|
June, 1999
Introduction
Hong Kong's open economy and laissez faire government have long been held up as a role model for the world. Over and again, players have reacted to market trends with great flexibility and assertiveness, producing an economy that restructures itself with great success.
Today, once again, restructuring is badly needed. For more than a decade, a property boom boosted the Hong Kong economy, and also lifted rents and wages to levels that now undermine Hong Kong's competitiveness as a financial and service hub. Even though prices and wages have been adjusting downwards since late 1997 through deflation and unemployment, much of the process has been delayed or dampened for political reasons. Moreover, the Asian crisis has led to deregulation of foreign investment in other Asian economies, enhancing their appeal to overseas capital.
Hong Kong is now at a turning point. It can either upgrade its productivity by improving its use of technology in producing value added services, or explore new economic opportunities, such as, Disneyland, the developments of Cyberport, Chinese medicine centre, and biotechnology, etc. This raises the question of which direction should the Hong Kong economy be heading in the next millennium?
The Nature of the Hong Kong Economy
Since China adopted its open-door policy in the late 1970s, Hong Kong had successfully transformed itself from a manufacturing-based economy to a services-based one. In particular, it has developed as an entrepot, handling trade flows between China and the world. This led to 15 years of double-digit re-export growth between 1980 and 1995. At the same time, China's and overseas demands for Hong Kong's other services have increased, with the services sector expanding from 67.5 percent of GDP in 1980 to 85.2 percent in 1997. On the other hand, Hong Kong has developed into an international financial centre, serving as a gateway for investment in the Mainland. Market capitalization of Chinese enterprises listed in the Stock Exchange of Hong Kong, including H-share companies and red-chips, amounted to about HK$160 billion by the end of 1998.
Despite this great change, the Hong Kong economy must continue to transform itself, in order to sustain healthy growth. The Asian crisis has exposed Hong Kong's high costs, while China's continued opening up to the world is bound to diminish the SAR's "gateway" status. It is not surprising that the Government wants Hong Kong to increase the value of its services output through the application of information technology.
New Worldwide Mode of Business
Advances in information technology are revolutionizing global communications by making them easier and cheaper. With Internet being the super-highway, information being the traffic, and the information carrying software being the vehicle, computers at various corners of the world formed a web of society by connecting to the Internet. This is the cyberspace which will have immense impact on the world economy.
The cyber-economy is in the making and its growth has been exponential. According to the latest market research from various sources, the number of people using the World Wide Web is estimated to have grown from 14.5 million in 1995 to about 100 million by the end of 1998, and is expected to increase to 320 million by 2002. World-wide electronic commerce (e-commerce) is forecast to reach between US$1.4 trillion and US$3.2 trillion by the year 2003, equivalent to about 5 percent of global sales.
Although the full impact of these developments remains to be seen, there are significant implications for market efficiency and globalization. The Internet gives big and small companies equal access to the world market, making information on the availability and prices of goods and services ready for millions of people all over the world. The huge increase in market information will intensify competition worldwide, making e-commerce an example of true globalization.
The availability of cyberspace is set to change how businesses are done globally. Physical proximity to business counterparties is no longer essential. Buyers and vendors will easily locate each other and make contact in a matter of seconds through the cyberspace. As communications are more direct, the negotiation time as well as the time requires to strike deals will inevitably be shortened. This may reduce the importance of middleman, which would have profound implications for the Hong Kong economy.
Implications for the Hong Kong Economy
As the global trend of cyber-economy is already in the making, it is up to Hong Kong to embrace the information technology. If Hong Kong is to continue with its role as a traditional hub, in which many middleman functions are performed, it could see cyberspace as a threat. However, with long experience of putting free flows of information and internationalization to good use, Hong Kong should see itself uniquely positioned to develop a cyber-economy which could strengthen its hubs' development.
First, Hong Kong's international connection will be reinforced as a result of the application of the Internet. In the past, Hong Kong manufacturers have developed their network of factories in China and various part of Southeast Asia due to cheap factor costs. Moreover, due to Hong Kong's efficient infrastructural and communications systems, many manufacturers maintained their local headquarters here, providing service supports, such as financial arrangement, product design, and marketing, etc. The end products are then re-exported through Hong Kong to other parts of the world. In this era of Information Revolution, the inexpensive and often real time communications will strengthen global connections. Hong Kong's headquarters will be able to monitor, distribute, co-ordinate and collaborate various overseas production processes through the Internet. This should shorten the delivery time of products and services, making inventory more manageable and reducing costs and risks. Production can also be tailor-made and in smaller lots. As a result, competitiveness is improved through higher quality and efficient operation. Along with these developments, Hong Kong will gradually find itself developing its entrepot on the cyberspace, where information will be the import, export, and re-export goods, and Hong Kong will be a hub which processes all this information.
