TNAG-1762-FCO40-2516-Economic-situation-in-Hong-Kong-1988 — Page 80

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Reference...

MMF 091/39311

HKC 090/1.

HONG KONG: THIRD QUARTER ECONOMIC REPORT 1987

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1. The economic boom has shown at least prior to the stock market crash little sign of abaiting. Indicators across the whole range show rapid growth rates. The economy has been running at, or very close to, full throttle: unemployment continued below 2% and there is evidence of excess demand for labour at prevailing wage rates, notably in the manufacuturing sector. However, the economy continues to demonstrate resistance to overheating: inflation was relatively low and rising only slowly, and higher real wages have been at least in part, offset by greater productivity and greater use of the cheap labour reserve in PRC.

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2. The year on year rate of growth in volume terms of domestic exports for the first nine months of 1987 is estimated at 25%.

The trends is marginally lower than the 27% recorded for HI. identified earlier in the year continue to be confirmed: the decline in the value of the US dollar and hence the HK$ has led to greater competitiveness of HK products against other Asian suppliers, especially in Western markets where currencies have also risen against the dollar. Throughout 1987, with the exclusion of China, the Japanese market has shown the greatest real growth.

3. The composition of domestic exports growth shifted noticeably in QIII, though one must be cautious in identifying trends from such a short period. Particularly noticeable is the decline in the growth of radios (20% to 1%) from QII to QIII) and textiles (56% to 31%); and the increase in growth of electronic components (6% to 29%).

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The trend during 1987 for rapid growth in re-export trade continues. The real growth has remained at 49% throughout the year. The major destination and source of re-export goods continues to be PRC, supplying 32% by value and receiving 48% by value of re-exports during QIII. In its position as an entrepot HK is clearly benefiting from China's export drive.

5. Retained imports in QIII grew by 19% in real terms over the same period in 1985. For the first nine months of 1987 the figure if 21%. The major areas of growth have been in raw materials and semi manufacturing and capital goods reflecting the rapid growth in industrial production fuelled by the export boom, and accompanying investment. The growth in retained imports of consumer goods and foodstuffs (both 10% in QIII) is more in line with the growth in the economy overall.

6. The report suggests that there has been substitution of capital for labour in response to the tight labour market. This may be the case: with low interest rates and rising labour costs such substitution would be expected. However the figures presented in the QIII report, relating to growth in levels of retained levels of imports of machinery for manufacturing, are too general to show

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