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Country Commercial Guides for FY 2000: Hong Kong Report prepared by U.S. Embassy Hong Kong, released July 1999

CHAPTER I: EXECUTIVE SUMMARY

This Country Commercial Guide (CCG) presents a comprehensive look at Hong Kong's commercial environment using economic, political and market analyses. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. embassies and consulates through the combined efforts of several U.S. Government agencies.

On July 1, 1997, Hong Kong reverted to Chinese sovereignty after over 150 years under British rule. The Sino-British Joint Declaration, signed in 1984, and the Basic Law, passed by China's National People's Congress in 1990, form the legal basis for China's "One Country, Two Systems" guarantees for the Hong Kong Special Administrative Region (SAR) of China. These documents, which guarantee a high degree of autonomy for the SAR except in matters relating to foreign affairs and defense, have to date been scrupulously observed. So far, Beijing has honored its commitments that the Hong Kong people will continue to enjoy the social and economic systems, life-style, and rights and freedoms that they previously enjoyed. The SAR continues to enjoy executive, legislative and independent judicial power.

Two years after the reversion, the problems facing Hong Kong relate not to the return to Chinese sovereignty, but rather to the financial and economic crisis that has affected the entire Asian region. Hong Kong is mired in a deep recession. Unemployment has risen to 6.3 percent as of June, 1999, a record high; retail sales are off 12.8 percent for the first four months of 1999; and GDP fell by 3.4 percent in the first quarter of 1999, after falling by 5.1 percent in 1998, the first time Hong Kong experienced negative GDP growth since 1984.

Signs of a turnaround have begun to appear, however. Last summer, the stock market looked to be in free fall, having lost some 60 percent of its value in the preceding 12 months. Fearing attacks from speculators, the government made its first ever intervention in the stock and futures markets, spending US$15.3 billion to buy all 33 Hang Seng Index constituent stocks and futures in August, 1998. Whether due to the intervention or not, the stock market has risen over 100 percent since that time, and has begun to approach pre-crisis highs. Tourism has begun to recover in recent months, with 12.1 percent growth for the first five months of 1999 compared with the same period in 1998. The sharp correction in property prices also appears to have run its course: although down 35-40 percent from their 1997 peak levels, property prices are up 20 percent now from last year's lows. In short, it appears that Hong Kong's economy has bottomed out and begun to turn upward, though it still remains susceptible to external factors, notably the economies of China, the United States, Japan, and the European Union, as well as risks from intra-regional shocks from Indonesia, Korea, and Thailand.

Hong Kong remains an economic and commercial powerhouse. It is the United States' fifteenth largest trading partner, with U.S. exports to Hong Kong totaling US$12.9 billion in 1998, and two-way trade of US$21.8 billion. The keys to Hong Kong's economic success -- its free-market philosophy, entrepreneurial drive, absence of trade barriers, well established rule of law, low and predictable taxes, transparent regulations, and complete freedom of capital movement -- all remain intact, and should contribute to Hong Kong's recovery. The "silver lining" in the recession -- lower property and labor costs, and less staff turnover -- should add to Hong Kong's attractiveness as a commercial and financial center.

Hong Kong's infrastructure is superb. Kai Tak Airport, which was strained to capacity in 1997 with 30 million passengers and 1.6 million tons of cargo, has been replaced by the new US$9 billion Chek Lap Kok Airport. The new airport's annual capacity has expanded to 87 million passengers and nine million tons of air cargo since its second runway opened in May 1999. Hong Kong also boasts the world's second busiest container port, now handling over 14 million TEU's (twenty-foot equivalent units) of cargo per year. An expansion of the container terminal facilities is planned, as construction of Hong Kong's ninth container terminal (CT 9) is expected to begin later in 1999. Hong Kong also boasts world-class telecommunications, public transportation, and international schools, further adding to its attractiveness as a base for U.S. companies.

There are over 1,100 U.S. businesses represented in Hong Kong -- including over 400 regional operations -- and over 50,000 American citizens reside in Hong Kong. According to preliminary U.S. Government statistics, estimated U.S. direct investment in Hong Kong totaled US$20.8 billion at year-end 1998 (based on historical cost), making the United States one of Hong Kong's largest investors, along with the U.K., China and Japan. Thirty-two American "authorized financial institutions" operate in Hong Kong, including seven of the top 10 U.S. banks.

Geographic proximity and cultural and linguistic ties, particularly to adjacent Guangdong province, have greatly accelerated Hong Kong's economic integration with China. Trade and investment with China have surged as China's economy continues its fast-track growth. China is Hong Kong's largest trading partner, absorbing one-third of Hong Kong's total exports of US$172.7 billion. Hong Kong serves as the principal transhipment point for Chinese exports. Almost 60 percent of cumulative foreign investment in China originated from or transited through Hong Kong. Over 5 million Chinese workers are employed by Hong Kong-invested enterprises in Guangdong alone.

With a per-capita GDP of US$24,653, Hong Kong's sophisticated population offers outstanding opportunities for sales of a full range of U.S. products and services, the current economic downturn notwithstanding. Hong Kong's role as a regional financial services and transportation hub contributes to a promising market in computers, telecommunications equipment and information technology services. A growing population and pressures for improvements in quality of life support growing demand for building products, pharmaceuticals, and environmental services and equipment. With its new airport offering significant new capacity, the market for aircraft and parts should flourish. All of these areas offer outstanding opportunities for U.S. exporters, as do such products traded through Hong Kong to China as paper and high value food products. The U.S. Consulate General looks forward to working with U.S. companies interested in entering this dynamic market.

Country Commercial Guides are available for U.S. exporters from the National Trade Data Bank's CD-ROM or via the Internet. Please contact STAT-USA at 1-800-STAT-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at HTTP://WWW.STAT-USA.GOV, HTTP://WWW.STATE.GOV, and HTTP://WWW.MAC.DOC.GOV. They can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance and country-specific commercial information should contact the U.S. Department of Commerce's Trade Information Center by phone at 1-800-USA-TRAD(E) or by fax at (202) 482-4473.