ENG-1998 — Page 84

THE ECONOMY

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were even larger, at $324 billion. These represented decreases of 5 per cent and 21 per cent, respectively, over a year earlier. The Bank of China Group, which has been established here for decades, is the second-largest banking group in Hong Kong after the HSBC Group. It started issuing Hong Kong dollar banknotes in May 1994. The other three state-owned commercial banks the China Construction Bank, the Agricultural Bank of China, and the Industrial and Commercial Bank of China were granted banking licences to operate in Hong Kong in 1995. On the other hand, the HSBC Group, together with the Bank of East Asia and the Standard Chartered Bank, are among the best-represented foreign banks in the Mainland.

Moreover, Hong Kong has been a major funding centre for the Mainland. Apart from being a direct source of funds, Hong Kong also serves as a window through which foreign funds can be channelled efficiently into the Mainland for financing the various development projects there. So far, most of the Mainland's fund-raising activities in the territory have taken the form of syndicated loans. but more recently, an increasing number of Mainland-related banks and enterprises have raised funds through issuance of negotiable certificates of deposit, bonds and shares. Since mid- 1993, H shares have been listed in Hong Kong's stock market by an increasing number of large state-owned enterprises in the Mainland. At end-1998, a total of 41 such enterprises were listed on the Hong Kong Stock Exchange, raising a total equity capital of $61 billion. The on-going restructuring of the Mainland's financial sector into a more rational and market-oriented system, in parallel with its continuing economic liberalisation on a wider front, will help attract more foreign investment there. Although fund-raising activities over the past year were constrained by the liquidity crunch in the region since mid-1997, Hong Kong's role as a major funding centre for the Mainland will be accentuated again when the regional financial situation returns to normal.

The Economy in 1998

External Trade

Hong Kong's export performance slackened considerably over the course of 1998, under the severe shrinkage in import demand in those East Asian economies hard hit by the regional financial turmoil. The disruption in air cargo handling services at the new airport in July and early August, and the severe flooding in Central China affecting overland freight in the Mainland, led to a further distinct setback in exports in the third quarter. Towards the end of the year, exports to the Mainland were aggravated by the decline in its import demand. Exports to the USA also receded, affected in part by its somewhat more moderate import demand for consumer goods, but probably also by the continued shift to offshore trading for goods destined to this market.

Total exports (comprising re-exports and domestic exports) still had a small increase of 1 per cent in real terms in the first quarter of 1998 over a year earlier, but moderated to a decline of 1 per cent in the second quarter, and fell more markedly by 7 per cent in the third quarter and by 10 per cent in the fourth quarter, amid a more difficult external trade environment. For 1998 as a whole, a decline of 4 per cent in real terms was recorded, in stark contrast to a 6 per cent growth in 1997. Within total exports, re-exports were down by 4 per cent in real terms in 1998, after a 7 per cent growth in 1997. Domestic exports shrank even more, by 8 per cent in real terms in 1998, following a 2 per cent growth in 1997.