TNAG-1483-FCO40-2037-Economic-situation-in-Hong-Kong-1986 — Page 186

HKK 09012

RECEIVED IN REGISTRY

21 OCT 1986

DESK OFFICER

PA

REGISTRY Action Taken

4

Mr Thomas INDEX

HKD

HONG KONG: MANUFACTURING INVESTMENT

Reference.........

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Useful background

Leonomy Allene.

19

1. In my minute to you of 24 Septémber discussing the HKGS half-yearly economic report, I noted the continued weakness of imports of capital goods retained for use in Hong Kong. Only a total figure was available then, which showed a fall in volume terms compared with the first half of 1985.

2.

This

Disaggregated data has now been published, showing developments of retained imports of various types within this total. Table 1 shows this information, with changes in imports of industrial machinery (subdivided into electrical, textile and other), transport equipment, construction machinery and all other capital goods. table is taken from a recent HKSB note, and their very up-beat commentary on the figures is given under it. They speak of a 'remarkable' 70% increase in retained machinery imports.

3. It may be worth examining these numbers to see whether the HKSB confidence (which follows the line taken by the new Financial Secretary in his speech of 17 September) is well-based.

CODE 18-77

4. The first point to note is that these changes over the corresponding quarter a year earlier are hard to interpret. rice in industrial machinery imports in Q2 1986 followed changes of -4%, -20%, -30%, -5% and 13% in the previous five quarters. The second quarter of 1985 may have seen unusually low imports making the growth in the year to Q2 1986 seem rapid.

The 71%

5. Figure 1 (attached) is an attempt to put these numbers in a clearer format. It shows the levels of imports of types of capital equipment for use in the Territory, adjusted for changes in their prices (ie showing volume of machinery not values) and drawn relative to 1981 levels. Thus a figure of 100 shows real imports at the same level as the quarterly average for 1981, 200 twice the level. (The series graphed were derived in a rather complicated and dubious fashion, as earlier figures are for total rather than retained imports, and the recent numbers are not adjusted for changes in the prices of these goods. Crude adjustments have been made for the rise in re-exports particularly to China in 1984 and 1985 - and for higher unit costs. The general trends shown are probably not too misleading however.)

6. The following features are shown:

i. the period Q1 1984-Q3 1985 shows real use of imported capital goods at much the same levels as 1981, the "area of considerable concern" of investment sluggishness referred to by HKSB;

ii. the transport equipment series shows considerable recent volatility with large deliveries in Q4 1985 and Q1 1986, and low imports in Q2 1986;

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