Country Report Hong Kong December 2008

Summary

The chief executive, Donald Tsang, is becoming increasingly unpopular. Although he remains safe in his position, the Chinese government is growing concerned that unrest will increase if the economy slows.
Chinas decision in December 2007 against permitting full direct elections for the post of chief executive before 2017 and for the Legislative Council (Legco) before 2020 will limit the options for political reform available to Mr Tsang.
As revenue streams weaken and government spending increases to support growth, the fiscal surplus will disappear. In 2009 and 2010 it is expected fiscal deficits equivalent to 4.4% and 2.2% of GDP respectively will be recorded.
The Economist Intelligence Unit expects real GDP to contract by 1% in 2009, given that a reduction in export volumes and financial turmoil will contribute to a weaker job market, which will undermine consumption.
Hong Kongs current-account surplus will remain substantial. Slowing export growth will be offset by weaker import expansion, and the services surplus will remain huge.
Consumer price inflation is forecast to slow to 1.1% in 2009, from an estimated 4.2% in 2008. Falling food prices and weak domestic demand will be the two main factors suppressing inflation in 2009.

Mr Tsang's poll ratings have been falling in recent months owing to the financial crisis, amid concern that unrest in Hong Kong will intensify if unemployment continues to rise.
On a visit to the UK in November, Mr Tsang appealed against an increase in protectionism as a response to the global economic downturn.
The Hong Kong Monetary Authority (which performs some of the functions of a central bank) was forced to intervene in the foreign currency market to stop the Hong Kong dollar from breaching its HK$7.75:US$1 upper band limit.
An agreement has been reached over the funding of a bridge linking Hong Kong, Macau and Zhuhai, a city in mainland China. However, construction is not set to start until the end of 2009 at the earliest.
The economy entered recession in July-September 2008, after real GDP shrank by 0.5% quarter on quarter. Private consumption was especially weak, after being hit by low consumer confidence and rising unemployment.
The annual rate of inflation fell to just 1.8% year on year in October. However, inflationary pressures remain serious, and, after stripping out the impact of government subsidies, underlying inflation in October was still 5.9%.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60;70;65
NAICS Code: 52;72;53