Hong Kong, China WT/TPR/S/109
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I. ECONOMIC ENVIRONMENT
(1) RECENT ECONOMIC DEVELOPMENTS
(i) Economic performance
1. During the period under review (1998-02), the Hong Kong Special Administrative Region
(HKSAR) has been hit by two successive external shocks:  the Asian financial crisis in the early part
of the period, and the global slowdown in 2001.  At th e same time, following the Territory's reversion
to the People's Republic of China, it has had to face considerable structural adjustments associated
with its growing integration with th e rest of China, particularly the Pearl River Delta region, under the
"one country, two systems" regime.
2. Aided by favourable external conditions,  notably WTO Members' commitment to keeping
their markets open, the Territory's recovery from the Asian crisis started in 1999 and accelerated in2000, when GDP grew by 10.2%.  This recovery was short-lived, however , owing to the global
slowdown in 2001, when real GDP in the Hong Kong SAR grew by just 0.6% in real terms.  While
this downturn was mainly caused by falling exports, weak domestic demand (possibly reflecting the
high level of national savings in relation to investment) also contributed.  As a consequence, the
unemployment rate reached 7.7% in the second quarter of 2002, its highest level since the 1980s
1, and
deflation has persisted for the past three years.  The latter reflects adjustment not only to the two
external shocks under the exchange rate peg to the U.S. dollar, which the authorities consider the
cornerstone of the financial and monetary system, but also to increased integration with Mainland
China, where prices, wages and property prices/rents in particular are considerably lower than in the
HKSAR.2
3. Hong Kong SAR's structural transformation from a manufacturing-based to a service-based
economy, which started at least two decades ago, has continued during the period under review.Services accounted for around 92% of GDP and 89% of employment in 2000 (Chapter IV).  This has
also been reflected in changes in the allocation of labour among sectors;  employment has increased in
services, particularly in finance, insurance, real estate, and business services (recording average
annual growth of 3.6% in 1997-02), while employment in manufacturing has declined (by an average
annual rate of 8.4% in the same period).
3  These changes in the structure of output and employment
seem to have raised the natural rate of unemploym ent as labour intensive industries have migrated to
Mainland China and demand for skilled labour has grown.4  Thus, unemployment would appear to
have become entrenched among low skilled workers.5  However, most of the recent variations in the
unemployment rate were attributable to the cyclical condition of the economy.  In 1999,
unemployment rose above 6%, before declining in 2000 as a consequence of the strong economicrecovery, but then increased in 2001 as the economy slowed again, leading to widespread corporate
downsizing and lay-offs (Table I.1).
6
                                                     
1 Government of the HKSAR (2002a).
2 IMF (2002a).
3 HKMA (2002). It is expected that job growth in  the next decade will be fastest in financing,
insurance, and business services, which have the highest concentration of high-skilled employment.  Thus, theemphasis should be on upgrading the quality of education, and relaxing immigration policies to allow the entryof more high-skilled labour.  (IMF, 2002b).
4 HKMA (2002).
5 Financial Times,  17 July 2002.
6 HKMA (2002).WT/TPR/S/109 Trade Policy Review
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Table I.1
Major features of the Hong Kong, China economy, 1998-01
1998 1999 2000 2001
Population ('000) (mid-year) 6,543.7 6,606.5 6,665.0 6,724.9
Labour force participation rate (%) 61.3 61.3 61.4 61.4
Unemployment rate (%) 4.7 6.2 4.9 5.1
Nominal GDP (HK$ billion) 1,279.9 1,246.1 1,288.3 1,279.0
GDP per capita (HK$) 195,585.0 188,622.0 193,299.0 190,188.0
Merchandise exports, f.o.b. (HK$ billion)  1,347.6  1,349.0  1,572.7  1,481.0
Domestic exports 188.5 170.6 181.0 153.5
Re-exports  1,159.2  1,178.4  1,391.7  1,327.5
Merchandise imports, c.i.f. (HK$ billion)  1,429.1  1,392.7  1,658.0  1,568.2
Exports of goods and non-factor services (HK$ billion)  1,619.8  1,628.2  1,890.3  1,804.1
Imports of goods and non-factor services (HK$ billion)  1,601.9  1,557.6  1,828.3  1,738.8
Trade in goods and non-factor services (HK$ billion)  3,221.6  3,185.7  3,718.5  3,542.9
Per cent of GDP 251.7 255.6 288.6 277.0
Source: Data provided by the authorities of Hong Kong, China.
