INFLATION : Overall consumer prices fell for the third consecutive year in 2001. The rate of decline narrowed in the first seven months of 2001, but widened again in the remainder of the year, amidst a slack local demand prompting further moderation in labour wages and property rentals. Import prices continued to ease, due to a general softening in world commodity prices and the relative strength of the US dollar at that time. Furthermore, local retailers continued to offer large price discounts on many items in a move to promote sales. For 2001 as a whole, the Composite Consumer Price Index (CPI) went down by 1.6 percent, which was nevertheless smaller than the 3.8 percent fall in 2000.

The decline in overall consumer prices widened further in the first half of 2002, as manifested by a 2.9 percent drop in the Composite CPI over a year earlier. Yet this was partly due to the influences of some special factors, including in particular the rates concessions and the waiver of water and sewage charges by the government. For 2002 as a whole, the Composite CPI is forecast to decrease by 2.8 percent.

EMPLOYMENT : The labour market held broadly stable in the first half of 2001, but slackened visibly since the second half of the year. Reduced labour demand, consequential to the downturn in economic activity, coupled with a further expansion in labour supply, led to a marked loosening in the manpower resource balance. The seasonally adjusted unemployment rate jumped from 4.5 percent in the first quarter of 2001 to 6.2 percent in the fourth quarter. It continued to surge in the first two quarters of 2002, to 7.0 percent and 7.7 percent respectively. The increase in the unemployment rate occurred extensively across almost all the major economic sectors and occupation categories.

Total employment had a marked slow-down over the course of 2001, with the year-on-year growth rate moderating from 3.1 percent in the first quarter of 2001 to -0.4 percent in the fourth quarter. It then contracted more visibly, by 1.0 percent and 1.9 percent respectively in the first and second quarters of 2002. There were increased incidents of corporate downsizing and lay-offs, and employers had generally adopted an even more cautious attitude towards staffing. On the other hand, the year-on-year growth rate of total labour force, having slowed down from 2.0 percent to 1.4 percent over the course of 2001, picked up again to 1.5-1.7 percent in the first two quarters of 2002. These differential growth rates likewise reflected a clear slackening in the labour market.

On short-term outlook, labour supply is likely to continue to grow, especially during the summer months of the year upon increased entry of fresh graduates and school leavers into the labour market. The effect on unemployment further ahead will depend on the extent to which these new comers can be readily absorbed into jobs, which in turn will hinge on the pace of pick-up in the overall economy giving rise to new labour demand. Restructuring of the economy will tend to impinge more on the less educated and lower-skilled workers.

EXTERNAL TRADE ACCOUNTS : Affected by the austere external economic environment, Hong Kong, China’s merchandise exports fell by 5.7 percent in value terms to HK$1,489.0 billion (US$190.9 billion) in 2001. Imports of goods likewise shrank, by 5.4 percent in value terms to HK$1,554.0 billion (US$199.3 billion) in 2001. As total exports of goods fell somewhat faster than imports of goods in value, the visible trade deficit reckoned on an balance of payments (BoP) basis widened slightly, to HK$65.0 billion (US$8.3 billion) or 4.2 percent of the value of imports of goods in 2001. This was nevertheless more than offset by an invisible trade surplus reckoned on a BoP basis at HK$133.5 billion (US$17.1 billion) in that year, thereby yielding a combined surplus of HK$68.5 billion (US$8.8 billion), equivalent to 3.9 percent of the total value of imports of goods and services, in 2001.

Notwithstanding a rebound in exports of goods upon firmer regional demand, Hong Kong, China’s merchandise exports still fell by 2.1 per cent in value terms over a year earlier to HK$699.8 billion (US$89.7 billion) in the first half of 2002, as export prices fell over the period. With import prices also falling and with subdued domestic demand, imports of goods declined to a greater extent, by 4.5 per cent in value terms over a year earlier, to HK$728.6 billion (US$93.4 billion) in the first half of 2002. Taken together, the visible trade deficit reckoned on a BoP basis narrowed to HK$28.8 billion (US$3.7 billion) or 4.0 per cent of the value of imports of goods in the first half of 2002. Along with an invisible trade surplus reckoned on a BoP basis at HK$69.1 billion (US$8.9 billion) in that period, there was a combined surplus of HK$40.3 billion (US$5.2 billion) or 4.9 per cent of the total value of imports of goods and services in the first half of 2002.

