Engines of growth fire on all cylinders (hktdc.com)


	Hong Kong's booming retail sector tells the story: robust capital gains flow on to the local economy, boosting consumer spending

	AmCham President Jack Maisano (left) and Chairman Steve Marcopoto release a survey that shows overwhelming confidence in Hong Kong's economic future

Economists who watched Hong Kong record its third straight year of prosperity in 2006 say powerful export and financial sectors augur well for continued growth.

The city's economic growth should average 6.5 per cent for the full year in 2006 after logging 6.8 per cent for the first three quarters, said government economist K.C. Kwok.

"This is very encouraging. The out-turn was rather more favourable than many people expected," he said, referring to global concerns early last year about rising oil prices and interest rates.

This year's robust expansion follows an 8.6 per cent rise in Hong Kong's gross domestic product in 2004 and 7.3 per cent in 2005. "We are talking about three consecutive years of strong growth. It's the best performance in the past 20 years," Mr Kwok said.

The three-year period has marked Hong Kong's full recovery from the economic consolidation which followed the 1997 Asia financial crisis, the bursting of the global internet bubble in 2000, the September 11 attacks in the US and the Sars scare in Hong Kong in 2003.

On solid ground

Hong Kong's growth upcycle remains on a solid footing with few worrisome signs of prices being pushed higher or the economy overheating, said Mr Kwok. "It effectively means we are enjoying high growth and little inflation and unemployment keeps falling. It was 8.6 per cent in mid-2003 and 4.5 per cent in the three months to end October (2006)," he said.

Unemployment may fall even further, he thinks, with tourism being a key sector for creating jobs. "Overall it's a very encouraging picture."

The twin engines for Hong Kong's economic growth have been the trade and financial services sectors which grew at double digit rates in 2006 and account for about 46 per cent of GDP, said Paul Tang, Chief Economist, Bank of East Asia.

The trade sector has been slowing somewhat in the second half in line with global conditions and "right now the economy is being strongly driven by the financial sector", he said.

Hong Kong has gone from strength to strength as a financial centre and hub for listing Chinese companies and financial institutions with the effects trickling down into the overall economy.

World's No.2

Giant flotations of state lenders Bank of China and the record-breaking Industrial and Commercial Bank of China this year have helped make Hong Kong leapfrog New York to become the second most popular market, after London, for companies to float new stocks. So far, Hong Kong has raised HK$307 billion (US$39.5 billion) which is nearly double that of last year.

Hong Kong's blue-chip benchmark the Hang Seng Index rose about 25 per cent in 2006 and the average daily stock market turnover jumped 66 per cent.

The capital gains being generated in the stock market will trickle down into the local economy, boosting consumer spending going forward, said Mr Tang.

"This is a kind of wealth effect. I think 2007 is a year that investors will capitalise on their gains from the stock market," he said.

There is no reason to think that Hong Kong's financial services boom will end any time soon, particularly with China's appreciating yuan currency and a continuing procession of IPOs in the city attracting foreign investors, said Citigroup economists Joe Lo and Patricia Pong in a report.

GDP strong

"We are optimistic about Hong Kong's economy and financial market over the next two years," they said. "A continued financial market boom would keep real GDP growth strong at 6 per cent in 2007, and 5.8 per cent in 2008, despite the prospect of weaker exports and tourism."

Citigroup is among a camp of economists who expect the US economy to stage a "soft landing" or slow to sustainable growth in 2007, rather than plunge into recession. The soft landing scenario would help Hong Kong sustain its economic momentum.

The outlook for Hong Kong from the grassroots of the economy, companies themselves, is also optimistic, two surveys found.

A poll of 206 companies by the Hong Kong General Chamber of Commerce found that 43 per cent of respondents expect business conditions to be "good" or "very good" in 2007, up from 23 per cent a year earlier.

"2006 has been a very good year for most businesses in Hong Kong," said Alex Fong, Chief Executive of the chamber. "The survey shows many companies feel the strong growth will continue through 2007, and that they are planning to hire extra staff to sustain their growth, which is a clear indication of their confidence in the coming year."

Confidence high

In the second survey, an overwhelming 98 per cent of 213 member companies polled by the American Chamber of Commerce said business conditions were either "very satisfactory" or "somewhat satisfactory" in 2006, up two percentage points from 2005.

Half said they would expand their businesses in Hong Kong and hire more staff in the next three years.

The rise of the yuan against the US dollar and other major currencies is widely expected to continue next year with Goldman Sachs forecasting the Chinese currency to reach 7.41 per US dollar by late next year, making it stronger than the HK dollar which trades in a HK$7.75-7.85 band with the greenback.

But most economists are expecting the Hong Kong government to leave the 23-year-old Hong Kong dollar peg to the US dollar intact, preserving financial stability in the city.

The yuan's rise should keep capital flowing into the city, lowering interest rates.

"On the back of this, we remain bullish on [Hong Kong's] growth cycle…we expect the cycle to extend steadily towards 2008," said Goldman Sachs.