RESTRICTED FILE CWY Report No. AS-125a Thi repnort was prepared for utp within the Bank and its affilinted ranniations They do not accept responsibility for its accuracy or completeness. The report may notbe nablihed nnr mnv it be mintped nc rpnrpcantinn thpir vi,we INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC SITUATION AND PROSPECTS OF HOLJNG KOJNGr SeArn--e 1-5 4,0 7 CURRENCY EQUIVALENTS US $1. 00 = HK $5. 714 HK $1 000 U. S. $0.175 HK $1, 000, 000 = U.S. $175, 000 PREFACE This report is based on the findings of an economic mission, consisting of Messrs. C.J.A. Jansen and Mark Cherniavsky, which visited HonR Kong in November 1966. It was completed before political dis- turbances broke out in Hong Kong in May 1967, and no attempt has been made to change the conclusions in the light of these developments. However, information which hi rpepntly become available suprests that,as seen at the end of July, the immediate effects of these disorders on Hono Konp's economic sitantion have hppin qmn1.- Tndi.trinT nroduction and exports continued throughout July at substantially higher levels thnn in the nrevious ynrP_ Trade with Mainland China has dronned And some diversion of re-export trade has occurred; however, tourist receipts o not seem tn have hen seriously affeted hvring the nn+.hs of May and June the public withdrew substantial amounts from bank deposits but +1io~A A r d e%+- n-n+C C'nA4 I Mf-f-i g'il+-in fnv,. I1- 1%nnlro- F.'hh . ga r in n fairly liquid position at the time. Moreover, most of the money so withdraen seem- to have been converted into Hong Kong currency an+ta while actual capital outflow apparently was small. It appears that with- dr awal of deposits mioeA Any.m in Tul -h IAwa.e n Tlhe+ andverrnm en+ revenue has so far been small. It is yet too early to assess whether and to what extent the 14ovurvauceo lave affctvo ed4ue " __a&-um P__puv -.AuI _rowP v4 un '000UOL. U L±U U ULL LOLJU1L111 UOHV L.L L W. UZL economy. TABLE OF CONTENTS Page No. BASIC DATA *.........*............ . ...............0.............. SUMMARY AND CONCIUSIONS ...................................... i I. BACKGROUND ................................................ 1 TT. ECONOMTC EXPANSTON IN RECENT Y.ARS--------------------------- Nynan,inncz nf Prey-nnynin fl'rr.1+.h- -- -- ------------- Employment, Wages and Productivity ................... Manuf.c+..in. ........ . .......... - Tourism .............................................. 8 Transportation and Utilities ......................... 10 III. BALANCE OF PAYMENTS AND FOREIGN TRADE ..................... 11 Introduction .............................. 11 .unports....................................... 12 Domestic Exports .................................. 14 IV. MONEY AND BANKING ................. ..... .............. ..... 16 Introduction ....................... 16 Monetary Developments ............................ 16 Banking ......................... 17 V. PUBLIC FINANCE ......................... o... ........... 19 VI. PROSPECTS ................................. *............... 22 Growth Prospects of the Main Sectors ................. 22 Requirements of Economic Growth ...................... 25 The Outlook for Public Finance ....................... 27 APPENDIX ON NATIONAL ACCOUNTS AND BALANCE OF PAYMENTS ........... STATISTICAL APPENDIX .................. ......... .. MAP ...................................... .............. e*..... PASTr. nATA (FY 1966 = 1 AnrI 19A - 31 March 1967) Population:. V-; A'4 -- n A 1, 7 -,411*-nl (1964-66) 1.9% per year .Fu '-Ui -L] uUt lt.U~Y kPt'r sq. Ju-J-j 79 4U rolitical status: r]iish Crown Colony Gross National Product: (Rough estimates) 1965, at market prices HK$11 billion Rate of growth, current prices Average 1960-65 14.2% 1965 13.9% Per capita GNP, 1965 about US$500 Growth rate 1960-65, real terms about 12% Gross Domestic Product: (Rough estimates) 1965, at market prices about HKll billion Average 1963/65 at factor cost about HK$9 billion Rough estimate of industrial origin: Agriculture, forestry, fishing 2% Manufacturing 33% Construction 8% Transportation and utilities 7% Other services 49% Per cent of GDP at current market prices: 1965 196o-65 (Rough estimates) Gross investment 29 27 Gross savings 20 12 Import surolus of goods and services 9 15 Government revenue 14.5 15.5 Rouznghn ann n3 nr ron+2 n invaa+mants IOA 0 (Rough estimate) 32 55 Money and credit (million HK$): Annual Rate of Change 1965 196o-65 Money supply 3,947 12.7% Bank credit to private sector 5,525 25% uoverrnient saving Capital expenditure 726 uverall deficit Public debt US4 million): March 196 Narch 1960 Debt outstanding 3.0 17l Fi 1966 TY 1900 Annual debt service 1.0 0.5 Debt service ratio (as % of export earnings) 0.8% 0.7% Balance of payments (US$ million): Annual Rate of Change 1965 1960-65 Exports, f.o.b. 879.7 11.9% Re-export, f.o.b. 263.0 7.0% Total exports, f.o.b. 1,142.8 10.6% Imports, f.o.b. 1,451.3 8.9% Trade balance -308.5 3.5% Net invisibles (rough estimate) 130.0 5.9% Balance on goods and services (rough est.) -178.5 1.9% Commodity concentration of domestic 1966 exports (textiles and garments) -32 High degree of diversifi- cation within textileq and garments .AntnrA_ September 1966 December 1960 Gross foreign exchange reserves NuS$ n1rv' ARA L AA0 (or 6 months' (or 5 months .LLJ±er~LULi noIe a belrne uv I;.& VI±L JAUl1L L.Lluux- I UL jts.titj ulu(d uj w . LI L "- Ql %tlCr L*L.7 % disbursements Grant aid ircm U.N* (refugee ad) and U.K. 0.3 IBRD and IDA operations: None. 1. The economic expansion of Hong Kong during the 96o's has been very impressive. The overall growth rate in real terms has been around 12-14 per cent a year. With this growth rate Hong Kong has been able to absorb an enormous influx of population from the mainland and still in- crease per capita income, virtually eliminate unemployment and greatly improve housing conditions. Population has gone up from about 1.7 million in 1950 to 3.8 million today.. Yet per capita GNP has risen to a level of over US$500 compared with probably US$200-250 in the early 1950's. In spite of an uneven income distribution, the standard of living of the broad mass of the population has improved visibly and the appalling poverty of the immediate post-war years has disappeared. There is no longer an unemployment problem. The housing shortage has been alleviated by a large volume of housing construction in the public and private - sectors. Another serious deficiency, the water shortage, has been over- come by the construction of fresh water reservoirs and an agreement with China for the provision of water. With some of its pressing problems thus solved or at least diminished, Hong Kong has attained a certain amount of prosperity. 2. Industrialization has dominated post-war economic development. After the communist take-over on the Mainland entrepot exports to China came to an end, but with the larze influx of refugee labor and managerial talent and Hong Kong's extensive commercial and financial connections abroad. industrial nroduction chipflv for exnorts. started to exPand rapidly. It was accelerated by the qualities of Hong Kong's entrepreneurs and the Inae highly literate labor force- willing to work hard and for wages that are low in comparison with those in the industrial countries of the Wet. Aln of heln warp +hp Pffininnny and o1nd financial nolicies of the government, low taxes, and freedom from business and financial 3 TWhen inAiatvin1 eAs=vl,ament a+.nrA mf+. nAic+.yjn1 i t.q were imported. Now, however, a large and growing proportion of semi-manufactures is produced jin U^ong Kong e T hermj +_ki ntiu increaseQ In the1C proportion of domestic value added per export dollar. Simultaneously V1Lr_&=~ LC&O UUVIJ CL DW4V UV%,44 L.LW11II J.JWWUL S.LL%C; ~ LLJMA tAO VU pr d c UJ IJU'.V ., sophisticated higher value products and a growing diversification over L ~L A leent re p tr a o. UL I L .J±rghtU LI UU 0 L L c.L JJI - V LA L kL V1 14 *7 VUI VuAlte fuJl JiIIAI.L kAU.U V1j_LU - t,.L'LJtijJU1'Vj UU1JOU'LU .LVJj Ulclut=jp other services - followed suit. Tourism and the entrepot trade, however made iuepenUent conributions to the growtn of the economy. Ajbtuougu entrepot trade has grown more slowly than domestic exports and has not regained its pre-war importance, its total value (uE3zu million in 1966) is considerable. Tourist expansion has been spectacular due to the attraction of Hong Kong's duty-free shopping and beautiful setting. - 11 - v-L.urs now number aou nal a millon a year. At timeS tne grOwull of the economy has been accompanied by speculative overtones, especially in construction. Residential and commercial uilding and the construction of transportation and power projects and fresh water reservoirs reached a peak in 1963-1964. After financial difficulties early in 19>, the building boom cooled down. 5. The success of Hong Kong's industrialization and export expansion is shown by the growth of domestic exports (over US$1 billion a year) at a much more rapid rate than world trade. Most exports go to the developed world and in fact Hong Kong is the leading developing country in supplying the developed world with labor-intensive manufactures, i.e. those industrial commodities in which less developed countries may have a comparative advantage. In this respect it is far ahead of such a large country as India. Hong Kong's entrepreneurs have shown remarkable ingenuity in finding new opportunities for effective competition and thus kept up the thrust of export expansion in spite of rising wages, increased competition and restrictive import practices abroad. 6. The industrialization of Hong Kong is not guided by any master plan or policies of tax exemptions, tariff protection, low-interest loans or other subsidies. Government encouragement has been indirect and largely non-selective: low business taxes; efficient negotiations of quota restrictions with foreign governments; establishment of a trade promotion center; efficient certification of the non-communist origin of Hong Kong products. And in the background, of course, there have been all along the major elements which have kept up confidence in the Hong Kong scene: the Colony's strong reserve position, sound financial and monetary policies, generally adequate expansion of infra-structure facilities by the govern- ment and the public utilities companies. 7. The develonment of the economy would not have been possible with- out foreign resources. Just after the war Hong Kong was impoverished. A large inflow of foreign capital helped to set the industrialization process going. In later years, capital inflows have continued to play an important role. Much of it has stemmed from Chinese political and economic misfortunes elsewhere in South East Asia. Part is in the form of medium-term inpnlip.rql nrPr3it. and irnt invoqtments from othtr qonrens. In recent years the current account deficit which used to be as much as 20 per cent. of MP has beepn decnlining andi t.he inflow& of out.rs rP.minP.q although still considerable is thus becoming smaller. 8. The future of the economy depends in the first place on develop- men ts in t1he major export mW"kets and thne continued '- * abiit --i TT-" V- " I businessmen and labor force to produce light industrial export products to the developed world is still quite small, it is likely that Hong Kong's exportslJ will continLue~ tA) grow fLaster thanJU total imports of the LdeUveloped - 111 - countries. If the rapid expansion fo world trade is kept up, Hong Kong's future growth rate may not be much less than the 13 to 15 per cent of recent years. A world trade slowdown would of course adversely affect Hong Kong's rate of progress. 9. Future growth requires a shift in the industrial structure from rather small-scale, family-directed operations to bigger production units. This shift would be facilitated by improvement of technical and commercial education, the establishment of a long-term credit institution and certain infra-structure investments. The domestic savings rate has risen in recent years, but it is almost certain that a sizable inflow of foreign resources will continue to be needed. Most of this money will have to come from private sources and Hong Kong should therefore be careful to preserve its attractive investment climate. There is always of course some atmosphere of uncertainty about Mainland China, but Hong Kong has managed to thrive in spite of this and, barring major political changes, should continue to do so. 10. The Hong Kong government faces no serious financial problem in the immediate future. The budaet for 1967/68, which is based on conservative revenue estimates, shows a minor deficit. However, as often in the past, the outturn may well be a modest overall surplus. The outlook for the longer-term depends on economic developments in Hong Kong and its maior export markets qnd on the level of the Lovernment's development spending (including certain current expenditures such as for P_nchtion). Tf ecnnomic conditions wprp to hPnroma lp. fn-vorqhIf wnd if government at the same time felt that, in the interest of future develop- ment, ahig'herleeofpbiexedtrweencsay(smyeth case), larger deficits might occur. Under adverse economic conditions the would be limited and in that case government might need to borrow from L)U ~ ~ ~ li Lt=~OJ± ~ 1t~)VtL1IIL U Id Ui± J L L_LiLJL Jk,L<_ DU tLIi r i ULLU borrow in foreign capital markets, but success of possible borrowing effort wold ofcors, -l- depend on wbetl d-1-k 4-l, iA44-4- ^-P 4 +11 markets had meanwhile improved. With a very low level of present debt _. V Ni 0.L CZJ" CA 0. j,LrIL _L ~ .L 'JJ iw - -~ FL'A '51 i .4V,Li ~1* 4 a earnings, Hong Kong has ample creditworthiness for borrowing on conventional Chrina. Any analns the Cori .L PO.LLULL Ulh thUrbance uareatee Uf i tlh ndite China, any Bank loans to the Colony would have the guarantee of the United "Y. ___ ftiliguVII. T 1:1A r.Vr()l~TTT 'I1, Tj-"" yn~(,11S1?rf ,,,W-mv i - a n-n +-)~ I- ~ -, (rq of China, 100 miles south of the Tropic of Cancer. The territory covers concentrated on the highly urbanized Hong Kong Island and Kowloon peninsula acquired on a 99-year lease expiring in 1998 account for the bulk of the lan' area.* They are motl use~ for agricuAlture and ar less denselyr populated. Except for its natural harbor, location on commercial routes, -u uex eauty, ong Kung nas few natura" rescso. n7---anxa a ceni bL.L Q~ L I AVil fl I RA ~11 LtW L,.LUU ~ 0 U L LILJ%.JWLJ '.SL a. resources are small, much of the land is too hilly for cultivation and ince there is hardly any riatural water usurage tJU 1C.LLJ.LU.LL e. s u2 , there is a continuous problem of providing sufficient water for the needs of the population and industry. 2. Hong Kong was acquired by Britain to serve as a foothold in her trade with China. In order to encourage the entrepot trade Hong Kong was given free port status and economic activity was from the beginning subject to a minimum of government regulation. By the end of the 1930's Hong Kong had become an important port with a diversified entrepot trade. Banking and commercial activities were highly developed and had a marked interna- tional orientation. 3. The second world war and the communist take-over on China's mainland marked the beginning of a re-orientation of Hong Kong's economy. The U.N. embargo on exports to 1ainland China in 1951 was a blow to the entrqoot trade trade and led to a sharp recession. Meanwhile, however, manu- facturing activity had started to expand under the impetus of refugee capital and managerial talent from mainland China and a tremendous influx of labor. During the 1950's and 1960's industry has become the dominant factor in Hong Kong's economic growth instead of the entrepot trade which did not regain its pre-war importance. A measure of the pace of the economic expansion is that, despite the continuation of immigration after 1950, unemployment has disappeared. Although population more than doubled since 1950,per capita GNP has risen to about US$500. It was probably only US$200-250 in the early 1950's. Except for the major cities of Japan. Sinpapore is the only Asian city with a comparable standard of living. Income distribution is uneven, but even in the lower income groups the appalling poverty of the immediate post war years has disappeared. 1. The oreanization of the Government of Hong Kong has remained practically unchanged since the war. There is no elective office or franchise. The Colony is administered by a Governor, appointed by the British Crown, who acts with the advice and assistance of an Executive nnd TopinIntAvP Connnil - These bodies consist of members ex officio and appointed members, some of them leading persons in Hong Kong's eConomic and Ascial lifae There is +hus haring of vnvernment authority with members of the community, but not in the way of parliamentary democracy. - 2 - The political sentiment of the population is mainly expressed in membership of the trade unions which are either Nationalist Chinese or Communist oriented. Open expression of political convictions by the population consists chiefly in peaceful manifestations during national holidays. There are no political parties and there is no overt expression of popular sentiment towards obtaining political independence or elective government. The advantages of the status quo are probably well realized by Hong Kong's people, independently of their political convictions, and there appears to be little inclination to endanger a situation which has brought full employment and prosperity. 