REAL GROSS DOMESTIC PRODUCT

The Hong Kong, China economy staged a sharp rebound in 1999, recovering robustly from the severe setback brought about by the earlier Asian financial turmoil. By the fourth quarter of 1999, the level of economic activity had already surpassed the previous peak in the third quarter of 1997. For 1999 as a whole, the GDP grew by 3.1 percent in real terms, in contrast to a 5.3 percent decline in 1998. Economic recovery has become more entrenched in 2000, with GDP attaining a double-digit growth of 12.5 percent in real terms in the first half of 2000 over a year earlier.

The recovery in 1999 was strongly export-led. Driven by the resurgence in demand in the East Asian markets as well as by sustained import absorption in the United States and Europe, exports of goods accelerated to double-digit growth in the second half of the year to give a 3.7 percent growth in real terms in 1999. Exports of services likewise picked up during the year, with a growth of 7.8 percent in real terms in 1999. On the back of continued brisk import demand both from within the region and in the conventional overseas markets, exports of goods surged further by 19.1 percent in real terms in the first half of 2000 from a year earlier. Exports of services also recorded an accelerated growth of 15.8 percent over the same period.

Locally, consumer spending turned around in the second quarter of 1999 and registered a growth of 0.8 percent in real terms for the year as a whole. Consumer spending picked up distinctly further to a growth of 7.0 percent in the first half of 2000 over a year earlier, upon sustained improvement in labour market conditions and increased overall income. As to investment spending, it resumed a positive growth of 5.1 percent in the first half of 2000 over a year earlier, reversing the 17.3 percent decline in 1999. The process of economic recovery has thus broadened to the domestic sector in 2000.

INFLATION

Consumer prices remained on a downtrend in the first eight months of 2000. But the decrease narrowed appreciably, from ¨C5.3 percent in the beginning of the year to ¨C2.7 percent in August in terms of the Composite Consumer Price Index (CPI). To a considerable extent, this was due to a firming of external commodity prices, and the hike in fuel oil price. Also, the pick-up in inflation in some of the major supplier economies contributed to this trend. On the domestic front, labour wages and property rentals had shown signs of bottoming out in more recent months, although in overall terms price pressure from domestic sources was still subdued. Amidst keen competition in the retail business, local retailers continued to give large discounts to promote sales. Also, there was a continued freeze in government fees and in a number of public utility charges.

EMPLOYMENT

Labour market conditions showed a visible improvement in the more recent months, as labour demands strengthened further while labour supplies slowed down. More specifically, having fallen for almost two years, total employment reverted to a small growth in the fourth quarter of 1999 over a year earlier. The momentum continued into the first two quarters of 2000, with growth accelerating to 1.7 percent and 1.9 percent, in tandem with the strong revival in economic activity. Total labour supply on the other hand exhibited a completely different profile, with growth hovering at around 0.5 to 0.9 percent in the latter part of 1999 and in the first half of 2000, distinctly slower than the 1.4 ¨C 1.9 percent growth in the early part of 1999. Total employment growth thus outpaced total labour force growth in the first two quarters of this year. This in turn contributed to a steady decline in the seasonally adjusted unemployment rate, from 6.0 percent at the end of 1999 to 4.9 percent in June ¨C August 2000. Total unemployment likewise dropped, from 210,700 to 172,000 over the same period.

TRADE ACCOUNT

Exports of goods were still slack in the first half of 1999 but revived sharply in the second half of the year. In 1999, total exports of goods (comprising re-exports and domestic exports) reached HK$1,349 billion (US$174 billion), representing virtually no change in value terms. Imports of goods contracted by 3 percent in value terms to HK$1,393 billion (US$180 billion) in1999, due to slack domestic demand. Taken together, the visible trade deficit narrowed to HK$44 billion (US$6 billion) in 1999, nearly halved from the deficit of HK$ 81 billion (US$11 billion) in 1998.

Exports of services staged a significant rebound in 1999. Apart from the sustained growth in inbound tourism, there was a surge in offshore trading activities amidst the distinct turnaround in export performance in China. Also exports of trade-related and other business services picked up along revived demand in the region. The invisible trade surplus thus expanded considerably to HK$112 billion (US$14 billion) in 1999. This, together with the already much reduced visible trade deficit, gave a substantial combined surplus of HK$66 billion (US$9 billion) in the year.

The global economic upswing continued to bolster Hong Kong, China¡¯s exports of goods and services in the first half of 2000. Bur import of goods also staged a sharp rebound along with the pick-up in domestic demand. The combined visible and invisible trade account nevertheless remained in surplus, at HK$12 billion (US$2 billion) in the first half of 2000.

