ENG-1998 — Page 83

THE ECONOMY

there, the value of two-way trade grew at a more moderate pace in the more recent years, at an average of 12 per cent between 1992 and 1997. In 1998, the two-way trade was indirectly hit by the regional financial turmoil, and declined by 6 per cent. Re- exports and domestic exports to the Mainland were down by 8 per cent and 12 per cent respectively in 1998, while imports from the Mainland fell by 5 per cent. Notwithstanding the fall in the two-way trade, the Mainland remained Hong Kong's largest trading partner in 1998, accounting for 38 per cent of Hong Kong's total trade. Besides this, 90 per cent of Hong Kong's re-export trade was attributable to the Mainland, making it both the largest market for and the most significant source of Hong Kong's re-exports. Reciprocally, Hong Kong was the Mainland's third-largest trading partner in 1998 (just behind Japan and the USA), accounting for 14 per cent of the Mainland's total trade.

Over the past two decades, there has also been a substantial increase in invisible trade and investment flows between Hong Kong and the Mainland. At present, Hong Kong is a major service centre for the Mainland generally and South China in particular, providing a wide range of financial and business support services such as banking and finance, insurance, accounting, transport and warehousing. It is also a principal gateway to the Mainland for business and tourism. In 1998, 39 million trips were made by Hong Kong residents to the Mainland, representing an increase of 16 per cent over 1997. Yet the number of trips made by foreign visitors to the Mainland through Hong Kong was down by 6 per cent to 2.2 million in 1998, mainly due to the reduced number of visitors from within East Asia amid the regional financial turmoil. Hong Kong has continued to be the largest source of external direct investment in the Mainland. At end-1998, the cumulative value of Hong Kong's realised direct investment in the Mainland was estimated at US$139 billion, accounting for about 52 per cent of the total value. There has been a notable shift in the composition of Hong Kong's direct investment in the Mainland in recent years, from industrial processing to a wider spectrum of business ventures such as hotels and tourist-related facilities, real estate and infrastructure development. Relative to other places in the Mainland, Hong Kong's economic links with Guangdong are much more intimate. At end-1998, the cumulative value of Hong Kong's realised direct investment in Guangdong was estimated at US$63 billion, accounting for about 77 per cent of the total for the province. Currently, more than five million Chinese workers are said to be employed in Guangdong by industrial ventures with Hong Kong interests. This is more than 18 times the size of Hong Kong's own manufacturing workforce.

In the opposite direction, there has likewise been a sizeable flow of investment capital from the Mainland to Hong Kong. By end-1997, the Mainland invested a total of US$18 billion in the territory, making it the second-largest external investor, just after the UK. More than 1 800 Mainland enterprises operate in Hong Kong. While these enterprises maintain high investment stakes in such traditional lines of business as import/export trade, wholesale/retail trade, banking, transport and warehousing, there has been growing diversification of such investment into other areas such as real estate, hotels, financial services, manufacturing and infrastructure development.

Along with the surge in two-way trade, investment and people flows, financial links between Hong Kong and the Mainland have also been on a rapid increase. By end- 1998, the external liabilities of Hong Kong's authorised institutions to entities in the Mainland reached $291 billion, while their external claims on entities in the Mainland

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