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CONFIDENTIAL #33
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28.
Although China's import control measures remain in force, the growth rate of domestic exports to China, which rebounded strongly in the third quarter of 1986, accelerated in the fourth quarter. At a value of HK$5,818 million in the fourth quarter, domestic exports to China were 59% higher than in the same quarter in 1985. Views obtained from EAD's consultation exercise on short-term prospects of Hong Kong's exports to China suggest that a significant proportion of the growth in domestic exports to China in 1986 was attributable to increased outward
processing activities in China, especially in the Pearl River Delta region (for details, please refer to CEC 1/87). The upsurge in such activities was related, at least in part, to the strong recovery in overseas demand for Hong Kong's products since March 1986.
29.
It appears that an increasing number of the simple but labour-intensive production processes previously performed in Hong Kong have been shifted to China to take advantage of the lower production costs. In the past year, these have become even lower in Hong Kong dollar terms with the devaluation of the Renminbi. It has also been reported that some Hong Kong manufacturers have set up factories in China with a view to gaining easier access to China's domestic market. Most of these
factories continue, however, to source their raw materials and semi-manufactures from Hong Kong. Apart from the increase in exports to China associated with compensation trade and outward processing activities, it is likely that the strong Yen has induced China to switch from Japanese imports to cheaper imports from other sources, such as
ONTIDENTIAL 22
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