February 2006
Special Edition
NEWSLETTER
This Newsletter is distributed quarterly, free-of-charge, to clients of International Business Center (IBC), and to other parties that have requested it. It is essentially newsworthy items regarding trade in Hong Kong and China, as well as IBC specific news.
CONTENTS
Import Tariff Cuts on 100 Categories of Product
Report Highlights Positive Impact of US-China Trade
Demand for jeans rises in Holland
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Introduction
Hong Kong's Financial Secretary gave his Budget Speech on 22 March 2006, which outlines the financial policies to be enacted in Hong Kong for the coming financial year. The following are extracts from the speech, which IBC feels are of relevance to our clients.
The main points that we feel are relevant are:
Economic Co-operation with the Mainland
Revenue: Sharing Wealth with the People
“I have developed my budgetary blueprints from the outset based on a pair of intertwined principles. These are “Market Leads, Government Facilitates” and “Prudent Management of Public Finances”. With these two postulates in mind, I have listened extensively to the views of the community. My hope is that I can lay the foundations for our social and economic development through my annual Budgets in a manner that is responsive to the aspirations of our community.”
“The Chief Executive has pledged to pursue excellence in governance, foster harmony in the community and facilitate economic growth. The strong economic recovery in the past two years has indeed improved the overall mood in Hong Kong. It is the clear wish of the people that we should capitalise on the present opportunity and further develop our economy. What the community wants is unambiguous: less argument, more action.”
“My Budget this year consists of four themes: Recovery, Enhancement, Commitment and Sharing. I shall expound on these seriatim.”
Economic Performance
“In 2005, Hong Kong's economy continued to expand rapidly. Following an increase of 8.6 per cent in 2004, our Gross Domestic Product (GDP) registered a growth of 7.3 per cent last year. Exports of goods and services enjoyed remarkable growth; fixed asset investment rose further and consumer spending continued to rise. Asset prices trended up gradually, and the financial situation of many families and individuals in Hong Kong improved.”
“40,000 new jobs have been created over the past couple of years as a result of our economy's recovery. Total employment reached a new high of 3.43 million. Recently, the unemployment rate fell from 8.6 per cent in mid-2003 to a four-year low of 5.2 per cent. The number of long-term unemployed also fell from its peak of 93,000 to 57,000. As at the end of last month, the number of unemployment Comprehensive Social Security Assistance (CSSA) cases was 10,300 less than the high of 51,400 in 2003.”
Economic Prospects
“Last year, our nominal GDP surpassed its 1997 peak to reach a new high of $1,382.2 billion. Hong Kong has now fully emerged from the Asian financial crisis and has regained its strength and vitality. Our domestic economy has been moving forward with increased momentum, and we are better placed to ward off external shocks. I am cautiously optimistic about this year's economic outlook.”
“The external environment should remain generally positive this year. Following the macroeconomic adjustment the Mainland economy underwent, it continues to grow strongly on a firmer footing. Despite the threat of protectionism from other countries and overinvestment in certain sectors, the Mainland economy nevertheless put in a strong performance, with consumption and investment booming. Production has been gradually upgraded, and people's income keeps rising. Mainland provinces and cities are constantly improving their infrastructure, and market reform is deepening.”
“The largest economy in the world, the US, has in recent years demonstrated its internal resilience and shrugged off a number of unfavourable factors. It has maintained steady growth. The situation in the US does, however, cast shadows over the state of the global economy. These include its huge current account deficit, whether there will be a larger-than-expected adjustment in US property prices following their sharp increases in recent years, and whether consumption in the US is sustainable in the long term by increasing debt.”
“European economies have been clouded for several years by negative sentiment but have shown recent signs of improvement. The Japanese economy has gradually regained its vitality after emerging from a prolonged downturn. Most other Asian economies will benefit from the strong performance of economies such as those of the US and Japan, and show steady growth.”
“However, the full impact on the global economic climate of increased oil prices and successive interest rate hikes has yet to be felt. Higher interest rates may also crimp the growth in local private consumption and investment expenditure. In addition, heightened geo-political tensions in certain parts of the world may also lead to further volatility in oil prices and financial markets.”
“Taking all these factors into account, and subject to there being no serious incidents or major external shocks, Hong Kong's economy is expected to achieve solid growth in 2006, with GDP forecast to increase by 4 to 5 per cent, slightly higher than the trend growth rate over the past ten years. As our economy continues to grow, the employment situation should improve further. Inflation will remain moderate, with the Composite Consumer Price Index (CCPI) expected to rise by 2.3 per cent for the year as a whole.”
