ENG-2008 — Page 80

40 The Economy

In the financial market, the local stock market continued the decline that began in the latter part of 2007 as the turbulence triggered by the sub-prime mortgage. crisis in the US in 2007 spread to a wider spectrum of the global financial markets. The pace of downward adjustment was particularly acute in the two months or so after the global crisis turned into a fully-fledged financial tsunami in September. The Hang Seng Index nose-dived during this period, marking an annual low of 11 016 on October 27, 2008, closed the year at 14 387, 48 per cent lower than the level at end-2007. The average daily turnover shrank to $72.1 billion in 2008, and stock market capitalisation to $10.3 trillion at the end of the year. Fund-raising activities also receded in 2008 as the sentiments in the local stock market turned less optimistic.

Underlying consumer price inflation continued to rise until July 2008, reflecting the earlier surges in global food and energy prices and in local private residential rentals. Nevertheless, the collapse of commodity prices in the international markets from the middle of 2008, together with the property market correction due to the financial tsunami, reduced the inflationary pressures, thereby leading to some easing of the underlying inflation in the latter part of 2008. The abrupt waning of consumer sentiments towards the end of the third quarter due to the negative wealth effect and the worsened employment condition, resulting in a weaker consumption market, also contributed. For 2008 as a whole, the underlying Composite Consumer Price Index rose by an average of 5.6 per cent, up from 2.8 per cent in 2007. Headline inflation was at a lower level, thanks to the various one- off relief measures introduced by the Government (i.e. rates concession, electricity subsidy, payment of public housing rentals on behalf of low-income households, and the waiving of the re-training levy). The headline Composite Consumer Price Index rose by 4.3 per cent in 2008, compared with an increase of 2 per cent in 2007.

Structure and Development of the Economy

Hong Kong is a global centre for world trade, finance, business and telecommunications with a strategic location on the doorstep of the Mainland, a vast booming economy. Hong Kong is currently the world's 13th largest trading entity. It operates one of the world's busiest container ports in terms of container throughput, as well as one of the world's busiest airports in terms of number of international passengers and volume of air cargo handled. Hong Kong is also the world's 15th largest banking centre in terms of gross external positions of banks, and the sixth largest foreign exchange trading centre. Its stock market is the third largest in Asia in terms of market capitalisation.

As an international business hub, Hong Kong has a business-friendly environment with the rule of law, free trade and free flow of information, open and fair competition, a well-established and comprehensive financial network, a superb transport and communications infrastructure, sophisticated support services, and efficient and innovative entrepreneurs complemented by a well-educated workforce. Moreover, it has substantial foreign exchange reserves, a fully convertible and stable currency, prudent fiscal management and a simple tax system with low tax rates. In view of these virtues, the US Heritage Foundation named Hong Kong the freest