5. From the side of Mainland China there have been few indications other than vocal ones of impatience with the preservation of colonial rule close to its border. The probable reason is that the existence of Hong Kong in its present form is useful to Mainland China. Hong Kong is China's largyst nirnp. of forPian Axhanna hean. of her imnor+q from Mhinn of food (almost half of Hong Kong's total requirements), inexpensive manufactures Pnd wnter, and the remittanesa hv nvascan Chinoe tn relativen in Mainland China through the Hong Kong banking system. Hong Kong also provides Mainland C.hina +th one of its main contats with the rest of theorld and thus serves as a convenient source of information. The uncertainty about Hong Ko,ng'lS political fate in t-he short run j4 pehp -11! not rTWO in many other countries in the region. Major changes however are bound to ^nn vn +1n 1n" "lln Dir +hn a ^-P +h), -n+iiwar +h)n TTbm Pr-v +n-"i=c r.nil revert to Chinese rule barring the unlikely event of an extension of the a large part of the population and productive facilities including almost c2_11L fresh water strg Will by thenu t:: J_UUCLUUU L11 1,11t; Jvuw ±1±VJ1. 6. itU Is not easy to distiuish -.U1 Wte effet; ofL the1z politic%a_l uncertainty on economic development. In view of the high growth rates of the past Lifteen years, It clearly has not slowed down udeVeloPmut. The expiry of the lease is still far away, well beyond the horizon to be adopted for most investment decisions. Tie short-run uncertainty, nowever, must play a role in investment decisions, if not of the Government, certainly in tnuse o ue priva omwl-our. 1u0 CaoUULo .In j:JA.u ± uni insistence of Hong Kong's financiers on short pay-back periods, not more than three or four years, aathough tue differlece in t]iS respect wJth other countries in the region is perhaps smaller than is often thought. However, a factor which does lead to a typical difference in the provision of investment funds is the absence of foreign aid which in countries like Korea and China (Taiwan) has permitted a substantial amount of long-term lending for the expansion of the infrastructure and for industrial projects. Hong Kong has received almost no assistance or this nature. -3- . he rapl rate oI economic expansion which prevailed almast without interruption since the early 1950's continued and probably even accelerated during the 190's. The behavior of various economic indicators suggests that the overall growth rate of the economy must have been extremely high. TABLE 1: Indicators of Fconomic Growth 1959-1965 Annual Growth Rate (in per cent) Industrial Production Domestic exports (accounting for most of industrial output) 13.2 Power consumption 16.5 Industrial wage rate 7.6 Tourism Number of visitors 19.4 Other Services Government current expenditure 12.8 Bank loans outstanding 25.0 Investment Private building 24.5 EBuipment 13.3 Government capital expenditure 21.0 Prices Retail price index 0.5 Source: Hong Kong Government Statistics. 8. There are no official estimates of Hong Kong's national accounts. In order to obtain a better picture of recent economic development, the mission made rough approximations of some macro-economic magnitudes (see Table 2 and Appendix). In view of the lack of time and information available to the mission these estimates are of course tentative. Their purpose is to illustrate the growth process and clarify some relationships in the economy. The estimates suggest an overall growth rate of around TM/ a vpar in currpnt prices and. since there has been little Drice change. well over 10% in real terms. In evaluating this extremely high growth rate it should be kpnt in mind that in most countries the overall growth rate is weighed down by the usually lower growth rate of agriculture. This is not the case in Hong Kn becaue its iaicnutural sector. is very small. obtain at least an approximation of the growth rate of production, it is dPiPclt +asess +he evpndi+*atern of the onomy. Tin Hong Kngc laissez-faire type economy information about financial flows, both internal andL eXterl a , 4 -. I - -1 4~L .L.LiLL +t'.A -14 . AlJI' +1- -l, --+U .U t LIJA,~.(J U~'. L n. to be large it can be safely conjectured that the overall deficit of the deficit (HK$1,500-2,000 million a year during the 1960's, on average more Uan tI'-J7o u1 UnIX. iu 1d4U0 Uppuad UIEU ciuafLLd.L IUauw Lruri aDvoduU milu. account for a large proportion of the financing of domestic capital formation. is infesrence is consistent with the general knowledge that non-residents' participation in real estate and industrial financing is Large and that non-resident6 are the source of a large proportion of tne Colony's HK$8 billion of banking deposits. From the mission's expenditure estimates summarized in Table 2 (which really are rough approximations) it appears that a shift has occurred during the 1960's towards reduced dependence on the inflow of foreign capital. Capital formation in both the private and public sectors during these years increased much faster than GNP. At the same time, an analysis of the trade balance and of certain information about invisible earnings indicates that the current account deficit must have increased much slower than GNP. This trend appears to have continued during 1966. Thus dependence on foreign resources, while by all accounts still large, has been on the decline and domestic savings apparently have come to account for a much larger part of the financing of domestic capital formation. TABLE 2: Rough Mission Estimates of the Growth of Production and Expenditure (in current prices) Annual Average 1960/1962 Average 1963/1965 Growth Rate HK $ M % of GDP HK $ M 76 of GDP Production Agriculture and Minina 200 3 200 2 - Manufacturing 2,050 33 3,100 34 15 Construction )OO 6 7q0 8 21 Transportation and utilities LhO 8 650 7 13 Other services 3 100 50 4,550 49 14 GDP (factor cost) 1000 100 9.2q 100 __ 9 off GNP X nf GNP Expenditure Tnvestment 1qq0 2 ?-800 28 2 Consumption (Resnqidl) 600 3 Q A_2nn A 1 Current account deficit 1 100 17 1,00 1 GNP (market v ig 7r Savings k lit 0 _ U U -L II L-) L47 - 5- Employment, Wages and Prodtiij t 10. The expansion of the economy has been accompanied by a spectacular increase in employment. The mass unemployment of the early 1950's has disappeared. The 1961 population census showed that unemployment had dropped to 2 per cent of the labor force and since then unemployment must have further declined. Many industries are experiencing an acute labor shortage and in the last few years the Labour Department has been recording a substantial number of unfilled vacancies. The labor situation was alleviated in the early sixties when poor harvests in Mainland China were followed by an increase in the number of refugees to over 140,000 in 1962. After 1962, however, the Chinese authorities virtually put an end to the outflow of refugees. The immigration more than compensated for the temporary decrease in the number of new entrants to the labor force caused by the small number of births during the war and early post-war years. At present the situation is changed and the effect is felt of the hieh birth rates of the fifties The number of nersons reachinL the age of 15 has increased from about 40,000 a year at the beginning of the decade to around 8o0no0 Pt present. times larger than the number of workers reaching retirement age), labor ha become scarce in Hong Kong and many mauatr nente?zpriises ar short of skilled and unskilled workers. The situation has led to a rapid "; e -;_ T___ -+ - nnk ,4 Ari, at--, - ___a. a V+ n - -a~, ^- - -,v. Ali "" c 1 a e r~n with some signs of acceleration during the last two years. For the economy output per worker. From a rough approximation of the increase in the labor .L & Lu- e J.7V.L 1L, WUu±U meemri UnclU UUUPUU rL- wurt-_r LJUtctu 2LJLJU2_LAY by 10 per cent on average. Wages have thus been increasing slower than productivity but the margin was narrowing in the most recenut years. 12. This aggregate notion of wages and labor productivity does not indicate the difference in the rate at which changes in productivity are occurring in different sectors. In view of the lack of production anu employment statistics it is difficult to get an accurate picture of the process. One of the most important industries, the cotton spinning and weaving industry, has made large investment to re-equip with modern machinery and is probably leading in the productivity increase. Modernization is also taking place in the more advanced sections of the garments and electrical equipment industry. Generally the trend is towards production in bigger units. One indication of the speed with which this is happening is that the number of employees in registered industrial establishments (establishments with more than 20 workers and all establishments using power driven machinery) is growing almost three times faster than the labor force as a whole. However, much of Hong Kong's labor is still engaged in small production units or as home workers. The productivity of this group is almost certainly increasing much slower than wage rates. To the degree small-scale operations become unprofitable labor will become available for a further expansion of better organized, more capital intensive production. - 6- 4.. 1L~ _11i L U UaJ L J. J.L Q0. Ar t~.L J . V-' 4U %, VJ.L V 4. Vj n- - - ..-.e s in wages is highlighted by a comparison with wages in other Far Eastern counris. At prsent , Hung Kong s wages are abaut na L U1 LV3 .,&, but much higher than in two increasingly more important competitors, China kiaiwau and Korea. ZAAPWoro V.L WIeueV coun,re1 LI L;ou arcuntteu ouv I t.IOiqt Ueop - v US$563 and US$255 million as compared with US$1,003 million by Hong Kong. a n Hong Kong, tne main impetU in tne export growtn 01 onu e is derived from increased manufacturing production, mostly of light industrial products. The following figures are based on statistical publications of the respective countries and give average daily wages in the manufacturing industry including fringe benefits such as free meals, year-end bonuses, etr. The figures refer to 1965. Average Daily Wage in Manufacturing Industry (in US $) Korea $ 0.77 China (Taiwan) $ 1.24 Hong Kong $ 2.04 Japan $ 4.16 14. Hong Kongts main comparative advantage - cheap, intelligent and hard working labor - will be increasingly challenged by its Far Eastern competitors, China (Taiwan) and Korea. The labor force in these countries shows many of the favorable characteristics of Hong Kong labor, but unlike Hong Kong they will not be faced with a labor shortage in the foreseeable future. And in contrast with Hong Kong, industry in these countries has the advantage of a larger domestic market, and, for approved industries, subsidized long-term credit and tax exemptions. Manufacturing 15. 7He noted the impetus to industrialization provided by refugees from Mainland China who nrevid pri nmnlp IA'h-r q+ . which upre IrI by international comparison, and industrial entrepreneurs from Shanghai and othnr indttri;1 nit.ip.q in EQten China. Thee entrerneurs frequently brought capital equipment, their skilled workers and managerial staff. qince then n- i-rss 4 4n-ee-lc-asa of local entrepreneurs and managers has appeared on the scene and the achieement oft&P this4 grou hlndsA parhwps been Uhs ~" success of Hong Kong's industrial sector. Another factor were Hon:, Kong's .~ ~ .4. .',.~... ~ U_L'J.. VLA ULA~ ~ . U V LkA -LU.1A A Q )tLi.LAL4L' from her entrepot trade which helped in finding markets for the pro- dwut- of una new i4ndmusr-e 11 svavle governmeni- WuA nvu4el, wioen10' private utilities companies took care of expansion of the infrastructure ment and operation of enterprises and levied low tax:es on business was auoUer facur favorng industrial growth. Finally an impo1tant factor has been the large inflow of foreign private capital in Hong Kong which was mentioned before (see Para 9). Throughout the post-war period - 7 - in conjunction with foreign know-how and management. 16. The pace of post-war industrialization is measured by the fact that domestic exports increaeU trUm amost notInUg oU US$1,003 miLLiUn LI 1966. During the same period there was an increase in the number of registered inustrial undertakings Irom almost 1,000 in 1947 tO 9,0UU 1 1966. The number of employees in these undertakings increased from 50,000 in l94{ to almost 4UUUUU in 190606. In addition to this there is a large but gradually declining number of workers in small, unregistered firms. Taking the 1961 population census as a yardstick present industrial employment may amount to about 650,000 or about 44 per cent of total employ- ment. 17. The most important among Hong Kong's industries are the textile and garment industries which accounted for 52 per cent of Hong Kong's exports in 1965. The expansion of the industry vas accompanied by a rising proportion of modern equipment in the industry and output per spindle and loom have increased steadily and part of the industry is now semi-automated. The knitting and garment sections of the industry have expanded especially fast. During the last decade garment exports have been rising at a rate of almost 20 per cent a year. 18. In the early post-war years the proportion of domestic value added in the total sales value of the textile industry was low. Exports consisted of unfinished fabrics produced from imported yarns. The garment industry used imported materials. At present the industry has a full range of spinning and finishing facilities. Imports of yarn have become insignificant because weavers and knitters use locally produced yarns. A large part of the fabrics production is finished locally. Quality also improved. As with other export products that were to follow, the textile industry started out at the low auality side of the market. Fabrics and garments are now in the medium to high quality range. The use of synthetic fibers is growing- 19. The switch towards sophisticated higher value products has allowed the Hong Kong textile industry continued expansion in spite of quota re.trictionns nnipd -ince thp Parlv 1960's by its maior huvers - the U.S.A.. the U.K. and a few European countries. Although the restrictions have encournad effnrtq to divArqify markptq thp Ahnrp of thp UnitPd Stntes and the United Kingdom in Hong Kong's textile experts remains high. The trend toards higher vniue of nroduct.inn i demonstrat.ed h the fet that thp value of textile exports to the United States is increasing significantly restrictions. 20. Besides textiles and grments there is an almost endless variety of otler LigIu inustrial prouuac ts uu m nl ulnL L n- pVi u --y ,-u4-- licensing agreements with foreign firms and sometimes with equity investment - 8 - orf non-residents- Thp mnqt imnortnnt nmonq these industries by number of workers employed and export value are the plastics, metal products and electrical nipmen+. industris. The nlaticS industry produces a large number of household and domestic articles. Especially successful are n +o fln-unroe nnri o %nn.C Tirh nIna+itc indna+.,r ioa na Xnnc nroduiced machinery and die moulds which are also exported. The variety of products for household use: flashlights, enamelware, watch bands and cases, vacuum btJJJ*.tes,4 L~ culey ee.tc.5 In-,a.ay on ths prdst hereALL Ina 'been an~l C.+nnl-t improvement in quality. Development has been most rapid in recent years of transistor radios is now at an annual rate of about 9 million sets a year, vu a large extenu v UCv;.iiUJ t,0 J wIu.Lk1 U .0. LI1110 Iavt majority interest. About half of the parts are imported but the proportion of uUmestically produced parts is increasing. The aseILy and prouuQion of condensers, transistors and other parts for use by the electronics indusury in the United States is another dynamic section of this induuUry. This section consists almost entirely of subsidiaries of American firms. aployment generated by these assembly plants is large but the domestic value-added proportion is low, reportedly not more than 7 per cent or 8 per cent of the export value. In view of the fast rising labor cost the scope for further expansion of this particular activity is probably quite limited. Besides these products the industry produces a large variety of electrical equipment: fans, motors, hairdryers, transformers, air conditioners. Many of these articles are produced under licensing agreements with foreign firms and to a varying degree they are making use of imported components. On the whole the tendency is however for an increase in the proportion of domestically produced parts. Tourism 21. A sector which is making an increasingly important contribution to Hong Kong's economic growth is tourism. The geographical location of Hong Kong as the main stopover between Japan and South East Asia, its beautiful scenery and the attractions of a large duty-free shopping center have favored the development of tourism. Hotel facilities have been expanded in step with the number of visitors and ancillary services - terminal facilities, restaurants, local transportation - are well developed. Overseas visitors numbered approximately 450,000 in 1966 and military personnel on leave (including U.S. service personnel stationed in Vietnam) almost another 200,000. Most visitors arrive by air. The increase in the number of visitors during the 1960's has been at a yearly rate of over 18 per cent. Political tension in the area, and the disparity between Pacific and Atlantic air - fares are Drobably amone the factors which have led to a lower erowth per- centage of 10-12 per cent in 1965 and 1966. 