“In the medium term from 2007-2010, I forecast a 4 per cent trend GDP growth rate in real terms, and a 2 per cent trend rate of increase in the GDP deflator. The forecast trend growth rate of nominal GDP over the period from 2007 to 2010 is therefore 6 per cent.”
2005-06 Outturn
“I am confident that, with Government's efforts to rein in our expenditure combined with strong economic growth, we shall be able to achieve, three years ahead of schedule, all three fiscal targets that I set in my first Budget in 2004:
·
operating expenditure reduced to less than $200 billion in 2004-05 and 2005-06;
·
fiscal balance restored in the Operating and Consolidated Accounts starting from 2005-06: the first time since 1997-98 that both accounts have recorded a surplus; and
·
public expenditure as a proportion of GDP lowered to and remaining below 20 per cent from 2004-05.”
“For 2005-06, I am forecasting a surplus in the Operating Account of $5.8 billion. This is mainly due to higher revenue from salaries and profits taxes and lower expenditure. Operating expenditure for 2005-06 will be $194.7 billion, down from $196.9 billion in 2004-05. For the second successive year, following a half-century gap, we have achieved lower expenditure than in the preceding year. My sincere appreciation goes to the civil service for realising the various savings initiatives. I wish also to thank the community for its strong support for the Government's work. In the Consolidated Account, I estimate that a surplus of $4.1 billion will be achieved in 2005–06.”
Economic Co-operation with the Mainland
“The signing and implementation of the Closer Economic Partnership Arrangement (CEPA) with the Mainland has been the most significant development in furthering our economic co-operation. With the inception of its three phases, we have fully liberalised trade in goods between Hong Kong and the Mainland. As of the second week in February, Hong Kong and the Mainland had reached agreement on rules of origin for a total of 1,370 products. We have issued more than 10 800 certificates of origin covering exports valued at $3.7 billion. Within the first two years of implementation, our businesses have already saved a total of $240 million in tariffs. In respect of trade in services, the Mainland's markets have also been considerably liberalised under CEPA. Currently, 27 service sectors benefit, and more than 920 Hong Kong Service Supplier Certificates have been issued. We estimate that the implementation of CEPA in its first two years has brought about the creation of 29,000 new jobs.”
“The implementation of CEPA III from the beginning of this year will provide further business opportunities for our enterprises and professionals. Our focus for the year is to ensure the effective implementation of CEPA. If any Hong Kong business encounters implementation problems, these should be reported immediately to the Trade and Industry Department, which will actively follow up.”
“As a service-oriented economy, Hong Kong needs a vast hinterland market to promote its economic development. The implementation of the Pan-Pearl River Delta (Pan-PRD) Regional Co-operation Framework Agreement has greatly broadened the scope of our co-operation with the Mainland provinces and regions concerned, and will facilitate the use of Hong Kong as a gateway to the international market by Mainland enterprises in the Pan-PRD region.”
Financial Services
“Hong Kong is one of the most vibrant international financial centres in the world. We enjoy a number of advantages, including a sound regulatory regime on a par with international standards, an efficient and transparent market, and many financial professionals from around the world experienced in providing services to Mainland enterprises. Our capital market has attracted huge amounts of overseas funds and won recognition from international investors. We have overtaken Tokyo since 2004 as the leading equity fundraising market in Asia. As Hong Kong investors are generally more familiar with the Mainland market and enterprises than foreign investors, the turnover of shares of Mainland enterprises in Hong Kong is far higher than in any other international financial centre. Hong Kong's competitive edge in financial services complements the Mainland's economic development and financial reform: we are best positioned to become the launchpad for Mainland enterprises to develop a global presence. We are forging ahead to create a win-win situation for the Mainland and Hong Kong.”
“The financial services industry is a key pillar of Hong Kong's economy and also the main area for development. I believe that we must continue to look for improvement in the following directions:
·
expanding the scope of Renminbi (RMB) business;
·
facilitating market development;
·
upgrading the quality of our financial markets; and
·
promoting the strengths of Hong Kong as an international financial centre.”
Expanding Renminbi Business
“Expanding RMB business is one of my major development objectives. Hong Kong is the first place outside the Mainland that can offer RMB business services. As at the end of 2005, 38 banks in Hong Kong were providing RMB deposit-taking, exchange and remittance services. Total RMB deposits in Hong Kong had reached RMB22.6 billion, and the cumulative value of spending and cash withdrawals using RMB debit and credit cards in Hong Kong amounted to $9.4 billion.”
