XN000022-1995-11-22 — Page 27

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Rise in cost of living

Following is a question by Dr the Hon David Li Kwok-po and a written reply by the Secretary for Financial Services, Mr Rafael Hui, in the Legislative Council today (Wednesday);

Question:

The cumulative rise in the consumer price index over the last five years is only 17% in the United States but is over 60% in Hong Kong. The rise in the cost of living in the territory has caused a significant rise in our labour costs, particularly in the service and other labour-intensive industries. In view of this, will the Administration inform this Council whether measures are being taken or planned to preserve the competitiveness of our service industry in the face of the chronic rise in the cost of living and rentals?

Reply:

In discussing the rise in the consumer price index as reflecting higher inflation in the economy along with the rise in labour costs and property rentals, we have to be clear about the underlying causes. For a number of years, Hong Kong was faced with a very tight resource situation, particularly in labour and accommodation. The tight labour market, until more recently, has led to rapid increase in wages as the market mechanism worked to balance limited labour supply against strong demand. Similarly, the strong demand for accommodation against the severe land constraint in Hong Kong has led to an upsurge in property prices and rentals. The rise in resource costs then feeds into the production process and pushes up the prices of goods and services. in the local economy, thereby resulting in higher domestically generated inflation. Contrary to what some commentators may have argued, it is not so much the rise in inflation feeding into higher labour costs and rentals as the reverse.

It is therefore essential to recognise that a relatively more abundant supply of the key resources, namely labour and accommodation, can be expected to contribute to the lowering of inflation in Hong Kong. At the present moment, already we are witnessing the economy moving in such a direction. The labour market has eased considerably, not due to a shrinkage in total employment but due mainly to a rather faster increase in labour supply in relative terms. While it is unfortunate that the unemployment rate has picked up as a result, increase in labour costs has begun to ease. The property market also has consolidated from the exceptional buoyancy in 1993 and the early part of 1994, and both property prices and rentals have fallen. In short, the market process is now working to alleviate the strong pressure on the cost of doing business in Hong Kong.