CHAPTER 5
THE ECONOMY
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THE Hong Kong economy went through an eventful year in 1997. First and foremost was the historic reunification of Hong Kong with the mainland of China (the Mainland) in July. Growing confidence in the run-up to the reunification provided a significant boost to economic activity. The Gross Domestic Product (GDP) registered accelerated growth, to 6 per cent in the first quarter and further to 6.8 per cent in the second quarter. The growth momentum was sustained into the third quarter, albeit at a somewhat slower rate of 5.7 per cent.
Domestic demand was highly intensive up to the early part of October. Overall investment spending on machinery and equipment grew strongly, as did building and construction by the private sector. Consumer spending also thrived, amid sustained growth in population, a steady rise in household income, and buoyancy in both the stock and property markets.
Sentiment then began to turn, as the regional financial turmoil that first broke out in Thailand in July swept through the economies of the Association of South-East Asian Nations. The turmoil intensified and then extended to economies in North- East Asia. Hong Kong as a global financial centre could not remain immune. The contagion induced a major speculative attack on the Hong Kong dollar in late October. Local interest rates came under much upward pressure. Marked corrections occurred in both the stock and property markets, giving rise to severe knock-on effect on domestic demand.
A crude initial estimate suggests an abrupt setback in economic growth to around 2 per cent in the fourth quarter. Yet given the strong performance in the first three quarters, GDP for 1997 as a whole still grew by about 5.2 per cent, slightly higher than the 5 per cent growth in 1996. Consumption demand grew by about 7 per cent, and investment demand as represented by gross domestic fixed capital formation was almost 13 per cent higher. Both were private sector-driven, and provided the major impetus to economic growth in 1997.
In the external sector, total exports of goods grew by 6 per cent in 1997, slightly faster than the 5 per cent increase in 1996. Performance was better in the second half of 1997 than in the first half. This was particularly so for domestic exports. Notwithstanding a relatively strong Hong Kong dollar in line with the US dollar, the real effective exchange rate (reckoned against export prices which were on a decline in Hong Kong dollar terms) remained generally stable. This was mainly due to increased investment in machinery and equipment, thereby raising productivity, as well as streamlining of production processes and relocation to lower-cost production centres. Thus Hong Kong was able to maintain growth in exports against reduced price