ENG-2010 — Page 86

44 The Economy

The local stock market ended 2010 higher than the previous year, but performance was interspersed with episodes of fluctuation in tandem with other markets worldwide. Sentiments in the stock markets waned in early 2010 on indications of exit strategies in the major economies. They were then hit by intensified concerns over the sovereign debt issue in Europe in April and May. The Hang Seng Index (HSI) fell to 18 986 on May 25, the lowest in 2010. Sentiments turned more bullish again in the autumn on another round of quantitative easing in the US (i.e. QE2). The HSI rose in early November to a peak close to 25 000, before retreating on renewed concerns over the fragile debt situation in Europe, notably Ireland. The HSI closed the year at 23 035, 5.3 per cent higher than at end-2009. Fund-raising activities were intense in 2010, amid the robust economic conditions and ample liquidity. Total Initial Public Offering (IPO) funds raised in 2010 amounted to $445 billion, 79.3 per cent more than in 2009, again making Hong Kong the top IPO centre in the world.

Inflation increased progressively in 2010, driven mainly by higher import prices amid the surge in global food and other commodity prices, rising inflation in import sources, and a slightly weaker US dollar. Domestic cost pressures, especially on the rental front, also emerged alongside the robust economic conditions. In 2010, the underlying Composite Consumer Price Index rose by 1.7 per cent, faster than the increase of 1 per cent in 2009. Yet the phenomenon of rising inflation also featured in many other Asian economies where economic growth was vibrant.

Structure and Development of the Economy

Hong Kong is a global centre for world trade, finance, business and telecommunications with its strategic location on the doorstep of the Mainland's vast booming economy. Hong Kong is currently the world's 10th 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 13th 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 a flexible labour market with a well-educated and highly motivated workforce complemented by a pool of efficient and energetic entrepreneurs. 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, Hong Kong has retained its rating by the Heritage Foundation as the freest economy in the world, a position it has held since 1995. The Fraser Institute of Canada has also consistently ranked Hong Kong as the world's freest economy.