 53,429 59,407 59,337

GDP per head (MPtc) 110,543 120,663 130,156 139,979 142,688

GDP per head (US$) 13,818 15,083 16,270 17,497 17,836Source: Census and Statistics Department, Macau in Figures.

Reference table 4

Gross domestic product by expenditure(MPtc m; constant 1989 prices; % change year on year in brackets)

1992 1993 1994 1995 1996

Private consumption 9,806 10,497 11,135 11,496 11,964(9.1) (7.0) (6.1) (3.2) (4.1)

Government consumption 2,359 2,515 2,693 2,934 3,094(–3.7) (6.6) (7.1) (8.9) (5.5)

Fixed investment 9,990 10,416 10,790 9,840 8,173(36.9) (4.3) (3.6) (–8.8) (–16.9)

Stockbuilding 290 325 468 284 195(–12.5) (12.1) (44.0) (–39.3) (–31.3)

Exports of goods & services 26,186 26,833 27,953 29,379 29,517(6.2) (2.5) (4.2) (5.1) (0.5)

Imports of goods & services 17,965 18,281 19,342 18,945 18,050(8.1) (1.8) (5.8) (–2.1) (–4.7)

GDP 30,666 32,305 33,697 34,988 34,893(10.6) (5.3) (4.3) (3.8) (–0.3)

Source: Census and Statistics Department, Macau in Figures.

Reference table 5

Prices1992 1993 1994 1995 1996

General CPIa

Index (1988/1989=100) 127.4 135.9 144.4 156.8 164.4 % change 7.7 6.7 6.3 8.6 4.8

GDP deflatorIndex (1989=100) 231.8b 252.9b 158.6 169.8 170.1 % change 11.8 9.1 6.3 7.1 0.2

a Excluding rentals. b 1982=100.


72 Macau: Reference tables


Reference table 6

Population(% unless otherwise indicated)

1992 1993 1994 1995 1996

Population total (’000; year-end) 378.0 390.0 403.6 415.0 415.9 % change 3.9 3.2 3.5 2.8 0.2

Crude birth rate n/a 17.9 15.4 14.4 13.2

Crude death rate n/a 3.9 3.4 3.3 3.4

Marriages per ’000 inhabitants n/a 5.8 6.9 5.2 5.1

Divorces per ’000 inhabitants n/a 0.5 0.6 0.6 0.8Source: Census and Statistics Department, Macau in Figures.

Reference table 7

Enrolment in education institutions(No. unless otherwise indicated)

1992 1993 1994 1995 1996

Students per 1,000 inhabitantsa 216 216 218 222 225

Curricular teaching 85,326 88,201 90,509 93,587 96,846

Kindergarten 21,535 21,432 20,974 20,476 19,770

Basic 37,719 40,037 42,823 45,153 46,703

Secondary 17,917 18,634 19,246 20,624 22,277

Technical secondary 735 827 949 1,189 1,163

Teacher training 365 353 326 318 338

Nurse training 184 115 146 172 177

Higher education 6,871 6,803 6,045 5,655 6,418

Special education 223 307 326 349 359

Adult education 39,483 32,827 31,913 38,456 38,506

a Excluding part-time higher education students.


Macau: Reference tables 73


Reference table 8

Labour force(% unless otherwise indicated)

1992 1993 1994 1995 1996

Labour forcea 246,442 257,736 262,310 271,228 277,372

Participation rates 64.7 65.2 63.9 65.3 66.7 Men 78.7 79.8 77.7 78.3 79.4 Women 51.8 52.0 51.7 53.7 55.4

Unemployment rate 2.2 2.1 2.5 3.6 4.3

Median monthly earnings (MPtc) 3,499 4,067 4,476 4,830 4,925

Share of employmentConstruction 9.3 10.0 7.5 9.5 7.5Manufacturing 28.5 25.0 22.9 21.7 20.6Financial & business services 5.3 5.4 6.3 6.2 6.6Restaurants & hotels 24.4 26.0 26.1 25.6 27.5Public, social & private services 25.9 26.5 30.4 30.1 30.6

a EIU estimates.


Reference table 9

Transport and communications(year-end)

1992 1993 1994 1995 1996

Vehicles (units)Total licensed 36,374 39,207 40,279 40,684 45,206 Light load 32,703 35,441 36,596 36,998 41,403 Heavy load 3,671 3,766 3,683 3,686 3,803New registrations 5,612 5,784 5,912 4,090 5,787 Light load 5,345 5,485 5,585 3,877 5,571 Heavy load 267 299 327 213 216Cars per 1,000 inhabitants 96 99 100 98 109

Telephones 133,191 152,538 167,939 189,856 206,154 New installations 29,728 32,370 32,616 41,867 50,485 Telephones per 1,000 inhabitants 379 333 416 457 496Source: Census and Statistics Department, Macau in Figures.

