Hong Kong

Politics:

• Analysis

  Hong Kong politics: Leung's latest confidence trick

  Hong Kong's chief executive, Leung Chun-ying, survived a no-confidence motion in the Legislative Council (Legco) on December 12th. But it will worry the central Chinese authorities that his administration, installed on July 1st, has fallen prey so soon to the sort of fractious politics and petty accusations that its predecessor faced. As Hong Kong moves further towards full democracy under Mr Leung, the risk is that the central government may conclude that Hong Kong's parties have not shown the requisite maturity to be entrusted with fully democratic government.

  Mr Leung was "elected" chief executive by a gerrymandered committee, rather than a vote by Hong Kong's entire population, but the central Chinese authorities were keen to ensure that the victorious candidate had a degree of popular backing (while also being willing to toe policy lines laid down by China's government). Mr Leung secured his position partly by highlighting illegal basement structures that had been built in properties owned by his opponent, the former chief secretary for administration, Henry Tang. The resulting scandal drew attention to the gap between Mr Tang's large dwelling and the small apartments that most of the territory's residents live in, thereby tapping into growing popular concern about social inequality and undermining Mr Tang's support ratings.

  Trouble in the basement

  Yet Mr Leung is now facing criticism over illegal basement structures in one of his own homes. Space is at a premium in Hong Kong and illegal building activity is common, especially in the homes of the better-off, so that the discovery of unauthorised structures has become a political hazard in the territory. The technical debate about what exactly constitutes illegal activity, whether Mr Leung was aware of breaches of building regulations and whether he lied or not in the process of denying the allegations has at times descended into bafflingly obscure detail. However, the bigger problem is the perception of hypocrisy that now surrounds the chief executive. The way in which he has responded to the accusations has often appeared evasive, reinforcing the concerns that many members of the public had about his trustworthiness during the election.

  The matter came to a head with a no-confidence vote in Legco, which Mr Leung survived. The vote was split largely along party lines: most of the 27 legislators who supported the motion were members of the pro-democracy camp, while the 34 who opposed it came largely from pro-administration parties. Mr Leung relied heavily on support from legislators elected by functional constituencies (FCs, which represent business and social interests), with 20 of the 33 FC lawmakers present voting against the motion. The Chinese government may have contributed to the strong backing for the chief executive within the pro-government camp by applying pressure through its local representatives, in order to bolster local political stability. No-confidence motions in Legco are non-binding, but a defeat would have severely damaged the authority of Mr Leung's administration.

  Pro-government, but not pro-Leung

  Nevertheless, Mr Leung does not command the wholehearted support of the pro-government camp, not least because of lingering resentment of the way in which he took down Mr Tang's candidacy. The latter was supported by many within the government and business establishment, and the local elite remain mistrustful of Mr Leung and his agenda. The pro-business Liberal Party, which has five seats in Legco, abstained in the confidence vote, while two pro-government independents voted with the democratic camp in support of the motion against the chief executive. One of the two, Paul Tse, has also called on Mr Leung not to seek re-election in 2017.

  Unfortunately for local political stability, the issue will not be resolved by the December 12th vote. Pro-democracy politicians have called for a protest march on January 1st to highlight this and other complaints. Mr Leung's support ratings have been badly affected by the row, which has now been running on for several months. A poll by the University of Hong Kong conducted in early December showed that confidence in Mr Leung had slipped since the previous survey in November, falling by 2 percentage points to 37% of those responding. Support for the chief executive is nevertheless still higher than in late September, when it stood at just 33%.

  China's doubts about democracy intensified

  The likelihood is that fractious politics that focuses on essentially minor issues will remain the order of the day throughout Mr Leung's term, making the passage of political reforms difficult. Such a strategy is not risk-free from the standpoint of the pro-democracy camp. There is a danger that by focusing on trivial breaches of regulations and issues of character the democrats will come across as irrelevant, particularly if the government makes headway on policies, such as social housing and the minimum wage, that have more impact on the day-to-day lives of voters.

