TNAG-1624-FCO40-2238-Relations-between-Hong-Kong-and-China-1987 — Page 145

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however. First, a substantial proportion of China's exports to Hong Kong are associated with the outward processing trade, as semi-finished or finished products are delivered back to Hong Kong after processing in China. For these goods, China earns an outward processing fee, which is only a fraction of their full declared value at the Customs. Thus, the net foreign exchange earnings will be considerably less than the recorded gross values. Second although in principle China classifies its exports according to the country of consumption, a large proportion of China's exports to Hong Kong are subsequently re-exported elsewhere. Thus, the amount of foreign exchange earnings China derives directly from Hong Kong itself is likely to be considerably smaller than what China's exports figures would appear to show. However, even when Chinese exports to Hong Kong are subsequently re-exported, some of the foreign exchange earnings China derives from these re-exports can be attributed to the facilities Hong Kong provides.

Table 4 & Figure 3

8.

On the other hand, Hong Kong is also an increasingly important channel through which China spends its foreign exchange. According to China's Customs statistics, China's imports from Hong Kong grew rapidly in the past six years, at an average annual rate of 35% in US dollar terms. In 1986, China's imports from Hong Kong, at US$5.6 billion, accounted for 13% of its total imports, and Hong Kong was China's second largest source of imports after Japan (Table 4 and Figure 3).

9.

Care should be exercised in interpreting these import figures. A sizeable proportion of China's imports from Hong Kong are related to the outward processing trade and such imports do not lead to a net absorption of China's foreign exchange reserves. Moreover, imports of raw materials and semi-manufactures, and of capital equipment account for a significant share of China's total imports from Hong Kong. Taking 1986 as an example, imports of textile yarn and fabrics, and of industrial machinery,

excluding those related to the outward processing trade

accounted for 10% and 8% respectively of

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(2) It is possible to separate out raw materials,

semi-manufactures and industrial machinery associated with outward processing activities because imports and exports related to those activities are classified as a separate category in China's Customs statistics.