Implication of CEPA to Hong Kong Since 2003

In order to evaluate before and after effect of the implication as well as the availability of the data, the analysis will began on the year 1991, and the year between 1991 and 1996 will serve as the control group. Since 1991, there are some events that had important impact to Hong Kong economy. The first and the most important one is, and will always be, the unification to

mainland China on July 1997. The second event on the horizon to Hong Kong, subsequently, is China and Taiwan’s successful accession to WTO and become member on January 1, 2002. The third, which is the turnaround event to Hong Kong, is the official arrangement of CEPA on June 29, 2003 which become effective on July 1, 2003. Finally, the 2008 Financial Crisis (Shah 2010) and Europe Deb Crisis (2010~now) did have another impact to Hong Kong Economy.

According to Statistical Table 1, between the year 1991 and 1997 Hong Kong enjoyed relatively high economic growth of 15.3% on 1991, 16.6% on 1992, 15.3% on 1993, 12.9% on 1994, 6.5% on 1995, 10.2% on 1996, and 11.0% on 1997. After the unification with China, Hong Kong’s GDP began to take a dive; with negative growth of GDP all the way through 2003, except the on the year 2000 with positive growth on GDP of 4.0%. During that 6 years

(1997~2003), the world economy was NOT on recession except for the internet bubble that occur for the short term on the year 2000. Notice that, July 1, 2003 was the date that CEPA become effective, and Hong Kong’s GDP, since then enjoyed a positive growth all the way through 2011, except on the year 2008, which is the year the global financial crisis took place. The change in GDP growth had shown clear evidence on down fall of Hong Kong GDP after the unification with China in 1997, and positive effect of CEPA on Hong Kong economy, as shown on the change in GDP growth.

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According to Statistical Table 2, a breakdown on the composition of Hong Kong’s GDP by economic activity between 2000 and 2010, the significance of manufacturing sector dropped from 4.8% to 1.8 % (-3%), construction industry dropped from 4.9% to 3.3% (-1.6%), and electricity, gas, and water supply, and waste management (utility sector) dropped from 3.0% to 2.0% (-1%). The dropped differences were picked up by the service industry, which grow from 87.2% to 92.9% (+5.7%). As compare to Statistical Table 2, which is same table, only display in the US dollar value, evidently display Hong Kong’s trend to further become service industry oriented economy instead of retaining its manufacturing capability. Further, according to

Statistical Table 2, the actual output of manufacturing sector had dropped year by year since year 2000, except the year 2004, 2005, and 2006. Notice that the effective date of CEPA was on July1, 2003, its effectiveness only postpone the continue downfall of Hong Kong’s declining

manufacturing sector. Statistical Table 4 and Statistical Table 5 exhibit the parallel decline of Hong Kong domestic product export, from the 28,118 million US dollar in 1997 gradually decline to 16,225 million US dollar in 2003, the year that CEPA become effective. However, to the manufacturing sector of Hong Kong, the benefit of CEPA only lasted three years, from 2004 to2006 with the X ≥ 30% value added content rule on FOB price under CEPA), then resumed on its decline path. Thus, the manufacturing sector in Hong Kong had become nearly nonexistence, or only in the minimum level that can only support the local requirement, as it shown on the Statistical Table 2 where the service sector had become the focal economic activity for GDP and growth with 92.9%.

The unemployment rate in Hong Kong tells another story. According to Statistical Table 6, the unemployment rate in Hong Kong prior to 1997 was around below 3.2% at 1995. It dropped to 2.2% in the year 1997, and suddenly over doubled to 4.7% in1998 and continued to grow. The peak of unemployment rate for Hong Kong was in the year 2003 where it reached 7.9% and then began to decline gradually to 3.4% in year 2011. Since CEPA went on effective

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on July 1, of 2003, apparently CEPA really did help Hong Kong on its unemployment rate management.

Figure 2, Hong Kong Unemployment Rate

http://www.censtatd.gov.hk/hong_kong_statistics/index.jsp

Then, in what way did the CEPA assist in Hong Kong economy as well as management on unemployment rate? According to Statistical Table 7, which shows that the change in percentage share in GDP of four key service industries, which are financial services, tourism, trading and logistics, and professional services and other producer services, in Hong Kong economy since 2000, that the percentage grow 3% from 48.9% of GD in 2000 to 51.9% of GDP in 2003, and grow nearly another 6% to 59.8% of GDP in 2007 and 58% in 2010.

1.8% 2.0% 2.0% 1.9%

3.2%

2.8%

2.2%

4.7%

6.3%

4.9% 5.1%

7.3% 7.9%

6.8%

5.6%

4.8%

4.0%

3.5%

5.3%

4.3%

3.4%

% of Unemployment

Hong Kong Unemployment Rate

Percentage Unemployed

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Through effect of the CEPA, the foreign direct investment in Hong Kong increased, too.

The Statistical Table 8 showed the inflow amount of direct foreign investment peaked in the year 2000 to 64.3 billion US dollar from 15.3 billion in 1998, and suffered a significant decline, 24.7 billion US dollar in 2001, 10.1 billion US dollar in 2002. Fortunately, as CEPA went on into effect on July 1, 2003, the decline in inflow of foreign direct investment finally had a bounce, to 14.2 billion US dollar in 2003, more than double in 2004 to 35.3 billion US dollar. Since then, the inflow of foreign direct investment continue to grow and reached it height in 552.2 billion US dollar in 2010.

It took 18 month to conclude the main text and six annex of CEPA, and another eight years to settle the eight supplements to the CEPA. As the time goes by and the economic integration between China and Hong Kong deepen, there will probably more supplements of CEPA coming. The trade in both in goods and services between the two sides were not equal to begin with, since Hong Kong is a free port and most of the goods it imports are tariff free while China imposes tariffs. The result of CEPA, under the clause for economic integration, simply made the trade in goods “fair” that is, free of tariff on trade and other nontrade barriers. One must notice that China began its “Reform and Opening Up” process since 1978 and the progress on China’s economic development is fast beyond anyone’s expectation. The development was not just on the quantity but also on the quality of the trade.

Hong Kong, given its colonial heritage, serve as the key entry port to China for British and other Western countries since 1842 [23], become the key port to enter into Chinese market after the World War II, is the primary victim of rapid economic development in China, especially from the southern costal part of China. The decline of Hong Kong economic development came after the unification with China in 1997 and actually decline further after China’s successful accession to WTO in January1, 2002 [24]. One vital issue is that via WTO clause, China lowered its tariff on trade and nontrade barriers to the WTO member and subsequently to cause China