ENG-2004 — Page 95

The Economy 1 65

and the GDP deflator tapered successively over the course of the year, with the former reverting to small increases in the second half. Yet the pace of upturn in the GDP deflator was considerably slower than that of the Composite CPI, due to the drag from worsened terms of trade caused by the further weakening of the US dollar. For 2004 as a whole, the declines in the CCPI and GDP deflator narrowed to 0.4 cent and 2.8 per cent respectively (Chart 16).

per

Chart 16

Per cent

2

-2

-4

-6

-8

Main inflation indicators (year-on-year rate of change)

Composite CPI

GDP deflator

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1999

2000 F 2001

2003

2004

2002 |

The Composite Consumer Price Index reverted to small increases in the second half of 2004, while the decline in the GDP deflator tapered over the course of 2004.

Economic Policy

The Government of the HKSAR believes in free markets, and adopts "market leads, government facilitates" as the guiding principle of its economic policy. Over the past few years, the Government has taken a proactive role to create a conducive environment for business and facilitate economic development, so to enhance Hong Kong's competitiveness and reduce rigidities in the economy. While these measures aim at a longer-term target, they also aided the swift revival of the Hong Kong economy after SARS.

Proximity to the Mainland as a huge and dynamic economic hinterland is a key edge that Hong Kong possesses over neighbouring economies. Over the past two decades, economic relations between the two places continued to strengthen. Bilateral trade has grown by leaps and bounds. Two-way visitor flows have surged, more so upon the Mainland's progressive liberalisation on residents travelling abroad. Hong Kong and the Mainland are each other's largest source of external direct investment. In the financial sector, cross-boundary fund flows have risen markedly