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Country Commercial Guides for FY 2000:
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CHAPTER II: ECONOMIC TRENDS AND OUTLOOK
A. Major Trends and Outlook
In 1998, Hong Kong experienced, for the first time since 1984, negative growth every quarter, with GDP shrinking 5.1 percent for the full year to reach US$165 billion at current market prices. GDP per capita fell to US$24,653 last year, down by seven percent from US$26,502 in 1997. Real GDP continued to drop at the rate of 3.4 percent in the first quarter of 1999 and will likely be flat or slightly negative for the year, with good prospects that positive growth will return in 2000.
Labor market conditions have deteriorated further since the Asian financial crisis began. The unemployment rate rose to 6.3 percent during the period of March-May 1999. The labor force continued to grow due to sustained expansion in the working age population, which in turn was underpinned by inflows of returning emigrants, immigrants from Mainland China, and other foreign individuals. Some analysts expect that the unemployment rate will reach 6.5-7 percent in 1999. The government formed a task force last year to address the unemployment situation, to try to create more jobs.
Hong Kong's merchandise, or visible, trade deficit decreased 48.8 percent in 1998 to US$10.4 billion. Exports of services dropped 6.5 percent in real terms in 1998, while the imports of services declined by 0.6 percent in real terms. Hong Kong's invisibles surplus, which shrank in 1998 to US$11.5 billion, offset most of its merchandise trade deficit.
In 1998, Hong Kong's total exports (comprising re-exports and domestic exports) declined. In real terms, total exports in 1998 decreased by 4.3 percent, as compared with a 6.1 percent increase in 1997. By value, total exports fell by 7.4 percent to US$173 billion in 1998. Total exports continued to fall in 1999, down by 7.8 percent in value terms for the period January-May of 1999 compared to the year earlier period. Re-exports, which account for 86 percent of Hong Kong's total exports, decreased by 6.9 percent in value terms in 1998. (Re-exports refer to goods made in foreign countries, principally China, which officially enter Hong Kong's customs territory for shipment onward to other countries.) Re-exports declined 6.8 percent in value terms for the period January-May of 1999 compared to the year earlier period. Domestic exports decreased by 10.9 percent in value terms in 1998, following a 0.4 percent decrease in 1997. Domestic exports declined 13.9 percent in value terms for the period January-May of 1999 compared to the year earlier period. China is Hong Kong's principal export market, taking approximately one third of total domestic merchandise exports. The United States is Hong Kong's second largest export market. Including re-exports from China, Hong Kong's 1998 total exports to the U.S. were US$40.3 billion, according to Hong Kong Government statistics. Other principal export markets in order of importance are Japan, Germany and the United Kingdom.
Total imports shrank by 11.5 percent in value terms in 1998 to US$183 billion. In real terms, total imports decreased 7.2 percent in 1998, following a 7.2 percent increase in 1997. Retained imports -- those not shipped onward to China or elsewhere -- fell by 14 percent in real terms to US$60.6 billion in 1998. The drop represented a setback in production and consumption in 1998, largely related to the Asian financial crisis. For the period January-May of 1999, total imports have fallen 13.8 percent in value terms compared to the year earlier period. China is the largest supplier of imports with a 39 percent share, followed by Japan, the United States and Taiwan. U.S. exports to Hong Kong totaled US$14.2 billion in 1998, down 16.6 percent from 1997. (Note: According to U.S. Government statistics U.S. exports to Hong Kong totaled US$12.9 billion in 1998, down from US$15.1 billion in 1997. For January-April 1999, U.S. exports to Hong Kong are down 6.7 percent compared to the year earlier period.)