4. Under the pegged (linked) exchange rate system, the brunt of the adjustment has fallen on
domestic product, factor, and asset markets.  As a result, prices fell in 2001 for the third consecutive
year, albeit to a lesser degree than in the preceding two years.  Deflation is due, inter alia , to the
decline in property prices and rents caused by a slow unwinding of the pre-1998 bubble, and weakdemand conditions (Table I.2).
7  While price adjustments in the goods market have been fast, nominal
wages have adjusted at a slower rate. 8  Despite a drop in productivity, real wages have continued to
grow, thereby contributing to higher unemployment.   In asset markets, the shocks entailed large
movements in stock prices.  As a result of the negative wealth effect associated with asset price
deflation, private consumption expenditure has slowed (partly due to homeowners' negative equitysituation), thus exacerbating deflation.  Deflation has also been attributed to price convergence owing
to the closer ties with Mainland China.
9  However, a study found that most price convergence has
taken place through price increases in Shenzhen rather than deflation in Hong Kong, China.10
Table I.2
Selected macroeconomic indicators, 1998-02
1998 1999 2000 2001 2002a
(Annual pe rcentage change)
Real GDP (2000 prices) -5.0 3.4 10.2 0.6 ..
Private consumption expenditure -6.7 1.3 5.9 1.4 ..
Government consumption expenditure 0.7 3.1 2.0 6.0 ..
Gross domestic fixed investment -7.3 -16.6 11.0 2.9 ..
Exports of goods and non-factor services -3.9 4.0 16.5 -1.8 ..
Imports of goods and non-factor services -6.3 -0.2 16.8 -1.7 ..
Real GDP per capitab-5.8 2.4 9.2 -0.3 ..
Real effective exchange rate 7.9 -6.4 -4.6 -0.1 -2.9
Table I.2 (cont'd)
                                                     
7 IMF (2002c).
8 Deflation in product prices could be attributed to cheaper food imports from China, shopping in
China, prevalence of price cuts and discounts, and the nominal effective appreciation of the Hong Kong dollar,
which results in cheaper imports (Government of the HKSAR, 2002b).
9 Government of the HKSAR (2002a).
10 IMF (2002c);  and IMF (2002b).Hong Kong, China WT/TPR/S/109
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1998 1999 2000 2001 2002a
Nominal effective exchange rate (1995=100) 5.2 -2.8 1.1 4.4 ..
HK$/US$1 7.745 7.758 7.791 7.799 7.799
(Per cent)
Savings deposit rate (%)c5.19 3.74 4.47 2.16 0.16
Best lending rate (%)d9.94 8.49 9.22 7.00 5.13
(Annual pe rcentage change)
Money supplye
M1f-5.0 13.9 8.3 5.8 5.5
M2g11.6 8.8 7.8 -2.7 -2.6
M3h10.3 8.4 7.5 -2.7 -2.6
Consumer price index (Oct. 1999/Sept. 2000 = 100) 2.9 -4.0 -3.7 -1.6 ..
Food 1.9 -1.8 -2.2 -0.8 ..
Housing 4.7 -5.1 -8.2 -3.0 ..
(Per cent of GDP)
Saving investment balance 2.7 7.5 5.5 6.9 ..
Gross national saving 31.8 32.8 33.6 33.4 ..
Gross domestic investment 29.2 25.3 28.1 26.5 ..
Government balancei
Government opening reserve balance 35.7 34.9 34.5 33.6 ..
Revenue 16.9 18.7 17.5 13.7 ..
Expenditure (inc. equity investment) 18.7 17.9 18.1 18.7 ..
Public expenditurej20.8 21.6 21.6 21.0 ..
Balance -1.8 0.8 -0.6 -5.0 ..
Government closing reserve balance 33.9 35.7 33.4 29.1 ..
Balance of trade and payments
Merchandise exports, f.o.b. 106.4 108.8 122.6 116.4 ..
Merchandise imports, f.o.b. 111.1 110.7 127.5 121.5 ..
Merchandise trade balance -4.7 -2.0 -5.0 -5.1 ..
Services balance 6.1 7.6 9.8 10.4 ..
Income, net 2.2 2.8 1.7 2.8 ..
Current transfers, net -1.0 -1.0 -1.0 -1.0 ..
