49. After declining in the second half of 1985 and in the first half of 1986, retained imports of capital goods picked up in the third quarter of 1986. Of particular note were the retained imports of industrial machinery for use in the manufacturing sector, which grew by 23 per cent in real terms in the first nine months of 1986, after a decline of 4 per cent in 1985 as a whole.
50. In the property market, demand for most types of private sector property has been strong this year reflecting a revival of interest in property investment generally. Following a strong recovery in the property market in 1985, prices and rentals held firm, while trading in property was active.
(c) Trade Relations
51. Hong Kong's longer term economic performance remains dependent on external forces. The threat of protectionism in Hong Kong's major export markets, particularly the United States, remains. While prospects for exports to China appear good in the longer term given China's modernisation programme Hong Kong's domestic exports and re-exports to China have been affected by tighter Chinese control on imports since April 1985.
52. The Hong Kong Government will continue to make every effort to counter protectionist pressures and to defend Hong Kong's trading interests. The past year has seen the satisfactory conclusion of several new agreements of vital importance to Hong Kong's textiles and garments industries. These include the extension of the Multi-Fibre Arrangement until July 1991 and bilateral agree- ments on textiles with the United States and with the European Economic Community.
53. As from 23 April 1986 Hong Kong has been a separate contracting party to the General Agreement on Tariffs and Trade and, in that capacity, has supported the launching of the Uruguay round of multilateral trade negotia- tions in November. In the forthcoming discussions Hong Kong will lend particular support to efforts to bring about trade liberalisation and improved market access: it has considerable interest in negotiations on trade in services, a sector of growing importance to the Hong Kong economy.
(d) The Public Finances
54. The Hong Kong Government budget returned to surplus in the financial year 1985/86 after three years of deficits. For the financial year 1986/87, higher yields from earnings and profits tax are expected, and the income from land sales will also be higher. On the basis of present trends a significant improvement in the surplus is likely at the close of the current financial year. Nevertheless, the Hong Kong Government will continue to keep public expenditure firmly under control and to contain the size of the public sector, presently equivalent to about 16-17 per cent of the gross domestic
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