Since 1983, the Hong Kong dollar has been linked to the U.S. dollar at a rate of approximately HK$7.8 = US$1. The Hong Kong Government is steadfastly committed to the link and has pledged to maintain it. Currency notes are issued by three commercial banks, and are fully backed by U.S. dollars on deposit with the Exchange Fund. The link requires local interest rates to generally track those in the United States. The market exchange rate of the Hong Kong dollar against the U.S. dollar remained on the strong side of the link during 1998, ranging from 7.732 to 7.749. During the Asian currency turmoil, the strength of the Hong Kong dollar has been maintained through the operations of its currency board mechanism, resulting in upward adjustments, at times quite sharp, of interest rates.
B. Principal Growth Sectors
Services dominate Hong Kong's economy, accounting for 85.2 percent of GDP and employing 82 percent of the work force in 1997. Between 1989 and 1998, exports of services grew at an average annual rate of 4.2 percent in real terms, while services imports increased at 6.3 percent. Major services include the trade and travel related sector (wholesale trade, retail trade, import/export, restaurants and hotels), which accounted for 26.1 percent of GDP in 1997; and financing, insurance, real estate and business services, which contributed 26.5 percent of GDP in 1997, up from 20 percent in 1990. See Section VII (I) for a discussion of the banking/financial services sector.
Manufacturing as a percentage of GDP has declined steadily as companies have shifted production facilities to lower cost locations in China and elsewhere. Manufacturing in 1997 accounted for only about 6.5 percent of GDP and 12.6 percent of the work force, down from 17.6 percent and 28 percent respectively in 1990. The textile and clothing/apparel industries remain the backbone of Hong Kong's manufacturing sector. These industries employed 32.5 percent of the manufacturing work force and accounted for 39.7 percent, or US$9.6 billion, of Hong Kong's 1998 domestic exports. Other principal industries include electronics, watches and clocks, and chemical and industrial machinery. Manufacturers continue to shift production facilities out of Hong Kong, primarily to China, to take advantage of lower labor and land costs.
(1) Tourism and Retail Sales
Tourism is Hong Kong's largest earner of foreign exchange after the textile and apparel industries. Tourism provided revenues of US$7.1 billion in 1998, down by 23.4 percent from 1997 due to a decline in Japanese tourism, the contagion effect of the regional currency turmoil, and bird flu in Hong Kong. Visitor arrivals numbered some 9.6 million in 1998, down by eight percent from 1997, but the numbers have shown improvement in 1999. Tourist arrivals for the first five months of 1999 rose 12.1 percent from a year ago to 4.2 million. The rise is partly attributed to the fact that the economies of Japan and Southeast Asia have stabilized, and partly to the relaxation of visa quotas for Chinese residents who wish to visit Hong Kong. Visitors from China accounted for 27 percent of Hong Kong's total arrivals last year, followed by Taiwan with 19 percent, Southeast Asia with 13 percent, Japan with 10 percent, and the United States with eight percent. The volume of visitors from the United States in 1998 decreased to 773,309 from 1997's 800,539. Hotel room occupancy rates remained the same at 76 percent in 1998 as in 1997. For the period of January-May, 1999, the hotel room occupancy rate increased to 78 percent.
Retail sales volume plummeted by 16.7 percent in 1998, following a 1.1 percent increase in 1997, reflecting the weak consumer demand as a result of increased lay-offs and reduced job security in the labor market. The largest declines in sales included motor vehicles; clothing and footwear; commodities in department stores; consumer durable goods; and jewelry, watches and clocks, and valuable gifts; registering a decrease of 29.2 percent, 27.8 percent, 26.9 percent, 17.4 percent and 16.8 percent respectively in volume in 1998. Other retail segments also showed a decrease in volume in 1998, including supermarket sales (down 2.5 percent in volume); food, alcoholic drinks and tobacco (down 3.4 percent in volume) and fuels (down 12.1 percent in volume). For the period January-April, 1999, retail sales have fallen 8.8 percent in volume compared to the same period in 1998.