22. Average expenditure per visitor is high and foreign exchange Parnings from tourism have hrnme qn imnortant nren nf fnroign Perhine earnings. A recent survey indicates that expenditure per visitor amounts - 9 - +t TSc50 for an nveran any of loz than fiva - RrTnPmewhat over half of this amount appears to be spent on shopping, much of it consisting of into account the expenditure by armed forces on leave, may have amounted +to h n TTQ(t1An --l"Jon -mA +I"- A--a+-;, i7alu eqr- nnd mv hnnvtr nn.nAe roughly estimated,to perhaps 60 per cent of this amount, or some 5 per cent us avlug nu'g Ounr 23). Along wLt the expansion of Wut econLmy there has been a very dynamic performance of the construction sector. A large part of the construction was undertaken by tne Government. Deviating from its usual stand regarding private sector activities, government has assumed major responsibility in providing housing. The tranenLous population increase of the late forties (see Stat. App. Table 2) led to a large numbiDr of squatters and homeless people. By the mid-fifties the government had embarked on a major effort to settle these people in low-cost multi-storey blocks, which were interspersed with factory blocks, markets, schools and other amenities. Altogether 1.1 million people, about 30 per cent of the Colony's total population, has been settled in government financed housing but despite this achievement the number of squatters is still estimated at half a million and a substantial number of people is still housed in slums. Private sector housing construction assumed major significance in the 1960's together with other building construction such as office buildings and hotels. These activities have led to the redevelopment with modern structures of Hong Kong Island's waterfront and the construction of a large number of luxury and semi-luxury apartment buildings on the Island and in Kowloon. These activities were to a large extent financed with bank credit. ifter banking difficulties in early 1965 banks became more cautious in their lending for real estate development (see also Para 38). Since then the private building boom has cooled down. Currently there is still an over-supply of new office space and expensive apartments. Private buildin, construction remained at a lower level throughout 1966. 24. The scarcity of land is one of Hong Kong's most obvious problems. The population density is extremely high, even in comparison with other Asian cities. Around the harbor on the Island and on Kowloon the density is about a quarter of a million people per square mile and in the newest of the government's housing estates density is even higher. Building space has been increased by land reclamation of about 3,000 acres from the sea. Within Hong Kong and Kowloon most space has been taken uo and plans have therefore been made for the construction of three new towns in the. New Territories. each Pvnntuallv housing ont million npnnlp- The fir-s of these towns is under construction and has already a population of over 200.000. as rn ari n oe Aof consthn i to povide amir v also undertook a large volume of construction to provide administrative bu ~ ...l5J iIffJLLJ 1.O4 AI.L4J n0. 5-t~ s. J.'4 s,LA -. -UtJ -. -k -..L.. -J.C -.J -A_ and,othe - 10 - traffic needs in the city and the New Territories. The most important of all public works activities however have been the reservoir schemes to provide sufficient fresh water to the Colony. With an irregular rainfall and no natural fresh water expanse of any size either under or above ground, Hong Kong has had an almost continuous water shortage which made restrictions on the use of water a part of daily life for the last thirty years. The construction of new reservoirs and an agreement with China to supply water from the nearby East River made an end to the shortage and 1965 was the first year without restrictions on water use. In addition to these schemes, the construction of the Plover Cove Scheme, a 30 billion gallon reservoir obtained from a dammed-in sea arm, is nearing its completion. The resulting increase in water supplies will be sufficient to meet water requirements until the early 1970's when further additions to the Colonv's water works should be completed. Transportation and Utilities 26. The foundation of Hong Kong in the 19th century was based on the 10 million tons per year. Most in- and out-going cargo consists of small Low harbor dues, inexpensive and experienced port workers and a fast turn L~4LJLLA'A MUCU J~A~ IA.i AC U.Jt LO CA...CMU..L%JLJCZ.Li. iIIC iIULJS 1%L.VLJ CXLI d. VI. C. Z .V ' .4ALA which is contributing greatly to Hong Kong's economic development. Another majUI '-idCLLJCL U. UIUULcatULn W-L111 UHC UU UIJ.LU: WU ILU 10 A\:EL 1uik 't11IPWv During the 1960's the number of passengers has tripled and the volume of airfreighu is inureasing au an even faster rate. Ine runway, protrumg into the harbor on filled-in land, is on the short side and the forthcoming introuction of larger subsonic Jets will necessitate extension of the run- way and enlargement of terminal facilities. Ground transportation in Hong Kong is provided by private bus ana tramway companies and two ferry companies which maintain connections between Hong Kong and Kowloon. Private interests have obtained a franchise and a measure of Government support for the cons+Tuc- tion by 1970 of a vehicle tunnel under the harbor. The rapid increase in the number of motor vehicles and the resulting congestion of Hong Kong-s city streets have led the Government to initiate a feasibility study of a mass transit system. 27. Most of Hong Kong's public utilities are privately owned. This is the case for the provision of electricity, gas, telecommunications and all public transport except for the railway to the Chinese border and the inter- national airport. The water works system is owned by the Government. In the past, several public utilities tended to finance expansion largely from the reinvestment of current earnings, but public control instituted in more recent years has put a limitation on the level of profits. 28. Electricity consumption has increased at a rate of 16.5 per cent during the 1960's. Present installed capacity is close to 800 MW. Expansion projects on hand will lead to a doubling of capacity in the next few years and further expansion beyond that stage. This expansion of capacity is being financed with a considerable amount of foreign equity participation. The telephone company is considerirg a mair expansiob scheme. - 11 - TTT DATAIMV A DAVMWTIQ AW.TT) MDr"T TVArV ±1LL1UroUUcU_ULULJ C7* ±I.rmatiLon auouu nriug noug vuuve u± am o vo . In fact, the only areas in which there is regularly recorded statistical information are merunanaise traue, wIc has shown lUrge anU pesiVent overall deficits, and the foreign reserves of the government and the banking system which in most years nave shown substantial increases. Little is known about other elements in the balance of payments although it is possible to make guesses, on the basis or partial evidence, of certain current invisible transactions such as receipts and payments on account of international transportation, insurance, tourism, banking services and defense expenditure by the United Kingdom in Hong Kong.l/ In line iIth the importance of the service sector of the economy and its international orientation, these estimates result in a favorable balance. Because of the size of the trade deficit, the current account as a whole, however, shows a large deficit. The mission's estimates for the sixties are summarized in the following table. Due to the lack of statistical information, these estimates are tentative and provide only a rough approximation. TABLE 3: Balance of a:m+ents neelo--me4s Iverage 1960 -1962 Average 1053-1965 Annual. Grorth I$ 91 5 of GNP HKIl, 0 of GNP Rate Imports, f.o.b. 5,702 88 7,686 78 10 Exports, f.o.b. 3,041 47 4,429 45 13 Re-exports, f.o.b. 1,044 16 1,339 14 9 Trade deficit 1.617 25 1,918 19 0 Services balance 545 8 666 7 7 Current Account Deficit 1,072 16 1,252 13 5 Capital Account (inc. remittances) 1,354 21 1,682 17 8 Increase in reserves 282 4 430 4 Source: Trade data: Customs Returns; other data: rough estimates by mission (see ~ 01 A1en1xonNtionalAcut) T1'.e ,,,-o,4 4p11 I,,.. +Inn+,, ~ .. hv.~4 4~- ,,4~f as a result of rapid export growth, the trade and current account deficits 11-Ve A-14-u-u -o ------4ua-es VAP uO _ H wvTTD.ouA u u A u y u &J. V C%.LJ±~ O J9.L %-LJUX LJ UIA IU~V V UA .L '.U t- 11 e currentJ. de i i st l constitutes a very large proportion of total available resources. Almost 1/ See Appendix on National Accounts, p. 4. nothing is kn3wn about the financing of this deficit. Except for some not received official foreign aid. Almost all of the financing of the current account defiCit And tei- infrgnesveiS thLus covered by the inflow of private capital and foreign remittances. Possibly betweuen One-quarter and Une-third Of tnis total amount was in the form of increases in bank deposits of non-Hong Kong residents. It is not possible to estUate even roughly how the remainder was financed. There is substantial direct investment in real estate and manufacturing by outsiders, while certain medium and larger scale manufacturers are receiving suppliers! credits from abroad. On the other hand, it is known that Hong Kong interests are making investments abroad and are also extending short-term trade credits. The capital account as a whole is thus a mystery; the only clearly evident fact is that Hong Kong continues to exert considerable attraction on many different types of outside investors, sufficient to finance a net capital inflow which by all accounts is very large. Imports 31. The importance of merchandise imports for Hong Kong's economic life can hardly be exaggerated. The Colony's production of mineral and agricultural commodities being of minor significance, over 90% of all foodstuffs and almost all raw materials have to be imported. During the sixties there has been, however, a gradual decrease in the ratio of retained imports to GNP. This important trend is in line with the increase in domestic value added as a proportion of certain exports, noted elsewhere in this report (see Paragraphs 18 - 20). As shown in Table 4, retained imports dropped from 79 to 72% of GNP (as estimated by the Mission) and the proportion may have declined to less than 70 percent in 1966. Although the amount of import substitution implied by these figures is impressive the dependence on imports remains of course quite high in comparison with almost any other country. As a result of economic growth, there has also been a change in the composition of imports. The preponderance of food- stuffs and other consumer goods in the total import bill has become less and the relative importance of production-oriented imports, especially of capital goods has risen. As economic growth goes on a further relative decline in the outlay on imported foodstuffs and other imoorted consumer goods will occur. - 13 - TABLE 4: Growth of Retaired Tports Annua± gru1 Average 1960/62 Average 1962/1965 rate 1963/65 HK T1 Million % HK $ lillon over LuUr_ Foodstuffs 51, 2.0 1u 24.L Y.u Other consumer goods 1,023 20.0 1,232 19.3 9.5 Consumer-oriented imports 2,337 .o 3,Ua 9.2 Fuels 225 4h 261 3.7 5.1 Raw materials and semi- manufactures 2,154 h2.0 2,994 43.0 11.6 Capital goods 405 7.9 670 9.6 18.3 Production-oriented imports 2,784 54.3 3,925 56.3 12.1 Total retained imports 5,121 100.0 6,969 100.0 10.8 0 of GNP (rough estimate) 79% 72% Source: Department of Commerce and industry; estimates by mission 1/ These figures (except the figures for imports as a percentage of GNP) are based on an end-use analysis of imnorts by the Department of Commerce and Industry. In this analysis, retained imports are defined as the difference between imnorts c.i.f. qnd re-ex=orts f.o.b. Since this definition Mos not correct for the mark-up by the local entrepot trade, retained imports are undr-P.tim,qt.PA. nrobh1v hv- npr rent. 32AThile t.he imponrtnneo of ro aw matenriamlsc i - n localn imponnrt b Ill has increased slightly, there has been a significant change in the composi- tion of these imports. TThiS ch-ange is related to th patr ofT inAotn development of Hong Kong which is leading to increased domestic production fabrics have become of minor significance while the imports of raw cotton and wool went up. Another important event has been the- inceas in the imports of building and construction materials which rapidly gained in iripurUCoiue Lu do ULuLu1e WIWI wit- SIMU-p 1nar ur4aS 111 CULnISUMU1 n Uuou -UAv/. 33. The origin of imports is widely diversified. Over half of total imports comes from a large number of Asian countries including about a quarter from Mainland China. Imports from this country cover about half of the Colony's food imports and further consist of inexpensive textiles, other manufactured consumer goods and a certain amount of construction steel. It is interesting to note the extent to which Chinese exporters have been able to penetrate Hong Kong's domestic market for inexpensive manufactures. For instance, garment imports from China increased from HK$36 million in 1962 to HK$87 million in 1964, and in the - 14 - first eight months of 1966, these imports amounted to HK$59 million. A large part of the remainder of food and raw materials imports comes from other South East Asian countries. Mbst of the semi-manufactures and capital goods imports are supplied by Japan, the United States and the United Kingdom. Domestic Eports 34. Dbmestic exports have been expanding during the 1960's at an impressive rate of 13.4 Der cent. Certain developments in Hong Kong's exports are analyzed in Table 5. The composition of exports remains heavily concentrated on textiles and garments which together account for over half of total exports. The diversification and increase in domestic value added within this broad categorv has been mentioned before. The success of new export items such as electrical equipment and miscellaneous manu- factures (largelv nlastic articles. wios. Pte) is reflected in the very high growth rate of exports of these articles. 35. On the whole, exports have increased much more rapidly than total world trade nnd thus Unna Knngls share of nrld +ad i on the inceas.P Almost all of the increase in exports was directed to markets in the dpvel aned nvl d Wnna Xnj no qh. q hr4 in inmnr+.q Ev +h7 n+. bn been increasing during the 1960's by 8 per cent per year. In view of the fnrt. +.haItf +n mn+ Pt re-lne 1,rn+vn An.ini +h-ro years increased at an unusually rapid rate, this is a remarkable achievement. f1bw,.reor, thei n%oer, -- I 3 ol-" --P rrr Tn--- 7-- -- 4 nv-+ , -1l-+ -; 4 ,, - 4 --'1a -- -4, world is still quite small, just under half of one per cent. In contrast V 4 U & . V -.'-L .U. ±..J.IciI .; 1i~%Lir V.JJ-VA. J %J U%J _L~In '4 ~ UJ countries did not even keep pace with the more sluggish increase in total iUrporlu- U ULM SE,~ C ulAuIil,. t:o a.Ilu C cl .~ I't3o l fllig IW116-o C%;L;.aj 0i 11 nict.l E; 11 those markets dropped slightly. The attempt of many developing countries to develop their domestic manufacturing industries and tue imposition by these countries of import restrictions due to balance-of-payments difficulties are the reasons for this drop. Notwithsanding the small size of nong Kong's overall share in world trade, resistance against a further penetration of certai maket le .to tV1 edC±Z. UeL4.luitU 1,fr0U.LU.LULI 11, U14 Diei~ Government has tried in the negotiation of restrictive agreements with foreign governments to obtailn msimum cope for Uiversification withAn the industry and increase in value added per unit of product. The continued remarkable increase of textiles exports to the United States, the United Kingdom and other countries applying the import restrictions indicates that these efforts have been successful and that the management of the textile industry has apparently been flexible enough to use this opportunity for increased export earnings. Diversification into other markets and products, however, remains of vital importance to Hong Kong's export growth. Action to find new markets and otherwise promote exports led to the establishment in 1966 with government support of an export promotion board with several offices abroad. The government is also lending support to an export credit insurance scheme meant to alleviate the financial risks in export transactions. - 15 - TABLE 5: Domestic Exports Expansion A. Composition of Exports Annual Average Average 1960/62 Average 1963/65 Growti Rate % of % of 1963/65 over HK $ M Total HK t M Total 1960/62 Textiles 604 19.9 73O 16.5 6.5 Clothing 1,006 33.1 1,592 35.9 16.5 1,610 52-9 2,322 52.4 13.0 Electrical equipment 35 1.2 211 4.8 80 Manufacturp of meta1 1I P 41 146 3. 5.3 Footwear 116 3.8 158 3.6 10.9 Mi.q11AnPrn.z MniifPrt. Q53 1. Q 834 18.8 P Others 703 23.1 758 17.1 2.5 Total domestic exports 3,042 100.0 4,429 100.0 13.4 B. Hong Kong Exports and World Trade (US $ Million) 1. Total Hong Kong exp. 532 775 13.4 ma-+-n unlT,s, sm+ loz mnn irn 7Cnn AhI 1- +n'1 AJ.. T. -rl~-' Jmport I..~ o* 'L1WLL4 I FC) 7 ..'-' 0* Hong Kong exp. to dev. count-,o 0)y Cly r- 7 Total imp. of dev. countries 95,100 124,900 9.5 3. Hong Kong exp. to less dev. 183 197 2.5 lut a" . u lss dev. .,4uy aw,uuu u. Destination of Exports and Market Shares Import Share * Annual Growth Destination of Exports (HK exports as Rate of (in percent of total exports) % of total imp.) Import Share Exports to: 1960/62 1963/6 1960/62 1963/6 U.S.A. 25.2 29.1 0.81 1.1i 11.2 U.K. 20.6 20.5 o.86 1.03 6.3 Other dev. countries 19.6 24.6 0.16 0.17 2.2 All dev. countries b5.4 74.2 0.37 0.46 8.0 All less dev. 34.0 25.0 0.62 U.5 -0.U Total 100.0 100.0 0.43 0.49 4.0 Source: Hong Kong Trade Statistics; IFS * Import share here defined as the share of Hong Kong exports in each country's 1,. %."M-L -L11IykJ1 UO., V.V V IL ljO.Lv % J± .L1111j.3 .j '.Jt 11WLA5F Lr .L. A .)t~ vwv v.