“In my last Budget, I proposed three strategic directions for the further development of RMB business in Hong Kong. In 2005, we made progress in the diversification of RMB assets and liabilities. Hong Kong residents will soon be allowed to open RMB current accounts in a Hong Kong bank. RMB deposit-taking services have been extended to non-individuals. Moreover, to facilitate the further development of our RMB business and ensure the safe and efficient settlement of transactions, the Clearing Bank for RMB business will shortly launch a new settlement system being developed by Hong Kong Interbank Clearing Limited.”
“Obviously, I hope that RMB business can develop more rapidly, and I fully appreciate the calls of the industry for further expansion. We need, however, to synchronise in tandem with the pace of financial reform on the Mainland and move forward gradually. As to the next stage of development, we are in discussion with the Central Government regarding the other two strategic directions, namely the proposals to allow cross-boundary trade to settle in RMB and to establish a RMB debt issuance mechanism in Hong Kong. These two types of business, if introduced, will greatly promote trade between the two places and the development of our bond market. They are vitally important in reinforcing our position as an international financial centre, and will at the same time provide a testing ground for the move towards full RMB convertibility.”
Development Logistics
“South China is a major global manufacturing centre. Hong Kong is an international logistics hub. Our airport has the world's largest international cargo throughput, and our container port is among the busiest in the world. In the face of competition from nearby regions, Hong Kong's logistics industry is making every effort to improve efficiency and provide speedy, reliable and full-scale value-added logistics services so that quality can compensate for cost differentials.”
“Where port services are concerned, we need to continue improving our competitiveness. The Government is assisting this process by working closely with the Mainland authorities in order to develop major cross-boundary linkages between our transport network and those of Guangdong and other Pan-PRD provinces, and to expand the source markets for goods. The Hong Kong section of the Hong Kong-Shenzhen Western Corridor was completed at the end of 2005. The basic works for the Shenzhen section and the boundary crossing facilities at Shekou will be completed by the end of this year. The commissioning of the Corridor will greatly increase the handling capacity of our land boundary crossings. The recently-launched Digital Trade and Transportation Network System will help reduce the cost of information exchange and provide more opportunities for commercial symbiosis.”
“We are working closely with the industry to enhance cost effectiveness. We have proposed a series of measures to attract more vessels to use our port facilities. Such measures include simplifying vessel entry procedures, lowering port charges, and establishing more service anchorages to increase midstream cargo-handling capacity. To meet demand for support services, we will conduct open tenders for suitable sites adjacent to the container terminals. We will continue to promote discussion within the industry with the aim of enhancing the transparency of terminal handling charges.”
“The Airport Authority and the industry concerned are examining the proposed establishment of a gold depository at Hong Kong International Airport. This will help to promote Hong Kong as a logistics hub and gold trading centre. To support this development, we will consider providing a concession in trade declaration charges for gold.”
Goods and Services Tax
“In so far as our existing public finances are concerned, expenditure is rigid and revenue, which is subject to economic fluctuations, is unstable. Land premiums and investment income are very important, yet volatile, revenue items. As a share of government revenue over the past ten years, the former has fluctuated between 3 and 28 per cent, and the latter between 0.5 and 18 per cent. Our salaries tax and profits tax, which are the major streams of recurrent revenue, are paid by a minority of residents and enterprises, and such taxes are highly sensitive to economic fluctuations. The problems arising from our narrow tax base are abundantly clear. The existing structure of government revenue is less than healthy. We need revenue items which are less sensitive to the ups and downs of economic cycles to offset the volatility of the others. Widespread experience overseas has demonstrated that a Goods and Services Tax (GST) can achieve this purpose. I believe that it is the civic responsibility of Hong Kong people to contribute an affordable amount of tax.”
“During the past two years or so since I became Financial Secretary, members of the community have periodically engaged themselves in discussions on GST, and have expressed their views to me. I can appreciate the concerns some may have. In working out the details of GST, I will follow the principle of maintaining our low and simple tax regime. The Government will consult the public on the detailed proposals. We intend, inter alia, to provide tax refunds to visitors and allow importers to defer payment so as to relieve pressures on their cash flow. To reduce the erosion of people's purchasing power, we will also propose relief and compensatory measures, including an increase in the level of CSSA payments and reduction of other taxes.”
“As regards timing, we will launch the public consultation in the middle of this year. It will last about nine months in order to allow sufficient time for the public to express their considered views. After the conclusion of the consultation period, we will prepare a report and submit our proposals for consideration by the Government of the next term. From making a decision to introduce GST to its actual implementation will take about three years. I hope the community can take the opportunity of the consultation period to have a rational discussion of the Government's proposals.”
