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Hong Kong SAR, a city surrounded by the China Sea is internationally known for its financial districts and highly developed capitalist economy. Linked particularly to the surrounding cities and the world economy, Hong Kong was once a manufacturing base which has transformed itself to a service centre in Asia. This chapter aims to review the past and future economic developments of Hong Kong to provide a background to the elements that have affected and will affect air travel demand in the city.

5.1.1 Past Economic Development

Hong Kong SAR, located at the centre of the East Asia developing countries, is recognized for its liberal government and well developed infrastructure to support any business service. Hong Kong’s international networks and free trade policies have allowed for the city to establish itself as a business hub in Asia.

Although dawned by a number of economic downturns, Hong Kong’s economy has demonstrated its resilience. HKSAR faced the Asian financial crisis in 1997 causing unemployment rate to increase over 5% and retail sales to decline 17% in 1998, and was further impacted by the 2001 global slowdown2. In 2003, the economy was affected by the SARS outbreak. On average, Hong Kong’s economic output growth in 2003 decreased 1.2%, representing an approximate US$ 1.9 billion loss in spending for final goods and services3. More recently, the economic recession in 2008 pushed Hong Kong’s GDP to be negative. With all the economic depression behind them, Hong Kong’s economy is now on a forward progression to recovery.

During the 60s and 70s, Hong Kong economy was predominantly driven by manufacturing. In the following decades, Hong Kong moved away from its traditional roots, heavily investing in its service sectors. As Mainland China infrastructure and openness to foreign companies developed, many manufactures relocated their facilities to the Mainland. The share of GDP for

manufacturing decreased from 30% in the 70s to less than 3% in 20084. By relocating a majority of its labour intensive manufacturing to the Mainland, and diverting funding to its financial and retail sectors, Hong Kong has become one of Asia’s busiest service hubs and market places. In 1991 Hong Kong’s tertiary GDP accounted for nearly 72% of the total GDP, and by 2008, it accounted for approximately 91% of its GDP5.

Closely tied to the economic success of Mainland China, Hong Kong’s foreign trade sector has greatly benefited from this throughout the past decades. Due to the liberal state of Hong Kong, free trade, and its place in the diplomatic international affairs, Hong Kong has been the centre stage for foreign trade, particularly in and out of Mainland China. Hong Kong is Mainland China’s third largest trading partner, behind United States and Japan. The link with Mainland China’s economy has been growing significantly with Mainland China’s share of HKSAR trade increasing from 39% in 2000 to 48% in 2008. Hong Kong ranked 13th largest trading economy, handled over US$749 billion in merchandise trade in 2008 compared to US$164 billon in 1990. Hong Kong is Mainland China’s most important logistics centre since 20056. Furthermore, Hong Kong is the site of the second-largest container sea port and the second-largest freight airport in the world.

Contributing significantly to Hong Kong’s economy, tourism generated over 3% of Hong Kong GDP in 20087. The World Tourism Organization ranked Hong Kong 12th in the world in terms of international traffic. Once dominated by Japan and Taiwan travellers, Mainland China now serves as the major source of inbound arrivals representing more than 50% of Hong Kong’s arrival demand. From 1981 to 2008, the number of inbound visitors from Hong Kong grew about 12-fold from 2.5 million to 29.5 million. During this period, tourist demand fell only once due to the SARS outbreak in 2003, lowering travel demand by 6.5%8.

Table 45 – Hong Kong economic drivers as a % of GPRD – 1995 to 2007

Economic driver 1995 2000 2001 2002 2003 2004 2005 2006 2007

Population 15.8% 13.4% 13.2% 13.1% 13.0% 13.0% 13.0% 12.9% 12.7%

5.1.2 Future Trends for Economic Development

At the time of the forecast, HKSAR GDP is expected to have contracted by -3.3% in 2009, in line with the world economy. Similarly, Hong Kong imports and exports will have shrunk by about -16% as world trade falls by -9.4%9. Economic recovery has been observed for the second quarter of 2009.

Fuelled by the strong growth of the Chinese economy and the rebound of the world’s economy, Hong Kong’s GDP should recover slightly in 2010, reaching +2.8% according to EIU. By 2013, Hong Kong’s GDP per capita will have reached the level of the United States. Driven by strong private consumption and flourishing financial services, GDP is forecasted to grow at an annual rate of 3.2% over the next 20 years (2010 – 2030).

Hong Kong’s future economic development will depend more and more on the economic growth of Mainland China. Negotiating trade and travel policies, Hong Kong’s attractiveness for Mainlanders and foreigners will increase in the future as Mainland China allows for local and Hong Kong based companies greater privileges into Mainland China and at the same time allowing for easier access to Hong Kong for a larger number of Mainlanders.

The financial sector plays a significant role in Hong Kong’s GDP and its expansion will aim to provide more services to Mainland China. Hong Kong banks will be given an broader access to the Mainland market10, taking advantage of Mainland China’s underdeveloped financial sector. In the longer term, the relaxation of Mainland China’s monetary and credit policy and connection of the Hong Kong Dollar with the Renminbi should benefit Hong Kong as a financial hub.

As Mainland China’s businesses develop, competition between Hong Kong-based and Mainland based companies will become fierce. However, it is believed that the increase in opportunities will outweigh the loss associated with the increased competition. As explained in later sections, Mainland China is implementing a more proactive diplomacy allowing for greater international opportunities and therefore creating new economic development for the nation.

Table 46 – Estimated GDP and population growth rates for HKSAR – in CAGR

2001-2005 2006-2010 2011-2015 2016-2020 2021-2025 2026-2030

GDP 3.9% 1.6% 3.9% 3.6% 3.4% 3.1%

Population 0.4% 0.8% 0.7% 0.6% 0.5% 0.4%