  The 2017 chief executive election and the 2020 Legco poll are supposedly going to be conducted in a more democratic way than current elections. Yet the circus-style politics of Hong Kong, with democratic legislators proposing "impeachment" for things that are hardly serious crimes and legislators attempting to hurl objects at the chief executive, plays to the worst prejudices in China about the weaknesses of "Western-style" democracy. It remains unclear whether China will be willing to permit a transition to full democracy in 2017-20: current events are likely to entrench doubts among the central leadership about such a step. The behaviour of Hong Kong's pro-democracy parties is partly a function of their exclusion from real power, but it will be considered by many in China's leadership to be a reason not to grant them further influence. Amid such a vicious circle, political tensions between the territory and the central authorities in China are likely to rise.

  December 13, 2012

• Background

  Hong Kong: Political and institutional effectiveness

  Political outlook: Political and institutional effectiveness

  Effective political debate and policy implementation in Hong Kong will continue to be impeded by several factors. The most important is the issue of political legitimacy. The chief executive is the most powerful politician in the territory, but the policies that he advocates arguably lack popular legitimacy, as he is elected by a committee rather than by all voters. Mr Tsang attempted to take popular concerns into account in policymaking, and his successor is likely to continue this approach, but the former's poor poll ratings showed that the tactic was not effective. On the one hand, this often looked like populism. On the other hand, Mr Tsang often seemed unable to connect with underlying public opinion. The administration will remain constrained by the need to take into account the wishes of the mainland government, which exercises its influence directly through the role of the National People's Congress (China's legislature) in interpreting the Basic Law, and indirectly through the sway that it holds over Hong Kong's political and business class. The tendency of elements of the pro-democracy movement to engage in crowd-pleasing confrontation rather than genuine policy debate can also hinder effective policy formation. However, the territory's judicial and regulatory systems remain admirably effective and impartial.

  July 25, 2012

• Structure

  Hong Kong: Political structure

  Official name

  The Hong Kong Special Administrative Region (SAR) of the People's Republic of China

  Form of state

  Special administrative region of China, with its own mini-constitution (the Basic Law), guaranteeing "a high degree of autonomy" until 2047. Presided over by a chief executive, whose appointment is strongly influenced by China

  The executive

  The Executive Council (Exco), comprising both ex-officio and non-official members, serves the chief executive in an advisory role

  Head of state

  Hu Jintao, president of the People's Republic of China

  Legislature

  Unicameral Legislative Council (Legco) with 70 members, comprising 40 directly elected members and 30 members elected by "functional" constituencies

  Local government

  District boards were renamed district councils after the 1999 elections. Local government municipal councils (urban and regional) were abolished shortly afterwards. The powers of the municipal councils were retained by government departments, with only small increases in the budgets of the advisory and partly appointed district councils

  Legal system

  Based on English law and the Basic Law (a mini-constitution underpinned by an international treaty). Foreign affairs and defence fall within the ambit of the Chinese central government; Hong Kong has autonomy in other matters

  Elections

  Leung Chun-ying was elected as chief executive in March 2012, and assumed the position on July 1st. The most recent Legco election took place in September. The next poll for the chief executive will take place in 2017; the next elections for Legco will occur in 2016

  Main political parties

  The pro-government Democratic Alliance for the Betterment and Progress of Hong Kong (DAB) is the largest party in Legco, with 13 seats. The pro-business Liberal Party (LP) has five seats, and the pro-government Hong Kong Federation of Trade Unions six. The pro-democracy camp holds 27 of Legco's 70 seats, including six held by the Democratic Party (DP) and six by the Civic Party

