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Source: www.asiaecon.org |

HONG KONG UNVEILS STIMULUS MEASURES AMID DEEPENING RECESSION


Hong Kong, Asia's most important financial hub, is heading towards a full-year contraction for the first time since the Asian financial crisis in 1998. Tumbling exports, slumping property prices, along with rapidly rising unemployment have severely strained the city's economy, with GDP forecast to contract 3% in 2009. Although the government has unveiled a comprehensive stimulus package aimed at boosting domestic demand and creating jobs, the stimulus might be too conservative to efficiently counter the pressures of the deepening economic contraction.


Hong Kong, Asia’s most important financial hub, is heading towards a full-year contraction for the first time since the Asian financial crisis in 1998. Tumbling exports, slumping property prices, along with rapidly rising unemployment have severely strained the city’s economy, with GDP forecast to contract 3% in 2009. Although the government has unveiled a comprehensive stimulus package aimed at boosting domestic demand and creating jobs, the stimulus might be too conservative to efficiently counter the pressures of the deepening economic contraction.


Hong Kong’s relative openness and exposure to the financial sector has made the city extremely vulnerable to the global financial crisis. Hong Kong relies on exports for two thirds of its GDP, consequently, every 10% fall in exports could potentially cut 7 percentage points of growth. Therefore, slashing global demand resulting from the global financial crisis has  severely impacted Hong Kong’s economy.


Moreover, Hong Kong’s reliance on falling international markets such as Japan and the US, will pose serious threats to its economy in the upcoming months. Hong Kong Trade Development Council (HKTDC) Chief Economist Edward Leung has stated that,“Although the US, the EU and Japan together account for about 30 per cent of Hong Kong’s total exports, the three traditional markets constitute an overwhelming 60 per cent share of Hong Kong consumer goods exports. Considering the Hong Kong manufacturers’ focus on consumer goods, the economic downturn in these traditional markets will have a more serious impact than that revealed by standard trade statistic”.


Hong Kong experienced a 2.5% fall in its GDP on the fourth quarter of 2008 from a year earlier, marking the third consecutive quarter-on-quarter contraction. The fall in trade will slow employment growth with unemployment  potentially reaching 7% in 2010, up from the current 4.6%, while also leading to a reversal in private consumption.
In order to ease economic pressures resulting from the deepening recession, the government has announced a HK$ 300 billion ($38.5 billion) stimulus package aimed at boosting domestic demand, investments, and increasing employment opportunities, through infrastructure development, tax cuts, tourism and international cooperation.
Hong Kong plans to spend over HK$ 39.3 billion ($5 billion) in infrastructural projects in 2009-2010. The projects are expected to create jobs and enhance the city’s overall competitiveness.


An estimated HK$400 million ($51.6 million) will be geared towards the Labor Department in an effort to enhance numerous employment programs and training. An additional HK$ 13 million ($1.7 million) will fund projects aimed at providing employment assistance to retrenched workers and new graduates. The new projects are expected to create around 62,000 jobs in the next three years.


Comprehensive funding for the health sector will also be included in the unveiled stimulus package. The government hopes to invest HK$50 million ($6.4 billion) on medical reforms. Health care expenditure is expected to increase by 17% by 2012 as the government plans to spend around HK$840 million ($107 million) on primary care services, public-private partnership, and the development of an electronic health record system during the next three years.


The government will also focus on numerous measures aimed at ensuring Hong Kong’s position as a major financial hub. Hong Kong is expected to issue government bonds to encourage the development of local bond market, offering a higher number of avenues for financing and greater diversified investment products.

The government has also stressed the need to focus on economic integration with emerging countries, particularly with mainland China. Mainland China has the potential to offer increasing opportunities as the $585 billion  economic stimulus,unveiled last November, begins to impact the economy. Hong Kong will also aim to create a suitable environment for the growing area of Islamic finance. Increased financial cooperation with emerging markets and global businesses would ensure Hong Kong’s position as a major international financial hub, even amid a global crisis.


Although these measures will significantly cushion the impacts of the global financial crisis in Hong Kong’s economy, experts have largely criticized the size of the stimulus package, as it might not be large enough to promote adequate long-term sustainable growth.

Given the severity of Hong Kong’s economic problems and the size of its foreign reserves, it is surprising that the government has not made more aggressive moves as the ones seen in neighboring countries such as Singapore, Japan and Indonesia. “The government has the ability to stomach a much larger fiscal deficit for the next two years,” said Standard Chartered’s Kelvin Lau. “They could run record deficits of HK$60 billion for two consecutive years without breaching fiscal prudence.”


While the government has provided stimulus packages for small and medium enterprises, more tax cuts will be needed in order to ease economic pressures and spur substantial growth. Unemployment is still expected to rise as companies continue to post layoffs in light of the deep fall in exports. The economy’s contraction has severely hurt consumer and investor confidence. Higher investments and expanded government support would ensure a stronger growth and a faster recuperation in Hong Kong’s economy.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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