(2) Property
The office rental market was buoyant in the first half of 1997, before softening in the second half as demand for office space declined because of the economic slowdown, coupled with the addition of more new buildings to the supply. In 1998, average monthly rental prices for Grade A (the highest grade) office space in Central, Hong Kong's premier district, dropped 15 percent because of downsizing in the corporate sector and an uncertain business outlook, while Grade A space in Wan Chai North, another popular commercial district for multinational companies on Hong Kong Island, dropped by 2.5 percent. By the middle of 1999, office rentals remained in the doldrums, with space in Central renting for as low as US$3.7 per square foot per month, 30-40 percent lower than at its peak, before the onset of the Asian financial crisis.
Similarly, the residential property market underwent a severe downturn in 1998. The market began to slip in the third quarter of 1997 when Chief Executive C.H. Tung announced his plan to build 85,000 new flats a year, targeting 70 percent home ownership by 2007. In the fourth quarter of 1997, the market plunged as a result of the Asian financial crisis and high interest rates. The Peak, Wan Chai/Mid-levels, and the South Side of Hong Kong Island are the most popular living areas for expatriates. By May 1999, rental prices in these areas, the "luxury" segment, had fallen some 28 percent from 1997's peak, with average monthly rents of US$3.8 to $4.1 per square foot for the Peak, US$3.6 to $4.4 for Wan Chai/Mid-levels, and $3.8-$4.3 for the South Side.
(3) Infrastructure (Construction, Telecommunications, Environment)
See Section II.E below for a discussion of these sectors.
C. Government Role in the Economy
The Hong Kong Special Administrative Region Government continues to pursue a generally non-interventionist approach to economic policy that stresses the predominant role of the private sector, just as it did prior to the transition to Chinese sovereignty in July 1997. Economic policy is based primarily on minimal interference with market forces. However, the government plays a significant role in infrastructure development, healthcare, public housing, and land sales. In the spring of 1998, the government, responding to public pressure, put forward a US$5.7 billion economic relief package, a package which resulted in a deficit of US$3 billion for fiscal year 1998-99. More recently, the government has also become more proactive in support of high technology development. It has introduced various schemes to encourage applied research and development, and has plans to develop a science park and a high-tech "Cyberport." The government also created a Commission on Innovation and Technology, whose final report in July 1999 recommended, among other things, creation of a US$1 billion "Silicon Harbor."
Hong Kong has consistently supported an open multilateral trading system. The government is an active member of the World Trade Organization (WTO) and the Asia Pacific Economic Cooperation Forum. Hong Kong maintains no anti-dumping laws, countervailing duty laws, import quotas or tariffs. (There are consumption taxes on a few items which apply equally to imports and local products.) It urges similar open trade policies for its neighbors and trading partners. Since July 1, 1997, Hong Kong has continued to enjoy a high degree of autonomy as a separate customs territory.
The tax system in Hong Kong is simple and tax rates are low. No one pays more than 15 percent of their income in salaries tax. As a result of generous allowances under the law, 61 percent of the work force pay no salary tax at all. The business profit tax is 16 percent and is payable only on net profits arising in Hong Kong or derived from business performed in Hong Kong. There are no taxes on capital gains, dividends, or interest. Other revenue sources include stamp duty on property and stock market transactions, betting duties, estate duty and hotel accommodation tax. The Hong Kong Government's low taxes and prudent fiscal policy have enabled it, generally, to achieve surpluses on its consolidated account over the past decade, although the budget has gone into deficit since the financial crisis began. Under the Sino-British Joint Declaration and China's Basic Law on Hong Kong, Beijing cannot tax Hong Kong or otherwise extract revenue from the SAR Government.
