Transcript Tutorial 2 - City University of Hong Kong

EF3461
The Economies of Mainland
China and Hong Kong
Tutorial 2
Hong Kong’s economy
City University of Hong Kong
Dr. Isabel Yan
Discussion Question
Discuss the features of Hong Kong’s economy during the transition period
(1984-1997) and the post-1997 period based on the following article:
•
Li, Kui Wai, Chapter 2: Economic Performance in Transition Years
Key events that marked the beginning and the end of the
transition period:
1984
: Conclusion of the Sino-British negotiation which laid
down the constitutional framework for the HK Special
Administrative Region (HKSAR). Under this
framework, HKSAR is to remain autonomous for 50
years after July 1, 1997.
1997 July : HK’s sovereignty was returned to the Mainland China
Aug : Asian financial crisis
1984-1997
•
Short-term investment behavior
Investors preferred short term investment because they considered July 1997 as a
terminal date before which the return of the investment must be realized. Also,
investors tend to engage in investments that can be easily be liquidated in short
notice.
Speculative Activities
Speculative activities in stocks and real estates are typical examples of short-term
investment behavior.
Wealth effect
The rise in demand for private property drove up the price of stocks and properties.
The asset appreciation in both stocks and property market reinforced each other.
Besides, wealth expanded as asset prices appreciated.
Wage-inflation spiral
Rise in aggregate demand led to higher inflation and wages in both private and
public sectors. The inflation in the service sector was higher than that of the
manufacturing sector because the manufacturing sector was more competitive due
to the close substitutes from import. On the contrary, the monopolistic nature of the
service sector allows the service sector to increase prices more rapidly.
•
Structural imbalance:
1) Shrinkage of the manufacturing sector and expansion of the service
sector
The shrinkage of the manufacturing sector in HK is due to the migration of
manufacturing plants and investment from HK to Southern China. The lower
cost in Mainland serves as a “pulling” force while the higher cost in HK
serves as the “pushing” force for the shifting of manufacturing production to
Mainland China.
“Industrial hollowing” or “deindustrialization”
“Industrial hollowing” refers to the shrinkage of the industrial sector.
2) Shrinkage of the real sector and expansion of the nominal sector
In the transition years, the real economy (measured mainly in terms of
industrial output) shrank. However, the nominal sector expanded because
HK experienced an influx of “hot money” from overseas which raised the
“money-deepening ratio” of HK. The money-deepening ratio is defined as
the ratio of money supply to GDP (M/GDP). This ratio reflects the extent
the monetary aggregate (the nominal sector) influences output and growth.
Economic bubble
A growing nominal sector together with a shrinking real economy weakens
the sustainability of the economy when a sudden shock hits. The outbreak
of the Asian financial crisis in 1997 results in the burst of the economic
bubble.
Post 1997
Post-Olympic Syndrome
“Post-Olympic Syndrome” is characterized by a
fall in tourism, a drop in consumer expenditure,
a rise in unemployment and a withdrawal of
funds. Prior to the Olympic Games, investments
and industries expand to cater for the event.
When the Olympic ends, the fall in various
investment results in a decline in income and an
increase in unemployment rate.
Asian Financial Crisis in 1997
The Asian financial crisis in July
1997 deepened and prolonged the
post Olympic syndrome. There was a
massive withdrawal of funds from
HK by the foreign investors.
1) Decline in income and increase in unemployment
2) Three Economic Dilemmas:
- Economic integration with Southern China vs competition from Southern
China (due to its lower cost)
- Expansionary fiscal policy to revive the economy vs a worsening fiscal
deficit
- Tradeoff between price stability and unemployment: inflation to boost the
business vs deflation to reduce economic hardship
Discussion Questions on the Policy Address




What are the major structural changes that HK has
gone through since WWII?
Tung said that HK is going to have another structural
change in the 2000’s, what are the industries that
Tung thinks HK should specialize in?
What are the economic principles of HK? Is Tung
going to follow these economic principles?
How do you think the concept of “Economism” fits
into Tung’s policy address?
Policy Address of the Chief Executive Tung Chee-hwa
(1)
The Changing Comparative Advantages of Hong Kong:
•
Before WWII:
fishing port, entreport
•
1950-1970:
labor-intensive manufacturing
China’s export declined when the National Party
took over, so HK’s role as entreport also declined. Besides,
HK had abundant cheap labor which made it a prefect place to
develop labor intensive manufacturing
•
1970’s:
•
1980’s:
international banking/financial center in the AsiaPacific region.
re-export revitalized due to the opening up of
Mainland China to foreign trade
China had abundant capital and labor resources but lacked well-functioning
transportation, telecommunications and financial sectors, so it relied on HK
to export its products to other countries.
•
•
1990’s:
2000’s:
service center e.g. insurance, financial services
focus on high value-added services – financial
services, logistics, tourism and producer services
Tung:“Our direction ... [is to develop] our position
as an international financial center, a producer
service center, a hub for information services and
logistics and a premier tourist destination”
Policy Address of the Chief Executive Tung Chee-hwa (2)
Hong Kong’s Economic Principles
1.
Laissez-faire principle, great economic freedom
Tung: “HK is a free market economy, and the prime mover of economic restructuring rests
mainly with the private sector”. HK was ranked as the world’s freest economy in the Heritage
Foundation’s 2003 Index of Economic Freedom for the 9th consecutive year.
2. Small Government and positive (non)-intervention
Positive non-intervention means that government only maintains a suitable
business environment through appropriate fiscal incentives, infrastructure
provision, education and training. The government won’t actively control the
functioning of the market.
Tung: “We will adhere to our “big market, small government” policy…”
3.
Dynamic/shifting economic advantages
Tung mentioned that China’s accession to WTO gives HK a new opportunity/advantage to serve
as a financial service center of Mainland which provides supporting services to Mainland’s
economic development.
4.
Flexible industrial structure: presence of entrepreneur and small and middle size
enterprises (SME)
Tung: “The vitality of our economy owes much to the numerous small and enterprises which
employ many workers”
5.
Viable foreign and local investments
Tung: “We have decided to encourage more overseas investors to settle in HK”.
Policy Address of the Chief Executive Tung Chee-hwa (3)
Five elements of “Economism”:
Economism: Economism is a conceptual framework which consists of five
basic economic concepts. These 5 economic concepts govern
the
successful operation of an economy. This
conceptual framework is
applied in a number of East Asian
economies, including HK,
Singapore, Taiwan and South
Korea.
1.
2.
Lacking focus on income equality, more on economic growth
A bigger economic pie means both the rich and the poor can
achieve a higher level of absolute income, though the share may
not be equal.
Tung mentioned nothing about income equality in his whole
policy address!
Government’s role as “economic fertilizer” to businesses &
households
Tung: “Government has to ….. invest heavily in education,
upgrade economic infrastructure, promoting innovation and
technology, improving business environment…..”
Policy Address of the Chief Executive Tung Chee-hwa (4)
3.
Importance of domestic economic stability
Tung: “A stable property market is one of the important
elements in revitalizing HK’s economy”.
4.
A “pro-growth” political regime
Tung: “..only sustained economic growth can lay the
foundation for improving people’s livelihood and help in taking
our society forward”
5.
Capitalist market economy
Tung stressed that a “Market-led Approach” will be used to
restructure the economy