Revenue: Sharing Wealth with the People
“Over recent months, I have heard suggestions that, as our economy recovers and the Government's financial position improves, we should increase expenditure or substantially reduce taxes, for example, by restoring the salaries tax bands and rates to their 2002-03 levels. However, other views hold that there is no need for the moment to introduce major tax relief. The Government should instead take this opportunity to save up for a rainy day.”
“I have pointed out that Hong Kong will continue to be confronted with various challenges. In the face of these, as a government that manages public finances prudently and keeps expenditure within the limits of revenues, we should not rush into deciding on substantial tax reductions. For example, the proposal to restore salaries tax rates to their 2002-03 levels would reduce government revenue by $7 billion a year, if implemented, and cause nearly 100 000 taxpayers to fall out of the tax net. I consider that such a proposal would affect the stability of our public finances, and would shrink our narrow tax base still further. As I have mentioned earlier, I also believe that citizens should fulfill their civic responsibility by paying some tax.”
“Being a government of the people, we need to appreciate our community's needs and be responsive to their aspirations with due regard to our fiscal position. Where practicable, we will indeed share wealth with the people. As our economy continues to improve, therefore, I am proposing to implement some modest tax concessions in the coming year to reduce the burden on taxpayers, particularly middle-class families, in accordance with the principle of affordability, but without wishing to narrow our tax base. I have decided against a one-off tax rebate as this would only be of short-term benefit.”
Salaries Tax
“I propose to lower the marginal rates of the second, third and top tax bands by one percentage point from the existing levels of 8, 14 and 20 per cent to 7, 13 and 19 per cent respectively. This proposal will reduce the tax payable by nearly a million people, i.e. three quarters of taxpayers, and cost the Government about $1.5 billion a year.”
“Purchasing a property is an important lifetime decision. To many people, particularly the middle class, mortgage payments are major items of family expenditure. Currently, each taxpayer is eligible for a seven-year salaries tax deduction for home loan interest of up to $100,000 a year. However, the recent increases in mortgage rates have added to their burden. Therefore, I propose to extend the limit for the deduction by a further three years to a total of ten years, subject to the maximum annual deduction of $100,000. This measure will cost the Government some $1.2 billion in 2006–07. We will introduce legislation to give effect to the two foregoing proposals as soon as possible into this Council.”
Profits Tax
“A good number of local chambers of commerce and professional bodies have suggested revisions to the current profits tax arrangements for corporate losses. Of these proposals, the most significant ones are for the introduction of group loss relief and loss carry-back arrangements.”
“We have studied these two proposals in some detail. With the development of today's financial tools, group loss relief can easily be abused as a means to evade tax, and such activities would be very difficult to combat. I estimate that the suggested exemption, if implemented, would cost billions of dollars a year in lost tax. While taxpayers who suffer losses in their businesses may be helped to a certain extent to tide over difficult times by loss carry-back arrangements, this would place enormous pressure on tax revenue during periods of economic downturn. The Government would not only suffer a loss in tax revenue, but also have to refund tax collected in preceding years. Compared with other places, Hong Kong's tax rate is already very low. Businesses are already allowed to offset their losses indefinitely against the profits of future years. Our tax regime remains very attractive to investors. I do not therefore propose to introduce any group loss relief or loss carry-back arrangements.”
Import Tariff Cuts on 100 Categories of Products
The State Council's Customs Tariff Commission announced that China has further reduced import tariffs on 100 categories of products from 1 January 2006, including vegetable oil, chemical raw materials, automobiles and auto parts. Also, tariff rate quotas on soya bean oil, palm oil and rapeseed oil have been eliminated. The levy of export duty on textiles has been scrapped, and provisional tariffs on more than 60 export commodities have been imposed.
Following this round of adjustments, China's average import tariff has maintained the same level of 2005 at 9.9%, with farm produce and industrial products at 15.2% and 9.0%, down by 0.1% and 0.3% from 2005 respectively. The total number of tariff items has increased from 7,550 in 2005 to 7,605.
The commission also announced that seven types of farm produce including wheat and corn and three types of chemical fertiliser including di-ammonium phosphate are now subject to tariff rate quotas. Sliding tariffs will continue to be applied to the import of cotton in excess of the tariff rate quota. Specific duty and compound duty will continue to be levied on 55 types of products including frozen chickens, beer, negative films, and video cameras. The actual rate of the specific duty will be adjusted according to the average import price. More than 200 import items will be subject to provisional tariffs.