Hong Kong Government-funded core projects, including those related to the Chek Lap Kok Airport and environmental protection, have further fueled the development of Hong Kong's economy. In Fiscal Year 1999 (FY99), which will end on March 31, 2000, government expenditures will account for approximately 21.1 percent of GDP, the first time that government expenditures exceeded 20 percent of GDP. Prudent fiscal management and strong reserves have obviated the need for the Hong Kong Government to incur debt to finance expenditures. The Hong Kong Monetary Authority (Hong Kong's de facto central bank) had a total of US$12.5 billion in Exchange Fund bills and notes outstanding at year-end 1998. The bills and notes are used as instruments of monetary policy and are a principal means by which the Hong Kong Government has worked to develop a local debt market. They are not used to finance expenditures.
D. Balance of Payments Situation
Hong Kong released official Balance of Payments (BoP) data for 1997 in April, 1999. The broad BoP account for 1998 will be available in late 1999. The first set of quarterly BoP account for the same reference quarter will be available in early 2000.
In 1997, Hong Kong recorded an overall BoP surplus of US$12.2 billion. The current account registered a deficit of US$6.7 billion, which was 3.9 percent as a ratio of the GDP estimate at current market prices in 1997. This was the net effect of a visible trade deficit of US$17.2 billion, an invisible trade surplus of US$11.1 billion, a net inflow of factor incomes of US$961.5 million, and a net outflow of current transfers of US$1.6 billion.
Total inflow into Hong Kong in 1997 amounted to US$59.1 billion, while total outflows was US$58.1 billion. The gross flows of external factor income into and out of Hong Kong were both very sizable, with each equivalent to about 30 percent of GDP.
As the inflows and outflows were close in magnitude, the net factor income flow was only US$961.5 million, or about 0.6 percent of GDP. Thus the GDP and GNP estimates were close to each other in 1997, with the latter being larger than the former by only 0.6 percent.
According to the findings of the surveys on external investments conducted by the Industry Department and the Census and Statistics Department, at year-end 1997, total inward direct investment stood at US$93.9 billion, based on original cost. At year-end 1998, settled foreign currency reserves (excluding forward transactions) totaled US$89.6 billion (including the Land Fund), and by mid-year 1999 this had dropped slightly to US$88.9 billion.
The Hong Kong Monetary Authority has, in February 1997, made an interim estimate of the BoP for 1993-1995. There was an overall surplus in the BoP (excluding reserves) in 1993, 1994 and 1995. In 1996, the merchandise trade deficit of US$18.2 billion (9.2 percent of total imports) exceeded the surplus in services trade of US$16.6 billion, leaving an overall trade deficit of US$1.6 billion.
E. Infrastructure Situation
Hong Kong's modern and efficient infrastructure supports its role as a trade entrepot and regional financial and services center. As rapid growth placed severe demands on that infrastructure, particularly on transportation and shipping facilities, the Government responded with a major infrastructure development program. Hong Kong's new US$9 billion airport and airport railway opened on July 6, 1998. All the related roads, bridges and tunnels were completed in advance of the opening. The conclusion of the Airport Core Program, however, does not end the Hong Kong Government's commitment to a world-class infrastructure. On the contrary, Hong Kong has plans to invest US$30 billion over the next five years to further enhance its competitiveness as a regional center. Significant projects include a planned expansion of container terminal facilities, additional roadway and railway networks, sewage and telecommunications facilities.
Airport
Despite start-up problems during the first few weeks of operations, particularly for cargo shipments, Hong Kong's new international airport at Chek Lap Kok has settled into a routine of efficiency after a year of operations. Each day, it handles an average of 450 flights, 90,000 passengers and more than 4,500 ton of cargo. There are more than 60 airlines operating some 3,000 flights between Hong Kong and 110 cities around the world. With 163,223 aircraft movement and 1,628,742 tons of cargo throughput in 1998, the new Hong Kong International Airport ranks fifth in the world in terms of passenger throughput and first in terms of cargo handled.
