ENG-2004 — Page 69

The Economy ❘ 43

small increase of 0.8 per cent in the third quarter and 0.2 per cent in the fourth quarter. In general, price pressures on the consumption front were modest all through the second half of 2004, as wages and earnings were still subdued in overall terms, while the rebound in property rentals over the previous year had yet to show up fully.

As to the GDP deflator, the year-on-year rate of decline also tapered, from 4.0 per cent in the first quarter to 2.8 per cent, 2.6 per cent and 2.1 per cent in the ensuing three quarters, along with the rebound in consumer prices and a pick-up in the price deflator for investment, the latter reflecting the distinct rise-back in the price deflator for construction investment and firmer prices of machinery and equipment investment. The pace of upturn in the GDP deflator was considerably slower than that of Composite CPI, due to the drag from a worsened terms of trade caused by the further weakening of the US dollar in the year.

Structure and Development of the Economy

With its strategic location at the doorway to the Mainland and in a time zone that bridges the gap between Asia and Europe, the Hong Kong Special Administrative Region (HKSAR) serves as a global centre for trade, finance, business and communications. Hong Kong is now the 11th largest trading entity in the world. It operates the busiest container port in the world in terms of throughput, as well as one of the busiest airports in terms of number of passengers and volume of international cargo handled. In addition, it is the world's 14th largest banking centre in terms of external banking transactions, and the sixth largest foreign exchange market in terms of turnover. Its stock market is Asia's second largest in terms of market capitalisation.

Hong Kong is characterised by a high degree of internationalisation, business- friendly environment, rule of law, free trade and free flow of information, open and fair competition, well-established and comprehensive financial network, superb network of transport and communications infrastructure, sophisticated support services, and a well-educated workforce complemented by a pool of efficient and enterprising entrepreneurs. Added to these are substantial foreign exchange reserves, a fully convertible and stable currency, prudent fiscal reserves and a simple tax system with a low tax rate. On these virtues, Hong Kong is widely regarded as among the freest and most competitive economies in the world. The US Heritage Foundation ranks Hong Kong as the world's freest economy for the 11th year in a row in 2005. The Cato Institute of the United States, in conjunction with the Fraser Institute of Canada and other research bodies around the world, also consistently ranks, Hong Kong as the freest economy in the world.

Over the past two decades, the Hong Kong economy has more than doubled in size, with GDP growing at an average annual rate of 4.8 per cent in real terms. This outpaces considerably the growth of 3.5 per cent for the world economy and 2.9 per cent for the Organisation for Economic Co-operation and Development (OECD) economies. Over the same period, Hong Kong's per capita GDP has doubled,