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The following is a speech by the Government Economist, Mr K C Kwok, at the inauguration ceremony and dinner of the Institute of Accountants in Management today (April 27): (English only)
The Hong Kong Economy: Some popular perceptions vs the reality
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SY, Albert, Members of the Committee, Ladies and Gentlemen,
It is my great honour to be invited to speak to this distinguished gathering.
About 15 years ago, I worked in a commercial bank and had a chat with a colleague who was an accountant from Australia. He told me that he wanted to work in Hong Kong because he could put his knowledge and expertise to work for the company, helping Management to improve efficiency and focus on strategic issues. This was much more meaningful than his previous jobs in Australia where he had to spend most of his time figuring how to get around complex regulations or doing tax planning.
I had therefore very little difficulty in understanding the purpose of your Institute when I had discussions with some of your founding members. I wish to congratulate your Committee on the very meaningful work they have done in launching the Institute of Accountants in Management (IAM), and I wish your Institute every success in the future.
In my capacity as the Government Economist, I think I am expected to say something about the economy tonight rather than demonstrating my ignorance in management accounting.
The Hong Kong economy has been doing well. Most of you can feel it through increases in your salaries and bonuses, not to mention the stock options, and the occasional cold calls from ¡°head-hunters¡±.
On a macro level, the economy has improved significantly since it got out of the cyclical trough in mid-2003. Real GDP grew by 8.6% in 2004 and 7.3% in 2005. Figures for the first few months of this year remain encouraging. Our trade, financial services and a range of professional services are doing particularly well. A friend in the investment banking business told me recently that I would have made good money if I had invested in any asset class in the past two years. This is of course an exaggeration. But it does illustrate the strong performance of the markets in the past two years.
Many people in Hong Kong may have already forgotten that up until about 15 months ago, the dominant view in Hong Kong, at least in the media, was that the Hong Kong economy faced serious structural challenges and was falling behind in competitiveness. There were worries that structural unemployment would be a prolonged problem and this was partly the background leading to the setting up of the Commission on Poverty in early 2005.
Today, there are a lot fewer people talking about the doom and gloom Hong Kong is likely to face in the future. But I am sure there are still a lot of question marks on the minds of many people as to whether Hong Kong has really sorted out its problems.
But what are these problems? I¡¯m not sure if there is any consensus on what they are. But quite a lot of them have to do with the perceived competition posed to Hong Kong by developments in our neighbouring cities. For example, the gradual fall in Hong Kong¡¯s market share in container throughput was often used by some commentators as an example to illustrate how the rise of Shenzhen and other neighbouring cities would make Hong Kong a ¡°sunset economy¡±.
The container throughput numbers are a very good example illustrating many of the issues that Hong Kong is facing, and what structural changes in Hong Kong are about. Let me spend some time on this subject.
The slow growth in container throughput numbers in Hong Kong as compared with the fast growth in Shenzhen is often seen to be a zero sum game. Hong Kong¡¯s loss is seen to be Shenzhen¡¯s gain, and vice versa. This mindset also underlies a lot of other issues that involve Hong Kong and other cities in southern China. I think this approach is not only mistaken, but also harmful.
Why not take a broader perspective in the issue? The Pearl River Delta (PRD) as a whole is developing rapidly and there is a continuous shift in the geographical distribution of various economic activities in the region. The division of labour between Hong Kong and Shenzhen has been evolving and this is part of Hong Kong¡¯s ongoing economic restructuring towards higher value added activities.
In the trading and logistics sector, there is an increasing level of sophistication and specialisation in various activities, spurred partly by the fall in transportation costs and the significant improvement in information technology. Many companies are keeping/growing some of these activities in Hong Kong while moving some into Shenzhen.
Given the rapid growth of the PRD as a global manufacturing and trading hub, there is room for both Hong Kong and Shenzhen to grow. To put the issue in another way, southern China would not have been able to develop all the manufacturing and trading activities in the past if Shenzhen had not developed its ports and Hong Kong had to deal with all such cargo growth. To turn the issue around, the growth of Shenzhen¡¯s ports has enabled many manufacturers and traders in Hong Kong to grow their business significantly. The rapid growth in trade between China and the rest of the world, and for southern China in particular, has also led to a significant increase in demand on Hong Kong as a trading, business and financial hub for many global trading companies.
From 1999 to 2004, for example, the value of trade organised and managed by companies in Hong Kong through merchanting with the goods never entering Hong Kong grew by an annual average of 19.7% in value terms, much faster than the 8.5% in visible trade. The trading sector that has a higher value added per worker than cargo-moving logistics has increased its contribution to GDP from 18.3% in 1999 to 22.3% in 2004, while the contribution of cargo-moving logistics activities to GDP grew from 4.2% to 5.4% over the same period.