Hong Kong is a major gateway to China, the world's fastest growing region for aviation. There are direct flights from Hong Kong to nearly 40 Mainland cities, and the demand for aviation services is growing. Looking ahead, Hong Kong International Airport is well placed to take advantage of Asia's economic recovery. With 24-hour operations, two all-weather runways, an ability to cater to all types of commercial aircraft, high-speed transport links from the terminal to the city, and the largest and most efficient cargo handling facilities in the world, Hong Kong International Airport appears to be well positioned to cater to Hong Kong's aviation needs in the coming decades.
While the airport is now completed and fully operational, the Airport Authority is considering plans to build a Third Party Logistics Center and possibly a warehouse shopping mall on the airport grounds, and is considering other commercial developments to boost revenues. The Hong Kong Civil Aviation Department is in the early stages of a complete upgrade of its air traffic control system, which should provide good opportunities for U.S. companies over the next five years.
Shipping and Port Activities
Hong Kong's deep-water channel makes it one of the busiest container ports in the world and the leading transshipment port for Southeast Asia and China. In 1998, Hong Kong handled a total of 14.6 million twenty-foot equivalent units (teus), a growth of 1.4 percent over 1997.
Unlike most countries, Hong Kong does not have a port authority. All eight of its existing container terminals (CT 1-8) and the newly operational River Trade Terminal (RTT) are privately owned and operated. CT 1 to 8 have a combined annual capacity of 11.5 million teus. Phase I of the RTT opened in late 1998. Upon full completion in 2000, the RTT will be able to handle 1.3 million teus and 900,000 tons of cargo a year. CT 9, the new container terminal to be developed on Tsing Yi Island, will provide additional capacity of 2.6 million teus by the early 2000's.
Hong Kong's port is not free from competition. The nearby Shenzhen ports of Yantian and Shekou are developing rapidly. In 1998, the Shenzhen ports together handled close to 2 million teus, more than 10 times their total throughput five years ago. Rather than competing head on with these emerging ports, Hong Kong is developing more and more into a hub port to complement the feeder service of these Southern China ports. In the long term, China's industrialization should generate sufficient cargo to support the continued development of Hong Kong and South China ports.
In anticipation of future cargo increases, the Hong Kong Government has already completed the detailed planning of CT 10 and 11 in Penny's Bay located on Lantau Island. However, the plan for CT 10 and 11 may have to be abandoned to make way for a Walt Disney theme park that may be built on the same location. Regardless of where the new container terminals are built, there will be a need for extensive private financing, providing excellent opportunities for U.S. financial firms.
Roads and Railroads
Hong Kong's roads have one of the highest vehicle densities in the world. As of March 1999, there were over 500,000 licensed vehicles and approximately 1838km of roads, or 272 vehicles per kilometer of road. This high vehicle density, combined with hilly, difficult terrain and dense building development, poses a constant challenge to transport planning, road construction and maintenance. To cope with worsening traffic congestion, the Highways Department has nearly 30 projects under construction, and approximately 65 projects in the planning stage. The department's annual expenditure for the financial year ended March 2000 was approximately US$ 550 million.
Hong Kong is serviced by three major railway systems. The Mass Transit Railway Corporation (MTRC) operates a five-line metro system, including the 34km Airport Express and the Tung Chung Line which opened in mid-1998. The Kowloon Canton Railway Corporation (KCRC) operates a 34-km line that services the new towns in the Northeastern New Territories, and that also provides a border crossing and freight service into China. In addition, KCRC also operates a Light Rail Transit System in the Northwestern New Territories.
Hong Kong is planning a massive expansion of its rail system. The investment in Hong Kong's domestic and cross-boundary rail networks in the next decade is expected to exceed in scale the US$20 billion spent on the Airport Core Program. Three major domestic passenger rail projects are already at various stages of implementation. Of these, KCRC is currently working on the West Rail Phase I construction, and the MTRC is working on the Tseung Kwan O Extension. The Government is also examining KCRC's TST Extension and Ma On Shan Extension proposals. Upcoming railway projects include a second KCRC border crossing at Lok Ma Chau and possibly a fourth rail harbor crossing. There should be significant opportunities for equipment sales and consulting services for these projects.