  Chief executive: Leung Chun-ying

  Chief secretary for administration: Carrie Lam

  Financial secretary: John Tsang

  Secretary for justice: Rimsky Yuen

  Principal officials

  Civil service: Paul Tang

  Commerce & economic development: Gregory So

  Constitutional & mainland affairs: Raymond Tam

  Development: Paul Chan

  Education: Eddie Ng

  Environment: Wong Kam-sing

  Financial services & the Treasury: Ceajer Chan

  Food & health: Ko Wing-man

  Home affairs: Tsang Tak-sing

  Labour & welfare: Matthew Cheung

  Security: Lai Tung-kwok

  Transport & housing: Anthony Cheung

  Chief executive of the Hong Kong Monetary Authority

  Norman Chan

  December 05, 2012

• Outlook

  Hong Kong: Key developments

  Outlook for 2013-17

  • A former convener of the Executive Council (Hong Kong's cabinet), Leung Chun-ying, began his five-year term as the territory's new chief executive in July. Issues related to social justice will be high on his agenda.
  • Growing popular discontent with the government may pose a minor threat to political stability in 2013-17, and calls for full democracy will grow louder. Weak economic growth in 2013 will increase the pressure on the authorities.
  • Interest rates are not expected to be raised until 2015, owing to the Hong Kong dollar's peg to the US dollar (which is expected to remain in place). Annual consumer price inflation will average 3.9% in the forecast period.
  • In 2013 the government will maintain a relaxed fiscal stance in order to boost weak economic growth. Welfare spending will be raised in the next five years, and budget surpluses in 2013-17 will be smaller than in 2010-11.
  • Real GDP growth will remain relatively slow in 2013, at 2.6%, owing to weak external demand. The economy will expand at a healthier average rate of 3.7% a year in 2014-17 as OECD markets stabilise.
  • Hong Kong's current-account surplus will remain substantial in 2013-17, at the equivalent of 6.6% of GDP on average. A widening trade deficit will be partly offset by a growing surplus on the services account.

  Review

  • Two unpopular government ministers, the education secretary, Eddie Ng, and the development secretary, Paul Chan, survived a no-confidence motion against them in the Legislative Council in November.
  • The economy posted a seasonally adjusted quarter-on-quarter expansion of 0.6% in July-September, meaning that in year-on-year terms growth in the three months stood at 1.3%.
  • The seasonally adjusted unemployment rate rose to 3.4% in August-October, from 3.3% in July-September. However, the total number of unemployed people (on a non-seasonally adjusted basis) fell by 1,900 to 131,000.
  • Although the headline rate of consumer price inflation in Hong Kong remained stable at 3.8% year on year in October, the underlying rate slowed to 3.8%, from 3.9% in September, as food and rent costs eased.
  • Retail sales growth slowed to 4% year on year in October, from 9.4% in the previous month. Sales of jewellery, watches, clocks and valuable goods fell in value by 3% year on year in October as spending by tourists declined.

  December 05, 2012

Economy:

• Background

  Hong Kong: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	7.1	Population growth	0.4
  GDP (US$ bn; market exchange rate)	248.6	Real GDP growth	2.2
  GDP (US$ bn; purchasing power parity)	357.8b	Real domestic demand growth	3.0
  GDP per head (US$; market exchange rate)	34,905	Inflation	2.5
  GDP per head (US$; purchasing power parity)	50,241b	Current-account balance (% of GDP)	10.1
  Exchange rate (av) HK$:US$	7.784	FDI inflows (% of GDP)	28.4
  a Actual. b Economist Intelligence Unit estimates.

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  Background: The territory of Hong Kong came under British control in the 19th century. Under the terms of the Sino-British Joint Declaration on the Question of Hong Kong, signed in 1984, Hong Kong reverted to Chinese sovereignty in 1997 as a Special Administrative Region (SAR) of China and was promised "a high degree of autonomy" for at least 50 years. The territory is ruled according to the Basic Law of the Hong Kong SAR, which functions as a mini-constitution.

  Political structure: Leung Chun-ying, who was previously the convenor of the Executive Council (Exco, the cabinet), officially began his five-year term as chief executive in July 2012. He replaced Donald Tsang, who had held the post since 2005. The chief executive, who is advised by Exco, is the dominant force in the government, although his public mandate is weaker than that of the Legislative Council (Legco, Hong Kong's parliament). In 2010 political reforms were passed that expanded the size of the chief executive election committee from 800 to 1,200. The number of Legco members chosen by popular vote was also raised, so that in the September 2012 election 40 of the 70 legislators were elected by universal suffrage.

