ENG-1986 — Page 72

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THE ECONOMY

transported by sea, although an increasing proportion of it was carried by road and by rail. Passenger traffic grew by an average of 21 per cent per annum between 1979 and 1986. The increase was mainly in travel by rail and, to a lesser extent, by sea and air.

Reflecting the increasing financial links between Hong Kong and China in recent years, external liabilities of Hong Kong's financial institutions to banks in China grew by 127 times from HK$213 million at end 1979 to HK$27.1 billion at end 1986. During the same period, external claims of Hong Kong's financial institutions to banks and other enterprises in China grew by 7.9 times from HK$5.9 billion to HK$46.8 billion. Apart from being a source of funds, Hong Kong also provided China with access to the world's major financial markets. The business of the Bank of China Group in Hong Kong has grown substantially since the late 1970s, as reflected by its much enlarged retail banking network and the increasing variety of financial services offered.

With regard to investment, Hong Kong's direct investment in China has been concen- trated in hotel and tourist-related facilities, and light manufacturing industries, such as electronics, textiles and wearing apparel. Most of the investment has been in the form of joint ventures with Chinese enterprises. Some Hong Kong manufacturers have maintained compensation trade and outward processing arrangements with Chinese enterprises partic- ularly in the Special Economic Zones and in the Pearl River Delta area. At the same time, enterprises owned by Chinese interests have also increased their investment in Hong Kong, and their activities have diversified from trading to such areas as property development, manufacturing, supermarkets, hotels and infrastructural projects.

The increasing economic relations between Hong Kong and China have been mutually beneficial, and have added a new dimension to Hong Kong's economic growth.

The Economy

The performance of the Hong Kong economy in 1986 was characterised by a strong recovery in domestic exports, a significant improvement in the growth rate of the GDP, a low rate of inflation, effectively full employment, and a small visible trade gap. Personal incomes increased more rapidly in real terms than in 1985, and consumption demand improved further.

Preliminary estimates show that the growth rate in real terms of the GDP was 8.7 per cent in 1986, representing a significant improvement over the provisional estimate of 0.6 per cent for 1985. Economic growth in 1986 was strongly export-led, with domestic exports providing the main impetus to growth.]

External Trade

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In 1986, domestic exports grew by 19 per cent in money terms, or about 16 per cent in real terms. This was in sharp contrast to the decline of six per cent in money terms or five per cent in real terms recorded in 1985. One major factor behind the strong export performance was the improved demand for imports in many of Hong Kong's major overseas markets. The depreciation of the Hong Kong dollar, in line with that of the US dollar under the linked exchange rate system, against most major currencies has also helped to improve the price competitiveness of Hong Kong's products. Domestic exports to the United States and to China, which are Hong Kong's two largest export markets, grew by about nine per cent and 16 per cent respectively in real terms. Much faster growth was, however, recorded for domestic exports to other markets, such as the Federal Republic of Germany (at about 35 per cent in real terms), the United Kingdom (about 13 per cent), and Japan (about 32 per cent), the currencies of which were relatively strong against the Hong Kong dollar. The