Telecommunications
Telecommunications is one of Hong Kong's most dynamic and competitive industries. Investment in telecommunications infrastructure has increased in recent years, despite the general economic downturn, and continues to play an integral role in Hong Kong's status as an international business center. In the fixed line local market, Hong Kong has a fully digitalized system, which continues to be expanded and upgraded by the former monopoly provider, Hong Kong telecom, as well as three new licensees. For international service, the issuance of international simple resale licenses, which allow resale of Hong Kong Telecom's international capacity as of January 1, 1999, has dramatically driven down international direct dial rates. With over three million subscribers, Hong Kong boasts one of the highest penetration rates of mobile phones in the world. There are five cellular networks (one TDMA, one CDMA, and three GSM systems) and six personal communications services (PCS) networks, all GSM1800. The introduction of mobile number portability in March of 1999 further intensified competition to attract and retain subscribers. Hong Kong is also fully participating in the global expansion of Internet services. As of March 1999 the government has issued over 130 licenses for internet service providers (ISPs). The largest ISP is still Hong Kong Telecom, which now also offers broadband internet access using its interactive television (iTV) service, which uses its extensive fiber ATM network. For some buildings not directly served by its fiber network, it is starting to deploy Asymmetric Digital Subscriber Line (ADSL) technology. Wharf Cable (the only cable television operator) is currently conducting trials of cable modems, and plans to start offering broadband services using its coaxial network at the end of 1999.
Recent regulatory changes and new technologies have provided opportunities for the introduction of new services and products. Although Hong Kong has extended the moratorium on the issuance of new wireline local service licenses until January 1, 2003, the government made an exemption for companies that offer local service using wireless local loop (WLL) technology. Despite the excellent infrastructure already in place, there is still a strong demand for broadband services for businesses, one area well suited for some WLL technologies. The government will also provide licenses for local services within a building or complex. The three new fixed line licensees have been granted an external (international) facilities based license, which will be effective January 1, 2000. In addition, companies offering non-wireline international communications, primarily satellite, can also obtain a license. For a new wireline external facilities license, a licensee must invest in bringing the physical cable into Hong Kong. If unable to qualify for an external facilities license, companies can provide international voice, data, fax, value added services, and virtual private networks using the ISR or international value added network services (IVANS) licenses, which are already available.
All the mobile operators are agressively deploying new services for their subscribers, including enhanced informational services and other value added services. Starting in the summer of 1999, mobile operators plan to begin deploying data services, such as e-mail and internet access. Operators are already looking forward to the introduction of 3rd generation mobile services within the next two or three years. The rapid growth of internet services provides excellent opportunities not only for hardware and software suppliers for ISPs and enterprise networks, but also for content providers and companies that offer innovative web-based services and electronic commerce solutions.
Environment
How to protect Hong Kong's environment has become a priority issue for debate among the government, the public and the business community in the past year. The quest for air and water quality improvements by the business community has driven the government to develop a number of initiatives to address environmental problems in Hong Kong. The Hong Kong Government has developed stringent environmental regulations and guidelines for industry and the public, and has commenced a wide range of environmental infrastructure projects to meet these objectives. The government is committed to spending over US$ 2.5 billion per year during the next three years on environmental improvement projects; U.S. companies should find many opportunities to participate in these projects.
The largest of all the environmental infrastructure projects currently underway is the Strategic Sewage Disposal Scheme, at a cost of over US$ 2 billion. The development of the second phase, including sludge minimization and deep oceanic outfall, is under environmental impact assessment and is expected to begin construction by the middle of 2000. Some of the construction work for the third and fourth phases of the project will be implemented concurrently with the second phrase. This should create opportunities for U.S. participation not only in this project, but also in other municipal sewage system projects, and for related equipment sales with an estimated value of US$ 300 million.