  Policy issues: The debate on electoral reform will continue in 2013-17, but other challenges will also confront Hong Kong's leadership. The government will have to guard against a sudden collapse in property prices, which will reach exorbitant new highs in the forecast period. Pollution and poverty are also moving up the political agenda. The government is seeking to strengthen Hong Kong's role as an entrepôt, focusing on financial services, logistics, tourism and professional services, and it also aims to develop several other services subsectors as pillars of the economy. The Closer Economic Partnership Arrangement with China gives Hong Kong's firms preferential access to mainland markets, particularly in the services sector.

  Taxation: The tax rate on corporate profits stands at 16.5%, and the standard rate of salary tax is 15%. The government-supervised pension scheme, the Mandatory Provident Fund, requires employers and employees each to make a minimum contribution of 5% of relevant income.

  Foreign trade: On a balance-of-payments basis the trade account recorded a deficit of US$9.1bn in 2011, following a surplus of US$2.4bn in 2010. The current-account surplus stood at US$16.2bn, equivalent to 6.5% of GDP, in 2011, little changed from the surplus of US$15bn (6.6% of GDP) posted in 2010.

  Major re-exports, 2011	% of total	Major imports, 2011	% of total
  Capital goods	36.8	Raw materials & semi-manufactures	34.6
  Raw materials & semi-manufactures	33.6	Capital goods	32.9
  Consumer goods	26.5	Consumer goods	24.9
  Foodstuffs	1.2	Foodstuffs	3.8
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  China	52.3	China	45.0
  US	9.9	Japan	8.5
  Japan	4.0	Singapore	6.8
  Taiwan	2.6	Taiwan	6.4

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  December 05, 2012

• Structure

  Hong Kong: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 05, 2012

• Outlook

  Hong Kong: Country outlook

  Hong Kong: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: In July 2012 a former convenor of the Executive Council (Hong Kong's cabinet), Leung Chun-ying, became the territory's new chief executive. He will struggle to bridge the gap between the expectations of the central Chinese government and those of the local electorate in 2013-17. In trying to accommodate the wishes of the central leadership he is likely to continue antagonising public opinion in Hong Kong, and this will lead to growing political tensions over the forecast period.

  ELECTION WATCH: Mr Leung was appointed as Hong Kong's chief executive by an election committee of almost 1,200, comfortably defeating his main rival, Henry Tang, a former chief secretary for administration. His victory owed much to backing from the mainland-Chinese government, which noted that his public support ratings were higher than Mr Tang's. Although the process remains closed and undemocratic, the 2012 election differed from past polls in that it was a genuine contest between the top two candidates. It may thus have offered a foretaste of the next election, when the chief executive may be chosen by popular vote for the first time.

  INTERNATIONAL RELATIONS: Under Hong Kong's mini-constitution, the Basic Law, defence and foreign affairs are the preserve of the central Chinese government. The Hong Kong government has authority over domestic matters and external issues relating to trade. A new free-trade agreement between the territory and Iceland, Liechtenstein, Norway and Switzerland came into force in late 2012. Hong Kong would be adversely affected by any deterioration in China's relations with other countries--a significant rise in Sino-US trade tensions, for example, could hurt market sentiment in the territory and might also be detrimental to external trade. Foreign governments have generally been reluctant to interfere in Hong Kong's internal affairs, but the US and the UK continue to publish regular reports on subjects such as freedom of speech and progress towards democracy in the territory.

  POLICY TRENDS: In the short term, policymakers will remain concerned about below-trend economic growth and the potential for asset prices to decline sharply. Property prices are at record high levels at present, but confidence in the real-estate market is likely to be fragile in 2013-17. Domestic monetary conditions will remain loose until 2015 as a consequence of the Hong Kong dollar's peg to the US dollar. However, as US rates rise from 2015, and as monetary policy in mainland China simultaneously tightens, the risk of a large fall in house prices will be high in the second half of the forecast period. The government and the Hong Kong Monetary Authority (HKMA, which performs many of the functions of a central bank) have introduced measures to restrain rises in property prices. These include a 15% tax on purchases of housing by non-residents and companies, introduced in October. But these moves are unlikely to prevent high levels of volatility in real-estate prices in 2013-17.