-. imports rose from 0.81% to 1.11%. The annual growth rate of the import share implied by these figures i in the last column - 16 - IV. MONEY AND BANKING Introduction 36. Hone Kone's monetary system is based on the automatic exchange of sterling for Hong Kong dollars by three banks 1/ authorized to issue currency notes. These banks nav sterling into an ExRhanae Fund. owned by the Government, and receive in return non-interest bearing certificates of indebtedness- The banks anr authorized to isnUn Hong Kong dollars tn the equivalent of their holdings of certificates of indebtedness. The certificates can be redeemed from the Evhann Fun at any +Tme at the reanuest. of the banks. This arrangement is basically similar to the colonial exchange system emoloved in other nrts of the British rrImmonwealth_ The rate of exchange has been fixed at sixteen Hong Kong dollars to one pound sterling. 2/ Transactions in sterling tk nln +.hrnah qiit.hori7.ed ferP.ion exchange banks at this rate. Transactions in other currencies are not subject to regulations Anid A rP P-rin"ap M_n-L-+ P^t-,,A +.h,ic "knt '0+M14CZ1arl wT.T-+.nea attractnn to many investors in and outside the area. The position of the Hong Kong dollar in this Market is strong becaus,~e of h ClnyP 41 montAr nd fiscal regime and the large volume of reserves. The foreign reserves of the LU~ ,t %A4IU .JLLU'.Q. O; LJUCLO_L0UL.LCL_L ICJ~~.U.L.~±LLLV 'J/ CLIILJ-. J L U V .L ... equivalent of six months of imports. Monetary Developments 37. The expansion of the money supply accelerated from an average ~J7,0 per. year± in thii e u 1" IV Is toU aroLund 114/10 ppu rL a yd4.uLJ, ring t-he 1as 4V five years. The ratio of money supply to CNP has been around 35e in recent years. Tis nign percentge for a country at onog ong's level of developmet is partly due to the virtual absence of a non-monetized sector of the economy. A summary of major factors in the increase in the money supply is given i1 Table 6. This table shows that throughout the last decade the overall balances on Government account have led to a contractionary impact of the public sector on the money supply with the notable exception of 1965 and the first nine months of 1966 when Government incurred deficits. Far more important, however, in its effect on the money supply have been the increase in foreign reserves and the increase in bank credit to the private sector. The latter expanded at the phenomenal annual rate of 26% during the late 1950's and 2U% during the last five years. A slowdown in monetary expansion has occurred after the banking difficulties of early 1965 which will be discussed in the following paragraphs. The expansion of private sector credit on a net'basis stopped and only in. the last months of 1966 did there occur a small expansion. Throughout the last 1/ The Hong Kong and Shanghai Banking Corporation, the Chartered Bank and the Mercantile Bank. 2/ This is not strictly accurate. The IT parity is sixteen dollars to one pound sterling, but in exchange transactions the rates are allowed to vary between Sh. 1 d 2-27/32 and Sh. 1 d 3-1/16. - 17 - decade the increase in private sector credit has been matched by an increase in fixed deposits by the private sector. The absorption of liquidity through increases in fixed deposits has been remarkable. During the last decade these deposits increased from only 16% to 120% of the money supply. In the Hong Kong context it is not possible to determine which portion of deposits is made by outside and which by local depositors. By all accounts the proportion of outside deposits is high, 50 to 60% of the total according to informed sources in Hong Kong. Undoubtedly, however, domestic deposits must have increased rapidly along with total deposits. As far as fixed deposits are concerned, this would be in line with the observation of a sharp increase in the savings rate during recent years (see Paragraph 9). Both the deposits by non-residents and those by local people testify to the high level of confidence in the Hona Kong banking system and the Hong Kong dollar. Banking 38. Commercial banking developed along with the growth of the entrepot trade and later of the exnort industries. Thi. strong relation with foreipn trade accounts for the well developed international contacts of the banking .vqtem. Thebanks are subject to few rgilAntIons but diffinlties early in 1965 with some local banks which had invested heavily in real estate by the Government and the leading banks helped to preserve confidence in the finrnni 1 rc+-m mcahnwn h+Ia cnn+ a f'aq nil gt.r+h nP ronnsi+_ The banking difficulties, however, marked the beginning of greater caution in landing The avnansinn of lans hasNslowed Aon and the li idity of the banking system 1/, which had gone down to 27.6% just before the banking ARif il+ aca 194Tcf Ja +1a l-nal minim-m -an-J eman+) hnno Jcan rnn+innin izlir to 34.9% at the end of the third quarter of 1966. The slowdown in the &x - --- -- -44. --t' setorI~J.~ credt i nceAJA& O ea " J.r)6 .O 'k rev ved the.A di cis o in Hong Kong about the establishment of an industrial bank. In the early iruy4s% a cmtte et up by the -uv-ret concluded that existiug fiancial institutions were able to cope with the demand for funds of all good industrial -pLojects and that the-, absence of an instittinsupyiglogte-inutra fLnance did not hamper sound industrial growth. The rapid expansion of to the private sector gave the impression that this judgment was substantially ~ .. ~ u 11U~WU VUX, O.l A UCdLS.iy L 7U W.IC uJC.iLr. LI=C.L LI'=y 11CXVU UI LL LJL' involved in long-term financing. Although opinion is still divided, many industriallsts, bankers and government officials now feel that the estnblishment of an industrial bank is desirable in order to supplement the supply of short and medium term credit from the commercial banks. The tendency towards more capital-intensive production will make the establishment of such an institution a matter of increasing importance. The Mission feels that, in view of the financial strength of the Govern- ment and the leading banks it should be possible to bring togdther sufficient resources to start such a bank from Hong Kong sources and with Government backing such a venture might also be able to attract significant resources from outside Hong Kong. 1/ Liquid assets (cash and net claims on other banks) as a percentage of total deposits. - 18 - TABLE 6: Monetary Developments 1957/61 1961/1966 1964 1965 1966 (, ont. - (.Tamnt-qn A. Chan-es in the i.bney A fa~ ai -I ofi, 1. W'7 1 WfV, 7 07). .*.J~,J. ~ /. ,IL"'/ / '-"4 2.-Jr A. I -_.I - 1 -4 Per cent increase per year 9.0 13.9 11.6 21.8 10.7 Factors Increase in bank credit to private secour 1,63e.6 ,.u 1,02.o 730.5 cUr.u Less: Increase in private Lime and savings de- posits 1,462.1 3,280.8 929.8 377.0 720.9 Less: Other net liabilities 130.9 110.6 -336.9 677.9 -116.9 Net increase in bank credit to private sector 39.6 -1205.4 428.9 -324.4 -385 Net increase in bank credit to public sector 27.4 -183.3 -145.1 128.9 77.0 Increase in foreign reserves 5929. 2,26.1 53.3 902.1 536.4 Total increase in money supply 659.9 1,954.4 337.1 706.7 274.8 B. Money and G.N.P. (1961-65) Money supply as % of G.N.P. 34.7 33.6 35.9 Private time & savings deposits (quasi money) as % of G.N.P. 35.4 41.1 39.6 Money supply + (quasi money as % of G.N.P. 70-1 7. 7 75 . Source: Statistical Appendix Tables 14-17; further information supplied to mission. - 19 - V. PUBLIC FINANCE 39. The expansion of the economy and the tremendous population increase during the post- yjr period. required a rapid expansion of public expenditures. As Table 7 shows--the pace was especially rapid in the early 1960's, but in subsequent years the rate of increase has been still very high. In contrast to most developing countries a large proportion of the expansion of the infrastructure is provided by private firms and is thus not a direct concern of the government. As mentioned before, this is the case with the provision of electricity and gas and most of public transportation and port facilities. On the other hand, however, strong demands on government funds are made to provide education, housing, medical services and fresh water for Hona Kona's fast growina nopulation. Since 1950 current expenditures have risen at an annual rate of 13% and capital expenditures at 22f. Only in reent vnrs has thprp hpn snme slowdown in these growth rates. The share of capital expenditures in the total has risen continuously and anuntwi to aonnt. i(11 ofP the* 1066/6 7 budtio ndir anntf a q:iarter rftta capital formation in the economy. 4O. The government has been able to finance these fast increasing expenditUres en+imly fPrm revenue until 1045 and in most yers haR aided to its reserves. Government revenue amounts to about 15% of GNP which is not low for a country -t H11ong KCong's 1-1 - tqprpl,nmpnt Thea uvrban chavrcter of the economy which facilitates revenue collection and the efficiency of the satisfactory performance. The government's achievement is the more remarkable sincue tAle stuc~ture of the eI~conomu1y impposes! cerin 11-414-4-- --JIA 4- UA.LLO k-t of revenue not encountered in most other countries. In the first place, customs duties and exCises play a re,lively smlal-l rlie in. the total fiscal effort despite the fact that total foreign trade amounts to around 135% of GE. The maintenance of a free port puts difficulty in the way 01 imposing duties on all but a few commodities such as liquor, tobacco, petroleum products and a few others. Thus the Government has only limited scope to exploit a tax field which is almost the mainstay of pubuic finance Ln many Other open economies. An the secona place, there is in Hong Kong little leeway for increasing the rate of direct taxes on corporations and individuals lest Hong Kong's attraction on investors be diminished. Last year these taxes were raised from 12-1/24 to a maximum rate of 15/. In view of the fact that the Hong Kong Government unlike many other developing countries does not provide fiscal incentives or subsidies to foreign investors it may not be feasible to increase this rate very much more without reducing Hong Kong's attractiveness for foreign investors. However, even at the 12-1/2% rate which has remained unchanged for many years, the profits and earnings tax was one of the most dynamic ele- ments in gavernment revenue reflecting the favorable financial results of business durinw, rt of these years. The limitations in revenue collection 'ave lad the government to exploit intensively a variety of other sources of revenue which do 1/ For details on Public Finance in recent years see Statistical Appendix, Tables 9-12. - 20 - 1/ TABLE 7: Government Revenue and E=enditure - Average of three-year perious (in millions of HK dollars) X J. L 1957/58/59 1960/61/62 1963/64/65 Consolidated revenue 579 1,00h 1,h51 vaurrenu e.xpeu±Ue u r e Current surplus 1 409 591 %apaL expenditure LIi4 i-3 Overall balance 21 38 -23 Annual growth rate over preceeding three-year period Consolidated revenue 20 13.1 Current expenditure 15.6 13.1 Current surplus 2o 13.1 Capital expenditure 29 18.3 Percent of GNP 2/ Consolidated revenue 15.5 15.0 Current expenditure 9.2 8.9 Current surplus 6.3 6.1 Capital expenditure 5.7 6.3 Overall balance 0.6 -0.2 1/ Fiscal years run from April to March 2/ Revenue and expenditure on fiscal year basis and GNP (at market prices) on calendar year basis Source: Hong Kong Government; estimates by mission. no+ suffer from these limitationS. The m-+.imnOrtAnt AmOna thP iR a category of revenue which is aimed at appropriating for the government a slice of the high rental innme of the CInny derivinr from the scarci+v of land. This includes the rates payable on real estate occupation, the sale of Cron laand leanses, nland ents Other forms of +ha novernmen+'z exploitation of what is in effect rent income are its efforts to raise revenue from parking meters and the exploitation of garages. Tand sales became temporarily a major element in government finance during the source is down to more normal proportions (4% of revenue as compared to 177d -Li ,~UC n . DH he JrU±Iortan rLI).U.i evenue so.Luce is th,e curren surplus of government enterprises, favored by rate policies which maintain the watcr works, the post office, the airport Und the railway on a seZl- suppuluatL basis. - 21 - 4l. The picture of rapid revenue growth has changed slightly the last two years. In 1965/66 the revenue increase dropped to 7,, mainly due to the drop in land sales and a temporary slowdown in imports which kept revenue from customs duties at about the same level as the year before. Some other important sources of revenue, however, continued to show high growth rates Dartly because of the time lag in collection. Direct taxes continued to grow at a rate of almost 20N and the current surplus of government enterprises also increased sharplv. On the whole, however. revenue collections increased slower than in past years. At the same time current and canital exnenditures went un faster than before, the latter because of the coming to a head of the expenditure on a number of important rroiects. The overall result was. for the first time since 1960/61, a deficit of almost 10o of consolidated revenue which the government financed entirely from its reserves. 2. These less favnrqh1e results wprp th- hakornund for the government's cautious budget for 1966/67. A drop in the growth rate of revenue to )i^ wa freas adqnceae in a fewT ta rae / were introduced to raise the total increase of public revenue to 10%. expenditure partly due to a raise in the salaries of public servants. to the completion or near-completion of the Plover Cove scheme and other I JU.LL VJI± ~us~ . The V~L~± LU~1, L±~W. ov r " - 4I--4--A 4'-t HK$131 million, slightly less than the previous year. The final out-turn 11.UM-V1UVVJ CL QU..L UDJA V..L li"y± . L.L.LVII * iM-,VVL11AV %, .. V. L SL 11 U 4 much higher than anticipated in the budget and expenditure lower. Weather con "-'* .LV1 CUOUC UU.t I L UL_LL; worJksi n til L,J .LIQU 14. UJ.L 1. year and public works expenditure is moreover experiencing the favorable effect of ut lt-up in the ouiLdig boom on wages of conutruction workes and prices of building materials. 43. The drawdown of reserves in 1964 and 1965 was modest and was followed by a small increase in 1966. Government's accumulated foreign exchange reserves including those of the Exchange Fund at the beginning of 1967/6o amounted to about 13u percent of total expenalture forecas for the year. The government's financial position is thus strong. 1/ Corporation and income tax were raised from 121 $ to 15; duties on tobacco and motor spirits were raised by about 20U. - 22 - VI. PROSPECTS Growth Prospects of the Main Sectors 44* The future of the Hong Kong economy depends mainly on the demand for relatively labor-intensive high-quality manufactures in the developed world and on bng Xong's ability to offer these goods at competitive .rices, At present, the imports by developed countries of these products from less develone countries ave still small 1/ iLowever, 4ong Iongrs ernorts of labor- intensive manufactures are the largest among underdeveloped countries,w eahead 1/ Cf. "Trade of the LDC's: Manufactures Point the Way" by Hal B. Lary in Columbia journal of 14orl Busnes, Sume 9-6. Th study +is based on basic data for 1964 supplied by the Statistical Office of the U.N * .J& Th selectio of4 .laborintesiv prouct is~L b4 .'4 . O40y Ute. author. The results of the study are summarized in the following table, which gives a stiknAg illustinU uf twO facts. \; Ueveluptu uountr.es obtain only about 8.5 per cent of their total imports of labor-intensive proucuu frum less uevelupeu countries; \ii over a quarVer vf te imports of these products from less developed countries come from Hong imports of Labor-intensive Manufactures by Developed Countries from LDC's (1964) illilons 01 US dollars) imports imports imports From all From. From Sources LD's Hong Kong 1. Textiles, carpets, clothing and other accessories 5,865 785 359 2. Other labor-intensive finished goods, mainly consumer items, excluding food 5,103 429 201 3. Selected food products and cigars 1,635 421 5 4. Selected materials for industrial use, mainly burlap, leather, wood products 3,651 623 4 5. Items of marginal labor intensity, including selected metal products, electrical goods and machinery 11,017 97 49 Total 1-5 27,271 2,355 618 - 23 - even of a very large country such as India. Yet the penetration of developed markets is not very deep and there is an a pricri possibility for a sizeable further increase in labor intensive exports. 45. As shown earlier Hong Kong has been able to raise the value of its textile exports faster than volume import restrictions in the developed countries would permit by diversification of production and a shift towards higher quality products. This trend is likely to continue. Because there is also scope for an increase in the domestic production of textile semi- manufactures, textiles and garments will probably remain for years to come, the most important of Hong Kong's manufacturing industries. At the same time it is also reasonable to expect a continuous expansion of other kinds of manufactured exports in accordance with past patterns. A factor that could have some unfavorable effect on export growth would be Britain's entry into the Common Market and the eventual loss of preferential treat- ment for members of the British Commonwealth. The proportion of exports directed to the United Kingdom has been dropping in recent years and amounted to 17 per cent in 1966. The impact of the long-expected entry in the Common Market would depend on the length and nature of a transitional arrangement, if any, for Commonwealth countries, but even at worst, the damage to Hong Kong's overall export performance will probably be not too great, because of Hong Kong's established trade relations with Britain and its ability to price its products competitively. 