Second, Hong Kong's international financial centre will similarly find an exciting future in the cyberspace. Electronic-brokers (e-brokers) will allow real-time stocks trading and settlement worldwide, offering companies a wider potential investor base and more liquid financial markets. In time, a full range of retail financial products should be available on-line. With no capital controls or other impediments, Hong Kong is well-positioned to lead such developments in Asia.
Internet banking is emerging as a rival to branches and automatic teller machines, with some larger banks in Asia already providing most traditional services on-line. These include product inquiry and placement, status inquiry, payments, etc. Internet banking is expected to gain popularity since it eliminates the human interface in many routine banking transactions, which thus enhance efficiency and reduce costs. In the foreseeable future, competition for quality of service will stem from banks' ability to provide tailor-made banking services that match clients' needs.
Third, Hong Kong also has great potential to take the lead in Asia in terms of e-commerce. Its people are keen on new technology, and its high-density residential buildings make wide bandwidth cable connections easier and cheaper to install. Already, multinational corporations are using Hong Kong as a testing ground for new information technology products.
In all, Hong Kong will continue its development as a regional service and international financial hubs in the cyberspace. Nevertheless, one crucial factor for such development is pricing. The Government should encourage further deregulation of telecommunications, that brings wider bandwidth services at less cost.
Restructuring Hong Kong
Hong Kong's openness, free information flows and physical infrastructure all contribute towards an environment favourable to the development of a cyber-economy. However, the success of such development requires the availability of the social infrastructures. These include: an education system capable of producing technologically qualified people; legal protection for intellectual property; security systems for e-commerce; and a financial market that supports new technology development.
This raises the question of whether the Government's traditional laissez faire policy is still appropriate. As the global trend of cyber-economy is already in place, what Government should do is to formulate policies that prepare people for such development.
The Education System
The historic trend from manufacturing to increasingly high value added services relies on a parallel trend of a rising quality of human resources. This is especially true in the Age of Information Revolution, with innovation and technology advancing rapidly. The implication is that Hong Kong needs a population of people who can think analytically and creatively, and are adept at self-teaching and lifelong learning.
In these respects, the Government should take a pro-active stance. First, they could provide more grants for university research. Second, they should ensure school curriculums are up-to-date, and teachers' quality will meet new requirements. A variety of government-supported training opportunities should be provided to teachers. The Education and Manpower Bureau should host regular discussion meetings among parents, teachers, and businessmen to explore new perspective on how students learn. In all, the education system should be restructured in order to prepare the next generation for the ever-changing cyber-world.
Protection of Intellectual Property
The most valuable assets in cyber-economic activities are original ideas that are stored and applied in easily replicated digital forms. Piracy of such material is often technically easy, depriving financial backers and developers of new products of their rightful rewards, and thus of the incentive to operate. This is particularly risky for the industry in Hong Kong, where piracy of intellectual property remains common and is widely accepted among the population.
In this respect, the Government should not have any hesitation in inter-departmental cooperation in cracking down piracy. Legislation should be adapted to e-commerce as well as litigation of on-line crimes. On the other hand, the public should be taught to respect copyright.
E-commerce Security
For e-commerce to become popular, a well developed security system as well as Government's regulations are necessary to protect business transactions done in the cyberspace. There are two types of security methods currently developed: 1) hardware identity, and 2) use of encryption key1. In order to complete business transactions on the Internet, one must give his encryption key, and the hardware identity is also automatically recorded. In case of the encryption key being stolen, the hardware manufacturers can still easily identify the terminal which has violated the law.
However, all these security protections are provided by private sectors. It is more important for the Government to regulate e-commerce security methods. The SAR Government will need to examine security systems not only to ensure that they protect e-commerce parties, but to make certain that the systems are in accordance with the requirements of Hong Kong's Privacy Act and other legislation.