  ECONOMIC GROWTH: The local economy is heavily exposed to trends in global trade, and it has struggled in 2012 as a result of contracting demand in the EU and weak growth in exports to the US. Slower economic growth in China has also hit local trade, and real GDP growth in Hong Kong in 2012 is estimated at only 1.6%. The economy will expand by 2.6% in 2013 as global trade flows return, falteringly, to faster rates of expansion. Private consumption growth will slow to 2.6% in 2013, from 3.4% in 2012. As economic growth rates in OECD markets stabilise, the Economist Intelligence Unit expects Hong Kong to record average annual GDP growth of 3.7% in 2014-17. Private consumption will resume faster expansion and will make the largest contribution to economic growth. This will reflect the improved outlook for jobs from 2014, supported in turn by our forecast of stronger growth in exports, which will generate employment in sectors such as shipping and logistics, catering, retailing, and tourism and professional services. Gross fixed investment will be supported by business investment, and also by major public infrastructure projects, such as the Hong Kong-Macau-Zhuhai bridge (which is due to be finished in 2016) and the third runway at the territory's international airport.

  INFLATION: Despite a fall in external inflationary pressures as food costs in China have moderated and global non-oil commodity prices have declined, consumer prices in Hong Kong are expected to rise by a relatively rapid 4.1% in 2012. The increase in prices this year has been driven partly by continued increases in housing costs. In 2013-17 inflation is expected to remain fairly strong, at an average of 3.9%. This will be partly because of persistently high inflation in the prices of imports from mainland China, where food prices are expected to rise strongly in the forecast period. It will also reflect the impact of rapid increases in local rents, which tend to move in line with house prices. The strong growth expected in house prices early in the forecast period may force rents up sharply, but there is a risk that housing prices and rents could fall more quickly than we expect later in the period if Hong Kong's property market slumps. This would cause inflation to decelerate.

  EXCHANGE RATES: The HKMA has repeatedly reaffirmed its commitment to maintaining the Hong Kong dollar's peg to the US dollar, and no change in this policy is expected in the next five years. We assume that Hong Kong's large foreign-exchange reserves, supplemented by its substantial fiscal reserves and its current-account surplus, will enable the HKMA to resist pressure to alter its exchange-rate policy. Given the potential for volatility in global financial and foreign-exchange markets, the currency peg will remain an important source of economic stability in the territory. There will nevertheless be growing discussion of the options for a move away from the US dollar peg towards a closer link to China's renminbi, perhaps via a peg to a basket of currencies, as is used in Singapore. The timing of such a move (which will not occur in the next five years) would depend on how quickly China opens its capital account.

  EXTERNAL SECTOR: At the equivalent of 6.6% of GDP on average, Hong Kong's current-account surplus will remain large in 2013-17. Persistently weak economic growth in important OECD markets will hold back export expansion in the forecast period compared with the rates recorded in the period preceding the 2008-09 global economic crisis. Combined with import growth, this means that the merchandise trade deficit will widen in the forecast period. In balance-of-payments terms, the larger trade gap will be partly offset by the burgeoning surplus on the services account--a consequence of both Hong Kong's role as a financial services entrepôt to mainland China and of the large number of tourists who visit the territory. The rising volume of merchandise trade in the latter part of the forecast period will also push up exports of port and logistics services. The surplus on the income account will remain sizeable, reflecting earnings from Hong Kong's foreign-exchange reserves and the large stock of overseas investments held by local residents. The income surplus will increase in 2015 in particular, as global interest rates begin to rise in line with those in the US. Repatriation of earnings by resident foreigners will mean that the transfers account remains slightly in deficit.

