Monday, March 20, 2006

Greater China

A very bad dose of flu construction or being planned, will help keep people moving as the local population continues to expand. River port facilities tying Hong Kong even more strongly into the Pearl River Delta are also steadily being upgraded, both for passengers and cargo.
Throw in a continued push by Hong Kong.s airport to maintain its status as south China.s air-freight hub, and companies have little to fear about Hong Kong.s transport and other infrastructure being anything but excellent. For worse l Service economy to falter.
Hong Kong's broader economy runs principally on services: tourism accounts for around 10% of GDP (if visitor spending in hotels and restaurants is included), and the wholesale and retail trades for around 4%. Services as a whole account for around 86% of GDP. SARS will hit tourism and retailing badly, regardless of how long the disease poses a health threat. Even after its spread is controlled, travellers are likely to remain extremely wary for several months. Our forecast of 0.3% real GDP growth this year is based on the optimistic assumption that SARS will be contained by the public health authorities in the coming weeks.
If the outbreak drags on for much longer, the impact could be even more severe. Other sectors will also be directly or indirectly affected. The financial, insurance, property and business services industries have taken steps to mitigate the impact of the disease, but many such measures will affect both business and the economy. Bans on staff travel, for example, will reduce future business as well as hitting airlines.
l Continuing weak leadership. The administration of the chief executive, Tung Chee-hwa, shows no sign of being able to establish clear policy initiatives, and continues to cave in to pressures from powerful business lobbies. In the latest example, recommendations that various responsibilities for the regulation of listed companies be removed from the profit-making stock exchange and placed with the market regulator were promptly shelved for further consultation by Mr Tung after an outcry from the stock exchange. The outcome is that general uncertainty over the direction of government, especially in the areas of tax policy, is likely to continue.
l Crisis of confidence. The low popularity of Mr Tung and some of his key officials is becoming a problem. The government is widely seen as out of touch, and the political inexperience of officials is beginning to show (as was the case in the recent Lexus-gate scandal, in which the financial secretary, Antony Leung, failed to reveal that he had bought a new luxury car shortly before introducing a sharp hike in vehicle first-registration taxes in his 2003/04 budget). The new accountability system of appointed officials introduced in 2002 with the aim of bringing greater administrative responsiveness appears to have made senior officials more accountable to no one except Mr Tung. The administration is developing a reputation for stumbling from one crisis to the next.
l Uncertain future role. Hong Kong's lack of confidence in its ability to negotiate the next few years will worsen as a result of SARS, but this merely underlines continuing anxiety over the territory's long-term prospects. This is fuelled in particular by concerns that Hong Kong's status as a logistics and financial services hub for China may be eclipsed.
Since Hong Kong's return to Chinese sovereignty in 1997, it has endured two recessions while China has continued to boom; this had led to growing questions as to where Hong Kong's future lies, especially as improvements in south China's ports and infrastructure threaten the role of its harbour and Shanghai 's financial clout continues to grow. Although such fears are overblown nowhere in China is close to rivalling Hong Kong's international services skills, and Shanghai will not emerge as an international financial rival at least within this decade the pervasiveness of such fears may undermine external confidence in Hong Kong.

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