Reference table 10

National energy statistics

1992 1993 1994 1995 1996

ElectricityCapacity (mw) n/a n/a 260.4 311.8 366.8Imports (’000 mwh) 101.2 126.3 130.3 177.4 174.0Consumption (’000 mwh) 969.1 1,133.2 1,221.1 1,265.4 1,345.9Source: Census and Statistics Department, Macau in Figures.



Reference table 11

Tourism

1992 1993 1994 1995 1996

Total visitor arrivals (’000) 7,699 7,829 7,834 7,753 7,461 of which from: Hong Kong n/a 4,604 6,088 5,618 5,206 Japan n/a 336 348 378 Taiwan n/a 185 379 416 516 China n/a 162 245 543 604 % change 2.8 1.7 0.0 –1.0 –3.8

Hotel rooms (no) n/a 7,120 7,875 8,479 8,545

Occupancy rate (av; %) 67 60 58 60 64

Average stay (days) 1.33 1.35 1.32 1.30 1.32Sources: Macau Economic Services, Economic Studies; Census and Statistics Department, Boletim Mensal de Estatica e Census de Macau.

Reference table 12

Construction statistics

1992 1993 1994 1995 1996

Buildings completedGross floor area (’000 sq metres): 1,201.0 1,427.3 1,140.9 1,221.1 1,908.3 Residential 781.8 932.1 578.7 563.4 1,247.7 Commercial & office 187.2 259.1 326.9 398.1 265.4 Industrial 62.6 38.8 62.6 37.2 0.0 Others 169.4 197.3 172.7 222.4 395.2

Number of units 12,983 15,668 9,553 9,432 16,866 Residential 11,033 13,665 7,443 6,030 14,693 Others 1,950 2,003 2,110 3,402 2,173

Building permits issued 201 176 181 142 114 Residential 171 147 141 103 85 Others 30 29 40 39 29

Consumption of cement (tonnes) 261,729 306,299 455,929 311,007 238,778

Housing credit to individuals (MPtc m) 7,361 9,198 9,684 9,499 10,825Sources: Census and Statistics Department, Macau in Figures; Land and Transport Department, Macau Public Works.

Reference table 13

Trend of foreign trade(MPtc m)

1992 1993 1994 1995 1996

Exports fob 14,080 14,236 14,854 15,914 15,899

Imports cif –15,685 –16,138 –16,925 –16,267 –15,931

Balance –1,605 –1,902 –2,071 –354 –32Source: Census and Statistics Department.



Reference table 14

Exports by main destination(MPtc m; fob)

1992 1993 1994 1995 1996

US 4,983 4,757 5,522 6,693 6,411

China 1,402 1,886 1,887 1,562 1,267

Hong Kong 1,763 1,785 1,660 1,594 1,684

Total incl others 14,080 14,236 14,854 15,914 15,899Source: Macau Economic Services.

Reference table 15

Imports by main source(MPtc m; cif)

1992 1993 1994 1995 1996

Hong Kong 5,160 4,818 5,137 4,700 4,627

China 3,204 3,429 3,186 3,539 3,818

EU 1,486 1,980 2,617 2,397 2,182

Japan 2,824 2,549 2,165 1,711 1,431

US 808 934 1,157 1,206 939

Total incl others 15,685 16,138 16,925 16,267 15,931Source: Macau Economic Services.

Reference table 16

Exports by main sector(MPtc m; fob)

1992 1993 1994 1995 1996

Textiles & garments 10,745 10,375 10,918 12,358 12,760

Footwear 133 183 272 327 302

Toys 689 598 728 578 264

Electronics 424 491 566 405 173

Other 2,090 2,590 2,370 2,246 2,400

Total 14,080 14,236 14,854 15,914 15,899Source: Macau Economic Services.

Reference table 17

Imports by end-use category(MPtc m; cif)

1992 1993 1994 1995 1996

Consumer goods 4,171 4,444 4,800 4,520 4,286

Foodstuffs, beverages & tobacco 1,380 1,616 1,943 1,899 1,712

Other consumer goods 2,792 2,829 2,857 2,621 2,574


Fuels & lubricants 667 739 793 834 1,016

Capital goods 2,418 2,040 2,243 2,282 1,630

Total 15,685 16,138 16,925 16,267 15,931Source: Macau Economic Services.



Reference table 18

Exchange rates(period averages; MPtc per 100 units of foreign currency)

1992 1993 1994 1995 1996

US$ 797.2 796.8 796.0 796.8 796.6

HK$ 103.0 103.0 103.0 103.0 103.0

£ 1,410.0 1,196.4 1,219.8 1,257.7 1,243.9

DM 512.2 482.0 492.3 556.8 529.8

FFr 151.2 140.8 143.9 159.9 155.8

¥ 6.30 7.20 7.80 8.52 7.33

Rmb 144.70 138.30 92.40 95.43 95.82 Source: Monetary and Foreign Exchange Authority of Macau.

Editor:All queries:

Ken Davies Tel: (44.171) 830 1007 Fax: (44.171) 830 1023



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