  December 03, 2012

• Forecast

  Hong Kong: Country forecast summary

  Country forecast overview: Highlights

  • Leung Chun-ying, a former convener for the Executive Council (Hong Kong's cabinet), began his five-year term as the territory's next chief executive in July 2012. Mr Leung has indicated that he will pursue an agenda focusing on issues of social justice, in a reflection of growing popular concern in the territory about economic inequality. However, such policies are likely to be modest in scope. The chief executive is aware that any sudden moves that could destabilise the property market or hurt Hong Kong's blue-chip firms would be opposed by the territory's middle class, who are heavily invested in both.
  • Mr Leung will need to be seen to be making progress towards the introduction of full democracy in time for the next chief executive poll in 2017. He will meanwhile have to deal with an increasingly confident Legislative Council (Legco, Hong Kong's parliament), the majority of whose members are now chosen by popular vote and which thus arguably has a stronger claim to legitimacy than the chief executive. However, the Chinese government will ultimately dictate the pace of the territory's transition to full democracy.
  • Hong Kong's government will pursue the territory's closer integration with mainland China, notably through the Closer Economic Partnership Arrangement and a strengthening of logistical links. The ongoing liberalisation of China's capital account will also support Hong Kong's development as an offshore centre for renminbi financial services, allowing it to maintain its lead over rival financial hubs on the mainland, such as Shanghai. More multinational firms are likely to site global functions in Hong Kong in 2013-17, boosting investment.
  • The Economist Intelligence Unit expects the budget to remain in surplus in 2013-17, even as the government increases expenditure on social welfare in response to calls for growing inequality to be addressed. Fiscal inflows from land sales should be strong as Mr Leung pushes for more public housing to be built. Rising business and personal income tax revenue will provide another boost to the public finances in the latter years of the forecast period.
  • Weak external demand will cause Hong Kong's real GDP growth to remain slow in 2013, at 2.6%, but export expansion and improving consumer confidence will ensure healthier average annual growth of 3.7% in 2014­17. The current account will post sizeable surpluses as Hong Kong continues to develop as a centre for tourism and as an exporter of high-value services.
  • The existing exchange-rate regime, which pegs the Hong Kong dollar to the US dollar at the rate of HK$7.8:US$1, will be maintained in the forecast period.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	1.6	2.6	4.0	3.5	3.9	3.4
  Consumer price inflation (av; %)	4.1	4.4	4.0	4.2	4.1	3.0
  Budget balance (% of GDP)	1.1	1.2	1.5	1.0	1.2	1.3
  Current-account balance (% of GDP)	7.0	6.5	6.7	7.4	6.8	5.5
  Commercial banks' prime rate (av; %)	5.0	5.0	5.0	6.1	7.4	7.9
  Exchange rate HK$:US$ (av)	7.76	7.76	7.80	7.80	7.80	7.80
  Exchange rate HK$:¥100 (av)	9.78	9.39	9.00	8.76	8.46	8.53

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  December 05, 2012

View detailed map

Country Briefing

Land area

1,104 sq km

Hong Kong island: 81 sq km

Kowloon: 47 sq km

New Territories & outlying islands 976 sq km (reclamation since 1887 67 sq km)

Population

7,061,000 (mid-2010 government estimate)

Main regions

Population in '000 (mid-2006):

Hong Kong island: 1,264

Kowloon: 2,070

New Territories: 3,598

Climate

Subtropical

Weather in Victoria (altitude 33 metres)

Hottest months, July and August, 26-31°C; coldest month, January, 15-19°C; driest month, January, 23 mm average rainfall; wettest month, August, 391 mm average rainfall (climatological norms)

Languages

English and Chinese (mainly Cantonese)

Measures

UK imperial system, changing to metric system. Local measures used include: 10 fan = 1 tsun (Chinese inch) = 0.037 metres; 10 tsun = 1 chek (Chinese foot) = 0.371 metres; 10 tsin = 1 leung (tael) = 37.8 g; 16 leung = 1 kan (catty) = 0.605 kg; 100 kan = 1 tam (picul) = 60.48 kg

Currency

Hong Kong dollar (HK$); HK$1 = 100 cents. Average exchange rate in 2011: HK$7.78:US$1

Fiscal year

April-March

Time

GMT plus 8 hours

Public holidays

New Year's Day, January 2nd; Chinese New Year, January 23rd-25th; Ching Ming Festival, April 4th; Good Friday, April 6th; Easter, April 9th; Buddha's Birthday, April 28th; International Labour Day, May 1st; Dragon Boat Festival, June 23rd; Hong Kong Special Administrative Region Establishment Day, July 2nd; Mid-Autumn Festival, October 1st; China's National Day, October 2nd; Chung Yeung Festival, October 23rd; Christmas, December 25th-26th

March 06, 2012