BALANCE OF PAYMENTS : The current account registered a further sizeable surplus of HK$91.5 billion (US$11.7 billion) in 2001, equivalent to 7.2 percent of GDP in that year. But concurrently there was a substantial net outflow of financial non-reserve assets in the capital and financial account, totalling HK$40.1 billion (US$5.1 billion) or 3.1 percent of GDP. This was largely attributable to a substantial net portfolio investment outflow, which more than offset the net inflows of direct investment and other investment. Taken together, a notable balance of payments surplus of HK$36.5 billion (US$4.7 billion), equivalent to 2.9 percent of GDP, was recorded in 2001.

EXCHANGE RATE : The Hong Kong dollar was generally stable against the US dollar in the first half of 2002. The market exchange rate stayed within a narrow range of 7.7980-7.8000, notwithstanding occasional shocks (such as the abandonment of the currency board arrangements in Argentina, concerns about the persistent fiscal deficits and renewed rumours about the Link) during the period. The Nominal Effective Exchange Rate Index was stable at around 106 in the first three months of the period, but gradually weakened to around 102 by end-June 2002 as the US dollar fell against major currencies.

FISCAL POLICY : The financial results for 2001-02 (ending on March 31) showed a deficit of HK$63.3 billion or 4.9 percent of the forecast GDP for 2001 as compared with the original budget deficit of HK$3.0 billion. The fiscal reserves stood at HK$372.5 billion at end-March 2002, representing a decrease of HK$57.8 billion from the balance of HK$430.3 billion at end-March 2001. The fiscal reserves at end-March 2002 represented 19 months of government expenditure in 2001-02.

The 2002-03 budget forecasts a deficit of HK$45.2 billion, equivalent to 3.6 percent of the forecast GDP for 2002. The budgeted government expenditure represents a growth of some 7.7 percent in real terms over 2001-02.

In the remaining years of the Medium Range Forecast from 2003-04 to 2006-07, government expenditure is planned to grow at annual average rate of 1 percent in money terms, below the trend GDP growth rate of 4.4 percent a year in money terms over the period 2003-04 to 2006-07.

MONETARY POLICY : The best lending rate offered by major commercial banks remained unchanged at 5.125 percent in the first half of 2002. Hong Kong dollar interbank interest rates eased amid ample liquidity in the banking sector. The three-month rate dropped from 2 percent at end-2001 to 1.81 percent at end-June 2002, while its spread over the US dollar counterpart narrowed from 13 basis points to -7 basis points.

Seasonally adjusted narrow money grew strongly by 16.4 percent in June 2002 from a year ago, largely reflecting the low opportunity cost of holding narrow money. However, broad money increased by only 0.9 percent, broadly in line with the movements in nominal GDP.

Domestic credit slackened on the back of weak economic fundamentals. Loans for use in Hong Kong fell by 3.5 percent in June 2002 from a year ago. The overall quality of the loan portfolio of banks worsened slightly, with the ratio of overdue and rescheduled loans to total loans for retail banks rising from 4.57 percent at end-December 2001 to 4.69 percent at end-March 2002. Banks remained well-capitalised, with a 16.6 percent consolidated capital adequacy ratio for all locally incorporated authorised institutions in Mar 2002, well above the standard set by the Bank for International Settlements.

MEDIUM-TERM OUTLOOK

The outlook for the Hong Kong, China economy beyond the short-term remains good, underpinned by further economic reform and development and on-going market liberalisation in the Mainland. China’s accession to WTO will open up even more opportunities for trade and investment. Hong Kong, China will continue to serve as an important foothold and conduit for business between the Mainland and the rest of the world. Yet with only a mild growth envisaged for 2002, and with the ensuing pick-up likely to be relatively gradual, the trend growth rate of GDP in real terms is forecast at 3 percent per annum for 2002-06 as a whole.

Annex I

HONG KONG, CHINA: OVERALL ECONOMIC PERFORMANCE

Notes : N.A. Not available.
^ Revised series incorporating the results of the major revision to GDP as announced on 1 August 2002.
* Before the detailed breakdown of the capital and financial account was available for the reference year of 1998, net errors and omissions within the BoP identity were embedded in the net change in capital and financial non-reserve assets in 1997.
@ As from June 2002, figures are compiled on the basis of the revised definition by including short-term Exchange Fund placements in the monetary aggregate. With the series backdated only to April 1997, percentage changes prior to 1998 are not available.
+ Three-month HIBOR.
# As from August 2000, the "resident population" approach is adopted in place of the "extended de facto" approach for compiling the population figures, and a set of revised figures on total population, total labour force, total employment, numbers employed, numbers underemployed, and labour force participation rate backdated to 1996 is thus compiled. The unemployment rate is nevertheless generally unaffected.

Annex II

HONG KONG, CHINA: FORECAST SUMMARY (percent change from previous year)

Annex III

HONG KONG, CHINA: MEDIUM-TERM TREND FORECAST (percent)