In 1998, the Hong Kong Government adopted a ten-year Waste Reduction Framework Plan which aims to minimize the amount of disposal waste and the costs of collection, treatment, and disposal. The Plan consists of two centralized waste-to-energy incineration facilities, at a total cost of US$ 1 billion; a construction materials recovery facility at a cost of US$ 100 million; and a US$ 5 million composting facility expansion. There should be opportunities for incineration and waste recycling technologies and related equipment valued at US$ 200 million.
Other business opportunities include the government's plans for the privatization of drinking water treatment facilities. The government is currently working on a feasibility study, and it is expected that the report will be released for public consultation by early 2000. This privatization should create investment opportunities for banks, private investors, and water management companies to bid on the necessary management and service contracts.
Additional niche markets exist in Hong Kong for the following types of environmental technologies:
Indoor air pollution control technologies - Centralized air conditioning is commonly used in Hong Kong's office buildings, hospitals, and shopping complexes. The government has begun to look into management and control technologies that can improve the air quality inside public buildings. There will be a growing demand for ventilation and dis-infection technologies for use in public buildings.
Vehicular air pollution control technologies - Vehicular emissions from diesel buses and trucks cause major air pollution problems in Hong Kong. The government is seeking options for alternative fuels and advanced technologies that can control the growing problem of respirable suspended particulates.
Energy efficient building technologies - The Chief Executive's 1999 Policy Address noted that improved energy efficiency and energy savings in buildings will be one of the government's priorities in environmental protection. The government has projected that the population will increase to 8.1 million by 2010 versus 6.7 million at present, thereby creating a strong demand for energy efficient lighting and air conditioning technologies for both old and new buildings.
Noise abatement technologies - It is expected that Hong Kong will build more highways, roads, and railroads linked to newly developed towns in the New Territories. Good noise control for roads and railroads is essential to minimize noise disturbance in residential neighborhoods.
Hong Kong's efforts to address the Year 2000 problem
The Information Technology and Broadcasting Bureau is responsible for coordinating the Hong Kong Government's overall Y2K program and strategy. The government has adopted a three-pronged approach to tackle the Y2K computer problem: a requirement that all information technology-based systems be Year 2000 compliant by July 1, 1999; establishment of a monitoring program which covers a wide range of non-government organizations including public utilities, financial institutions and hospitals; and a series of public awareness programs. In June 1999, the Global 2000 Coordinating Group, which monitors the Y2K readiness and progress of compliance work in 43 countries/cities in the world, announced that Hong Kong is one of the two best places in terms of Y2K readiness among the countries assessed.
As of June 1, 1999, 96 percent of mission critical computer and embedded systems within the government were confirmed to be Y2K compliant or have been rectified, and most of the remaining systems were rectified by the end of June, 1999. Contingency plans have been formulated for mission critical systems that did not make the June 30 deadline.
The Hong Kong Monetary Authority is working with the financial sector on the Y2K issue. As of mid-June 1999, 98.7 percent of banking institutions were already Y2K compliant.
In early June, Cable and Wireless Hong Kong Telecom announced that all of its business components that support its products and services were declared Y2K compliant. Rectification work completed by the remaining three fixed telecommunication network services is as follows: as of May 1, New T&T was 89 percent compliant, New World Telephone -- 74 percent, and Hutchison -- 100 percent. Mobile phone service providers expected to achieve compliance by July 1, 1999, and major internet service providers claim to be 100 percent compliant.
The main area of concern in Hong Kong is small to medium size enterprises. As a result of the Asian financial crisis and a weaker economy, many small and medium size firms have reduced their budgets for Y2K rectification. In addition, Hong Kong has a large labor pool but a limited availability of knowledgeable technical systems staff. Therefore, the small to medium size enterprises that have switched to more automated or electronic computer systems in their daily operations could face problems come January 1, 2000.
