Ups and Downs of the Hong Kong Economy PDF

# Ups and downs of the Hong Kong economy ## Introductory Question What are the characteristics of the Hong Kong economy? What reflects the performance of the Hong Kong economy? ## A Open and highly externally-oriented economy of Hong Kong The Hong Kong economy is open and highly externally-orien...

# Ups and downs of the Hong Kong economy ## Introductory Question What are the characteristics of the Hong Kong economy? What reflects the performance of the Hong Kong economy? ## A Open and highly externally-oriented economy of Hong Kong The Hong Kong economy is open and highly externally-oriented. Hong Kong has always been having frequent business activities with the rest of the world. Businessmen from all around the world invest in Hong Kong. Therefore, the Hong Kong economy is easily affected by economic ups and downs in other parts of the world. ### Comparison between Hong Kong's total external trade and GDP in recent years | Year | Total external trade (ml HKD) | GDP (ml HKD) | |---|---|---| | 2003 | 12,567 | 18,154 | | 2004 | 17,763 | 18,502 | | 2005 | 20,371 | 21,383 | | 2006 | 22,900 | 23,982 | | 2007 | 28,361 | 26,504 | | 2008 | 30,000 | 28,667 | | 2009 | 24,004 | 24,004 | | 2010 | 28,361 | 29,467 | | 2011 | 58,084 | 30,504 | | 2012 | 71,018 | 31,457 | | 2013 | 75,204 | 32,514 | | 2014 | 75,517 | 33,487 | | 2015 | 82,325 | 35,000 | | 2016 | 73,460 | 36,500 | | 2017 | 83,992 | 37,000 | | 2018 | 84,041 | 38,000 | | 2019 | 81,790 | 39,000 | _Source: Hong Kong Census and Statistics Department_ ## B Indicators of the economic performance of Hong Kong ### 1 Gross Domestic Product (GDP) The gross domestic product (GDP) of a region refers to the total market value of goods and services produced by the economic activities within its territory in a given period (usually a year). A growing GDP usually reflects good economic performance, while a declining GDP usually reflects poor economic performance. ### 2 Per Capita GDP Per capita GDP refers to the GDP calculated based on population. It is calculated by the following formula: $$Per\ capita\ GDP = \dfrac{GDP}{Total\ population}$$ ### Year-on-year percentage changes of per capita GDP of Hong Kong. 1997-2019 _Source: Hong Kong Census and Statistics Department_ ### 3 Unemployment rate Unemployment rate refers to the percentage of unemployed population in the labour force. When the economic performance is good, the unemployment rate tends to drop. On the contrary, when the economic performance is poor, the unemployment rate tends to rise. The unemployment rate is calculated by the following formula: $$Unemployment\ rate = \dfrac{Unemployed\ population}{Labour\ force} \times 100\%$$ ### Identify the changes in Hong Kong's unemployment rate from 1997 to 2019 with reference to the source above. | Period | Change (rising/falling) | |---|---| | 1997-1999 | rising/falling | | 1999-2000 | rising/falling | | 2000-2003 | rising/falling | | 2003-2008 | rising/falling | | 2008-2009 | rising/falling | | 2009-2019 | rising/falling | ### Describe Hong Kong's unemployment trend from 1997 to 2019. The unemployment rate in Hong Kong experienced ups and downs. It increased substantially in 1997 and reached a high level in 1999. Subsequently it rose to a historical high level in 2003 and then steadily declined. In 2001, it increased again and then dropped. From 2011 to 2019, it remained relatively low and stable. ### Describe the economic situation of Hong Kong from 1997 to 2019 according to the unemployment statistics above. The unemployment rate refers to the proportion of the employed population to the labor force. From the statistics we can see that Hong Kong's economic situation remained very volatile. Sometimes the economy continued to improve, but sometimes it rapidly slowed down, causing ups and downs in economic development. ### 4 Average wage Average wage refers to the amount of money obtained by dividing the total wage paid to all employees by the total employed population. As it includes the extra bonus received by employees, it can reflect the economic situation of a region. In general, when the economy is performing well, the average wage tends to increase. However, when the economy is performing poorly, the average wage tends to decrease. $$Average\ wage = \dfrac{Total\ wage\ paid\ to\ all\ employees}{Employed\ population}$$ ## C Events that caused economic fluctuations in Hong Kong Since Hong Kong's economy is highly open and externally-oriented, any event in the Mainland and overseas will inevitably have a great impact on Hong Kong's economy. This has led to the changes and trends shown in the economic statistics above. ### 1 Asian Financial Turmoil In July 1997, the Asian Financial Turmoil first took place in Thailand. The currencies of Thailand and other