Magazine article Financial Management (UK)

OK in HK: Hong Kong Has Had Its Fair Share of Economic Problems over the Past Quarter, Including Sars, Spiralling Unemployment and a Big Budget Deficit. but Confidence Is Returning Now That the Region Is Free of the Virus. Norman Lyle Reports on Hong Kong's Recovery, Bolstered by Its New Free-Trade Agreement with Mainland China

Magazine article Financial Management (UK)

OK in HK: Hong Kong Has Had Its Fair Share of Economic Problems over the Past Quarter, Including Sars, Spiralling Unemployment and a Big Budget Deficit. but Confidence Is Returning Now That the Region Is Free of the Virus. Norman Lyle Reports on Hong Kong's Recovery, Bolstered by Its New Free-Trade Agreement with Mainland China

Article excerpt

Hong Kong, the world's tenth-largest economy and the freest--has had a challenging yea,'. After an impressive start in the first quarter, with real GDP growing by 4.5 per cent, the region suffered the shock of Sars.

But nothing dampens the region's entrepreneurial spirit. The economy is rebounding much faster than expected, helped by the recovery of business travel since the World Health Organisation lifted its warning to foreign travellers on 23 May. Tourist arrivals have recovered by 70 per cent and Hong Kong's major carrier Cathay Pacific, expects to return to full capacity by the end of this month. The stock market hit a seven-month high in July and there was a rush of new listings, mainly from enterprises on mainland China. Despite the health crisis, trade is robust. Hong Kong remains the world's busiest container port and world's busiest airport for international cargo.

Since 1980 the Hang Seng Index has leapt up and down, but trade in Hong Kong has largely continued to grow (see chart, below). According to Edward Leung, chief economist on the Hong Kong Trade Development Council, export prospects are good. "The comeback is being supported by overseas buyers' pent-up demand; the weakened US dollar; the gradual recovery of the global economy; Asia's strong intra-regional trade; and the newly concluded closer economic partnership arrangement (CEPA) with the mainland China's first ever free-trade agreement, "he says.

From January next year, 90 per cent of Hong Kong's domestic exports to the mainland will be freed from tariffs under the first phase of the CEPA agreement. In addition, 18 service industries, including accountancy, legal services, advertising and telecommunications, will be granted market access. To qualify under CEPA, firms must be incorporated in Hong Kong and have been doing business there for the past three to five years, be liable for profits tax and employ at least half of their staff locally, Overseas firms can take advantage of CEPA by acquiring or forming partnerships with finns based in Hong Kong.

"CEPA is a most significant step in the process of integrating Hong Kong's business and trading capabilities into one of the world's most important manufacturing centres," says Christopher Hammerbeck, executive director of the British Chamber of Commerce in Hong Kong. "Further integration can only enhance the advantages that flow from trading and investing in this region."

The agreement will encourage closer economic interaction between Hong Kong and the Pearl River Delta (PRD), the biggest manufacturing region in the world. Hong Kong firms employ 10 million workers in 65,000 factories in the area and Hong Kong handles 80 per cent of its imports and exports. The PRD is home to the wealthiest consumer base in China and it has a GDP of more than $100 billion. …

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