TNAG-1640-FCO40-2287-Economic-situation-in-Hong-Kong-1987 — Page 37

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Pare

Mortis.

Mr Morris, HKD

Reference

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HONG KONG: HALF YEARLY ECONOMIC REPORT 1987

1.

МКС одо

RECEIVED IN REGISTRY

1 4 DEC 1987

DESK OFFICER

INDEX

PA

16

REGISTRY

Action Taken

The economic boom based on extremely rapid export growth continues. The trends identified in HKG's 'First Quarter' report (my minute of 29 June to Jeff Thomas) have in most areas accelerated. The pick-up in investment in manufacturing machinery that has taken place since late 1986 has helped meet the surge in demand, as has an increase in processing in China, but there are signs of inflationary pressure from the side of rising real wages. The labour market is said to be "very tight".

External

A

2. (The growth rates in what follows are adjusted, unless otherwise stated, for price changes they show "real", volume changes over the corresponding six-month period a year earlier.) In the first half of 1987 domestic exports grew by 27%. Hong Kong producers have not raised their prices as quickly as their own costs have risen, sharpening the competitive edge in non-US markets resulting from the earlier and continuing depreciation of the US$ and so the linked HK$. This is clearly shown in the geographical pattern of growth in domestic exports:

Hl 1987-86

(% change)

USA

13

China

65

FRG

UK

34

26

Japan

58

While the USA is still Hong Kong's largest market for domestic exports, it is becoming relatively less important as more rapid growth in other markets continues. (Domestic exports to the USA were 38% of the total in H1 1987, 43% in H1 1986.)

3. A substantial proportion of exports to China were raw materials and semi-manufactures, suggesting that much of this rapidly growing trade is a manifestation of increased outward processing and compensation trade, with subsequent imports of goods processed in fairly simple manufacturing operations mainly in Shenzhen and elsewhere in Guangdong. The labour cost advantage of the mainland for un- and semi-skilled operations will increase as wage costs in the Territory continue to reflect very high labour demand.

4. There is striking evidence of Yen strength affecting Japanese demand for both components and finished goods: exports of radios, clothing, metal manufactures and electrical appliances to the Japanese market grew by 174%, 82%, 61% and 56% respectively. Exports of watches and clocks, and electronic components grew by 30% and 20%.

5.

Total imports grew by 34%; those retained for use in Hong Kong by 24%, reflecting both the buoyant domestic economy and rapid growth in the re-export trade. The commodity composition of this growth is as follows:

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