1. 1 Structural changes for the HK economy : Are these changes good or bad? : Myths and Reality K C Kwok Government Economist 8 October 2005

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3. 3 Was HK’s economic downturn & deflation during 1997-2003 a cyclical or structural phenomenon? Cyclical arguments –external shocks: Asian financial crisis, Russia/LTCM, Argentina, NASDAQ bubble burst, 911, Gulf War, … –a massive deflationary spiral as a result of collapse in asset prices Structural arguments –factor price equalization –other Chinese cities becoming competitors

4. 4 The labour market implications of the cyclical vs structural debate Why is unemployment rate so high despite economic rebound? Structural? Implication: workforce unable to fit in with knowledge based economy Cyclical? Implication: unemployment rate can improve further once economic recovery is fully entrenched

5. 5 The bigger implication of the debate: Does HK have a future? Factor price equalization –HK is too expensive and not competitive –past prosperity built on property bubble Competition from other Chinese cities –“In the past, China needed (relied on) HK. Today, HK needs (relies on) China.” Can HK be competitive with weak –manufacturing base? –hi-tech manufacturing?

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11. 11 Our analysis: HK’s structural unemployment, though rising over the years, has been exaggerated

12. 12 Jobless recovery?

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14. 14 Change in employment Between 1990 and 1996 Between 1997 and 2003 trough Between 2003 trough and 05 H1 (‘000) Manufacturing-269-168-48 Construction44-361 Services551236217 Wholesale/retail trade69-3325 Import/export trade926098 Restaurants/hotels44-2418 Transport, storage and communications6327 Financing-158 Insurance8884 Real estate1711 Business services57528 Community, social and personal services13816838 Total29625170 Job losses-302-291-59 Job gains598317229

15. 15 Question: What went wrong? Our analysis: GDP growth way below trend growth

16. 16 2005 Four-quarter rolling average % Consumption as % of GDP yet to recover

17. 17 % change in employment per % change in output Between 1990 and 1996 Between 2003 trough and 2005 H1 Manufacturing3.293.19 Wholesale/retail, restaurants and hotels 0.560.59 Services ex PCE–related sectors0.460.30 of which: Trade-related0.420.49 Overall0.320.31

18. 18 Large pool of low-skilled, unemployed workers unable to adapt to labour market ? Long-term unemployment on the rise?

19. 19 Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1 199719981999200020012002200320042005 0 0.5 1 1.5 2 2.5 3 % 0 2 4 6 8 10 12 14 % Long-term unemployment benefitting from economic upturn Long-term unemployment rate (left scale) Overall unemployment rate (right scale)

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23. 23 How serious is the aging problem for HK’s labour force?

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26. 26 Aging of HK’s labour force : The labour force is maturing, not “getting old”. The labour force is becoming more productive. But more old, under-educated workers to be looked after

27. 27 Is HK economic prosperity built on a property bubble?

28. 28 19841986198819901992199419961998200020022004 0 200 400 600 800 1000 Index (1984 = 100) Per capita GDP Flat rental Per capita labour earnings Flat price and rental vs per capita GDP and labour income Flat price

29. 29 19841986198819901992199419961998200020022004 0 100 200 300 400 500 Index (1984 = 100) Office rental Office and shop rentals vs per capita GDP Per capita GDP Shop rental

30. 30 Has HK’s economic recovery relied on tourists from Mainland, and wouldn’t that be unsustainable?

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32. 32 Facts about HK’s tourism HK is one of the world’s 15 biggest tourist markets in recent years. 21.8 mn visitor trips were made to HK in 2004, 56% (12.3mn) of them were from the Mainland. Inbound tourism’s direct GDP contribution is 2.5% and employment contribution is 3.8%. But the indirect significance is arguably much more important. Outbound visitor trips was about 69 mn in 2004.

33. 33 HK’s structural transformation financial services trade and logistics business centre, conventions & exhibitions professional services transportation hub tourism infotainment creative industries? cultural centre? research? centre of excellence for medical & education services? quality of life creativity

34. 34 Economic integration with Mainland CEPA I & II; Individual Visit Scheme; allowing Mainland funds to invest in HK; RMB business in HK; importation of talents & students; facilitating Mainland businesses to come to HK; etc. HK as China’s premier business & financial centre; risk management HK as China’s (& Asia’s?) premier consumer trend setting city The HK Diaspora

35. 35 HK’s container port losing out to Shenzhen? Continuous structural change in PRD Is trade & logistics a cargo moving business? Or is it an information management business? What about shipping registrar? insurance? finance? legal services? What will be the spatial distribution of economic activities in the PRD when the region develops further?

36. 36 Exports of trade-related services (comprising mainly offshore trade) (%) Domestic exports (%) Re-exports (%) Average annual growth rate: 1986-95 3.923.84.3 (10 years) 1996-04 -4.78.115.3 (9 years) Structural shift in Hong Kong's external trade (change in real terms)

37. 37 Domestic exports of goodsRe-export of goodsOffshore trade 2002 1311,430 1,458 2003 1221,621 1,667 Value of goods involved in re-export trade and offshore trade (HK$ Bn)

38. 38 HK’s container port losing out to Shenzhen? HK is not hollowing out. HK is reaching out. HK is not losing out. HK is moving on.

39. 39 Productivity growth as measured by changes in GDP per employment (%) 1996-2004 (8 years)1999-2004 (5 years) Hong Kong 2.43.4 US 2.11.9 Singapore 1.61.4 Taiwan 3.12.4 UK 1.7 Japan 1.11.7

40. 40 Thank you