Current account balance 2.7 7.5 5.5 7.2 ..
Capital account balance -1.4 -1.1 -0.9 -0.7 ..
Financial account balance -1.0 -5.6 -3.6 -6.0 ..
Balance of payments -4.1 6.2 6.1 2.9 ..
Foreign exchange reserve (US$ billion, end of period) 89.6 96.3 107.6 111.2 112.1
(in months of retained imports)k17.1 19.8 18.0 20.0 ..
.. Not available.
a Estimates.
b Based on mid-year population figure.
c Prior to July 2001, savings deposit rates refer to the maximum rates set by the Hong Kong Association of Banks.  Thereafter th ey
are based on the interest rates quoted by a number of major licensed banks.
d Best lending rate quoted by Hong Kong and Shanghai Banking Corporation (HSBC).
e As at end of year.  Figures are adjusted for foreign currency swap deposits.f Refers to the sum of legal tender notes and coins held by the public plus customers' demand deposits placed with licensed bank s.
g Refers to the sum of M1 plus customers' savings and time deposits with licensed banks, plus negotiable certificates of deposit s
(NCDs) issued by licensed banks held by non-authorized institutions.
h Refers to the sum of M2 plus customer deposits with restricted licence banks (RLBs) and deposit-taking companies (DTCs) plus
negotiable certificates of deposits (NCDs) issued by RLBs and DTCs held by non-authorized institutions.
i Figures are for the corresponding fiscal year.  Eg. figures for 2000 represent the figures for financial year 2000/01.  Calcul ations
are based using calendar year GDP.
j Public expenditure includes government expenditure plus expenditure of the Housing Authority, Lotteries F und, and all
government trading funds.
k Retained import is the difference between imports and re-exports.
Source: Data provided by the authorities of Hong Ko ng, China; Census and Statistics Department, Hong Annual Digest of
Statistics 2001 , Hong Kong, China;  and IMF, International Financial Statistics.WT/TPR/S/109 Trade Policy Review
Page 4
(ii) Macroeconomic policies
(a) Monetary policy and exchange rate policy
5. Operating under a currency board system, Hong Kong, China does not have an autonomous
monetary policy.  The primary monetary objective of the HKSAR is to maintain currency stability
under the linked exchange rate system by peggin g the value of Hong Kong dollar (HK$) to the
U.S. dollar (at the fixed rate of HK$7.8 to US$).  Aware of the ongoing debate regarding the costs andbenefits of the exchange rate system, the author ities remain fully committed to the linked exchange
rate system and consider that it remains the best option for Hong Kong, China.
11  The authorities
believe that this stability is required because of the openness of Hong Kong, China's economy, with
the total value of trade in goods and non-factor services close to 280% of GDP in 2001 (Table I.1).
The success of the currency board system depends, however, on Hong Kong, China's ability tomaintain prudent fiscal policies (see below), ample foreign reserves, a sound banking system, and
flexible prices and a well-functioning labour market, all of which are crucial to facilitate adjustment to
shocks.  The authorities noted that although Hong Kong's fiscal position has worsened in recent years,
the fiscal reserves remained sizeable at 29.5% of GDP at end-April 2002, and the Government is not
in debt.  As a result, the budget deficit does not pose an immediate threat to the stability of thecurrency board system.  Moreover, the Government has stated its determination to address the fiscal
imbalances over the medium term.  In addition, foreign exchange reserves remain ample in Hong
Kong, China, amounting to US$112.4 billion at the end of June 2002 (or around 3.6 times the
monetary base).  The deflationary pressure should ease as economic activity recovers and the property
market stabilizes.
6. Since the inception of the linked exchange rate system in 1983, despite several external
shocks, the exchange rate (i.e. the Hong Kong dollar against the U.S. dollar) has remained stable innominal terms.  However, since 1999 the nominal effective exchange rate has appreciated (Table I.2).
This has eroded the price competitiveness of Hong Kong, China's exports.  However, the authorities
claim that the benefits of having a stable currency outweigh the negative impact of any possible loss
of competitiveness, as exchange rate stability plays a key role in supporting Hong Kong, China's
position as a trading and financial centre.  By contrast, with the exception of 2001, as of 1999 the realeffective exchange rate has depreciated, as a result of the decline in domestic prices (Table I.2).
7. The linked exchange rate regime in Hong Kong, China is a rules-based currency board
system, with a built-in automatic interest rate adju stment mechanism to ensure exchange rate stability.
