Hong Kong Business Forecast Report Q1 2009

No Escaping The Global Slowdown

In light of deteriorating growth prospects, not only across the developed world, but also in mainland China, we have revised down our 2008 and 2009 growth forecasts for Hong Kong. We are now expecting the territory's real GDP to expand by 4.6% in 2008, rather than 5.0%, and note that if it were not for a stellar first quarter outturn of 7.3% yearonyear (yoy) growth, this figure would have been lower still. Indeed, growth slowed substantially in Q208, to 4.2% yoy, on the back of moderating exports and domestic demand. For 2009z we are now forecasting economic growth to dip to 4.1%, having previously been anticipating a 4.8% expansion. However, we caution that risks to both our new forecasts are still weighted to the downside.

Hong Kong held elections for its Legislative Council on September 7 2008. As we anticipated, the vote brought little change to the political composition of the Council, with the total number of seats for the pandemocratic camp falling from 25 to 23, while the proBeijing camp gained two seats to secure a total of 35. Beijing therefore continues to wield influence over politics in the territory. Of note, the government is likely to face greater opposition on social issues going forward, with more grassroots politicians securing seats in the Legislative Council (LegCo). The League of Social Democrats gained three seats, up from two previously, while the number of seats won by the Federation of Trade Unions rose from three to four.

The Hong Kong Monetary Authority has been forced to intervene in the foreign exchange rate market after almost a year, to stem a rise in the domestic currency and keep it within official trading limits. The territory's currency board arrangement allows the Hong Kong dollar to fluctuate within a HKD7.75007.8500/US$ trading band. With the Hong Kong dollar considered a relative safe haven, we expect demand to remain strong as riskaverse investors continue pouring funds into the territory. Although unilateral interest rate cuts and HKD strength are causes for concern regarding the longevity of the territory's exchange rate regime, we nonetheless retain our view that the dollar peg will hold.

Hong Kong continues to attract high levels of foreign direct investment (FDI) due to its unique position as a businessfriendly gateway to mainland China. It benefits from a transparent legal system and highly skilled workforce, making the city a major hub for international finance. This strong position will be maintained following the government's decision to further lower the corporate tax rate. The proinvestor climate is also augmented by the absence of red tape, significant corruption and any major security threats. Finally, the preferential access that Hong Kong enjoys with the mainland ensures that the territory will carry on drawing substantial overseas investment.