Asian countries slumped in a short period of time. This led to a widespread economic meltdown in Asia. After the outbreak of the Asian Financial Turmoil, Hong Kong's economy suffered enormously. The real estate market and stock market crashed. As a result, many properties fell into negative equity, the unemployment rate rose, and the HKSAR government had a fiscal deficit. ### 2 Burst of dot-com bubble in the US In the late 1990s, there was an investment boom in telecommunication and internet-related businesses in the US and around the world. This was known as the dot-com bubble. The stock prices of dot-com companies in Hong Kong also rose rapidly. In 2000, many US dot-com companies went bankrupt. This led to the burst of dot-com bubbles. Hong Kong was also negatively affected by the burst of US dot-com bubbles. The stock prices of certain dot-com companies in Hong Kong fell as much as 90%. ### 3 911 Incident On 11 September 2001, a series of terrorist attacks against the US were launched. This was known as the 911 Incident, in which 2,988 people were killed and the World Trade Center complex was completely destroyed. The US was Hong Kong's second largest export market. After the 911 Incident, Hong Kong's total exports to the US dropped significantly and Hong Kong's entrepot trade was badly affected. At the same time, Hong Kong's tourism, catering, and retail industries suffered a serious blow. As a result, Hong Kong's economy was severely hit and the unemployment rate continued to rise. ### 4 Signing of the Mainland and Hong Kong Closer Economic Partnership Arrangement In 2003, the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) was signed between the Mainland and Hong Kong. CEPA not only eliminates economic and trade barriers between the Mainland and Hong Kong but also facilitates investment to achieve mutually beneficial goals. This has greatly promoted the overall economic development of Hong Kong. ### 5 Global Financial Tsunami In the second half of 2008, several large financial institutions in the US experienced financial difficulties and even went bankrupt. This led to the Global Financial Tsunami that swept the world. The trend of large-scale capital withdrawal in financial markets led to the immediate collapse of global stock markets. Many Hong Kong investors suffered huge losses, and property prices fell sharply. In addition, during the wave of company closures, about 3,500 Hong Kong enterprises with factories in the Pearl River Delta region went out of business. From 2008 to 2009, Hong Kong faced an economic recession. Its GDP had a significant decline and the unemployment rate continued to rise. Due to the further economic co-operation between the Mainland and Hong Kong, Hong Kong's economy recovered gradually in 2010. Hong Kong's GDP rose again and the unemployment rate decreased. At the same time, the real estate market and stock market also continued to grow. This resulted in the gradual improvement of the economic situation. ## D Role of the HKSAR Government in stabilising and developing the economy ### 1 Role of the HKSAR Government in stabilising the economy #### 1.1 Maintaining a sound political system and legal system The implementation of the "one country, two systems" under the Basic Law ensures that Hong Kong enjoys a high degree of autonomy. Moreover, Hong Kong possesses a mature and sound legal system. Therefore, the HKSAR government is one of the world's most corruption-free governments. Besides, Hong Kong adopts a policy of free trade with a simple tax system to create an excellent business environment. In order to remain competitive in the world, the government makes efforts to maintain Hong Kong's political and legal advantages. #### 1.2 Maintaining the stability of financial market As an international financial centre, the stability of Hong Kong's financial market is very important. In 1998, during the Asian Financial Turmoil, the stock market of Hong Kong was attacked by international speculators. The government used a huge amount of reserves to buy local stocks as a means of intervention. Eventually, the speculators retreated after heavy losses. The stability of the financial market and Hong Kong's economy was successfully restored. #### 1.3 Properly allocating social resources In recent years, Hong Kong's economy has been fluctuating and the lives of citizens have been inevitably affected. As a result, people have higher expectations of the government. When implementing policies, the government should balance the interests of every party and allocate the social resources well. This helps stabilize Hong Kong's economy. #### 1.4 Relieving people's hardship The government should care about the interests of vulnerable groups and monitor the prices of daily necessities. It should also provide timely financial