Newer sectors (eg. electronics) have done well but their contribution to total export receipts is relatively small. On the import side, a rying proportion of the recent increase has been accounted for by consumer goods. Raw material imports, a rise in which is normally taken to herald an upswing in the exports which will embody them, have also been going up but comparatively slowly. Overall, while total domestic exports rose by just over 11% in the first eight months of the year compared with the corresponding period of 1977 imports (less re- exports) increased by nearly 21%. By the end of August, the trade gap had already substantially exceeded the record deficit for a whole year in 1974. We do not know enough about the balance of payments to say how this gap has been financed, but there may well have been (unquantifiable) drawings on credit, eg. for the Mass Transit Scheme
itself.
Boom conditions in the domestic economy are mainly responsible for this situation. The budget forecast of a 9% increase in GDP in 1978 has recently been revised upwards by the Financial Secretary to a range of 9-11%, and even this could prove to be an under-estimate. Consumer demand, originally boosted by the surge of exports in 1976, but now domestically generated, continues strong and the official estimate for the growth of private consumption too has been raised, from 10% to 13%. Construction activity, both public and private, is at a very high level, with the Mass Transit Railway and new town projects in full swing. It is largely on account of these factors that imports are outstripping exports. Low unemployment and high vacancy rates are leading to bidding-up of wages, and further symptoms of overheating included, at least until very recently, fairly fierce booms in the securities, property and gold markets, with rapidly increasing mainland Chinese investment in the Colony, under the new regime, adding fuel to local confidence. Inflation, perhaps surprisingly, remains fairly moderate. In the first six months consumer prices on average rose no more than 5% year-on-year, partly no doubt held down by the high level of imports, and only a slight acceleration to 6% is officially expected in the second half of the year
Given the limited range of options open to the Hong Kong Government for corrective action, prospects for a dampening of the consumer boom and a consequent improvement of the trade account rest mainly on the operation of the "adjustment mechanism". In a paper read to the Hong Kong Society of Security Analysts on 8th September, the Financial Secretary, Haddon-Cave, discussed the working of the adjustment mechanism in the present situation. Against the background of the widening trade gap the effective exchange rate fell by more than 16% between end-January 1977 and end-August 1978 (although the Hong Kong dollar remained stable until fairly recently against the US dollar and the USA is Hong Kong's largest market, taking 39% of her domestic exports in 1977). As a result of depreciation of the exchange rate, Haddon-Cave said that export competitiveness had been gradually regained. However, he conceded that certain factors had been impeding the speed and effectiveness of the adjustment process. Low interest rates and easy bank credit, for instance, had been keeping up the level of domestic demand and offsetting the stimulus to exports of a weakening exchange rate. The pressure of demand in the property market was another distorting factor. Certainly, despite the depreciation of the Hong Kong dollar and two increases in domestic lending rates since April - the Hong Kong Shanghai bank's best lending rate has risen from 41% to 6%- there is little sign yet of a slowing down in the domestic economy, although the recent sharp turndown in the stock market, where the Hang Seng index has fallen by 15% since the beginning of September, may be an advance indicator of a more general cooling down.