In addition, China will offer to the imports originating from 10 ASEAN countries conventional tariffs that are more preferential than the most-favoured-nation rates under the respective agreements signed. Among these, zero tariffs will be offered to products under the Early Harvest programme. For certain imports originating from Asian Pacific countries, Pakistan, and Hong Kong and Macau, conventional tariffs will be applied. For certain imports originating from the 30-plus least developed countries such as Cambodia, Myanmar, Laos, Bangladesh and Sudan, preferential tariff rates will be applied. A total of 15 fresh fruits originating from Taiwan including pineapple, custard apple and papaya will continue to enjoy zero tariffs.
© Hong Kong Trade Development Council
Report Highlights Positive Impact of US-China Trade
The US-China Business Council (USCBC), a private and non-profit association, issued a report on 25 January concluding that despite the US-China trade imbalance, the long-term benefits to the US of trade with China are substantial. The conclusion is based on a detailed assessment of US-China trade and investment since 2000 and projections to 2010. The study was conducted by Oxford Economics and The Signal Group. Some of the relevant findings are listed below.
Economic health
By 2010, US gross domestic product (GDP) will be 0.7% higher and US prices will be 0.8% lower as a result of trade and investment with China since 2001. Together, these equate to an increase of around US$1,000 in real disposable income per US household annually.
Productivity
Output per worker across the US economy will increase by 0.7% by 2010, much of which is attributable to improvements in manufacturing productivity as a result of increased trade with China. This higher productivity will be the result of two effects: (a) increased competition, which causes the least productive manufacturing firms to close or to increase their productivity to compete with imports from China; and (b) price effects, which allow US firms that source some of their inputs from China, or from other countries competing with China, to benefit from lower costs.
Employment
The recent expansion of trade and investment with China is contributing to a decades-long shift in the structure of US employment away from manufacturing and toward services. The report estimates that while US manufacturing employment by 2010 will have been reduced by 500,000 jobs, this job loss will be offset by an equivalent 500,000 increase in US service sector jobs. While this structural shift displaces some workers in manufacturing sectors and thus represents a real cost to workers in those sectors, the economy as a whole will benefit from the permanent output and price effects of increased trade with China. The overall impact should be a continuing, increasing and positive boost to US output, productivity, employment, and real wages.
Trade deficit
The imbalance with China cannot, by itself, explain the recent deterioration of the overall US trade position. While the bi-lateral imbalance has been rising dramatically in absolute terms, China's share of the overall US current account deficit has remained fairly constant, at around 20%, for more than a decade. The increase in China's share of US imports from 2000 to 2004 was offset by declining shares of other East Asian countries, reflecting a profound shift in production patterns by Asian and other multinational firms operating in the region. The growth in Chinese exports to the US since 2001 is partly the result of an increase in foreign investment in China associated with its WTO entry, rather than any major change in the treatment of those exports under US trade policy.
Chinese Imports
As a result of its booming import demand, China was one of the main locomotives of global economic growth. China's import growth from 2000 to 2004 contributed more than any other country's to global import growth. China's demand thus stimulated export growth among its trading partners, including the US, whose sales to China have constituted the fastest growing segment of its exports in recent years.
© Hong Kong Trade Development Council
Demand for jeans rises in Holland
Any notion that jeans are going out of vogue in the Netherlands or suffering the effect of EU quota restrictions has been undone with the news that jean sales increased 5% year-on-year for the six months to October 2005.
A study by market research institute GfK shows that the rise in demand was markedly skewed towards chain stores, while department stores and mail order companies sold more or less the same in 2004 and 2005.
Volume-driven retailers suffered with falling sales of 5%, as consumers moved towards more expensive-looking but "bargain" jeans, spending an average of ��38 on a pair.
Interestingly, that figure compares with an average price of ��51 available in the boutiques of independent retailers, who were hit with the double whammy of expensive units and many of them to sell.
Competitively, jeans with apparent novelty or branding - but at "bargain" prices - appear to have a better chance in the market. Some magazines describe a "Dutch look" which features wider leggings than for US-style models.
But equally popular could be US-based Seven Jeans cuts, which particularly specialise in women's designs, including a distinctive fit, finish and fabric. These product lines have expanded to include non-denim bottoms and jackets and have been marketed with strong celebrity and product placement, without dropping mid-market interest.
Another winner in the Dutch market could well be home-grown Garcia Jeans, which offers four collections a year covering men's, women's and children's collections.
Garcia Jeans this year teamed with MFI Racing, the Formula One racing team, to have the jeans firm's logo appearing on MFI racing cars, transporters and official stationery - all useful in attracting the younger, hip consumer to dress in denim.
© Hong Kong Trade Development Council
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