Update on the Hong Kong Economy for The Task Force on Economic Challenges Government Economist 8 December 2008

Global/local developments since last meeting Global financial market strains eased somewhat; risks of meltdown receded for the time being Local interest rates also down But global credit market still not functioning...

Concern about global financial meltdown eased, but credit markets still tight

Local interbank rates down… but banks still cautious in lending

Global synchronised downturn increasingly apparent…

… leading to a further mark-down in global economic growth forecasts

US economy in a dire state

Likewise for EU and Japan

Asia also feeling the pinch

HK economy also hard hit…

GDP growth slowed markedly in Q3 2008

Impact on the four harder-hit sectors

Financial services

Banking sector under pressure in a number of ways: Income : Contraction in loan balance; Non-interest income withering amid falling demand for investment products Loss provisions and charge-offs : Provision for losses on investments; Non-performing loan; Falling property prices leading to more negative equity cases Operational pressure : Liquidity / capital demand from foreign / Mainland branches; Lehman-related issue; Structural changes leading to higher compliance and operating costs

Financial sector activities already slowing markedly since early 2008

Partly due to sharp declines in IPO activity and stock market turnover ……

…… but loans also began to fall

Financial services sector: unemployment/vacancy* * Private sector vacancies posted by the Labour Department.

Trading and logistics

Export outlook is grim 2003 SARS Current global crisis 2001 global downturn 1998 AFC

Trading and logistics: unemployment/vacancy* * Private sector vacancies posted by the Labour Department.

Tourism and consumption-related sector

Tourist number remains on a decline; Retail sales down in October 1998 AFC Current global crisis 2001 global downturn Current global crisis 2003 SARS 2001 global downturn 2003 SARS 1998 AFC

Tourism and consumption-related sector: unemployment/vacancy* * Private sector vacancies posted by the Labour Department.

Real estate and construction sector

Property market down further; Transactions fell back to 2003 average 1998 AFC 2001 global downturn Current global crisis 2003 SARS

Construction sector output remains on a downtrend 2001 global downturn 2003 SARS 1998 AFC Current global crisis

Real estate and construction sector: unemployment/vacancy* * Private sector vacancies posted by the Labour Department.

Feedback from SMEs

Impact on business receipts SMEs by sectors % decline as compared to normal situation for week ending 28 Nov Expected further % decline in one month's time Wholesale trade -24.7 -13.8 Retail trade -24.9 -10.5 Import/export trades -17.9 -12.5 Restaurants -13.9 -8.3 Transport services -29.7 Travel agents -15.2 -17.7 Financing institutions -23.3 -6.9 Insurance agents and brokers -9.2 -9.4 Construction and related activities -32.8 -8.5 Business services -10.6 -9.5 All the above sectors -18.7 -12.2

% decline as compared to Impact on employment SMEs by sectors % decline as compared to normal situation for week ending 28 Nov Expected further % decline in one month's time Wholesale trade Retail trade -0.6 -0.7 Import/export trades -2.3 -0.9 Restaurants -2.8 -0.2 Transport services -5.8 -1.7 Travel agents -0.5 -1.1 Financing institutions -1.3 Insurance agents and brokers Construction and related activities -7.6 -3.6 Business services -4.5 All the above sectors -2.5 -0.8

Impact on access to credit SMEs by sectors Tighter than normal for week ending 28 Nov Expected further tightening in one month's time (% of SMEs) Wholesale trade 12.0 Retail trade 10.0 7.5 Import/export trades 17.1 16.2 Restaurants 19.0 12.1 Transport services 8.3 Travel agents 3.3 Financing institutions 12.5 Insurance agents and brokers 15.0 Construction and related activities 11.4 5.7 Business services All the above sectors 10.7

Outlook for HK

Latest 2009 forecasts vary widely Standard Chartered: 2.3% Fitch: -1.2% IMF: 2% Morgan Stanley: HSBC: 1% JP Morgan: -1.3% S&P: 0.7-1.2% Credit Suisse: -2.2% Bank of China: 0.5% Citigroup: 0.3% Hang Seng Bank: 0%

Our latest assessment Global economy in a dire state; timing of recovery still highly uncertain HK’s GDP growth likely to turn negative in 2008 Q4 and 2009 H1 Recession in 2009 seems inevitable given the recession in advanced economies and ensuing drag on Asia China still a positive factor for HK, esp with series of measures to boost domestic demand and forestall severe export slowdown

Measures to mitigate the impact : Ensure banking sector liquidity and monetary stability SME loan guarantee schemes Job creation initiatives Increase minor construction projects and speed up infrastructure projects where possible CPG’s support for HKSARG

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