A Financial Market for Cyberspace Companies
In the US, NASDAQ provides a source of capital for new high-technology businesses, and the proposed Second Board market in the Stock Exchange of Hong Kong will serve this purpose when it opens next year. However, it is very likely that Hong Kong underwriters may ask for an unfavourably low P/E ratio in listing cyberspace companies, as these companies usually have difficulties to show profit in short to medium-term. To make fund raising easier for these companies in the financial market, the Stock Exchange could adopt flexible regulations - for example, exempting them from the lowest profit requirement, and underwriting arrangement, etc.
Other Policy Implications
Although the volume of e-commerce is still small, it has enormous potential to reduce transaction costs and increase productivity and efficiency. It is therefore the perfect-sounding activity for a high-cost services centre like Hong Kong. However, there are relatively few signs that Hong Kong entrepreneurs and investors are eager to enter the field, which - compared with booming property or stock markets - is complex and risky.
More debate is needed on what role the Government should play. The Government itself could make more use of e-commerce in its dealings with the public (for example, on-line inquiries, payment of taxes and fees, issuance of licences, purchasing of supplies and so on). The US Government has designated US$200 billion per year for purchases through e-commerce. The SAR Government may need to establish dedicated channels through which to share ideas with e-commerce developers, end-users, and corporations in order to learn more about this new type of economic activity. It may also need to adopt a more pro-active stance in attracting high-tech professionals to come to work in Hong Kong.
Conclusion
The Hong Kong economy is once again at a turning point, and information technology offers an attractive way for the Territory to upgrade its value of the services it sells to the world market. As such, Hong Kong should adhere to the application of information technology to enhance its hubs' position. In addition to the international financial centre and regional service hub, Hong Kong is actually capable of becoming a cyber-hub. However, the social infrastructure must be developed first in order for the cyber-economy to become a success.
Chart 1: Employment
The seasonally adjusted unemployment rate rose to 6.3 percent in the three months to April. Employment conditions in the wholesale/retail trades and restaurants remained depressed. However, the construction and transport sectors appeared to be recovering, with their unemployment rates decreasing. The unemployment rate is likely to stabilize in the second half of the year, when the economy is expected to bottom out.
Chart 2: Inflation
Deflation intensified in April. The composite price index and CPI(A) dropped by 3.8 percent and 3.3 percent respectively. The fall is recorded across the board. This is a result of the contraction of domestic demand, and the trend will continue as unemployment rates reach new highs.
Chart 3: Retail Sales
Retail sales fell by an annual average of 12.9 percent in value and 9.3 percent in volume terms during the first quarter of 1999. Retailers continued to cut prices, which helped sales volume. A recent survey showed that consumers' economic confidence is recovering, and retail sales are expected to improve moderately.
Chart 4: Orders-On-Hand
The value of manufacturers' orders-on-hand declined an annualized average of 19.3 percent during the first quarter of 1999. The negative effects of the relatively strong HK Dollar continued to be the main factor adversely affecting overseas demand for the Territory's products. In any event, the value of manufacturers' orders-on-hand is unlikely to recover in the short-term.
Chart 5: External Trade
The total merchandise trade deficit shrank to HKD12.9 billion in the first quarter of 1999, down from HKD32.6 billion during the same period of last year. Sluggish domestic demand caused imports to fall by 13.8 percent year-on-year, while exports declined at a slower pace of 9.0 percent over the same period. Overseas demand for the Territory's exports is likely to remain slow, while domestic demand is likely to recover moderately. The total merchandise trade deficit may widen moderately in the medium-term.
Chart 6: Deposits
Growth of HKD deposits moderated to 9.7 percent in March, compared with 10.8 percent in January. The moderation may be due to the easing of the deposit rates. We believe that deposit growth will remain steady in 1999.
Chart 7: Loans and Advances
The falling trend of the total loans continues. Total loans and advances dropped by 18.1 percent in March, but this is nevertheless a slight improvement from the 21.3 percent decrease in January. Domestic loans contracted further. As economic conditions continue to be difficult in the coming months, banks will remain cautious in their lending. And the current contraction of loans and advances is likely to continue.
Chart 8: Effective Exchange Rate Indices
The annual change in the trade-weighted effective exchange rate index improved to -1.5 percent in March from -5.3 percent in January. As US interest rate trend is likely to turn upward, the US Dollar and the Hong Kong Dollar will probably strengthen in the coming months. | 