46. % During the 1960's total imports of the developed countries (where over thr.P-nar.Pr. nf Un Konn. exnorts are sold) hnvi increased hv about 9.5 per cent a year. During the same period Hong Kong's exports to thosp nmintrip. in-rPnqP1 hv 18-4 nr rpnf. Tn qnit of c.rt.nin nonsible developments which may have an unfavorable effect on export growth, a contin- uat.ion of +this relation (i.e Hng Kong'seportsv+ inceangn mnTuh faster than developed countries' imports) seems likely. The main factor which - determineA Uone Kng's succesful exorn+ perrmance +he 4+ne v t +414a tion under very able management of relatively low priced labor, still exi _ - WOO hav in1rAnH fanq. in rimpntyors, but +.h differential with developed countries where wages have also gone up rapidly may not have cagtoo much. Copeiion footedvlpigcountries Will become more intense as industrialization in these countries proceeds and a fuller has the advantage of seasoned and resourceful management, well-developed .1. ~ ~ ~ ~ 6I; - -JQJ,.LQ. - -J.J O.LJIM-~ - - -hed. - - seas.. conJ.~ -- ts. J.L In these circumstances it is reasonable to expect sufficient diversification assumption of continued economic expansion in the developed countries and J.'naumon' furtuer rap- u gruWWIIn L u L vu - mpxor 4 u-s Tfu-- ma-- -, 1- u-1 a on o U a U JI±~.LU V11 J WU Lo -- ofL Lteir. _L111pV. U , IIULJ1, 11.VLJS, 1112y UC XJ-I to realize export growth rates of approximately the same level as in the -_ X1 I_ __ -.t .. - - -. _-_ * .I past (13-15 per cent a year'. nuwever, ±± VUZ.LLJU UuLuu±un iJ ni developed world were to deteriorate considerably in the future, then Hong Kong's export position would be seriously affected. - 24 - 7. The denendence on outside develonments is Pauallv strong in the case of the entrepot trade and a number of other service industries such - as shinning- nort activitie- stornioe insurnno in+trnational communicn- tions and banking. As far as the entrepot trade is concerned, it seems Iikplv that thp grmq+.h rntp will rnntinma tN ha Iner than the rno.T.h rate of domestic exports but a continuation of past growth at 7-9 per cent a year bemleOnrn~1 n nmntion as is p%^osible Y.ithq n1 th-venertaninties of the China trade. The demand for several other services is closely ~ ,,s ~ ~ . V J. '.J L&J VL L1 U-LoaJIJL Cra..Lt-. aLl.L VLULIO~ U Ul.VL . -- probably grow at about the same rate as international trade. 48. The prospects for the tourist industry are favorable. A factor oo-P uILP- iUrcJJ -1-e numier of visiours u apanw likely to increase further as incomes in Japan rise. The termination of Lo1e Vieu 4awm conlt WoU±U reduce tne LIUMAve1r1 o.1 UJJ.eU Qtlute1 0 vie personnel visiting Hong Kong, but this factor will probably be outweighed uy a covUiuat.UI vi Une: Ureau uuwaui an iJcreaue Ul VweVeruii a1U janeU visitors to East Asia. After the temporary building surplus has been absorbed, the construction industry should resume its high growth rate, paced by a high level of housing construction and a number of projects in the transportation sector (see Paragraph 53). 49. The overall prospects of the economy thus seem favorable and further economic growth at a high rate is likely. The growth rate will probably not be less than 10 per cent and may approach the 13-1) per cent rates of the past. A serious slowdown in the economic growth of the developed world would of course adversely affect these prospects. Requirements of Economic Growth 50. Barring a renewal of the inflow of immigrants the growth of the labor force during 1967-71 will probably be at a somewhat lower rate than in the past five years. The number of persons in the productive age groups (15-64 years) will increase by approximately 3 per cent per year. However increased prosperity will probably lead to a drop in the currently very high rates of participation in the work force. A somewhat lower growth rate for the economically active population, perhaps 2-2.5 per cent a year during the next five years,seems therefore likely. This compares with a growth rate of over 4 per cent a year during 1961-66 and an even higher growth rate in the 1950's. Realization of the economic growth potential discussed in the previous section will therefore depend even more than in the past on an increase in the productivity of labor. This has several implications. The level of training of the labor force will have to be raised; labor should shift to firms and occupations with high productivity; the capital-labor ratio will have to rise. In order to realize the growth potential it is also necessary that certain infra-structure facilities be expanded. The relationship of these requirements to economic growth is, in the short run. perhaps more tenuous than in most countries. In view of the dominant role of external trade conditions on Hong Kong's prosperity it is conceivable that the economy temporarily flourishes while education and infra-structure requirements are to a certain extent neglected. How- ever- for the long run nrosnects. action in these areas is of great importance. -25 - 51. While general literacy is at a fairly high level, an expansion and improvement of technical and business education is necessary to give the labor force the skills required for the more sophisticated, larger scale production of the future. For this purpose secondary education needs to be expanded and adapted. Probably 50-60 per cent of the children be- tween ages 12 and 17 are outside the secondary system. The Government's education policv is aimed at exoanding and imorovine secondary education and establishing vocational schools for part of the children between ages 12 and l who at preqnnt do not. rPvn1ve q ndnarv PiI.tAon Thorp is also need for an expansion of education atmore advanced levels. While-managerial ai technical skills available in Hong Kong were of sufficiently high aualitV to meet the requirements of the first, relatively simple stage of industriali- 7.ation. thprp is no doifht thnt thp inrtninoF qnhis.tiontion of nrodiuction will require a drastic increase in the university output of engineers, businp.s Pnonomistq and a(-onnmntn+._ Enn n nf' in.qtrnction in enoineering7 business economics and accounting is planned or under consideration. These nroinnt..q hiuld hP aonrded high priority q9_ A fNir+hsmt fo-r "nic*iv~ner dctv isag r?,A i n re-organization of Hong Kong's industry in the direction of larger, better nrnenni 7el nini. T f ra cIim n- i^A 4mA 4 'knor+h nL meL n propelled by the opportunity of establishing a large number of enterprises based on Hong Kong' m ai co% mp arative -dv g-tagethe abund an c e o_f in expLen Sive and hard-working labor. Relatively simple technology and small size of export performance. The managerial and financial problems of industry could U OU.L.y UV OLJLV~L W. Ld±J Uhle .LamdiIe J.L. vilet LraLU.LVLJCL.L .LClIILY-V LJt:U enterprise. As Hong Kong enters a more advanced stage of industrialization 4uVil sope 1001 eXpaonSL0 4.1u : T_us_ uI--- wIA -a w -au n- v -um - --ure-. UL1'~ OUI~~ .LLJ. AjW ± VL1 II UIL-L,i UcL- W-L.LJ- Uai'lUW. L aL)UI' IWO tUUIt OLVIUi in supply, its price is rising rapidly and the main impetus of industriali- zation is moving IrUm small producULon units (cottage indusuries, home workers) to larger establishments with a bigger investment per worker and access to bett-er man mU mUethods and research. Me gradual decline of small scale industries will release workers for employment in establishments witU igher produuUvity. tere is aIso ample scope Lor a I.w of labor from primary industries and certain service industries to industrial and commercial activities with high productivity. As a result of this continuing redistribution of the labor force the number of workers available for activities with high productivity should increase much faster than the 2-2.5 per cent annual growth rate of the labor force as a whole. While the larger firms will therefore not face a labor shortage, there is no doubt that marginal firms will feel that they are unable to pay the rising costs of labor and be forced to amalgamate where this is possible or to liquidate. In part, changes in industrial structure can be expected to occur in the natural course of Hong Kong's economic evolution but they can be facilitated by public activities in the fields of infrastructure, longer term credit and training. - 26 - 53. There is need for expansion in the fields of power, communica- tions, and transportation. The power companies have embarked on expansion schemes which will allow a continuation of the smooth expansion of power consumption of the post-war era. In addition to the large current surpluses of the comoanies. there sApms to h mufficiint finance from out- side sources to finance the implementation of these schemes. A large expansion scheme of telenhone services which will allov a Mh.t;ntial improvement in the availability of telephone connections will probably nlso rpivp mnff-iriPn onid.iA finnnna Tn +Ahi +.vn-n-e+.JAin mentor there are several major projects under consideration but sources of finanina -frr Qnmn r-P +hinn ni'D l ne ^lnnv Thn -mnlcnmrn+.nafinn of +.hp long discussed toll tunnel for motor vehicle traffic across the harbor linkinria Vi r-+.nvi n T -Il A nA Vnr.Tm^Y (+^+nl no an+ TT'qt(vr A milljrn Will be undertaken by a private company with some support of the government. Itwllg ahead a soon as o Ut Si4de financeC on r ea~ aa o t er.ms c-n b secured. An extension of the runway and terminal facilities of Kai Tak 1; 4-p ort at a tot al coSt of TTSZt20 milio is nede to m-4--- _-ake the airor "n".-,n for the forthcoming introduction of larger subsonic jets. This project w .ll IJ LJ.be ~ L JL LJJV U11C7 '~. SO IL1J1U VILCII IS 10M)L.IJ6 DO Outi _e *So- -e_ for help in the financing. Major projects under consideration in the urauspurtoation sector L1wUIfdU1', IRuwv7 n IvJU ytU vUeIn -LLlJ-.UUU . A Ulle government's expenditure forecast are the construction of a container port anu oi a mass transport system. Ie cost of the ±r_ phase o te containerization project is estimated at US$22 million. The first con- struction phase of the mass transport system which will take suveral years will cost approximately US$175 million. In addition to these projects, major road projects in the New Territories are under study. Land scarcity is a dominant factor in Hong Kong's economic life, but a large effort to open up the New Territories where land use is much more extensive could go a long way to alleviate the situation. 54. -With the present state of information about capital formation in Hong Kong it is difficult to make a forecast of total future capital requirements or future capital availabilities. It seems reasonable to predict, however, that along with substantial increases in domestic saving there will continue to be large net inflows of capital so long as Hong Kong continues to maintain its attractiveness to foreign investors. In order to maximize the chances of obtaining sufficient outside capital, these qualities should be carefully preserved. The most important among them are: low taxes, freedom of international transactions on current and capital account, convertibility of the currency, a minimum of govern- ment interference with the establishment and management of private enter- prise and provision of adequate infrastructure facilities. The awareness in Hong Kong of these requirements is strong and the likelihood that the government will change its policies in a different direction seems small. - 27 - 55. A factor of increasing importance will be the availability of long-term capital. In the past the banks channelled considerable amounts of funds to manufacturing but the banking difficulties of early l965 have made the banks more cautious, at least for the time being. Banking statistics indicate a slowdown in the rate of bank lending to industry since early 1965. In order to ensure that funds become available for Hong Kong's further industrialization, a domestic lending institution supplying medium- and long-term finance is desirable to supplement medium-term suppliers' credits and equity participation from abroad. The Colony and some of its largest banks could provide such an institution with a solid financial base which might also enable it to attract the interest of outside investors. The Outlook for Public Finance 56. In the immediate future the government probably will not be confronted with a difficult financial situation. The budget for the cur- rent financial year (April 1967 - March 1968) shows an overall deficit (i.e. after allowing for capital expenditure) of only WK$35 million or about 2 Der cent of total expenditure. Since the revenue estimates are obviously over-conservative, it is most likely that the final outcome will be, as often in the past, an overall surplus instead of the forecast small deficit. The forecast overall rate of increase in revenue is only 3.7 per cent as compared with an average rate of increase of about 10 per cent a year in the past five years. 57. For the longer term the situation could well be different. Lonoar term fi.nnl dpvplnmen+q dpend nrtv of ouwrn on +.hp fntre growth of world trade, but perhaps more importantly on the revenue and exnpnditure-- - nilinion nf + nrnment. T'h n ha rea]red a five-year forecast of revenue and expenditures which covers the financial ment states that the forecast is based on the assumption that the active that exports will not be seriously affected by various external restrictions. E, 1l£~. 1.. 5 L 0 &.I'.W V .Lj IJLcxtjU lL1~£u U.LV " LICIC (I LCL1r K--LC;1IC:L5 U of uncertainty because the economy is much affected by extraneous influences. IL nsv vihs uve wole P_-v %_,_ te iwv uueuvxpeu n t'- O~..U5 L UIA~ .L 1 UA1~ L IJe± VIL UL: Vie~w oi IU UUI'" Ut:Vt1_LUpme[ts t ilt: forecast shows a marked slowdown in'the growth of revenue and expenditures. V eAL PETLUdU a WhUle Modeuew duici Lb 1U 10t!UaS_, nAtpuue million or 6 per cent of prospective revenue from all sources. The break 1mpiXZ by ute forecast with past growth rates is shown in the following table: - 28 - TABLE 8: Public Finance - Growth Rates -' Annual rate n- inr-onao in nor non Arream 10LA nwn-r vtra-rni7n I QOAr)/A-: A -rn"evn. IOAA/7tl ^vr avtwu 10ALM( (Government forecast)2/ Current revenue 14.4 7.6 Iter _Znal1 r e venue 6.1.C Duties 11.0 7.7 lotal revenue 1 6.9 Current expenditure 14.0 10.2 lucation 10.h a. Health 15.0 7.6 Welfare 9.2 13.9 Urban services 13.4 8.5 Personal emoluments 13.7 8.2 Capital expenditure 17.4 2.4 Education 12.1 14.7 Health -6 -3.5 Housing 1.0 -5 Waterworks 12.9 -11 V.jU.-L llctvuz LVU U U LJA-a.a 10.~ LI~.J 1960 - 1966. 'M__ t U .±. ± -Ie 0-- ------ ± 1 -~ 1 . JVV-.4 O-l . expenditure see Statistical Appendix Table 13. Source: Hong Kong Government. 58. As far as revenue is concerned, this forecast does not seem to be in line with the above-quoted expectation of continued rapid expansion of the economy and thus a rapid growth of the tax base. Internal revenue (which includes the important corporation and income taxes) was in the past quite responsive to economic growth and increased annually by 16-17 per cent at tax rates which remained virtually unchanged until 1966/67. For the future, however, the growth rate of internal revenue i s estimated by the government at only 6 per cent. The growth rate of revenue from duties is also expected in the government forecast to drop sharply although there seems to be little reason to expect a lower growth rate in the import - 29 - (or local manufacture) of articles such as liquor and tobacco which account for the bulk of revenue from duties. The official forecast also shows a slowdown in the growth rates of other forms of revenue (licenses, fees. motor vehicle taxes, post office) which appears equally inconsistent with the expectation of rapid economic growth. If the Mission's expectation of future GNP arowth at or near recent levels is correct. the revenue estimates would imply a shrinking of government revenue as a proportion of GNP, while in the past revenue has expanded as fast or faster than GNP witnout an adjustment or the tax rates. 49. Thp PxnPnditure estimates in the government forecast are also on the low side. The growth rate of the most important element in current exnPnditure, nPrcnnIl PmoIuments. is to dron sharply according to the government forecast. Between 1960 and 1966 the number of government amnnoee increased annnlly hy nver LC nr cent. vr. In view of the prospective increase of government tasks in many fields resulting from the population 4 in eae and +ha rowth of the oanomy, it.is unlikPly that the growth in the number of public servants could be kept much belAomw the past groWAVh rate.* Andq them g"ea ise in wnae Which hAs amounted to about 8 per cent in recent years will go on and necessitate revisions in government pay scTs inP 4ie -o1tes factors it inappersP that the expected growth rate of expenditure on personal emoluments is unrea.listicaly low- and that theJcreases a V LUU1 1 LJItZt W.L_. UISUOU %,r:. W__ than 10 per cent a year and possibly close to the 14 per cent increase rate of he past. The government estimate for current expeniuvre on education also appears to be on the low side. The mission has tried to estimave IIU 0LZ4UULJUeceZ vl Ullt IatJU icrease 1n WnU Juav .J school-going age and the achievement of modest gains in the percentage 0 CILL.Luren aIU_UeUIng bUIIUV. 