THE ECONOMY
in recent years and the successive rises in mortgage rates since the latter part of 1988. The events in China in the middle of 1989 reinforced the consolidation. Immediately after these events, transactions were few and prices were reported to have fallen by an average of 15 to 20 per cent. Since late July there had been signs of revival, although the pace of recovery differed between sub-sectors. Support had largely re-emerged from end-users of small to medium-sized residential flats, and to some extent also from buyers of luxury flats. The demand for shopping space weakened in the latter part of the year, affected by a slackening in the tourist industry and in local consumption expenditure. As regards office space, the leasing market was generally stable in the latter part of the year, although prices had probably eased marginally. The demand for industrial premises remained moderate.
Developers became more cautious and selective in their investment after early June. Although land prices had softened compared with the levels that were attained earlier in the year, response to some of the more recent government land auctions was reasonably satisfactory, indicating that many developers maintained an optimistic outlook for the property market.
Inflation
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The rate of consumer price inflation, as measured by the Consumer Price Index (A), averaged 10.1 per cent in 1989. This was the highest rate of increase since 1983, when it was 9.9 per cent. The corresponding rates of increase were 5.5 per cent in 1987 and 7.5 per cent in 1988. With the economy operating close to capacity, the inflationary pressures during the year were largely domestically generated. However, in the latter part of 1989, the inflation rate showed a tendency to ease, in line with the moderation in economic growth.
Among the various component items of the CPI(A), those commodities which do not have direct substitutes from outside sources or which possess a substantial wage and rental component, such as foodstuffs (mainly meals bought away from home), transport and vehicles and various types of services showed the fastest increases in prices in 1989 over 1988. For these three components the rates of increase were 12.3 per cent, 12.1 per cent and 11.4 per cent respectively. Together they accounted for 75 per cent of the overall increase in the CPI(A).
Economic Policy and Public Finances
Economic Policy
Economic policy in Hong Kong is to a large extent dictated, and constrained, by the special circumstances of the economy. Owing to its small and open nature, the economy is vulnerable to external factors, and government actions designed to offset unfavourable external influences are of limited effectiveness. Further, the government considers that, except where social considerations are over-riding, the allocation of resources in the economy is best left to market forces with minimal government intervention in the private sector.
This basically free-enterprise, market-disciplined system has contributed to Hong Kong's economic success. The narrowly-based tax structure with relatively low tax rates provides an incentive for workers to work and for entrepreneurs to invest. Both workers and entrepreneurs are highly motivated, given that all individuals have an equal opportunity to better their lot. The primary role of the government is to provide the necessary infrastructure and a sound legal and administrative framework conducive to economic growth and prosperity.
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