Country Report Hong Kong June 2009

Outlook for 2009-10

• Hong Kongs chief executive, Donald Tsang, is becoming increasingly unpopular. Although he is safe in his position, the Chinese government is becoming concerned that unrest will grow as the recession deepens.
• Chinas decision in December 2007 not to permit full direct elections for the post of chief executive before 2017, or for the Legislative Council (Legco) before 2020, will limit the options for political reform available to MrTsang.
• As revenue streams weaken and government spending increases to support economic growth, the fiscal deficit will grow. The deficit will average 4% of GDP in the next two years.
• The Economist Intelligence Unit expects real GDP to shrink by 6.7% in 2009. The contraction will be broad-based and will affect all sectors of the economy, including exports, private consumption and fixed investment.
• Hong Kongs current-account surplus will remain substantial. The territory will continue to record a large trade deficit, but this will be offset by a huge surplus on the services account.
• Consumer price inflation is forecast to fall to 1% in 2009, from 4.3% in 2008. Falling food prices and weak domestic demand will be the two main factors bringing down inflation in 2009.

Monthly review

• Mr Tsang has caused controversy in Hong Kong after he said that the Tiananmen Square massacre in the Chinese capital, Beijing, in June 1989 could be consigned to history.
• The Hong Kong authorities have been accused of overreacting to the recent outbreak of swine flu, after some travellers to Hong Kong were found to have the virus.
• A study by a top think-tank, the Bauhinia Foundation Research Centre, has shown that economic integration within Greater China holds opportunities for Hong Kong, despite closer ties between Taiwan and mainland China.
• A sixth supplement to Hong Kongs Closer Economic Partnership Arrangement (CEPA) with mainland China was signed in May, providing for a further opening up of the Chinese market to Hong Kong-based companies.
• Real GDP in Hong Kong fell by 7.8% year on year in the first quarter of 2009, following a 2.6% decline in the final quarter of 2008. In quarter-on-quarter terms, real GDP fell by 4.4% in January-March.
• The main cause of the slump in the economy has been the weakness of the export sector, which has been hit hard by the collapse in global demand.

This report covers the following industry codes:
SIC Code: 49;59
NAICS Code: 22;44