11u15 Zuggeu a UUUuiuation f ne rat. of increase in current expenditure on education by 15 per cent a year which represents a striking contrast with the official oUrecast. Simiary the government forecast of a sharp reduction in the growth rate of expendi- ture on health and other urban services seems questionable. ON the wvole, it would seem reasonable to expect that the overall growth rate of cur- rent expenditures will not be much lower than in the past. 0o. In the cast of ca ial expenditure the government forecast is for a stabilization of expenditures at about the present level of around HK$7>U million. This is in sharp contrast with the rapid growth of capital expenditures in the recent past. An important factor in the fore- case is the completion of the Plover Cove Scheme which will allow a taper- ing off of expenditure on water works. By 1970/71 the government expects however that new schemes will have been taken in hand and that expenditure will start to build up again. Capital expenditure for education is expected to increase sharply partly because of increased capital subven- tions to private education. Housing expenditure, the largest item on the capital budget, increased very fast in the past. For the future how- ever the government foresees a reduction of expenditures chiefly because in the forecast resettlement and low cost housing are kept at about the present level, while government support for middle-class housing is - 30 - reduced. There are strong doubts that this estimate is realistic. For one thing, there is a substantial need for replacement of inadequate housing. Another element of increase in the demand for housing is the increasing numbers reaching the age of family formation as an after-effect of the post-war baby boom. The effect of this will probably be enhanced by the factor that increasing prosperity tends to lead to a relative increase in the number of marriages in any given population. These factors will probably more than outweigh in the next few years the fact that immigration has virtually come to an end and that the birth rate is on the decline. In fact, the decline in the birth rate will affect the demand for housing (and many other services) with considerable delay. The government has pointed out that its estimates do not make allowance for a number of projects which will probably have been started by the end of the decade. These are the expenditures for the first phase of a container port estimated by the government at HK$124 million; expenditures for the first phase of a mass transport system, estimated at HK$1,000 million; "very large" expenditures for road construction and road improvement schemes now under study and a contribution from public funds to a medium and long term lending institution. From the viewpoint of the economy's long-term growth requirements most of these schemes and projects are probably of high priority and making quite notional allowances for their inclusion in the total, priority public capital requirements could realistically go as hieh as HK$1.000 or 1.200 million by 1970/71. 61. While there are serious doubts about the validity of the govern- ment's financial forecast this does not necessarily mean that the overall deficit will turn out to be different. Revenue and exnenditure are both under-estimated and adjustments may cancel out each other. By way of illustration a comnarison is made between the nvernment's forecast and a tentative estimate by the mission. The latter is based on an extra- nolation of currPn+. rvne and Prnnitur_ t. the armwth rnte of the past four years. Allowance is made for a slowdown in land sales. Capital exvnenditi-ive J nocim,A +T COZ U 1 rA m-4114 h1r 1070/71 +h -mn+ mentioned in the previous paragraph. TABLE 9: Government Revenue and Expenditure (HK$ million) Tean t-'MC -v a+4-m4- Government forecast by mission Revenue 10,516 12,h54 (N*~- _ _- 4-- 7 rl i AoL1 'J.'. 44V VL" W.J. I Y -0 L - W,J& Capital expenditure 3,863 h $24 Cuulaiv d c $. U$L.LiLo 116 13 ; Cumulative deficit in US $ million 116 134~ - 31 - ue. Ine deficit in tne government forecast anouni to ily per cent of total revenue. A deficit of this magnitude could probably be covered without great difficulty by additional taxation and perhaps some drawdown of reserves. At the beginning of 1967/68 these stood at nIfl,26> million (USt221 million), equivalent to about two thirds of total revenue. The deficit in the mission estimate is of about the same magnitude but both revenue and expenditure in this estimate are much higher than in the government's forecast. This illustrates the point that continued revenue growth at the rate of the past several years witl allow the government to finance a considerable expansion of government expenditure without any serious financial problem. The increase in expenditure in this tentative estimate would be sufficient to cover our rough estimate of priority capital expenditures and would also allow a vigorous expansion of education, health and other services. If however a slowdown in economic growth would lead to a lower growth rate of revenue and if the government felt that it would not be justified to cut expendi- tures at the same rate, then a more serious financial problem could arise. Under adverse economic conditions, the scope for additional taxation and local borrowing might be small and the government might need to borrow in foreign markets. The financial strength of the Colony would permit a considerable amount of outside borrowing but if the present situation of capital markets remains unchanged, it is uncertain that borrowing efforts would be successful. London would probably be the most appropriate market for a British Crown Colony, but in view of Britain's economic difficulties it is unlikely that more than a marginal amount of Hong Kong's prospective needs could be covered from this source. The succese in other capital markets is also uncertain. However for the time being the Government does not have a financial problem requiring borrowing abroad although the possibility that such a financial problem will arise in the next several years cannot be excluded. 63. A final word about creditworthiness. Public debt outstanding is very small (US$14 million equivalent) and debt service (UStl million) negligible. The prospects for foreiFn exchanRe earnings are favorable and the Colony has large foreign reserves (US$886 million equivalent in September 1966). It is therefore unlikely that Hong Kong would have difficulty servicing a substantial increase in its foreign debt. Of course Hong Kone's future might be disturbed by political developments in the area, especially agressive policies on the part of Mainland China. As against this possibility. any Bank loan to the Colony would have the guarantee of the United Kingdom. If the element of political disturbance can thus be discounted- therp remainq little doubt that Hono Kona could assume large amounts of debt on conventional terms. Appendix on National Accounts and Balance of Payments Introduction 1. Little information.is available on Hong Kong's National 4ccounts. Neither the government nor any agency outside the Government is engaged in producing statistics on this subject on a regular basis. Rather sketchy estimates for the late forties and early fifties 1/ and preliminary results of investigations for the financial years 1960/61 and 1961/62 (by Dr. E.R. Chang of the University of Hong Kong) are the main information on the subject. The preliminary results of this last enquiry had just become available when the mission visited Hong Kong. It is based on a 20% sample of income and corporation tax returns supplemented by published information on public utilities, government revenue and expenditure and foreign trade. However, a full description of the method followed in establishing these accounts is not yet available. With regard to the balance of payments, the only information available to the mission consists of estimates for the years 1963-65 produced by the Ministry of Overseas Development of the U.K. Government. These estimates are incomplete and, by the Ministry's own admission, of a very tentative nature. The latter is also true for a breakdown of current invisibles for the years 1960, 1964, 1965 provided by the Ministry to the mission. 2. On the basis of these pieces of information and various economic indicators. the mission has attemoted to anoroximate the most imortant macro-economic magnitudes for the years 1960-1965. The following summary tables wr nrparp.d! (i) gros dometic dnrc!t. by industrial origin: (ii) gross capital formation; (iii) balance of payments; (iv) expenditure on gross national nroAut. Mlanrly the missinn had nsnit.r +hp Jime nor the information to make accurate estimates. Many of the assumptions have an In spite of these serious limitations we feel, however, that the results do Joel0 i ov +.naunep ue o eon omic dloments Aduing t he 1QArsc Gross DomStic Product by industrial Origin J. ~ ~ a s a startin IntoLJ CumJi. 41US~IC1'JJ 41 WEOCLA 1"4 0 wJ4uall a Ul"J 00ULJ.UUM for 1960/61 and 1961/62 which we transposed to a calendar year basis by sra gJl4LLue Vouu r 4. ons -L em u% hlne =Avi JU.LUUuL bo GU vy vue main economic sectors, Dr. Chang's estimates were also used except for some important, uU amU11v.LtUt!U.Y VMIry ouguL JU0UUmLJmU. Ille convtr-LJOUVLuJu vY UvutV manufacturing sector is estimated by Dr. Chang at only 23.7% in 1961/62. 1u" sector employs 14" % V1 Ulne Lauur lurce alnu acuunu.1 u.Lr aunumo a.L.L exports (45% of GDP), a part of the value of re-exports and a certain (but unknown/ share of domestic consumption and capiual forination. Mere Lb no doubt that this estimate must be far too low and we have tentatively 1/ Ronald A. Ma and Edward F. Szczepanik, "The National Income of Hong Kong. 1947-195o", Hong Kong, 1955, and Edward F. Szczepanik, "The Economic Growt! of Hong Kong", London, 1958. -2- contribution to GDP. Although port activities and shipping are quite ;mpu-r- o - --u- nou - Tff- uu-n x vu-- -n ev a v v o 4. :a v- v" 1_ -1 6 4 U-- '- -- nTn1 -Ue _LUj1J UCUJU .LLJ 11JL1r, D~ULJ, LU _LO ULJ.LLA;L llct~U W,it: cont.LVAU ULVIJ U%U LT.[ by bh transportation sector can be much more important in Hong Kong than in most countries due to the absence of inter-city transport. Dr. Chang'.3 estimate that the transport, storage and communications sector account fUr 1V.La of Ur is muC nigher than in countries with a highLy deveopeUd transport and communications system (U.S.A. 6.1%, Germany 5.9%). Tentatively we nave reduced the contribution of this sector to >70 of GDP. In the case of wholesale and retail trade and banking and other services we have made moderate downward adjustments in their contributions to GDP. 4. Having thus obta:ned an estimate for GDP by origin in 1you and 1961, the following steps were taken to extrapolate the results for the years 1962-1965: - Agriculture, forestry and fisheries. The value added of this sector was assumed to increase at the same rate as the total production value of the primary sector as reflected in the respective administration reports of the government. - Mining. On the basis of production statistics for minerals and govrnmaent revenue from quarrying, we assumed that the value added of this small sector remained unchanged. - Manufacturing. In view of the relatively small size of the domestic market and the predominance of manufactures in total exports, it was assumed that the growth rate of the value added of manufacturing pro- duction had been about equal to the total growth rate of domestic exports. This assumption may be questioned to the extent that the output of manu- factured goods for the local market may have grown more slowly than output for the export market. On the other hand. however, the increased substitution of domestic semi-manufactures for imported inputs has led to a rapid increase in the proportion of domestic value added Der export dollar. It may well be therefore that the GDP of manufacturing has grown much faster than the value of exoorts and that our estimates in this respect are too conservative. - Gnntruction. A growth index for the construction industry was established by adding together, fer each year, rovernment capitnl eApenitUre anwd privtte uuLUg LLV vZjUVJ j* I 1±VtUV UU.LU.L1Jg LLJVtO U111t=1 U was estimated on the basis of government data for the value of private build- .LLJr, LUIII VL, UU t-cJLLIcI-id± Wtfcb)11:U J UVtU-dgU tWo-yetar VUUJULJt - lectricity, gas, water. It was assumed that the our of tis sector increased at the same rate as the consumption of electricity and water. Uas production is Of relatively small importance. In accordance with Dr. Chang's estimates the contribution of gas and electricity to the total value added of this sector was estimated at 08 per cent. - Transportation, storage, communications. The arithmetic average of the growth rates of passenger traffic and sea-going cargo was taken as indicative of the growth rate of this sector. - Wholesale and retail trade. The growth rate was assumed to be equal to the growth rate of the total value of foreign trade, becau3e of the overwhelming importance of foreign trade (135% of GNP in 1965). - Ownership of dwellings. The growth rate was assumed to be equal to the increase in rates collected by the Government. The government endeavors to reflect in its rate assessment changes in the value of the prooerty. - Phlic aminitrationand defense The growth rate was assumed to be equal to the growth rate of government current expenditure minus dua+.inn and halth which rinneinidsd in the services setor. -Bankineg ndohe r r-,me. Tlin crmrf. -r+. wn- Qcinei t. 1-ip- equal to the growth rate of the rest of the economy. The reason for this this composite sector (banking deposits up 22% per year, number of overseas v-L.L-%.LL UyJ CVV pu~l- yidu10 2. - DwelliLgs anu non-resJ_ueno±La. uuLu_LLg. DZim1aUU a one Oum1 of private building investment (see Paragraph 4, Construction) and government ±nvenmens ini nousing. - Other construction and works. Figures for 1960 and 1961 are based on Dr. Chang's estimates. Increase in following years was assumed to be at the same rate as the increase in government capital expenditure. - Transport equipment, machinery and other equipment. Estimated to be equal to the value of retained capital goods imports plus 25%. This percentage should allow for mark-up by local trading houses on the imports of capital goods not directly imported by manufacturers and for a modest volume of local machinery production. - Increase in stocks. Figures for 1960 and 1961 based on Dr. Chang's estimates. Extrapolation was made in line with the growth of GDP. It was furthermore assumed that there was a positive correlation with changes in imports. Balance of Payments 6. - Merchandise trade. We have used customs returns figures but reduced imports to an f.o.b. basis. Transport and insurance on imports - were estimated at 7-1/2 per cent of c.i.f. value as in the balance of pay- ment estimates for 1963-1965 made by the U.K. Ministry of Overseas Develop- ment. - Non-factor services. The figures on this item are very rough approximations. For transportation, government services and other services we used tentative estimates by the U.K. Ministry of Overseas Development for the years 1960, 1964 and 1965. The values for the intervening years are the result of intrapolation. In the case of travel we used our own estimate (see also Paragraph 21 in the report). 1960 1961 1962 1963 1964 1965 (mnillinn.q nf BK inllnr.0 Transport -192 -221 -250 -280 -309 -267 Travel 541 585 633 686 743 797 Government 120 126 132 138 144 186 Other services 18 P - Th - 30 - h6 - 62 18 492 501 514 532 654 Evidently it is not possible to claim accuracy for these estimates. However in view of the rapid development or tourism it seems plausible that the total services balance should show a gradually rising trend in spite of increasing deficits (because of the expansion of foreign trade) on transport and other services. - Factor income from abroad. Data for 1960 and 1961 are based on Dr. Chang's estimates. Investment income was assumed to grow in the following years at the same rate as external assets (Statistical Appendix Table 17). Other factor earnings were assumed to grow at the same rate as foreign trade. Factor payments were assumed to grow annually by 2 per cent of the deficit on goods and non-factor services. 7. - Change in reserves. See Statistical Appendix Table 17. - Capital Account. Estimated as a residual. Includes remittances. Expenditure on GNP 8. - Consumption was determined on a residual. No attempt was made to make an independent estimate. -5- TABLE 1: Gross Domestic Product by Industrial Origin (in millions of HK dollars) 1960 1961- 1962 1963 1966 1965 A,riculture, forestry, fisheries 182 211 228 232 203 216 ftining and quarrying 16 19 19 19 19 19 Manufacturing 1,766 2,o6 2,311 2,669 3,087 3,5ub Construction 332 384 65 610 763 903 Eleotricity, gas, water, sanitation, services 134 155 180 207 240 274 Transportation, storage, communica- tions 268 310 341 367 397 .409 Trade, wholesale and retail 967 1,097 1,229 1,385 1,598 1,723 Ownership of dwellings 353 409 62 509 590 789 Public administration and defense 289 335 367 405 482 567 Ban-king, other services 1,070 1,240. 