F. Macau Economic Scene
Macau, a Portuguese-controlled thirteen square mile enclave of around 430,000 persons, is located west of Hong Kong on the Pearl River estuary in southeast China. It will revert to Chinese sovereignty on December 20, 1999.
U.S. business interests in Macau are modest by international standards. There are approximately 480 Americans residing in Macau, the majority of whom are retired with smaller numbers in business. The United States is Macau's most important foreign market, taking nearly 50 percent of Macau's total exports, while imports from the United States amount to five percent of Macau's total imports.
1998 GDP growth was down three percent from 1997 levels, but preliminary reports for the first half of 1999 show a reversal of this trend. The government forecasts a 1999 return to 1997 levels with positive growth in 2000. Nominal GDP for 1998 was US$7.33 billion. The Asian crisis has not had a direct impact on Macau's industrial sector, as production has remained nearly constant. However, Macau's gambling and tourism industries have been hit hard, resulting in a sharp decrease in GDP. Unemployment, which in past years has hovered around three to four percent, has been on the rise and is currently at six percent. Inflation continues to decrease and was only 0.2 percent for 1998 and -3.0 percent for the first quarter of 1999.
Total government revenue for 1998 was US$1.343 billion. Expenditure was slightly less at US$1.338 billion leaving a fiscal surplus of US$5.35 million. Accumulated surplus over the past three years has created a balance of US$196.8 million with no public debt. Net domestic credits equaled US$760.1 million.
Macau's money supply (M2) was US$10.8 billion at year end 1998. Patacas (the local currency) account for only 30 percent of this supply while 53 percent is Hong Kong Dollars and 17 percent is other currencies. Currency in circulation equals US$194 million. The public sector is only responsible for 0.2 percent of the US$6 billion in loans and other credits. The Macau Monetary Authority holds 37 percent of net foreign assets.
Macau ran a positive trade balance in 1997 of US$149 million, up from US$65.9 million in 1996, with total exports of US$2.14 billion exceeding imports of US$1.95 billion. In 1998, exports declined 0.3 percent while imports dropped 6.1 percent. Textiles lead Macau's exports, accounting for nearly 85 percent of all merchandise exports.
Macau has traditionally filled the niches of neighboring economies and is confident it can continue to do so. It is exploring ways to capitalize on its recently constructed airport. One stumbling block is the continued problem of triad violence. The government, however, insists that the violence does not threaten legitimate businesses and that the severity of the problem is exaggerated by the foreign press. One area that Macau is working to develop is its status as a gateway to China, which should be promising even if direct sea and air routes are established between Taiwan and China.
Table 1: Forecasts for Major Indicators (real growth rate percent change)
1996 1997 1998 Real GDP -0.5 -0.1 -3.3 Inflation Rate 4.8 3.5 0.2 Private Consumption 3.2 4.1 3.1 Public Consumption 6.6 4.0 3.0 Gross Domestic Fixed Capitol Formation Public Sector 11.2 7.7 --- Private Sector -29.4 0.06 --- Unemployment* 4.3 3.2 4.6 Trade Balance (US$ mn) -4.1 65.8 186.4 *Feb. 1999 -- Apr. 1999 = 6.0 percent Table 2: 1996-1998 Nominal Trade Figures (US$ millions) 1996 1997 1998 Total Goods Exports 1,995.5 2,147.6 2,141.1 Domestic Exports 1,678.9 1,886.7 1,867.9 Re-exports* 316.6 260.9 273.2 Total Services Exports --- 3,131.4 --- Total Goods Imports 1,999.7 2,076.8 1,949.8 Macau/U.S. Trade Imports from U.S. 117.9 130.7 91.9 Exports to U.S. 804.8 971.5 1,020.3* Converted from Patacas using average yearly exchange rates of 7.967, 7.976, and 7.979 for years 1996, 1997, and 1998 respectively.
Sources: Based on compilation by Research Department of the Macau Economic Services Bureau.
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