ENG-2006 — Page 78

50 The Economy

were altogether 27 services sectors benefiting from CEPA and nearly 1 700 Hong Kong Service Supplier Certificates had been issued. These CEPA concessions give Hong Kong companies a 'first mover' advantage in the Mainland market, and foster better synchronisation of the chain of cross-boundary financial activities, goods production and distribution. The improvement in efficiency and productivity help reduce transaction costs significantly benefiting both Hong Kong and the Mainland. The trade and investment facilitation measures under CEPA also help increase the flow of investment between the two places.

With continuing reform and further liberalisation of the Mainland economy, particularly after its entry into the World Trade Organisation, more foreign investment are expected to flow into the Mainland. Hong Kong's role as a service hub for the Mainland will continue to strengthen. Apart from being a springboard into the Mainland for foreign enterprises, Hong Kong also acts as a platform for Mainland enterprises to tap overseas markets, which is increasingly important for Mainland enterprises as they grow bigger and become more international.

The Economy in 2006

External trade

Merchandise exports achieved another year of strong growth in 2006. Total exports of goods, comprising re-exports and domestic exports, grew 10.2 per cent in real terms in 2006, after an 11.4 per cent rise in 2005. After kicking off with a rapid growth in the first quarter of 2006, growth slowed slightly in the second quarter, before picking up again in the third and fourth quarters. Notwithstanding the uncertainties at the beginning of 2006, the global economic environment was largely supportive during the year. A number of favourable factors also set in particularly during the second half of the year. These included a notable fall-back in oil prices, improved competitiveness as a result of a weakened US dollar, and a strengthening of intra-regional trade. Adding to this, was the ongoing strong support from the robust Mainland economy and its vibrant trade flows.

Within the sphere of exports, re-exports continued to be the growth driver, rising by 10.8 per cent in real terms in 2006, following an 11.6 per cent growth in 2005, which marked the fifth consecutive year of double-digit growth. Nevertheless, re- exports slowed in the second quarter after their strong first quarter start, but picked up in the second half of the year on the back of the strengthening intra-regional trade and the further weakening of the US dollar. Domestic exports accounted for only 5 per cent of total exports in 2006. Reflecting the volatilities during 2006, domestic exports were lifted by a strong surge in textile and clothing exports in the first half of the year but which then reverted to a decline mode in the second half as the high base set in. For 2006 as a whole, domestic exports moderated to a 1.1 per cent growth in real terms, after a 7.6 per cent growth in 2005. The year 2006 was the third consecutive year in which domestic exports registered positive growth (Chart 7).