1,397 1,600 1,843 2,099 GDP at factor cost 5,350 6,200 6,989 8,004 9,222 10,505 Indirect taxes minus subsidies 230 267 298 340 388 39? GDP at market prices 568 6,6KI 7,28 80,44 9,610 10,897 Factor income from abroad 71 27 48 60 37 89 GNP at market prices 651 6,.49T 7,335 UOT 1 0,986 Population mid-year (estimate) (thous. persons) 3,171 3,171 3,410 3,592 3,692 3,80h ONP per capita 1,782 2,08 2,151 2,340 2,613 2,888 GNP per capita in US $ 312 358 376 410 457 505 - 6 - TABLE 2: Gross Capital Formation Tin millions of HK dollars) ig6n 19(1 196P 1963 1964 1965 Dwellings and non-residential knildn 4ib 1.14 c'I 826 1A109 129711 Other construction and works 128 160 20 240 261 321 and other equipment 465 486 570 710 845 970 formation 1,038 1,089 1,309 1,776 2,215 2,565 Total gross capital formation 1,1448 1,425 1,729 2,256 2,845 3,135 M"TL 1 ). D-*Id--- _1 rdyI (in millions of HK dollars) 1960 1961 1962 1963 1964 1965 Exports, f.o.b. 21867 21939 31317 3,83i 4,48 5).,027 Re-exports, f.o.b. 1,070 991 1,070 1 160 1 356 1 503 Total exports, f.o.b. 3,937 3,930 4,307 4,991 5,74 6,530 Imports, f.o.b. 5,424 5,523 -6,158 -6,856 -7,910 -8,293 Trade balance -1,487 -1,593 -1,771 -1,865 -2,126 -1,763 Non-factor services 487 492 501 514 532 65h Factor income from abroad 71 27 48 60 37 89 Current account -929 -1,074 -1,222 -1,291 -1,557 -1,020 Capital account (including remittances) 1,118 1,132 1,794 1,698 1,459 2,008 Change in reserves (minus sign denotes increase) -219 -58 -572 -407 +98 -988 TABLE -: Expenditure on Gross National Product (in millions of HK dollars) 1960 1961 1962 1963 1964 1965 Consumption 5,132 6,144 6,828 7,439 8,359 8,861 Gross capital formation 1.h8 1,425 1,729 2,256 2,845 3,135 Balance of foreign trade and current invisibles (non-factor services only) -1,000 -1,101 -1,270 -1,351 -1359 -1,099 Gross domestic product at market prices 5,580 6,467 7,287 8,344 9,610 10,897 Factor income from abroad 71 27 h8 60 37 S9 Gross national product at market prices 5,651 6,494 7,335 8,ho 9,647 10,956 STATISTICAL APPENDIX TABLE Public Debt 1 Public Debt A. Public Debt Outstanding as of March 31, 1966 B. Service Payments on Public Debt Population, Employment and Wages 2 Total Population 3 Vital Statistics 4 Net Immigration 5 Population by Five-Year Age Groups, 1961 Census 6 Literacy by Age Groups, Census 1961 7 Economically Active Population by Industry 8 Wages Publin Finanrp 9 (onqn1idtei rvernmen. Rnvonn 10 Consolidated Government Expenditure 12 Government Reserves 11~rw~ ~4 ~ ~ .. ~i+v' 10A I'/A7 -1070/71 MoneJAPy and. .C*~lL&4 .L4 11 %J1±U y O Jup jJ . 15 Analysis of Factors Affecting the Money Supply 16 Loans and Advances by the Banking System 17 External Assets Foreign Trade 18 Composition of Inports (c.i.f.) Ly Source of =mports 20 Composition of All Exports (f.o.b.) 21 Destination of Domestic Exports Uf.o.b. A. In million 1Ay B. In per cent of total 22 Domestic Exports of Textiles, Garments and Electrical Equipment 23 Destination of Re-exports (f.o.b.) 2b Trade Balance TABLE 1 : Public Debt A. Public Debt 1/ Outstandine as of March 31. 1966 (in thousands of US$ eauiv.) Debt Outstandine Item March 31, 1966 1. Debt Repayable in domestic currency 3-1/20 Rehabilitation Loan 1J17/LA A17 2. Debt Repayable in Foreign Currency (sterling) U.K. Govt loan for develop7 OV o.IL o n J. la Dv. P.a T.-1J.J P- - C-,- 1 Total Public Debt 13,7d6 .0. urvice raymenow on ruU± -euM ul uubup o1 Ue equiv.) FY 1966/67 interest 28 Repayment 6o Total 953 1/ An unknown portion of the debt repayable in domestic currency is held by creditors abroad. In view of the freedom of exchange transactions in Hong Kong, service payments on this debt are freely convertible into foreign exchange. Debt repayable in domestic currency was therefore included in this table. Source: Annual Report of the Accountant General. TABLE 2: Total Population 1931 1/ 849,751 1935 2/ 966,341 1940 2/ 1,821,893 1945 3/ 500,000 - 600,000 1950 1/ 1,670,000 1955 1/ 2,250,000 1961 4/ 3,133,131 1961 5/ 3,209,500 1962 7/ 3,442,700 1963 / 3,550,000 1964 7/ 3,636,600 1965 "/ 3,722,600 1966 9/ 3,785,300 1/ Ponulation census March 7. 1931. 2/ Annual report Director of Med. and Health Services 1950/1, quoted by Edw. Szczananik. "The Economic Growth of Hon- Kong". London 1958. 3/ Mid-year estimates by Edw. Szczepanik, op. cit. / PInntion annans March 7, 1961. / End-year estimates based on the by-census 1966. TABLE 3: Vital Statistics Births Deaths Est. mid Per 1,000 Per 1,000 year pop. Number population Number population 1956 2,440,000 96,746 39.7 19,295 7.9 1961 3,174,700 108,726 34.2 18,738 5.9 1962 3,346,600 111,905 33.4 20,324 6.1 1963 3,503,700 115,263 32.9 19,7468 5.6 1964 3,594,200 108,519 30.2 18,113 5.0 1965 3,692,300 102,195 27.7 17,621 4.8 1966 3,732,400 92,476 24.8 18,700 5.0 Source: Hong Kong Government Gazette and Hong Kong Government Report 1965. TABLE 4: Net IniRration Total for Averaee From mid-yenr to mid-year: 5-year periods per year 1935 1960 large irmigraticn 1940 1945 large immigration 1945 1950 975,000 195,000 1950 1955 301,000 6,200 From end-year to end-year: 1955 1960 270,000 54,000 1960 1965 192,400 38,480 1960 1961 41,700 1961 1962 141,600 1962 1963 11,700 1963 196h - 3,800 1964 1965 1,200 1965 1966 - 11.100 19W5-1955: Estimates by Edw. Szczepanik, op. cit. 195K-9 QAI estimates by tasl p aon ad affna lh+.n nffincia estimates of total population and natural increase .o/J Onulnj^"afa TuL 5: ropu.ation oy rive-Year Age Groups, "1o9 -ensus (in thousand persons) Age Group M F Total % 0-4 257.7 243.0 500.7 16.0 5-9 220.4 204.9 425.3 13.6 10-14 185.9 165.1 351.0 11.2 o-14 664.0 613.0 1,277.0 40.d 15-19 90.2 74.9 165.1 5.3 20-24 111.2 91.5 202.7 6.5 25-29 137.2 116.8 254.o 8.1 30-34 140.9 122.2 263.1 8.4 35-39 123.3 111.6 235.0 7.5 40-44 107.3 95.7 203.0 6.5 45-49 86.5 80.7 167.2 5.3 50-5h 60.1 63.8 123.9 4.0 55-59 37.2 49.8 87.0 2.8 60-64 23.6 4o.o 63.6 2.0 15-64 917. 87.0 1,764.6 3.4F 65-69 13.2 27.8 41.0 1.3 70-74 7.6 18.5 26.1 0.8 75 and over 5.4 15.5 20.8 0.7 over 65 76.f 6i.8 ~F7 "T Total Dopulation 1.607.8 1.521.9 L199.6 100.0 Source: Popnlat.ion Ann 1961. TABLE 6: Literacy by Age Groups, Census 1961 Of persons in age-group % can read 10-14 91.3 15-19 91.0 20-24 88.2 25-34 77.6 35-44 70.7 45-54 61.6 55-64 47.7 65 and over 35.3 Total population 74.6 Source: Population Census 1961. TARTRF 7! tninaie-mlny Aciv Penni.AAn hr Tu..et vanrnr 1rQ41 Number (thousands Per cent of persons) of total Agriculture and fisheries 07.6 7.2 Mining and quarrying 8.9 0.7 Manufacturing 475.5 39.2 of which textiles 87.2 7.2 garments 108.5 9.0 Construction 100.2 8.3 Utilities 19.0 1.6 Trade 131.3 10.8 Communications 86.7 7.2 Other services 265.3 21.9 Unclassified 16.6 1.4 Total working population 1,191.1 98.3 Unemployed 20.9 1.7 Total economically active population 1,212.0 100.0 Source: Population Census 1961. TABLEPR 8 i TTn p- M;ir(-h 1960 1962 1964 1965 1966 A. Index of Average Daily Wages for industrial Workers 1/ (195d = 100) All industries 121 134 160 173 186 All manufacturing industries 1/ 17 132 158 171 103 of which: textiles 2/ 121 134 156 171 185 Other industries W/ 157 152 178 195 213 1/ Excludes fringe benefits. The index figures are compiled by using the overall average wage in 1958 as the common base throughout industry, nrot the average daily wage in 1958 in the industry concerned. 2/ Cotton spinning, cotton weaving (2 and 3 shifts), knitting, garment and shirts industries. 3/ Footnote 2/ above plus rubber footwear, enamelware, metal torches, motor repairing and plastics industries. h/ Dockyards, electricity supply, tramway operators and communications. B. Wage Rates The range of daily wages for workers in manufacturin, industry in March 1966 was as follows: Skilled workers HK$8.50 - 27,00 Semi-skind HKt5.qO - 21.00 Unskilled HK$4.50 - 12.00 The weighted average daily wage rate for males in selected indistries in 1966 waq2 General Worker Highest Paid Skilled Workers 1/ IvTTr1 N Cotton spinning 7.50 10.54 (twister) Cotton weaving (3 shifts) 7.35 10.53 (sizer) Cotton weaving (2 shifts) 10.15 Knitted piece goods 6.03 (female) 11.78 (machine operator) Garment and shirts 8.00 12.50 (machine operator) Rubber Producers 7.24 14.00 (hand cutter) Enamelware 8.20 11.39 (enamel painter) Metal trash cans 8.16 13.00 (painter) Electronics 9.00 Plastic flowers 7.89 13.06 (mould maker) Construction 11.60 33.00 (bamboo scaffolder) 1/ Excludes technicians, foremen, supervisory staff, etc. Source: Department of Labour. TABLE 9 Consolidated Government Revenue (HX$ million) 1960/61 1961/62 1962/63 1963/66 1964/65 1965/66 1u7dg Direct Taxes Total 268,2 332.2 368.2 435.6 511.5 615.1 675.3 of which Profits & Earnings Tax 155.1 199.1 215.1 268.5 319.2 372.1 417.0 Rates 101.4 116.3 128.5 144.6 167.6 224.0 242.6 Estate duty 11.7 16.8 24.6 22.5 2,7 19.0 15.7 Indirect Taxes Total 239.7 279.3 306.0 349.4 398.3 391.0 455.8 of which Duties 168.0 175.8 199.9 225.5 254.7 259.4 316.0 Stamp D4ties 39.9 55.3 53.1 62.7 74.8 61.7 62.0 Other 31.8 48.2 53.0 61.2 68.8 69.9 77.8 Other Revenue Total 1. 7 81.9 92.6 115.1 133.2 124.4 126.8 Government Enterprises current surpluL-57.5 76.9 70.5 16.9 V 70.3 94.8 115,6 Other Income Total 171,2 215.4 370.6 386.1 360.0 351.5 363.1 of which Receiptp Reimbursements & Sales 30.4 33.7 48.7 50.3 57.6 67.6 85.5 Rents 5/ 39.0 46.5 56.8 71.2 87.0 112.1 117,5 Interesg V 38.3 46.9 57.0 69,8 82.4 95.7 89,1 Land sales 63.5 90.3 208.1 194.8 133.0 76.1 71.0 Total Revenue 818.3 985.7 1,207.9 1,303.1 1,473.3 1,576.8 1,736.6 1/ Coinprises taxes on bets and sweeps, business registration, dance halls, entertainment, hotel accommodations and motor vehicles. 2/ Comprises licenses, franchises (including royalties from privately owned utility companies), fines, forfeitures, fees and proceeds from lottery. Excludes revenues accruing to Post Office and Airport. 3/ Comprises current surplus of Post Office, Railways, Airport and Waterworks. / Includes repayment of Development Loan Fund Loans (DLF, a separate fund for the financing of Government and private sector projects), net surplus of Stores Department and of Government quarries, plus outside contributions towards Government projects. 5 Includes rental income of Housing Authority. Includes interest accruing to Development Loan Fund and Housing Authority. 7/ The net surplus fell drastically in 1963/64 because of the Water Emergency. The operation of tankers bringing water from China cost H$44.9 million. 8/ Revenue of the Housing Authority in 1966/67 estimated by the mission. Note:The classification of revenue is not the same as is used by the government. Source:Annual Reports of the Accountant General (1960/61-1965/66); Estimates of Revenue & Expenditure for 1966/67. TABLE 10 : Consolidated Government Expenditure milon) 1960/61 1961/62 1962/63 1963/64 1964/65 1965/66 1966/67 Budget I. CUT RENT EXPENDITURE General Services Total 231.1 248.9 264.1 288.1 :334.6 403.5 452.5 as to General Administration 102.1 106.4 116.4 129.6 157.7 182.5 219.5 Police, Justice, Prisons 75.8 77.0 85.7 93.6 111.5 127.2 138.8 Defense 1/ 53,2 65.5 62.0 6h.9 65,4 93.8 94.2 Economic Services Total 55.3 55K2 61,o 65c6 79.7 88.2 98.6 as to Agriculture 6 5 7.2 7,6 8.3 9.5 10.7 11.3 Roads and Bridges 615 7.7 8.1 8.5 8.6 9.7 10.7 Ports and Harbor 10.3 11.2 11.7 14.7 15.6 16.5 194 Commerce and Industry 89 1003 11.9 13.7 16.2 20.5 24.9 Other 23.1 1808 21.7 20.4 29.8 30.8 32.3 Social Services Total 229.2 265.1 299.2 337.4 110.3 48:2.3 554.5 as to Education 99.8 119e9 140.0 155.5 L88.7 224.5 256.8 Health 73.0 82.9 89.9 101.0 122.8 140.4 158.5 Welfare 9. 8 10.5 11.9 1l 4 12,9 15.1 19.2 Urban Services 31.0 32.7 34.1 38.6 44.4 52.0 57.7 Housing and Resettlement, 2/ 15.6 l1l 23.3 30.9 41.5 50.3 62.3 Transfers Total 24.8 24.7 25.9 27,.0 30.5 32.2 36.6 as to Public Debt Interest 1.7 1.7 1.7 1.7 1.6 1.6 1.6 Pensions 23.1 23.0 2.2 25.3 28.9 30.6 35.0 TOTAL CURRENT EKPENDITURE )40,. 5 93,9 650 ,2 718.1 855.1 1,006.2 1,142.2 (Continued on next page) -.2- 1960/61 1961/62 1962/63 1963/66L 1964/65 1965/66 1966/67 B Budget II. CAPITAL EKPENDITURE General Services Total 23.7 16.0 23.5 25.6 3)4.0 95.1 77.0 as to General Administration 19.1 11.5 17.5 15.7 23.8 82.4 3/ 58.9 Police, Justice Prisons 4.6 4.5 6.,0o 9.9 10.2 12.7 18.1 Economic Services Total 134.1 165.6 215.2 226.7 278.4 357.1 308.7 as to Agriculture 5/ 0.5 2.0 1.1 0.9 1.2 0.7 2.5 Roads and BrIdges 22.0 16.7 22.2 25.6 28.9 13.1 52.6 Po2ts and Harbor 5/ 2.1 4.0 4.1 1.4 12.2 26.0 12.8 Government EnterpRises 4/ 74.9 113,0 141.3 122o7 170.3 205.2 184.0 Commerce and Industry 0.1 190 2.2 0.5 0,2 1.2 20,2 Land Development 34.5 28.9 hL.3 65,6 65.6 80 9 54.6 Social Services Total 140.3 17798 218.2 285.0 272.5 267.8 340.5 as to Education 5/ 18.7 26.5 2)4.7 32.2 34.4 31.6 45.4 Health and Sewerage 19.1 18.9 37.0 33.7 14.2 25.6 27.7 elfare 04 0,2 2.3 2.1 0,7 0.7 0.7 Urban Services 7.0 18.3 12.7 10.5 17.,2 .38.4 39.6 Housing and Resettlement 6/ 95.1 113.9 11.5 206,5 206,0 171,5 227.1 TOTAL CAPITAL EXPENDITURE 298.1 359)4 456.9 537.3 584.9 720.0 726.2 1/ Includes capital expenditure. i/ Includes current expenditure by Housing Authority (Mission estimate for 1966/67). 3/ Includes advances to banks of HK$30.7 million during banking crisis. G/ Capital expenditure by Post Office, Waterworks, Railway, Airport, Government Stores and Quarries. / Includes loans made by Development Loan Fund. $7 Includes Development Loan Fund loans for housing (principally to Housing Society) and Capital expenditure of Housing Authority. Note: The classification of expenditure is not the same as is used by the government. Source: Annual leports of the 4ccountant General (1960/61-1965/66); Estimates of Revenue and p' enditure for 1966/67. TA3LE 11 : Consolidated Government Surpus/Deficit (HKS million) 1966/67 1960/61 1961/62 1962/63 196.3/64 1964/65 1965/66 Budget Current &e capita. expenditure ó38.5 953.3 1,107.1 1,255.4 1,440.0 1,726.2 1,868.h ,Revenue 813.3 985.7 1,207.9 1,303.1 1,473.3 1,576.8 1,736.6 Grants from abroad 1/ 2.0 4.1 0.2 2.4 4.0 3.4 0.7 Surplus/Deficit -18.2 36.5 101.0 50.1 37.3 -16.0 -131.1 1/ World Refugee Year Schemes and Commonwealth Development & jelfare Schemes. Source: Annual Reports of the Accountant General (1960/61-196/66); Estimntes of Revenup Pnd Txnenciture for 1966/67. TABLE 12: Government Reserves (in HK miionT March 31 December 31 1961 1962 1963 1964 1965 1967 2/ General Reserves 489.7 606.2 757.3 811.7 680.8 670 Revenue Equalization Fund 138.0 138.0 138,0 138.0 138,0 138 I/ Exchange Fund Surplus 242.4 38h.2 45o,6 30117 389.5 426 Balance in Development Loan Fund 19.8 22.1 20. 60.2 46.9 :31 TOTAL 889.9 1,150.5 1,366.3 1,311.0 1,255,2 11265 Change +260.6 +215.8 -55.3 -55.8 +L0 1/ HK$150 million was transferred from Exchange Fund Surplus to Development Loan Fund during 1964. 2/ Forecast by Government. 3/ A contingency fund for unexpected revenue shortfalls. Note: Not all of these reserves are foreign assets. A. certain proportion (less thnn In- per cent in March 1967) consists of balances with the local banks. Source: Information supplied by the Government. TAILE 13 : Gov-rnment Forecast of Revenues and_Exenditur /6-90/71 1/ (K million) 1966/67 1967/68 1968/69 1969/70 1970/71 1961/62-1365/66 1966/67-1970/71 (cumuilative) 1.RVN revene 2/108.5 2 211.3 2 99.6 202)15.9 internal reventie -58021 ,' 890 3,00S-1 Rates 267.0 2'8.0 307.0 326.0 368.0 731.2 1,506.0 Duties 310.0 323.6 3b8.3 369.2 391.6 1,115.8 1,7h7.5 Lands and rents 1.5 96.1 110.8 126.8 142.9 292.2 553.1 Land sales 6 '.0 75.0 50.0 80.0 50.0 699.6 392.0 Interest 66.1 6L.0 56.0 55.9 51. 260.2 297*6 Development Loan Fund 66.1 6l.0 6.0 .7.1.6 209.9 36.2 61.5 L3.0 h3.7 h620.5. Government enterprises 196.5 207.3 219.0 227.0 231.5 662.9 1,085.3 Other revenue 315.1 336.0 348.0 356.5 367.6 1,139.1 1,723.2 2. CURRENT_EXPENDITRE I?54.3 1 .L 1 1,568.3 1 671.6 3J858 7 3I6.8 Police112.5 120.0 l3' t1.0 9 Defence contribution 26.2 67.8 67.8 67.8 67.8 121.0 295.6 Education 267.0 267.6 290.7 315.6 360.1 828.7 1,461.0 Health 167.1 165.0 178.3 195.6 204.2 53'.9 910.0 Social welfare 18.9 22.0 26.2 25.7 28.8 61.7 119.6 PWD 80.5 80.0 86.5 92.0 97.8 269.7 637.1 Urban services 66.7 65.6 70.8 7h.9 79.0 202.0 355.0 Public administration and other current experditure 539.1 571.6 616.6 663.6 71:2.7 1,571.6 3,103.2 (Personal emoluments) (62C.3) (625.5) (668.2) (714.1) (756.2) (2,003.6) (3,38L.8) 3. CAPITAL EXPENDITURE 728.7 760.5 806.3 797.3 769.8 2,91k2 3 2.6 Defence contributions T7 9.T 9,5 97 17 Education 66.9 78.5 87.j 65.0 62.3 16.7 318.1 Health 22.6 22.3 16.9 16.7 16.1 116.1 90.6 Housing 206.7 213.3 220.0 216.8 216.0 807.5 1,070.8 Waterworks tI2.0 130.0 82.9 91.L 115.8 723.9 562.1 Ciil engineering 135.0 163.5 265.0 262.0 203.0 n.a. 988.5 Other capital expenditure 122.6 163.3 166.5 157.3 167.0 n.a. 737.2 b. OVERALL SURPLUS/.DEFICIT -105.6 -125.6 -159.2 -156.3 -117.0 +97.6 -661.5 1/ Classification not comparable with tables 9, 10-and 11. 2/ Includes corporation and income tax, property tax, stamp duty, bets and sweep tax and a few smaller taxes collected by the Inland Revenue Dept. 3/ Debt service payments received by D.L.F. 6/ Current receipts of waterworks, post office, railway and airport. 5/ Includes capital expenditure of D.L.F. 6/ Roads and bridges (including Cross Harbour Tunnel), sewerage, development (including new towns), port works. No allowances made for Govern- ment contribution to port containerisation and mass transit system. Source: Information supplied by the Government. TABLE 14 : Money Supply (in million HK$) Sept. December 31 1955 1960 1961 1962 1963 1964 1965 1966 Notes issued 726.2 914.7 953.0 1,042.5 1,140.2 1,296.5 1,628-8 1,690.7 Notes & coins issued 51.5 82.2 72.2 78.7 89.6 103.0 111.0 122.2 Demand deposits 1/ 41.2 1,407,,7 1,470.1 1,6(5.0 1,996.7 2,236.5 2,532.0 2,697.3 ToTAL 1,718.9 2,404.6 2,495.3 2,785.2 3,226.5 3,636.0 h,271.8 4,510.2 Offsets: Cash in banks 1-4.L 135.7 11.1 161.9 201.5 238.4 220.6 231.8 Government cash 2/ 1.8 7,0 5.9 5.0 8.3 5.9 6.4 5.8 Government deman[ deposits 2/ 18.6 61.8 90.3 83.9 102.7 1h0.8 86.7 45.5 Demand deposit of note & coin fund 9.8 30,1 _17.6 11.4 10.8 10.6 11.1 5.3 Total Offsets 174.3 234.6 227.9 262.2 323.3 395.7 324.8 288.4 MoNEY SUPPLY 1,5h4.6 2,170,,0 2,267.h 2,523.0 2,903.2 3,240.3 3,9h7.0 4,221.8 1/ Includes net balances due to non-reporting banks which are outside the banking s-ystem as defined here. 2/ Includes balances of Developrent Loan Fund. Source: Information provided by the Government; Annual Reports of Accountant General. TABL:, i Anal sis of Factors Atef.fectgthe cney Jupýy ,in millions of HK dollars) Jeceab-e 31sept. -_e_ember31. 195_ 19:60 1961 162 1963 1965 1965 1966 1. ublic, sector :. ank credit to Oovermnmentl, 25.0 2.25. 