FT.com / World Reports / Hong Kong 2005 - The economy: Growing stream of stimuli from mainland

These are giddy times for Hong Kong. A rising tide of Chinese tourists has propped up consumer confidence, which in turn is buoying property prices and wages, creating a virtuous circle unimaginable only two years ago.

In the second quarter, Hong Kong’s gross domestic product grew 6.8 per cent, even faster than analysts and the government had expected. Unemployment fell to 5.7 per cent between May and July, compared with a peak of 8.6 per cent not long ago.

The Hang Seng Index has risen by about 16 per cent so far this year. Many of Hong Kong’s leading companies announced better than expected results for the first half of this year. Property values are up 14 per cent over the first seven months of this year, according to Jones Lang LaSalle.

And this is only the beginning. Hong Kong Disneyland, China’s first theme park from the US entertainment giant which opened last week is expected to drive more tourists to the former British colony.

Projects that would provide additional jolts of growth are in the works as well. China and Hong Kong have decided to build one of the world’s longest bridges across the mouth of the Pearl River, the region’s main artery of commerce.

Construction, originally scheduled to start at the end of this year, now looks likely to get moving in 2006, providing a boost to Hong Kong infrastructure companies such as Hopewell Holdings. When completed, the bridge will make the western Pearl River delta more accessible, opening a swathe of new territory for Hong Kong investors.

Michael Enright, a professor at the University of Hong Kong, estimates the bridge could bring at least HK$100bn a year in economic benefits to the region.

	Territory factfile
	Click here for a PDF file

Hong Kong banks are also pressing to increase the range of services they can offer in the renminbi, the Chinese currency. Analysts expect Beijing will bow to these demands, allowing Hong Kong financial institutions to lend in renminbi. Today, China limits their yuan-denominated services to exchange, taking deposits, issuing remittances, offering credit cards – none of which amounts to much profit for the banks.

Optimism about Hong Kong is infecting even sober brokerages and investment banks. In a May report, Goldman Sachs proclaimed “the magic of Disneyland – a second wave of tourists”. Lehman Brothers called it “Hong Kong’s economic sweet spot”. CLSA, the brokerage, is sticking with its monicker “boomtown”. There is a common theme among these reasons for optimism about Hong Kong’s economy: they all have to do with mainland China. While cross-border ties have always been important for the Hong Kong economy, their significance has increased even further in the past two years.

Hong Kong owes much to the mainland for its recovery from the severe acute respiratory syndrome (Sars) crisis in 2003. Today, the mainland provides a growing stream of stimuli – not the least of which are its tourists, professionals and companies that list on the Hong Kong stock exchange – and keeps other impulses in check.

Tai Hui, economist at Standard Chartered Bank in Hong Kong, argues that the territory’s close links with the mainland will help keep inflation in check. “Hong Kong’s terms of trade, a ratio of its export prices relative to its import prices, has been on a steady down trend since early 2003,” he wrote in a recent report in which he raised his GDP forecast for Hong Kong from 4 per cent to 5.8 per cent.

The Closer Economic Partnership Arrangement, agreed in 2003, has allowed Sasa, the local cosmetics retailer, to open its first store on the mainland. Moving closer to the mainland economically brings its share of risks as well. For one, a slowdown in the Chinese economy, which many analysts are predicting, could have a knock-on effect on the territory.

However, CLSA believes that in such an event, the effect on Hong Kong would be limited. “There could be some impact on Hong Kong’s trade business, but the strong growth for Hong Kong is on high value-added services and we believe the underlying momentum there will remain,” it wrote in a report published in June.

Another is the indirect impact China has on Hong Kong’s labour market. While joblessness has fallen, many observers agree the current rate reflects structural unemployment. That is, while more of the people in professional jobs are finding work, former employees in low-end manufacturing are not as factories have moved to China.

Henry Tang, the financial secretary, expects that the growth in the tourism and logistics sectors will provide jobs for those displaced by the shift of factories to the mainland.

“We have a roughly 3.5m working population labour poll [in] which not everybody will be suitable for financial services or trade-related services,” he says,“and so tourism is going to play an important part in giving job opportunities to those who are otherwise not qualified for an information-based or knowledge-based economy.”

Mr Tang has ample reason to be content. The fundamentals of Hong Kong’s economy are sound and improving. Despite interest rate hikes since April, tight supply and rising inflation, which will keep real interest rates low, property values are expected to keep rising. In a city where so much depends on the property market, that is likely to keep Hong Kong in its virtuous circle for at least another year.