The monetary base increases when foreign curren cy – with the U.S. dollar as the intervention
currency – is sold to the currency board for domestic currency.  By contrast, the monetary basedecreases when the foreign currency is bought from the currency board with domestic currency.  The
expansion or contraction in the monetary base causes interest rates for the domestic currency to fall or
rise respectively, creating the conditions to automatically counteract the original monetary movement,
acting to stabilize the exchange rate.
12 Interest rates in Hong Kong, China remain by and large
determined by their U.S. dollar counterparts.  The Base Rate (i.e. discount rate) is set with referenceto the U.S. Fed Fund's target rate (based on a pre-specified formula).  Other interest rates have
declined following the successive cuts in the U.S. rates (Table I.2);  nevertheless, domestic credit
                                                     
11 HKMA (2001a).
12 For more details on the history of Hong Kong, China's different exchange rate systems and the
workings of the current one see:  HKMA (undated).Hong Kong, China WT/TPR/S/109
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growth has remained weak reflecting the uncertain business environment, weak asset prices, and
sluggish conditions in the property market (Chapter IV(4)(i)).13
8. Hong Kong, China's currency board is not a pu re currency board arrangement in that the
Hong Kong Monetary Authority (HKMA) does not convert the Hong Kong dollar balances of the
clearing accounts of licensed banks into U.S. dollars at the fixed exchange rate of HK$7.8/US$;  they
are instead converted at a market rate.  (The arrangement is referred to as the ConvertibilityUndertaking.)
14
(b) Fiscal policy
9. Articles 107 and 108 of the Basic Law stipulate that the HKSAR should strive to maintain a
balanced budget, and maintain low tax rates, hence the pursuit of a prudent fiscal policy.
Nevertheless, the Territory ran a consolidated fiscal deficit in three of the four years to 2001(Table I.2).  Moreover, the fiscal balance deteriorated sharply (from near balance in 2000) to a deficit
amounting to over 5% of GDP in 2001.  This was mainly due to the Government's adoption of a
counter-cyclical fiscal policy, in the face of economic downturn since 1998,  and a decline in revenues
from land premiums, profits tax (from the banking and property sectors), and stamp duty on property
transactions.  Fiscal reserves (a key factor in maintaining the currency board system) declined by 16%between 1999 and 2001.
10. A Task Force on Review of Public Finan ces concluded that Hong Kong, China's public
finances were confronted with structural problems.  On the revenue side there had been a diminution
in revenue from land, and in investment income from fiscal reserves as the la tter decline owing to the
persistent fiscal deficit.  In addition, the tax base is narrow and several tax relief measures affecting
individuals and business were introduced in 1998/ 99 and 1999/00 (Chapter III(4)(i)).  Salary and
profit tax revenues, which account for around 60% of tax revenues, declined as a percentage of GDP,from 6.9% in 1997/98 to 5.8% in 2001/02.  Stamp duties related to stock and property transactions
have also been eroded since 1997/98 due to a dec line in financial transactions and the slowdown in
the property market.
15
11. On the expenditure side, the share of public expenditure as a percentage of GDP has been
increasing since the mid-1980s when it stood at 16%, to reach 21% in 2001-02.16  The Government's
target is to reduce this share to 20% of GDP or below by 2006-07.  However, government expenditure
in Hong Kong, China seems to be rigid.  This rigidity is bound to be accentuated by the aging
population, which will increase the need for public spending, especially on health care and pensions.
Spending on education is also expected to increase, as the Government plans to increase investment in
                                                     
13 The property market (including building and construction) is an important variable in determining
the demand for credit in Hong Kong, China.  In 2000, the property market absorbed some 48% of total creditgranted by all authorized institutions, and 56% of th e total credit supplied by local banks (IMF, 2001a;  HKMA
Annual Reports  and Monthly Statistical Bulletins ;  and WTO Secretariat)
.
14 Starting from 1 April 1999, the exchange rate und er the Convertibility Undertaking has been moving
by 1 pip (ie. HK$0.0001) per calendar day to conver ge with the linked rate of 7.80 on 12 August 2000
(HKMA, undated;  and IMF, 2001b).
15 The stamp duty was reduced from 0.3% in 1997/98 to 0.2% in 2001/02 contributing to the overall
reduction in duty collection.  Stamp duties collection as a percentage of GDP declined from 2.2% in 1997/98 to0.9% in 2001/02.