25.0 25.0 25.0 25.0 25.0 2. 'Iote and coin issue by Oovernment 31.5 82.2 72.2 78.7 89.6 103.0 111.0 122.2 To tal7 107.2 97.? 103.7 114.6 I.c 157.2 Offsets 3. Local currency d balance- 73.7 111.6 206.6 328.4 h80.0 476.8 42).3 365.1 4. Balances abroadý 587.8 560.0 4-6.3 45.0 434.2 ;5.2 506.2 489.4 5. Assets Note and Coin Security Funds 29.5 79.2 71.2 78.3 89.4 101.1 110.7 120.9 Total 691.0 750.8 72. 1 '6.7 I,003.6 1,162.7 1,0 1.2 97.6 o. NJet credit to public sector -61h.5 -643.6 -6w4.9 -757.0 -889.0 -1,034.1 -905.2 -828.2 II. Private sector 7. Loans and advances, 631.6 1,719.7 2,å03.9 2,823.7 3,617.1 4,561.1 5,032.6 5,255.1 6. investnent . 60.6 125.0 147.1 156.0 233.8 512.8 537.8 Total 1,780.3 2,527.9 9 70.8 3773.1 ,794.9 5,55. ¯5,792.9 O fffsets 9. Tine arid savings deposits 231.6 1,246.2 1,786.5 2,395.5 3,039.5 3,969.3 4,356.3 5,067.2 10. ;et miscellaneous accounts 132.0 201.3 315.6 212.4 200.1 -136.8 541.1 426.2 Total 363.6 7.5 2,102.0 2~507.9 3239.6 3,832.5 5,88 7 T93-. 11. Net credit to private sector 302. 332.8 425.9 362.9 533.5 962.4 638.0 299.5 12. Het domlestic credit -312.1 -310.8 -219.0 -39.1 - 55.5 -71.7 -267.2 -528.7 li . External sector 6/7/ 13. Exchange Fund 66.? 86.4 88LL.4 978.5 1,074.5 1,233.5 1,539.8 1,622.0- ( 'nti a n ne p pagE -2- Sept. December 31 19E5 1960 -961 1962 1963 1966 1965 1966 1. Government balances abroad $37.8 $60.0 466.3 465.0 636.2 586.2 506.2 489.6 15. Note and Coin Security Funds 19.7 9.1 53.6 55.3 58.6 58.5 58.6 76.5 16. Net bank balances 57.6 946.7 1,001.6 1,385.1 1,660.7 1,398.0 2,075.7 2,567.8 17. Bank investments 36.6 80.6 82.7 64.2 30.8 37.9 l6.0 16.8 Total external sector 1,717 2,7T(U 277T 2,917.0 3,2 T 7 3,312.0 - W777.i ,77o.5 Total Money Supply 1,52&.6 2,170,0 2,267,6 2,523.0 2,903.2 3,260.3 3,967.0 6,221.8 1/ Owing to the lack of comprehensive statistics covering the whole banking system, the money supply is defined here as equivalent to the monetary liabilities of the reporting "authorized" banks (the term refers to authorization to deal in the official foreign exchange market) and the Government vis-a-vis 6he general public. Thus, monetary liabilities of the non-authorized banks, small Chinese banks, are excluded, and the money supply figures given consequently represent some under-estimation. Moreover, as the number of reporting banks rose over the period covered, part of the increase in the money supply is due to change in the statistical coverage. However, the error involved is comparatively small, since most of the additional reporting banks were newly established. 2/ Bank credit to the Government consists entirely of bank holdings of bonds issued in 1948, which are very roughly estimated to be about HK$25 million. 3/ Consists of cash and bank balances of the Colonial Governent, the Kowloon-Canton Railway, the Post Office, special funds, and the Development Loan Fund. 6/ Includes balances held by special funds and the Development Loan Fund. Sterling assets are valued at Ll - HK$16.00; all investments were at market value. 5/ Includes net balances due from non-reporting banks ihich are outside the banking system as defined here.. 7/ Comprises only that portion of sterling assets which is equivalent to the amount of certificates of indebtedness outstandIng to the note--issuing banks in Hong Kong. 7/ Estimate by Mission. Source: Annual rep6rts of the Accountant General; information provided by the Government4 TABLE 3.6: Loans and Advances by the Banking System (in millions ofC HK dollars) F 19 i 96 6 e n d o f e n d o f June September December llarch June September Manufacturing 985.8 1,o14.7 1,014.7 1,075.9 1,1:5.0 1,120.7 of which: Textiles 491.8 513.6 496.5 510.2 524.6 501.L Footwear and garments 98.3 98.2 106.0 114.4 120.6 118.0 Metal products and engineering 1J0.9 107.3 101.2 96.7 93.5 91.1 Rubber, plastics, chemicals 65.4 U3.1 64.3 73.7 79.0 74Æ8 Electrical and electronics 27.7 26.8 27.3 36.7 37.6 45.8 Transport and transport equipment 155.2 159.5 190.6 191.6 189.0 139.9 Building construction 903.4 892.2 932.9 950.2 937.2 939.5 Týrade 1,619.9 1,6093 1,60.4 1,653.4 1,651.-h 1,730.2 Financial concerns, ineluding banks 274.2 243.6 199.8 210.3 135.6 173.4 Professional and private individuals 725.5 713.3 683.2 671.6 643.0 671.7 Others 484.9 492.8 521,7 547.0 571.3 5614.7 Total 5,1148.9 5,I5. 5,183.3 5500.0 5--2 3901 Source: Government Gazette. TABLE 17: External Assets 1/ December 31 1955 1960 1961 1962 1963 L964 1965 Sept. 1966 Exchange Fund 2/ 713.6 1028.8 1,119.2 1,39L.3 1,51L.9 1,524.1 1,936.6 1,936.6 Notes & Coins Security Fund 19.7 49.1. 53.621 55.3 58.6 58.6 8.h 7h.5 Government holdingsh/ 587.8 560.0 66..3 454.0 434.2 584.2 506.2 489.4 Net bank holdings,5/ 57.6 94.7 1,oo1.,4 1,385.1 1,660.7 1,398.0 2,0756 2,547.8 Bank investments 36.4 80.6 82.,7 4h.2 30.8 37.9 1.0 16.8 TOTAL 1,905.1 2,663.2 2,721.2 3,292.9 3,700.2 3,602.7 4,590.7 .5,06.1 Change 758.1 +58.0 +571.7 +407.3 1-97.5 +988.o +474.4 1/ Excludes the foreign-exchange holdings and balances abroad of the non.-authorized banks. 2/ Sterling assets valued at Tl = HK$16.00; all investments are at market value. 3/ Figure refers to March 31st of following year. 4/ Includes sinking fund assets held abroad. All investments are at market value. 5/ Includes Head Office or Branches outside Hong Kong and short claims such as bills discounted drawn on abroad. Source: Information supplied by Government, TABLE 18: ComEcsition of Imports (c.i.f.) HK$i milli) 1955 1960 1961 1962 1963 1964 1965 1966 Food 971.3 11353.2 1L06.5 1 609.0 1,733.4 2 012.5 2 041.5 2 216.1 Cereals, cereals prep. 250.7 317.2 360.2 t 731.2 398.3 Meat, meat preps & live animals 215.4 334.1 309.4 346.6 403.3 512.4 603.1 653.6 Fruits, vegetables 200.3 263.9 263.9 287.0 304.4 340.7 402.1 412.4 Dairy products & eggs 78.3 128.2 135.3 149.0 168.8 184.5 186.8 187.0 Fish & fish preps. - - 113.3 101.0 111.4 127.1 180.6 176.6 194.6 Beverapes & Tobacco 79.9 115.3 132.4 148.6 171.3 189.7 211.7 208.2 Crude Materials 554.5 687.5 723.2 747.8 820.1 906.6 923.6 1 030.1 Textile fabrics & waste 227. T 7 377 3M i 3m.T 3 W Wood, lumber, cork 65.4 87.3 63.8 84.9 86.6 83.0 65.0 60.8 Mineral Fuels 134.3 197.6 212.9 235.4 261.5 262.0 291.3 336.6 Chemicals 328.0 465.9 531.8 558.0 573.6 670.4 669.4 747.7 Plastic materials - - - - - - - - - - k'EL 220.6 07. Manufactured goods 1 129.( 1 932.1 1771.5 1 995 0 2 335.3 2 677.7 2 67.2 3 297.2 Textile yarn, fabrics, etc., T.1W.f 366. .2. 1T403.1 1, 279. IF Non-metallic mineral manufactures, n.e.s. - - 107.5 103.2 131.7 168.1 404.5 599.5 735.7 Paper, paperboard 122.3 133.7 138.2 155.2 166.9 204.0 203.3 242.2 Iron and steel - - - - - - - - - - 308.6 348.4 274.8 MachineryTansprt uipm 211.3 598.8 622.8 710.9 855.1 1 024.3 1,176.7 3 309 6 Machinery other than electric 4 26977 271 L 320.7 Electric machinery & appliances 56.8 175.9 207.5 245.4 344.6 409.4 505.I 721.0 Transport equipment 72.1 153.9 143.9 173.1 166.2 190.5 203.2 180.9 Miscellaneous Manufactures 251.3 427.4 464.4 535.5 579.0 713.4 796.4 856.6 7=ng 337'7M. 2. C 09. 1 5 -2~ 1-M. ~ T UT7? Professional, scientific & controlling instruments - - 176.2 192.8 214.2 209.5 221.2 250.1 307.5 Others 59.3 86.0 104.9 117.0 82.6 94.0 86.6 94.8 TOTAL IKPORIS 3,718.9 5,873.7 5,970.b 6,657.2 7,411.9 8,550.6 8,964.8 10,097.0 a Tis'sc-n--------eIT-T- I-------av-a:CL-=a-------a 1------a--i----- 6ource: Hong Kong Trade 6tatistics. TABLE 19: Scurce of Imports 1955 1966 Percent from Percent from Total developed countries 52.7 53.7 of %hi eh USA 8.7 10.8 UK 11-9 10.0 EEC 9.6 7.8 Other TIuiAna+ l Coanz ounieiJ h.2 2-8 Japan 1.1 18.2 0t Iei Deve]-cped Countr, -/ n. Tot al ,'Ls deveope Co--4-- 1,7 * h of which Middle East 0.7 2.3 of which lainland uniua C-. 24. Thailand 5.0 2.6 Malaysia ;.w V.6 Other Asian Countries 9.4 9.1 Other Countries 0.4 1.2 TOTAL 100.0 100.0 L/ Excludes Communist Bloc Countries. / Australia, New Zealand, Canada, and bouth Africa. 3/ For 1966, Malaya, Sabah and Sarawak; for 195, Malaya and North Borneo. Source: Hong Kong Trade Statistics. TABLE 20: Conposition of all Exots (FL.a.) (HK- m- llin) 1955 1960 1961 1 9 Total DoMestic Re- Domestic Re- Domestic Re- Domestic Re- Domestic Re- Domestic Re- Domestic Re- Exports Exporta Eports Eorts Exports Ep Exports Exports xports Exports Exports Exports Exports FOOD 303.5 130.0 180.5 114.ä 191 .2 120.4 259.4 156.3 259.9 160.4 32M.4 135.1 278.2 153.9 299.8 Fruits, vegetables 120.3 ¯3. 8. ~i 653 ~ 26.h ~¯ ~.5 ~7 0 2 ~727 .~ ~7.3 22.7 2 BEVERAGES & TOBACCO 18.5 13.5 12.3 26.8 12.5 47.4 12.3 60.3 12.6 58.6 10.5 66.5 12.4 37.9 13.8 CRUDE MATEIALS 271.1 137.9 171.8 130.6 136.3 84.8 146.2 85.0 127.1 102.h 160.1 108.3 156.c 110.2 172.5 Metalifferous Ores, scrap Y2.7 100.7 2.0 -97.2 T.7 -M. -9 7 -.'' . 9.1 -. ~~- ~--. - ~ CHEMICAIS 263.1 5J..1 130.0 55.8 177.0 56.9 176.7 52.1 211.5 51.6 17L.3 54.7 236.4 2 254.3 Medical, Pharnaceutical prod. S3. lfif , 7 J795 63.8 17.2 ~r23 =1. -93~7 17.3 -0. T.0 11-23 20 1173 * 1*0 MAUFACTURED G00DS 877.2 7691 380 5 908.5 274.2 861.6 274.2 941 0.2 952.2* .2* 1,1090* . 21. 773.* Textile yarn, fabrics, & -Ö7." .210. 9~ 129.2 7. .3 7.. _20.. 17 _21K -2 -anufactures of metal, n.e.s. 104.2 117.8 9.9 120.8 7.8 135.3 7.7 rO.9 6.1 1h5.9 20.2 157.h 15.9 175.7 21.6 Ngon-metallic mineral manufac- tures, n.e.s. -- - -- 13.5 8.7 14.5 8.0 13.5 8.4 34.1 135.3 36.14 238.2 45.4 334.3 MACHINERY & TRANSPORT EQUIMENT 79.5 76.8 66.1 100.1- 67.0 151.2 6 .8 196.0 .9 22.6 _22 j 6 £3_2.2 &,9 Machinery, other than elect. =3. 122 22 ~~ 29.1 -17.3 27 21.0 233 2 .I 31.o 27.0 .7 27.0 .0 Elect. inachirery appliances 27.4 47.4 20.0 73.2 24.7 l06.4 22.0 152.7 19.5 186.3 23.4. 293.2 18.1 476.1 30,7 Transport equipment 17.7 17.2 21.5 13.2 13.2 27.5 13.0 22.4 12.1 14.9 16.6 23.5 18.7 29.1 20.2 MISCELLANEMUS MANUFACTURES 692.2 1,672.8 10 7 1 571.5 95.2 1 968.L 102.0 2 317.1 106.3 2 856.7 12h.h 3.191.0 1h7.2 3W.s T7-17 Clothing 330.1 1,0lU. T "62.1 10.3 7. ~2 T _,61. Ö- 1,772.6 -. 2 Footwear 81.8 11.5 2.4 103.7 1.9 129.5 1.0 146.3 0.7 144.6 1.2 152.7 1.2 18E.2 4.5 oTRS 26.9 1.6 23.6 1.0 30.6 26.7 3. 22.8 3 20. h8 23.h 56.8 21.7 55.3 TOTAL 23r( 2, 76.r 2.939.0 991.0 .3,17. 1,069.9 3 1,160.2 427.6 1 356.C 5,026.8 1 0028 5,729.8 1,833.3 Slightly different classification. Source: Hong Kong Trade Statistics. TABLE 21: Destination of Do.nestic Exports (f.o.b.) A. In million HK$ 19553/ 19583/ 1960 1961 1962 1963 1964 1965 1966 Total Developed Countries 718.5 1,192.2 1,894.3 1,819.8 2,267.3 2,709.1 2301.h ,898.9 4,538.1 of which: USA 87.9 326.4 745.2 678.9 878.6 973.8 1,227.2 1,718.8 2,036.3 UK 251.3 393.2 585.2 589.2 714.4 863.8 968.4 860.7 987.3 W. Germany 33.3 64.6 107.0 l05.,8 151.2 217.3 :294.1 370.7 420.5 Sweden 5.7 17.5 33.7 35.7 50.0 64.3 78.0 84.8 88.7 Netherlands 20.2 23.2 16.2 22,9 34.2 43.9 57.2 86.2 120.1 Other European Countries 52.4 70.1 72.0 87.6 111.7 149.4 :215.1 233.h 304.6 Canada 28.9 r1.2 76.6 64,,7 90.8 85.3 .115.9 135.1 175.5 Japan 146.3 120.2 100.7 106.5 76.7 120.6 118.5 133.0 161.6 Australia 3.4 75.9 86.4 60.7 85.9 134.4 112.5 133.9 128.2 Other Dev. Areas 2/ 39.1 49.9 71.3 67,,8 7:3.8 106.3 114.5 142.3 115.3 Total Less Developed Areas 1 815.9 1,796,6 972.9 11.j2 100 01 . 121.9 1,126.2 1,127.9 1 191.6 of which: Western Hemisphere 60.2 90,2 102.8 95,.2 107.2 108.4 125.1 128.9 146.4 Middle East 27.9 51.7 61.0 62,.7 88.3 100.1 99,8 122.0 122.3 Singapore ) ) ) ) ) ) 151.6 142.9 152.3 Malaysia 404.9) 427.5 276.5) 3150) 326.4) 348.0) 178.6 164.4 125.3 Indonesia 193.4 210.8 78,8 172,9 56.9 42.5 53.1 40.7 102.1 Thailand 179,1 217.0 83.0 85.8 73.6 76.9 91.0 98.6 82.1 Other Asia 713.2 556.9 143.7 126.6 139.6 145.0 137.1 142.1 183.3 Africa 192.2 180.2 177.0 1993 192.7 2:28.6 220.1 217.7 205.5 Other Countries 45.0 62.3 50.1 61.7 65.4 72.4 69.4 70.6 7.3 TOTAL 2,534.4 2,988.8 2,867.2 2939.0 3 317.4 3,831.0 4,427.6 5,026.8 5,729.8 (Continued on next page) -2- B. In per cent, of total % Exported to: .955 3/ 1958 1960 1961 1962 1963 1964 1965 1966 Total developed countries 28.3 39.9 66.1 61.9 68.3 70.6 74.6 77.5 79.2 tf which: USA 10.9 3.12 j.l~ 26~7 2 277 73U.-2 UK 9.9 13.2 20.4 20.0 21.5 22.5 21.9 17.1 17.2 W. Germany 1.3 2.2 3.7 3.6 4.6 5.7 6.6 7.4 7.3 Sweden 0.2 0.6 1.2 1.2 1.5 1.7 1.8 1.7 1.5 Netherlands . 0.8 0.8 0.6 0.8 1.0 1.1 1.3 1.7 2.1 Other European c.;!/ 2.1 2.3 2.5 3.0 3.4 3.9 4.9 4.6 5.3 Canada 1.1 1.7 2.7 2.2 2.7 2.2 2.6 2.7 3.1 Japan 5.8 4.0 3.5 3.6 2.3 3.1 2.7 2.6 2.8 Australia 2.1 2.5 3.0 2.1 2.6 2.2 2.5 2.7 2.2 Other Dev. Areas 1.5 1.7 2ý5 2.3 2.2 2.8 2.6 2.8 2.0 Total Less developed areas 71.7 60.1 33.9 38.1 31.7 29.4 25. 4 22.5 20.8 of which: Western Hemisphere T3 3 3. 2' 3. Middle East 1.1 1.7 2.1 2.1 2.7 2.6 2.3 2.4 2.:1 Singapore 16.0 14.3) 9.6) 10.7) 9, 9.1 3. 2.8 2.7 Malaysia 9) )) ) ) ) 4e0 3.3 2.2 Indonesia 7,6 7.1 2.7 5.9 1,7 1,1 1,2 0.8 1.8 Thailand 7.1 7.3 2.9 2.9 2.2 2.0 2:.1 2.0 1. 4 Other Asia 28.1 18.6 5,0 4.3 4.2 3.8 3.1 2.8 3.2 Africa 7.6 6.0 6.2 6.8 5.8 6.0 5.0 h.3 3.6 Other countries 1.8 2.1 1.8 2.2 2.1 2.0 1.5 1.5 1.3 TOTAL 100.0 100.0 100.0 100.0 100.0 10, 100.0 100.0 100.0 1/ Excludes Coimunist :Bloc countries other than Yugoslavia. 2/ New Zealand and South Africa. 3/ Includes re-exports. Source: Hong Kong Trade Statistics. TABLS 22: Donestic_Exports of Textiles, Garments and Electrical Equipment (f.o.b.) (in millions of HK dollars) Textile Yarns and Fabrics 1960 1965 ilectriral Machinery 6 Appliances 1960 1965 Garments 1960 1965 Grey yarns 96.5 92.L Electrical transformers : current breakers 3.9 Suits, jarkets and coats 26.9 79.6 Other textile yarns and thread 6.1 10,3 Other electrical switchgear 0.9 Slacks, shorts, jeans, trousers 177.6 211.8 Cotton sheating 118.6 J-h3.2 Transistorized radios and parts C.3 129.5 Skirts, dresis, frocks, blsuses Poplin and broadcloth cottns 15.8 56.6 Television parts 27.5 jumpers 115.5 160.1 Cotton irills 53.0 65.0 oier teleconrrunicati.ns equiDernt 0.2 Shirts 228.2 339.0 Cotton shirting 0.3 5LI.9 Eictric fans .6 12.0 Swimsuits and overalls 11.5 27.7 NL and sateen cutton 10.8 66,2 Other domestic electrical equiprnt 0.8 Handkerchiefs, socks, stockings, Canvas and ducks cotton 1.5 37.9 Torch batterics and bulb 20.5 28.0 te 19.,7 23.3 Cotton jeans and denims 3.6 20.8 Radio batteries 0.9 5.3 Gloves 92.6 93.3 Cotton flannels n.S. 29.0 Filament bulbs 6.0 4.2 Jackets, pullovers and jumpers 65.3 u67.5 dovei cotton or other textile fabrics 28.5* 95., . lectrical fiber and buls 51.5 Undergarents and nightgarments 13h1.å 16Li.1 Cotton piece goods, printed or not Electrical equipmknt for vehicles 5.3 Other outer garrrents 106.1 16.2 printed 115.9 n.s. Capaeitcr condensors 5.1 Other 52.7 60.0 Tulle, lace, embroidery, ribbons n.s. 3.9 Klectrical plaas and switches )j'h 11.2 TOTAL 1, 010. 1,772.6 Cordaga oi synthetic fibre 2.2 9.5 Other electrical mnachinery 5.6 8.9 af which io: Cotton fishing nets 0.3 3.1 Unspecified 5.0 - U.S.A. 37.2% 35.2% Other special textile fibers n.s. 5.9 TOTAL 7.3 293.2 U.K. 20.7% 18.8% Bags and saks 6.5 1,.2 ~0¯h-iich to: Canada, South Africa, Sheets and bedspreads 7.1 11.7 U.S.A. 1.% 61.6% Australia, New Zealand 7.0% 3.9% .,o tton t owels 30.1 62.6 U.K. 21.5% 16.2% West Germany 8.3% 16.5% Other miade-up articles ]ls.5 25.3 EEC 3.0% b.7% Other EEC 1.2% 3.6% Table linen 18.9 16.6 Others 61.2% 19.5 Sweden 0.2% 3.4% Carp ts 3.2 9.1 Others 25.% 18.6% Other textile yarns and fabrics 13.9 1.0 TOTAL 555.2 835.5 Of which to: New Zealand, AustraUia, Canada, Soutn Africa 12.8% 20.i% U.K. 35.3% 29.b% EC0 2.5% L.2% Indonesia 13.7% 29% 0.2.A. 15.5% t6.5% Oth-srs 20.3% 26.9% ·e classifica;ion may not be comparable. Source: long Kong Trade Statistics. TABLE 23 : Destination of Re-exports (f.c.b.) 1960 1961 1962 1963 196L 1965 1966 Total Developed Countriest 271.14 251.4 257.1 25.9 312.7 29.2 12.9 35.6 4283 31.6 573.7 38.1 607.3 33.1 of whichi. USA 18.1 1.7 22.1 2.2 28.9 2.7 37.1 3.2 46.5 3.4 85.9 5.7 104.8 5.7 UK 22.6 2.1 18.5 1.9 22.9 2.1 43.2 3.7 55.0 4.1 47.0 3.1 30.2 1.6 Other Eur 47.2 4.4 149.5 5.0 60.1 5.6 75.9 6.5 75.1 5.5 119.0 7.9 128.4 7.0 Japan 130.3 12.2 123.3 12.4 143.4 13.4 185.3 16.0 199.0 14.7 255.5 17.0 278.3 15.2 Other Dev. Areas 9 53.2 5.0 143.7 4.4 57.4 5.4 71.4 6.2 52.7 3.9 66.3 4.4 65.6 3.6 Total Less Developed Areas 799.1 7t4.6 733.9 74.1 757.2 70.8 747.3 64.4 927.7 68.4 929.1 61.9 1,225.9 66.9 of which: Western Hemisphere 10.6 1.0 13.8 1.4 16.8 1.6 11..4 1.0 12.8 0.9 19.4 1.3 24.4 1.3 Middle East 24.9 2.3 18.9 1.9 24.5 2.3 32.2 2.8 32.5 2.4 39.7 2.6 38.1 2.1 Africa 21.3 2.0 12.8 1.3 14.1 1.3 1.3 1.2 22.0 1.6 28.0 1.9 h.0 2.4 Asia 723.8 67.6 662.5 66.8 676.5 63.3 665.6 57.3 837.0 61.8 820.6 514.7 1o938 59.7 of which:i Indonesia 74.7 7.0 52.8 5.3 67.4 6.3 44.5 3.8 207.1 15.3 145.6 9.7 342.9 18.7 Mainland China 107.3 10.0 91.3 9.2 76.9 7.2 61.8 5.3 46.7 3.4 53.9 3.6 54.0 2.9 Formosa 61.6 5.8 53.4 5.4 55.2 5.2 50.5 4.4 54.6 4.0 69.1 4.6 71.8 3.9 Macau 53.9 5.0 56.8 5.7 65.1 6.1 63.1 5.4 6,4.1 4.7 65.4 4.4 74.5 4.1 Malaysia ) 20.3 ) 21.6) 20.2 ) 21.1 93.3 6.9 83.2 5.5 80.9 4.4 Singapore 217.5 213.6) 216.o; 264.6) 188.0 13.9 206.0 13.7 213.5 11.6 Other Asian Countries 208.8 19.5 194.6 19.6 195.9 18.3 201.1 17.3 183.2 13.6 197.4 13.2 256.2 11.0 Other Countries: 18.5 IL.7 25.9 2.7 25.3 2.3 23.8 2.1 23.14 1.7 21.1 1.4 25.6 1.4 TOTAL 1,070.5 100.0 99o 100.C 1 069.9 L1o_.0 1,160.2 100.0 1356.0 100.0 1L502.8 100.0 1 833.3 1.0 1/ Excludes Communist bloc countries other than YugosLavia. 2/ Canada, Australia, New Zealand and South Africa. Source: Hong Kong Trade ätatistics. TABLE 24: Trade Balance (HK$-milli6n)-- 1961 1962 1963 1964 1965 1966 Imports (c.i.f.) 5,970.4 6,657.2 7,411.9 8,5o.6 8,964.8 10,097.0 Exports (f.o.b.) 2,939.0 3,317.4 3,831.0 4,427.6 5,026.8 5,729.8 Re-Exports (f.o.b.) 991.0 1,069.9 1,160.2 1,356.0 1,502.8 1,833.3 Balance -2,040.4 -2,269.9 -2,420.7 -2,767.0 -2,435.2 -2,533.9 --------------(------(-----―て― SEひTに呂Bシべ1く．じノ’1」RFJ-jl玉5ひ1