More efficient ports and lower transportation costs in the PRD benefit the manufacturers and traders in the region as a whole, and enhance the global competitiveness of the region's supply chain. This benefits many Hong Kong companies directly. And as the whole PRD region grows, Hong Kong also shares the fruits of this development in many indirect ways, such as more demand for inbound tourism and business services. In addition, many Hong Kong companies are active players in the trade and logistics sector in Shenzhen and benefit from the growth there. It is therefore important to understand the economic relationship between Hong Kong and the PRD from both a competitive and a complementary perspective.
In addition, an increasing share of Hong Kong's international trade is now handled by Hong Kong's Airport as the high-valued and time-sensitive goods are willing to pay for the higher costs. 34% of Hong Kong's trade in value were handled by air in 2005 as compared with 20% in 1995, whereas the share of trade handled by sea and river fell from 54% to 33% during the same period. This is another illustration of how Hong Kong goes up the value chain. The volume of air cargo handled by Hong Kong is more than 2 times the total of Guangzhou, Shenzhen, Macau and Zhuhai combined.
Having said all of the above, there is no doubt that the competition facing Hong Kong's port is very real. The direct contribution of port and related cargo movement activities to the Hong Kong economy is still substantial, and the role these activities play in underpinning the growth in Hong Kong's trade and other trade-related services remains critical. The employment contribution of such activities is also an important consideration. Indeed, the Government has been trying its best to promote the development of the port and logistics industries.
But we also need to bear in mind that the challenges we face in a particular sector should not be generalised into an economy-wide problem. The gradual relocation of container handling activities into Shenzhen could be seen, in a sense, similar to the ¡°hollowing out¡± of manufacturing from Hong Kong into the Mainland back in the mid-1980s.
Another widely-held misconception is that the structural changes in the Hong Kong economy, coupled with continued ageing of our labour force, will lead to a high level of structural unemployment. This is another important part of the arguments many commentators put forward in predicting a gradual demise of Hong Kong. Let me address this subject.
Has ageing led to a rise in the overall unemployment rate in Hong Kong? The popular belief is ¡°YES¡±. But does this belief stand up to objective scrutiny? The answer is ¡°NO¡±. While ageing has increased the number of workers in the 50-59 age bracket that has a high unemployment rate, ageing has also led to a fall in number of workers in the 15-24 age bracket that has even higher unemployment rates. In other words, for the economy as a whole, the rise in the number of older unemployed is offset by the drop in unemployed youths.
In any case, the words ¡°population ageing¡± are misleading so far as the workforce as a whole is concerned. Population ageing refers to people getting old. But the median age of our workforce has merely increased from 35 in 1995 to 39 in 2005. I would say our labour force is maturing, not ageing.
Two other important developments related to our labour force are also important: (a) The rapid process of upgrading in education standards and professional qualifications have enabled our workforce to better fit into the modern services economy. (b) The gradual but continuous rise in the share of the female labour force has lowered the overall unemployment rate as the females have a lower unemployment rate than their male counterparts.
Therefore, contrary to popular belief, the long-term developments in socio-demographics have actually helped to lower our overall unemployment rate. Again, the challenges facing the older-aged, low-skilled and under-educated workers are real. But such problems should not be over-generalised or exaggerated.
But why then is our unemployment rate so high?
The economic downturn we went through between 1997 and 2003 was unprecedented in the past few decades. The economy has yet to fully recover from the damage done over this deep and prolonged downturn. Furthermore, our construction industry is going through some major challenges and this has contributed to a high level of unemployment for many workers at the lower segment of the labour market. But I am quite confident that as our economic recovery continues, the unemployment rate will continue to go down. Indeed, with inflation starting to rise very slowly, I think we are beginning to approach a level of unemployment which economists call the ¡°natural rate of unemployment¡± or NAIRU. Our own internal analysis suggests that the natural rate of unemployment in Hong Kong is around 4% in recent years, having risen from around 2.5% in the early-1990s. This means that, given the difficulties in the construction industry, an unemployment rate of around 4.5% may be considered as close to full employment for the rest of the economy.
Can we get to 4.5%? I think the chance is quite high. Can we get the unemployment rate down even further? My answer is also in the affirmative. But this has to be achieved through institutional improvements that enhance economic efficiency thus lowering the natural rate, or else the economy would have to accept an accelerating rate of inflation.
I hope I have helped to clarify a few misconceptions about the Hong Kong economy. We have had perhaps too much navel gazing and self-criticism in the past, to the extent that many people in Hong Kong have lost confidence in themselves. Things are not all rosy, but things are certainly not all that bad. The big picture for Hong Kong is that we have got a lot of the ingredients in place to take advantage of the many business opportunities and challenges that are presenting themselves. The gathering tonight and the people in this room are a life demonstration of the strength of Hong Kong.
Thank you.
Ends/Thursday, April 27, 2006
Issued at HKT 20:05
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