Country Report Hong Kong July 2008

Outlook for 2008-09

• Hong Kong's next election will be for the Legislative Council (Legco) in September 2008, but the balance between the pro-democracy and pro-China camps in the legislature will not change much.
• China's decision in December 2007 not to permit full direct elections for the post of chief executive before 2017 and for Legco before 2020 will limit the options for political reform available to the chief executive, Donald Tsang.
• The large budget surplus will be maintained in 2008-09, when it will be equivalent to an average of around 3% of GDP.
• The Economist Intelligence Unit expects real GDP growth of 4.7% in 2008. Growth will ease to 4.4% in 2009, as investment and private consumption cool.
• The current-account surplus will remain substantial, owing to the huge services surplus.
• Consumer price inflation is forecast to average 5.3% in 2008, compared with just 2% in 2007. Higher inflation is being driven by rising food prices and the weakness of the Hong Kong dollar. Average inflation will slow to 4.3% in 2009.

Monthly review

• Mr Tsang's poll ratings have suffered in the wake of a row over political appointees.
• The government has rejected proposals to subsidise petrol amid soaring global oil prices, but may cut taxes on diesel fuel.
• Financial services output expanded by 9.2% year on year in real terms in the first quarter of 2008, leading year-on-year growth in services output of 6.4%.
• The outlook for financial services is darkening, however, with a number of companies having postponed or down-scaled planned listings in recent months.
• The mainland Chinese government has delayed granting approval to mainland banks to issue renminbi-denominated bonds in Hong Kong.
• Hong Kong's own renminbi deposit base stood at Rmb76.6bn (US$9.8bn) at end-April, up from Rmb25.5bn a year earlier.
• Tourist arrivals increased by 9.5% year on year in January-May, to 12m.
• Year-on-year consumer price inflation reached 5.7% in May, up from 5.4% in April.