TNAG-1640-FCO40-2287-Economic-situation-in-Hong-Kong-1987 — Page 102

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Reference.....

CC:

Mr Buckle, FED

HONG KONG: FIRST QUARTER ECONOMIC REPORT

(1.

The booming economic conditions of late 1986 continue. Domestic exports grew strongly in the first quarter, aided by the continuing fall in the value of the US$ and so HK$ which has further improved competitiveness. Involvement in China's external trade continues to grow. There is full employment and increasing evidence.

of labour shortages.

2. Inflation is at a somewhat faster rate, but the position has been assisted by weak commodity prices and stable prices of imports from China. Domestic manufactures seem slow to increase export prices as costs rise, preferring higher output and market share at the expense of lower profit per unit.

EXTERNAL

-

3. (Unless otherwise noted, all percentage changes are in volume terms adjusted for price changes relative to the corresponding period a year earlier.) Total domestic exports rose by 28% in the first quarter - the highest rate recorded since early 1984. Indications from the level of retained imports of raw materials, and order book evidence suggests continuing good performance, though at a lower growth rate for the rest of the year. Growth rates to major markets are as follows:

USA China

FRG

UK Japan

Q1 1987 over Q1 1986

% change

10

75

43

24

58

Exchange rate and hence competitiveness considerations explain more rapid growth to the UK, Japan and the FRG than to the USA. Very high growth to China at a time when overall Chinese imports are still being restricted suggests greatly increased processing trade, with products in finished form returned to Hong Kong for subsequent re-export.

4. This is reflected in the import data, with imports from China growing by 53%. Greater Chinese efforts in promoting their own non-oil exports through the Territory to overseas markets have also been apparent. Retained imports of raw materials and semi- manufactures increased by 46% in the first quarter; retained imports of industrial machinery for use in the manufacturing sector by 24%, presumably indicating confidence about sustained export opportunities.

5.

Re-export trade showed faster growth than domestic exports. Re-exports now amount to 49% of total exports. Rapid growth (also of 49%) is due mainly to increasing re-export trade with China which is the most important market for re-exports (32% of the total) and the most important source of goods subsequently re-exported (45% of the total).

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