16 Public expenditure includes government expenditure plus expenditures of the Housing Authority, the
Lotteries Fund, and all of the Government's trading funds.WT/TPR/S/109 Trade Policy Review
Page 6
education and training in an effort to ensure that the labour force keeps pace with the ongoing
structural changes. 17
Table I.3
Structure of direct and indirect tax revenue, 1997-02
(HK$ million and per cent)
1997/98 1998/99 1999/00 2000/01 2001/02
Total (HK$ million) 158,256.0 115,222.0 111,717.0 126,187.0 125,019
(Per cent of total)
Direct taxes  58.8  66.8  61.0  59.7  63.7
Earning and profit tax  57.8  65.7  59.9  58.5  62.2
Estate duty 1.0 1.1 1.1 1.2 1.5
Indirect taxes  41.2  33.2  39.0  40.3  36.3
Bets and sweeps tax 8.5  10.6  10.7  10.0 9.3
Hotel and accommodation tax 0.3 0.2 0.2 0.2 0.2
Stamp duties  18.4 8.8  10.8 8.6 6.9
Air passenger departure tax 0.6 0.5 0.4 0.4 0.5
Cross Harbour Tunnel passage tax 0.1 0.2 0.1  n.a  n.a
Duties 5.3 6.7 6.6 5.8 5.6
General rates 4.0 3.1 6.4  11.4  10.2
Motor vehicle tax 2.7 1.9 2.3 2.4 2.1
Royalties and concessions 1.2 1.1 1.4 1.4 1.5
Taxi concessions 0.0  n.a  n.a  n.a  n.a
n.a. Not applicable.
Source: Hong Kong SAR, Census and Statistics Department (various issues), Annual Digest of Statistics;  and the
authorities of Hong Kong, China.
12. The 2002-03 Budget proposed several measures to restore fiscal balance.  Under the present
economic conditions, the authorities considered it inappropriate to introduce a broad-based goods and
services tax.  Thus, the only tax changes proposed in the 2002-03 Budget were an increase in the duty
rate on wine, from 60% to 80%, and the introduction of a Boundary Facilities Improvement Tax (i.e. a
tax on passengers departing from Hong Kong, China through sea and land crossings).18  Civil service
pay will be cut by 4.75% and the salary-related portions of subventions to the various organizations
will be reduced at the same rate.
(c) Balance of payments
13. Hong Kong, China's external indicators seem strong;  as a consequence of the considerable
surplus of gross national savings over gross national investment, the Territory has run current accountsurpluses since 1998 and accumulated seemingly ample reserves.  The current account rose to the
equivalent of 7.2% of GDP in 2001, up from 2.7% in 1998 (Table I.2).  The merchandise trade deficit,
a reflection of the slowdown in merchandise exports,  was offset by an increasing surplus in the
services balance, which has continued to increase since 1998 (Table I.2 and Table AI.1).  This reflects
the economy's ongoing shift towards services.  The deficit in the capital account reflects the effects of
successive cyclical shocks.  Hong Kong, China has not been immune to shocks in international
financial markets.  As a result, in 1998, the Govern ment intervened in the stock market to mitigate
                                                     
17 Government of the HKSAR (2002a).
18 A bill will be introduced into the Legislative Coun cil in 2002-03 so that the tax can enter into effect
in 2003-04 (Government of the HKSAR, 2002a).Hong Kong, China WT/TPR/S/109
Page 7
speculation (see below).  Portfolio investment has also been affected by the uncertain economic
environment (Table AI.1).  The accumulation of foreign external reserves has been substantial
throughout the period, exceeding HK$870 billion in June 2002, equivalent to 20 months of retained
imports (i.e. total merchandise imports minus imports for re-exports).19  This level of reserves seems
to be sufficient to cover external requirements and to maintain the currency board system.20
14. From 1998 to 2000, inflows of foreign direct investment in Hong Kong, China increased;
there was a particularly sharp rise in 2001.  Nevertheless, net FDI remained positive during the period
under review with the exception of 1998, when the economy suffered a severe setback as a result of
the contagion of the regional financial turmoil (Table AI.1).  FDI was predominantly in the services
sector.  The increase in foreign direct investment has been most pronounced in investment holdings,
real estate and various business services, which absorbed some 68% of all FDI inflows in 2000(Table AI.2).  However, the sectoral pattern of investment has not changed in recent years.  The
three economic sectors persistently ranked at the top for inward FDI over the past few years, in terms
of both the total stock and flow are:  investment holding, real estate and various business services;
wholesale retail and import/export trades;  and banks and deposit-taking companies.  The most
important investors in the HKSAR are the British Virgin Islands and China accounting respectively
for 49% and 23% of total incoming FDI in 2000.