EXTERNAL BALANCE OF PAYMENTS

The current account surplus improved to HK$82 billion (US$11 billion) or 6.6 percent of GDP in 1999, on the back of a much reduced visible trade deficit and a marked increase in invisible trade surplus amidst the recovery in regional demand. As the local economic situation progressively improved over the course of 1999, there were resumed investment flows into Hong Kong, China in the fourth quarter of 1999, amounting to HK$43 billion (US$5 billion) or 13.0 percent of GDP in that quarter. For 1999 as a whole, there was a net inflow of financial non-reserved assets of HK$12 billion (US$2 billion), equivalent to 0.9 percent of GDP in that year. Together with the large current account surplus, a balance of payments surplus of HK$74 billion (US$10 billion) equivalent to 6.0 percent of GDP was attained in 1999. Hong Kong, China¡¯s reserve assets correspondingly surged in that year. This reversed the situation in 1998, when an overall balance of payments deficit of HK$54 billion (US$7 billion) equivalent to 4.3 percent of GDP was recorded.

EXCHANGE RATE

The spot exchange rate of the Hong Kong dollar against the US dollar weakened marginally from 7.774 at the beginning of the year to 7.797 at end-July 2000. This was broadly in line with the movement of the Convertibility Undertaking Rate for the Aggregate Balance, which had moved from 7.750 by 1 pip per calendar day effective from 1 April 1999, and reached 7.800 on 12 August, where it will stay thereafter. As the US dollar strengthened against the European currencies and the Japanese yen, the trade-weighted Nominal Effective Exchange Rate Index of the Hong Kong dollar increased from 131.5 at end-1999 to 134.2 at end-August 2000.

FISCAL POLICY

The distinct pick-up in the economy in the second half of the 1999¨C2000 financial year helped boost government revenues, and resulted in a surplus of HK$10 billion. Despite the economic downturn, expenditure growth was maintained in 1998¨C1999 and 1999¨C2000. To redress this imbalance, expenditure growth in 2000¨C2001 (and in the remaining years of the Medium Range Forecast period to 2003¨C2004) is planned to grow at a rate below the forecast growth of GDP. A modest deficit of HK$6.2 billion is thus anticipated in 2000¨C2001.

MONETARY POLICY

In line with the US rate hikes, the Hong Kong dollar savings deposit rate and the best lending rate of the major commercial banks were raised by a total of 100 basis points in the first half of 2000, to 4.75 percent and 9.5 percent, respectively. Hong Kong dollar inter-bank interest rates had been on arising trend since the beginning of the year, with 3-month interbank interest rate reaching around 7 percent in mid-May. It then started to ease as signs of slowdown in the US economy alleviated concerns over a further tightening of monetary policy by the Federal Reserve. The relatively thin spread between Hong Kong dollar and US dollar interest rates at the longer end moved into negative territory in June and reached ¨C30 bp at end-August.

Movements of monetary aggregates diverged during the second quarter of 2000. Narrow money supply, HK$M1, contracted by 3.1 percent during the second quarter of 2000, after a decline of 2.9 percent in the previous quarter. On the other hand, both HK$M2 and HK$M3 rose by 1.6 percent in the second quarter of 2000, compared with a decline of 1.0 percent in the first quarter. The increase in the broad money was mainly attributable to the rise in HK dollar time deposits during the period.

As the domestic economy continued to show signs of recovery, domestic credit began to bottom out in the first half of the year. Total outstanding domestic loans recorded a year-on-year decline of 2.5 percent at end-June 2000, representing a significant moderation over a 10 percent decline at end-June 1999. The overall quality of the loan portfolio of banks in Hong Kong, China continued to improve. For local banks the share of overdue and rescheduled loans in total loan portfolio reduced slightly from 7.0 percent at end-1999 to 6.9 percent at end-June 2000, while the share of classified loans (1) decreased from 9.8 percent to 9.3 percent over the same period. The consolidated capital adequacy ratio of local banks rose to 18.9 percent, slightly higher than 18.7 percent at the end of 1999.

ECONOMIC OUTLOOK

Hong Kong, China¡¯s economy has clearly recovered from the severe setback brought about by the Asian Financial Crisis. The earlier overshoot in the property market has been rectified. The labour market has improved with the unemployment rate declining. The cost of doing business has come down visibly. Together with the process of corporate restructuring and downsizing seen last year, this has enabled the economy to restore competitiveness expeditiously. With the prevailing sanguine external environment, economic activity in Hong Kong, China, is expected to remain intensive. For 2000 as a whole, GDP is forecast to grow by 8.5 percent in real terms.

The prospects for the Hong Kong, China economy beyond the short-term remain bright, benefiting from the sustained robust growth in China as well as the further economic reform and liberalization in China upon its accession to the World Trade Organization. With the earlier concerns about Hong Kong, China¡¯s growth prospects in the wake of the Asian Financial Crisis now alleviated, the trend of GDP growth rate in real terms for the medium-term period is forecast at 4 percent per annum.

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(1) Loans that are classified as substandard, doubtful or loss under the HKMA¡¯s loans classification system.

HONG KONG, CHINA : OVERALL ECONOMIC PERFORMANCE