Hong Kong
Flexible Middleman in Uncertain
Times
Big Trends in HK
• De-industrialization
• Economic reintegration with China
• Externally Oriented Economy
Big Picture
• Basic Law says Capitalist way of life
persist for another 40 years Basic Law Text
• Government pursues policy of ‘positive
non-intervention’ (Tsang, S,
).
A Modern History of Hong Kong -
Google ??
– Support the economy with infrastructure if
cost-benefit is positive
– Let market pick economic winners
Government Policy and Investment
Environment
• Common law system with a generally
independent judiciary
Judicial Independence and the Rule of Law in Hong
Kong
• Overcome a history of public corruption
Kong Experience
• Only tarriffs on alcohol and cigarettes
• No capital controls
• Corporate Tax Rates 16.5%
, OECD
average 26.25%
EIU.com
OECD Tax Database
Hong
Human Capital Resources
• Well educated population
• Barro-Lee Database Harvard CIID
http://www.cid.harvard.edu/ciddata/ciddata.html
Educational Attainment of the Total Population Aged 25 and Over
Country
Hiong Kong
Singapore
Population
Highest level attained
Average
Year
over
No
First level
Second Level
Post-Secondary Years
age 25 Schooling Total
Complete
Total Complete Total Complete of
(1000s)
(Percentage of the population aged 25 and over) School
2000
2000
4137
1923
10.7
12.7
26.6
28.3
13.9
16.8
47.4
48.5
28.7
13.2
15.3
10.6
8.7
7.2
9.47
8.12
Pegged Exchange Rate
• HK$ stable vs. US$ but against a trade weighted basket it
is fairly volatile.
Exchange Rate Appreciation
4.00%
1.00%
-2.00%
-3.00%
US$
Trade Weighted
Feb-09
Feb-08
Feb-07
Feb-06
Feb-05
Feb-04
Feb-03
Feb-02
-1.00%
Feb-01
0.00%
Feb-00
Statistics
2.00%
Feb-99
Financial
3.00%
Feb-98
IMF
Internatio
nal
Exchange Rate
• Standard Deviation of
growth rate vs.
various currencies.
(95% of months, up
and down movements
will be within + or – 2
standard deviations)
Standard
Deviation
Growth Rate
Euro
3.34%
Yen
2.69%
Renminbi
0.52%
Trade Weighted
0.79%
Exchange Rate Policy Keeps
Inflation Stable
Inf lation
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
-7.00%
2000
2001
2002
2003
2004
2005
2006
2007
2008
..and Interest Rates Lows
De-Industrialization
Hong Kong Census and Statistics
Landlord
Community Services
FIREBS
Transport & Communication
Wholesale & Retail Trade
Construction
Utilities
20.00%
Manufacturing
25.00%
Mining
30.00%
Share of GDP
Agriculture and Fishing
Hong Kong Industries
15.00%
10.00%
5.00%
0.00%
2008
1980
Hong Kong Services Industries
Finance and International Trade are the most important industries
% of GDP
and growing more so.
Wholesale Trade
Retail Trade
Import & Export Trade
Restaurants
Hotels
Financing
Insurance Service
Real Estate
Business Service
1990
1.48%
3.16%
13.91%
3.05%
1.11%
5.60%
0.77%
8.58%
3.24%
2000
0.88%
2.17%
17.59%
2.04%
0.73%
10.24%
1.08%
4.85%
4.20%
2007
0.74%
2.52%
19.63%
1.92%
1.03%
17.24%
1.46%
4.41%
4.81%
• Lending dominated by the banking sector.
• Banking dominated by HSBC and its Hang
Seng subsidiary.
Banks Loans vs. Bonds in Hong
Kong
Outstanding HK Dollar Debt
1600000
1400000
1200000
1000000
800000
600000
400000
200000
0
Bonds
Bank Loans
Millions HK$
Direct vs. Indirect Finance
Asia 2004
Bank Loans
Corporate Bonds
250
% of GDP
200
150
100
50
Si
ng
ap
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e
So
ut
h
Ko
re
a
Th
ai
la
nd
ia
al
ay
s
M
H
K
C
hi
na
0
Source: Eichengreen & Luengnaruemitchai
Market Dominance
• More than 2/3’s of deposits are held at top 4
banks including HSBC, Hang Seng, Bank of
China and StanChart.
Deposits of Customers
Bank of America
Bank of East Asia
Bank of China
Dao Heng
Hang Seng
HSBC
International Bank of Asia
Wing Hang
Wing Lung
Mill HK$
$27,508.00
$140,817.00
$606,428.00
$92,537.00
$414,328.00
$938,990.00
$22,245.00
$45,697.00
$49,604.00
Hong Kong Exchange
Red Chips and H -shares
• Growing importance
of Red Chips
(Chinese companies
incorporated outside
PRC) & H-share
(PRC incorporated
shares traded in HK).
1994
1999
2004
2009
H-Shares
Red Chips
Total
0.96%
4.04%
5.00%
0.89%
20.24%
21.13%
6.89%
21.26%
28.15%
26.41%
23.67%
50.08%
Re-Export Industry
• China re-exports by
far the biggest
element of trade
Rexports
HKD mn
Top 9 to China
$598,304
China to China
$578,631
China to Top 10
$784,469
Other
$774,331
Total
$2,735,735
Tourism Industry
3,000,000.000
2,500,000.000
2,000,000.000
1,500,000.000
1,000,000.000
500,000.000
Tourists Not From China
Tourists from China
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
0.000
Market Dominance
• More than 2/3’s of deposits are held at top 4
banks including HSBC, Hang Seng, Bank of
China and StanChart.
Deposits of Customers
Bank of America
Bank of East Asia
Bank of China
Dao Heng
Hang Seng
HSBC
International Bank of Asia
Wing Hang
Wing Lung
Mill HK$
$27,508.00
$140,817.00
$606,428.00
$92,537.00
$414,328.00
$938,990.00
$22,245.00
$45,697.00
$49,604.00
Investment Performance
• Volatile Financial Market
• Healthy external Position
• Troubled External Partners
Property Price Index
Large Swings in Stock Index
Hang Seng Index
35,000.000
30,000.000
25,000.000
20,000.000
15,000.000
10,000.000
5,000.000
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
0.000
Good Average Performance,
this decade, But Volatile
Hang Seng
S & P 500
S & P Global 100
Std.
Mean
Dev.
0.82% 6.57%
-0.02% 4.54%
0.05% 4.77%
Not Reliant on Outside Financing
Trade Balance as a % of GDP
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
China Trade Recovering but still
troubled.
China Monthly Exports & Imports
160,000.000
Million US$
140,000.000
120,000.000
100,000.000
80,000.000
60,000.000
40,000.000
0 8 r- 08
0 9 r- 09
08 l-08 - 08 v-0 8
09 l-09
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o
an Ma
ay
ay
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J
Ju
Ja
J
M
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S
M
M
Hong Kong Future
• Long term Prospects are good but
economy is reliant on China growth.
• Free market enabled HK to fairly smoothly
adjust to changing economic environment
.. And should again.