21  Inflows from the British Virgin Islands  reflect the
common practice of Hong Kong, China's enterprises in setting up non-operational companies in
offshore financial centres (i.e. in tax havens) for channelling funds back to Hong Kong, China.22
China is the largest recipient of Hong Kong, Ch ina's direct investment.  Hong Kong, China's
investments in China have been increasing since 1998 when they stood at HK$54.1 billion to reach
HK$361.2 billion in 2000 (equivalent to 78% of tota l FDI outflows) (Table AI.3).  The large amounts
of inbound and outbound FDI from and to China may reflect "round tripping" by Mainland enterprisesseeking to take advantage of tax incentives accorded by the Chinese authorities only to foreign
enterprises.
(iii) Structural measures
15. Economic integration with Mainland China has provided added impetus to the HKSAR's
efforts to continue its transformation into a high-value-added, service-based economy, this processhas, in turn, contributed to structural unemployment and raised income disparities.
23  To meet these
challenges and resulting problems, several structural policies have been implemented by the
authorities, including those aimed at:  upgrading human capital and infrastructure (e.g.
telecommunications and transport);  encouraging R&D;  increasing competition;  and improving
corporate governance and the regulatory environment (Chapter III).24
16. During the 1980s and 1990s, labour intensive activities were relocated from Hong Kong,
China to low-cost centres on the Mainland;  the Territory became a major provider of services (e.g.
financial services, business services, and trading services including transportation) to the Mainland.
However, the HKSAR is now starting to face comp etition from Mainland Chinese service suppliers.
                                                     
19 Information provided by the authorities.
20 The currency board system requires a reserve-backing to function properly.  For a thorough
explanation of the functioning of a currency board see:  Chan and Chen (undated).
21 FDI data for 2001 will be released at the end of 2002.  (Information provided by the authorities.)
22 Census and Statistics Department (2001).
23 The structural changes seem to have favoured the better-educated, which suggests that there is
shortage of skilled labour.  Moreover unemployment among the low skilled is higher than among skilled
workers (IMF 2002c and 2002b, and Government of the HKSAR, 2002a).
24 IMF (2002a).WT/TPR/S/109 Trade Policy Review
Page 8
For instance, the HKSAR's position as one of the busiest container ports in the world is confronted
with increasing competition from ports elsewhere in Southern China because of the significant cost
advantages the latter can offer to customers (Chapter IV).25  Thus, the HKSAR has taken steps to
enhance competitiveness and upgrade the quality of services through investing in new technology and
promoting innovation.26  The HKSAR will also shift the focus towards high-value-added sectors
(notably financial services, logistics, tourism, and producer and professional services).27  D e s p i t e
these challenges, the authorities believe that Hong Kong, China will benefit from the further
integration with the Mainland, particularly as China continues to open up its market following its
accession to the WTO.28
17. According to the authorities, Hong Kong, China has traditionally followed a policy of
minimum intervention in the economy, allowing ma rket forces to allocate factors of production.
However, in August 1998, the Government boug ht HK$118 billion of stocks to defend the
Hong Kong dollar and the stability of the financial market against suspected manipulation by
speculators.  The purchase, which was financed from the Exchange Fund, concentrated on the shares
of the 33 firms in the Hang Seng Index (HSI), t hus supporting the Territory's powerful conglomerates
at the expense of the Territory's small and medium-sized companies.  In 1999, the Government set upan independently managed fund (the Tracker Fund) to dispose of its equity holdings.  As planned at
the outset, it would appear that the authorities have managed to gradually dispose of most of these
assets over time without disrupting the market .  At the end of July 2002, the Government had
disposed of over HK$130 billion worth of shares, with only HK$13 billion now remaining in the
Fund.