assistance to people in need. In this way, Hong Kong's social and economic development can remain stable. ### 2 Role of the HKSAR Government in developing the economy #### 2.1 Developing infrastructure and assisting different industries Good infrastructure can not only improve people's quality of life, but also create a perfect platform for business investment. The opening of Hong Kong International Airport enhances the quality of passenger and cargo services. Moreover, the establishment of various exhibition venues provides a high-quality business environment to enterprises. Besides, the government allocates appropriate resources to various industries, such as high-tech industries, to enhance their competitiveness. This will help promote Hong Kong's economic development. #### 2.2 Providing universal education Human resources are an important pillar of Hong Kong's economic development. Therefore, the government continues to increase the spending on education. It also increases the number of student places provided by tertiary institutions to train more professionals and talents for the creative industries. This encourages the development of knowledge economies in Hong Kong. #### 2.3 Attracting talents Hong Kong is gradually developing into a knowledge economy. In order to learn the advantages of other countries, Hong Kong must introduce foreign talents. Moreover, the admission of talents can raise the overall quality of local labor force. This helps enhance the competitiveness of Hong Kong and sustain its economic development. #### 2.4 Strengthening co-operation with the Mainland The government should actively co-operate with the Mainland. The government can make use of the advantages of Hong Kong and the Pearl River Delta in manufacturing and service industry to encourage the development of high value-added industries. This can help Hong Kong maintain its position and competitiveness in the world economy. ## E Advantages and disadvantages of government intervention in the economy ### 1 Advantages of government intervention in the economy #### 1.1 Stabilising the market Hong Kong enjoys a highly open market economy. When Hong Kong faces economic recession due to external factors, the government can take measures to stabilize the economy. For example, creating more jobs and providing more public services will help promote economic recovery. #### 1.2 Relieving people's hardship The government has the responsibility to concern and improve the lives of grass-roots people. To protect the interests of grass-roots people, the government needs to intervene in the operation of the market at appropriate times. Thus, Hong Kong's social and economic development can be stabilized. #### 1.3 Enhancing Hong Kong's competitiveness In the face of competition from around the world, the government can invest in basic infrastructure and provide R&D allowance to foster the growth and development of domestic industries. This can increase the competitiveness of Hong Kong in the global market. ### 2 Disadvantages of government intervention in the economy #### 2.1 Affecting foreign investment The free market policy adopted by the government has always been a major factor in attracting foreign investment. Therefore, the intervention in economic activities by the government tends to undermine the confidence of foreign investors. This may affect the economic development of Hong Kong. #### 2.2 Probably causing other economic problems While government intervention may benefit some people, it can at the same time harm the interests of other people. For example, providing financial aid to certain industries to support their development causes unfairness to those industries which are not subsidized. Another example is the implementation of statutory minimum wage. Although it protects the wages of grass-roots workers, it raises the business costs of some corporations. The corporations may then pass on the additional costs to consumers, thereby affecting their daily lives through price inflation. #### 2.3 The government may make mistakes in policy-making Hong Kong has been adopting a free market economy. Therefore, any government intervention in the market will undermine the original market balance of supply and demand and affect economic development. In 1997, when the property prices repeatedly hit record highs, the government proposed to build at least 85,000 housing units every year in order to meet the demand for housing. However, the outbreak of the Asian Financial Turmoil led to a sharp fall in property prices. Moreover, the policy of building 85,000 housing units weakened the public's desire to buy properties, and accelerated the collapse of the property market. The property prices did not rise again until 2003. This dealt a heavy blow to Hong Kong's economic development.