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THE ECONOMY
The Economy in 1987 The Hong Kong economy remained buoyant in 1987, and displayed a considerable degree of flexibility and resilience at a time when production was running up against capacity. Continuing the trend established in 1986, domestic exports and re-exports grew rapidly, as did domestic demand, including both consumption demand and investment demand. Against this background, the unemployment rate dropped to an historic low level and shortages of labour were experienced in many sectors, resulting in significant upward pressure on wages and salaries. The rate of inflation accelerated but was still moderate compared with Hong Kong's experience over the past decade. The demand for most types of property remained firm during 1987, and trading in the property market was active.
Preliminary estimates show that the growth rate in real terms of the GDP was 14 per cent in 1987, following an increase of 11 per cent in 1986. Thus the economy has enjoyed double-digit growth for two consecutive years. Economic growth in 1987 was mainly export-led, but the upsurge in domestic demand also contributed. However, largely because of the economy adjusting itself to the rapid growth and possibly because of the stock market crash in October, there were signs that the economy was settling to a more moderate growth rate towards the end of 1987.
External Trade
In 1987, domestic exports grew by 27 per cent in money terms, or by about 23 per cent in real terms. This compared with an increase of 19 per cent in money terms or 16 per cent in real terms recorded in 1986. A major factor behind this strong performance was the sustained demand for imports in Hong Kong's major overseas markets. The depreciation of the Hong Kong dollar, in line with that of the US dollar under the linked exchange rate system, against most major currencies also helped to improve the price competitiveness of Hong Kong's products. Domestic exports to the United States, which was Hong Kong's largest market, grew by about 10 per cent in real terms. Much faster growth was, however, recorded for domestic exports to other major markets, such as Japan (at about 41 per cent in real terms), the Federal Republic of Germany (about 27 per cent), and the United Kingdom (about 27 per cent), the currencies of which were relatively strong against the Hong Kong dollar. Domestic exports to China, which was Hong Kong's second largest market, grew by about 52 per cent in real terms. This substantial growth was, however, largely attributable to the increased outward processing trade with China. As a result of this growth pattern, the relative importance of the United States market in Hong Kong's overall domestic exports dropped to 37 per cent in 1987 from 42 per cent in 1986.
In terms of the major product categories, domestic exports of clothing grew by about 17 per cent and those of textiles by about 38 per cent in real terms in 1987. They accounted for 33 per cent and eight per cent respectively of the total value of domestic exports. Substantial increases were also recorded for domestic exports of radios (about eight per cent in real terms), domestic electrical appliances (about 13 per cent), and metal manufactures (about 27 per cent). As regards domestic exports of other products, the growth rate was about 23 per cent in real terms.
In 1987, re-exports grew by 49 per cent in money terms, or by about 46 per cent in real terms, representing a sharp increase from the corresponding growth rates of 16 per cent and 14 per cent in 1986. This rapid growth was mainly due to the flourishing entrepôt trade with China, which featured prominently both as a source and as a market for Hong Kong's re-exports. Nearly 80 per cent of Hong Kong's re-exports during the year were associated with the China trade. The other major re-export markets were the United States, Taiwan,