(2) D
EVELOPMENTS IN TRADE
18. Trade in goods and non-factor services has continued to increase since 1998 to reach 277.0%
of GDP in 2001 (Table I.1).  Hong Kong, China remains a net exporter of services reflecting the
HKSAR's shift from manufacturing to services.  Expor ts of services have been growing since 1999
(Table I.4).  Consistent with Hong Kong, China's ro le as an êntrepot, transportation and trade-related
services are the most important service exports;  moreover, merchandise re-exports increased, while
domestic exports have declined somewhat (Table I.2).
                                                     
25 Shanghai plays a similar role in the Yangtze River Delta as that played by Hong Kong, China in the
Pearl River Delta.  During the 1990s Shanghai successfully reshaped itself from a traditional manufacturing-based city to a modern business centre.  Hong Kong, China and Shanghai may be viewed as complementary
service providers and not as substitutes because of th eir geographical location (Hong  Kong Trade Development
Council (2001).
26 For a more details on Hong Kong's future development strategy see:  Commission on Strategic
Development (2000).
27 Government of the HKSAR (2002a).
28 Hong Kong, China will also benefit from Chinese Taipei's WTO market access commitments,
including those on tariff cuts and the opening of numerous services sectors (such as telecommunications,
banking, insurance, distribution, as well as commercial and professional services, etc.).Hong Kong, China WT/TPR/S/109
Page 9
Table I.4
Exports and imports of services, 1998-01
(HK$ million and per cent)
1998 1999 2000 2001
Service balance (HK$ million)  78,552  95,115 126,037 133,468
Exports of services (HK$ million) 272,112 279,167 317,580 323,087
of which (%)
Transportation 31.3 32.0 31.3 31.5
Trade-related 28.2 29.2 30.7 30.7
Travel 21.6 20.2 19.5 20.0
Financial 6.0 6.9 6.6 6.1
Insurance 1.1 1.1 1.1 1.2
Other services 11.8 10.6 10.8 10.4
Imports of services (HK$ million) 193,560 184,052 191,543 189,619
of which (%)
Travel 53.9 55.4 50.9 50.7
Transportation 22.1 21.3 25.4 26.0
Trade-related 4.4 5.7 5.8 5.5
Financial 3.5 3.1 2.9 2.8
Insurance 2.4 2.7 2.1 2.1
Other services 13.7 11.8 12.9 12.8
Source: Hong Kong SAR, Census and Statistics Department (various issues), Annual Digest of Statistics.
(i) Composition of trade
19. Imports and re-exports of office machines and telecommunications equipment, other electrical
machinery, and toys have continued to increase  since Hong Kong, China's previous Trade Policy
Review, reflecting its shift from manufacturing to services and its expanding role as a gateway to and
from southern China.
20. Textiles and clothing, which are still largely covered by quota agreements in major markets,
remains the largest category of domestic exports, accounting for 50.9% of domestic merchandise
exports in 2001;  its share in re-exports has declined.  As regards domestic exports, the shares of
office machines and telecommunications equipment, and other electrical machinery declined to about
15% and 3.7%, respectively (Chart I.1).
(ii) Direction of trade
21. China remains the largest market for Hong K ong, China's domestic exports, accounting for
32.2% of domestic exports in 2001 (up 2.8 percentage points from 1998).  The HKSAR's other major
export markets are the United States, the European Union, and Chinese Taipei (Chart I.2).  The shareof domestic exports destined for the United States increased between 1998-01, while the share
destined for the EU declined slightly.  Reflectin g the growth of the Chinese economy, China's shares
in Hong Kong, China's total exports (domestic exports plus re-exports) continued to increase.  China,
Japan, the EU, Chinese Taipei, and the United States have remained Hong Kong, China's largest
suppliers of merchandise imports;  China's share increased by 3.1 percentage points from 1998 (toreach 41.4% in 2001), while Japan's share was down 1.3 percentage points to 11.2%.WT/TPR/S/109 Trade Policy Review
Page 10
Chart I.1
Product composition of merchandise trade, 1998 and 2001
1998 2001
Imports
Source :UNSD, Comtrade database (SITC Rev.3);  and the authorities of Hong Kong, China.Chemicals
6.3Office machines & 
telecom. equipment
23.0
Textiles & clothing
14.9Other consumer 
goods
18.5Per cent
Domestic exports
Re-exportsAgriculture
6.8Other semi-
manufactures
9.3
Other electrical 
machinery   6.6
Transport equipment
4.0Other
1.6Chemicals   5.7Office machines & 
telecom. equipment
28.4Mining   3.7
Textiles & clothing
14.0Other consumer 
goods
18.4Agriculture    5.5Other semi-
manufactures
8.5
Other electrical 
machinery   7.6
Transport equipment
  2.4  Other  0.5
Office machines & 
telecom. equip.  
17.5
Textiles   5.7
Clothing
39.3Other consumer 
goods
17.8Semi-manuf.   
6.6 
Other  2.6Non-electrical 
machinery  2.1Office machines & 
telecom. equip.  
14.9Textiles  5.2
Clothing
45.7Other consumer 
goods
15.3Mining  2.1Semi-manufactures   5.7Other electrical machinery
      3.7
Other  3.3
Chemicals   5.7Office machines & 
telecom. equipment  
21.5
Textiles & clothing
16.1Agriculture
3.8  
Other consumer 
goods
28.3Other semi-
manufactures  8.0
Other electrical
 machinery
7.6Other  2.2Chemicals  5.0Office machines & 
telecom. equipment
  27.6
Textiles & clothing
14.8Other consumer 
goods
26.6Other semi-
manufactures  7.1
Other electrical
machinery
  9.2Non-electrical machinery
4.3
Other  1.3Mining   2.4
Agriculture  2.7  Total:  US$186.8 billion Total:  US$202.0 billion
Total:  US$24.6 billion Total: US$20.3 billion
Total:  US$150.3 billion Total:  US$170.8 bi llionMining  3.7Non-electrical 
machinery  5.3Non-electrical 
machinery   5.3
Agriculture  2.0Agric. 2.0Other electrical machinery
   4.5
Mining  1.8Non-electrical 
machinery   2.2
Non-electrical machinery
4.3
Mining   1.4Hong Kong, China WT/TPR/S/109
Page 11
Chart I.2
Direction of merchandise trade, 1998 and 2001
1998 2001
Imports
Source :UNSD, Comtrade database (SITC Rev.3);  and the authorities of Hong Kong, China.Other 
7.1
EU15
11.1
China
38.3Japan
13.0Per cent
Domestic exports
Re-exportsSingapore
3.2Other East Asia
7.3
Chinese Taipei 
 7.2Korea, Rep. of
5.1United States
6.7
Singapore
3.2
Chinese Taipei
6.8Japan
11.8EU15
9.9
China
41.4Other  East Asia
             8.0
Other East Asia
5.1United States
28.8
EU15
18.8China
29.4Japan  3.4
Chinese
Taipei  3.5Other East Asia
5.6Other
7.3
United States
30.1
EU15
16.4Other 
8.3
Japan   2.6Singapore  1.8
China
32.2
Singapore  2.2United States
22.3
EU15
15.4Chinese
Taipei 2.4
China
35.0Other East Asia
5.2
Other America
4.6Singapore  2.0United States
21.2
EU15
14.2
China
37.4Other East Asia
6.3
Other America
4.0Other
6.5
Japan  5.5
Chinese Taipei 
2.3Total:  US$186.8 billion Total:  US$202.0 billion
Total:  US$24.6 billion Total: US$20.3 billion
Total:  US$150.3 billion Total:  US$170.8 bi llionKorea, Rep. of
5.2United States
7.4Other
7.1
Chinese Taipei  3.9Singapore  2.7
Other
7.3
Japan  6.3WT/TPR/S/109 Trade Policy Review
Page 12
(3) OUTLOOK29
22. Given the openness of Hong Kong, China's ec onomy, resumption of growth in the HKSAR
depends on an increase in external demand.  While the medium-term (2002-06) outlook is promising,
it will take time for the economy to recover.  Ec onomic restructuring will continue, coupled with an
expected increase in unemployment.  Deflation may be expected to persist as retailers reduce mark-
ups, nominal wages remain stable, and rents continue to decline.  Nevertheless, for 2002, in the lightof more favourable external factors and if HKSAR's succeeds in moving up the value chain, the
authorities forecast GDP growth of 1.5% in real terms, and real trend growth of 3% over the medium
term.  The recent weakening in the U.S. dollar, while likely to improve HKSAR's exports
competitiveness, is a reflection of market concern about certain pitfalls in the U.S. economy.  A
relapse or even slower growth in the U.S. ec onomy would have a negative effect on Hong Kong,
China's economic performance and hamper its recovery.
                                                     
29 This section is based on:  Government of the HKSAR (2002a) and (2002c).