1

Update on the Hong Kong Economy for Update on the Hong Kong Economy for The Task Force on Economic ChallengesThe Task Force on Economic Challenges

Government EconomistGovernment Economist

8 December 20088 December 2008

2

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...

3

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

0

50

100

150

200

250

300

350

400

450

500

11/06 12/06 2/07 4/07 6/07 8/07 10/07 12/07 2/08 4/08 6/08 8/08 10/08

TED spread

OIS spread

Spreads (bps)

4

Local interbank rates down…but banks still cautious in lending

0

1

2

3

4

5

6

11/06 12/06 2/07 4/07 6/07 8/07 10/07 12/07 2/08 4/08 6/08 8/08 10/08

HIBOR (1M)

HIBOR (3M)

Spreads (bps)

5

Global synchronised downturn increasingly apparent…

6

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

Jan 2008 Apr 2008 Oct 2008 Nov 2008

World 4.4 3.8 3.0 2.2

Advanced economies 2.1 1.3 0.5 -0.3 Euro area 1.9 1.2 0.2 -0.5

Germany 1.7 1.0 0.0 -0.8 Japan 1.7 1.5 0.5 -0.2 United Kingdom 2.4 1.6 -0.1 -1.3 United States 1.8 0.6 0.1 -0.7

4.8 4.4 3.2 2.1

7.0 6.6 6.1 5.1

ASEAN-5 6.2 6.0 4.9 4.2Brazil 4.0 3.7 3.5 3.0China 10.0 9.5 9.3 8.5India 8.2 8.0 6.9 6.3Russia 6.5 6.3 5.5 3.5

Newly industrializedAsian economies

Emerging and developingeconomies

IMF global economic projection for 2009

7

US economy in a dire state

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

US'sLeadingIndicator

US's GDPannualised q-t-q rate of

change in real terms

Rate of change (%)

US leading indicator sharply down US imports are falling

-20

-15

-10

-5

0

5

10

15

20

25

30

96 97 98 99 00 01 02 03 04 05 06 07 08

US's importsdemand

in real terms

Year-on-year growth rate (%)

US's importsfrom Asia in

nominal terms

8

Likewise for EU and JapanEU GDP vs Sentiment Index

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

97 98 99 00 01 02 03 04 05 06 07 08-6

-4

-2

0

2

4

6

EU'sSentiment

Index(LHS)

EU's GDPannualised q-t-q rate of

change in real terms(RHS)

Year-on-yeargrowth rate (%)

Quarter-to-quartergrowth rate (%)

Japan GDP vs Tankan Survey

-50

-40

-30

-20

-10

0

10

20

30

40

50

95 96 97 98 99 00 01 02 03 04 05 06 07 08-5

-4

-3

-2

-1

0

1

2

3

4

5

Japan TANKANLarge enterprises

(LHS)

Japan GDPReal Growth

(RHS)

Index Year-on-year growth rate (%)

9

Asia also feeling the pinchGDP growth slowing

-20

-15

-10

-5

0

5

10

15

95 96 97 98 99 00 01 02 03 04 05 06 07 08

China Japan Hong Kong Singapore

Korea Taiwan Indonesia Malaysia

Philippines Thailand

Year-on-year growth rate (%)

Exports all down

-40

-30

-20

-10

0

10

20

30

40

50

96 97 98 99 00 01 02 03 04 05 06 07 08

China Japan Hong KongSingapore Korea TaiwanIndonesia Malaysia PhilippinesThailand

Year-on-year growth rate (%)

10

HK economy also hard hit…

11

GDP growth slowed markedly in Q3 2008

-10

-5

0

5

10

15

Q197

Q397

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

Q103

Q303

Q104

Q304

Q105

Q305

Q106

Q306

Q107

Q307

Q108

Q308

Year-on-year rate of change

Seasonally adjustedquarter-to-quarter rate of change

GDP rate of change in real terms (%)

12

Impact on the four harder-hit sectors

13

Financial services

14

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

15

Financial sector activities already slowing markedly since early 2008

Non-bank financingcompanies

(LHS)

Banking(RHS)

Insurance(RHS)

-60

-40

-20

0

20

40

60

80

100

120

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

Q103

Q303

Q104

Q304

Q105

Q305

Q106

Q306

Q107

Q307

Q108

Q308

-30

-20

-10

0

10

20

30

40

50

60

Business receipts(year-on-year rate of change (%))

Business receipts(year-on-year rate of change (%))

16

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

5000

10000

15000

20000

25000

30000

35000

Jan07

Mar07

May07

Jul07

Sep07

Nov07

Jan08

Mar08

May08

Jul08

Sep08

Nov08

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

Hang Seng Index(LHS)

0

50

100

150

200

250

Jan07

Mar07

May07

Jul07

Sep07

Nov07

Jan08

Mar08

May08

Jul08

Sep08

Nov08

Daily total turnover (HK$ Bn)

Dow Jone'sIndustrial Average Index

(RHS)

Index Index

17

…… but loans also began to fall

Loans for use in HK(excluding trade

finance)

-30

-20

-10

0

10

20

30

40

1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08

Year-on-year rate of change (%)

Trade finance1998AFC

2001global

downturn

Currentglobalcrisis

18

Financial services sector: unemployment/vacancy*

* Private sector vacancies posted by the Labour Department.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

Unemployment rate (%)

-100

-50

0

50

100

150

200

250

Jan02

Jul02

Jan03

Jul03

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Year-on-year rate of change in vacancies (%)

NovAug-Oct

1998AFC

2001global

downturn

2003SARS

Currentglobalcrisis

122%

19

Trading and logistics

20

-15

-10

-5

0

5

10

15

20

25

Q197

Q397

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

Q103

Q303

Q104

Q304

Q105

Q305

Q106

Q306

Q107

Q307

Q108

Q308

0

1

2

3

4

5

6

7

8

Hong Kong's total exports(LHS)

World GDP*(RHS)

Year-on-year rate ofchange in real terms (%)

Oct

Year-on-year rate ofchange in real terms (%)

* The world GDP being plotted here is weighted by Hong Kong's total exports of goods.

Export outlook is grim

1998 AFC

2001 global

downturn

2003 SARS

Current global crisis

21

Trading and logistics: unemployment/vacancy*

0

1

2

3

4

5

6

7

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

Unemployment rate (%)

-60

-40

-20

0

20

40

60

80

100

Jan02

Jul02

Jan03

Jul03

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Year-on-year rate of change in vacancies (%)

Aug-Oct

Nov

1998AFC

2001global

downturn

2003SARS

Currentglobalcrisis

-42%

* Private sector vacancies posted by the Labour Department.

22

Tourism and consumption-related sector

23

-80

-60

-40

-20

0

20

40

60

80

100

120

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

Year-on-year rate of change (%)

-25

-20

-15

-10

-5

0

5

10

15

20

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

Retail sales

Year-on-year rate of change in volume(%)Inbound tourists

Oct Oct

(208.4)

22

Tourist number remains on a decline; Retail sales down in October

1998 AFC

2001 global

downturn

2003 SARS

Current global crisis

1998 AFC

2001 global

downturn

2003 SARS

Current global crisis

24

Tourism and consumption-related sector: unemployment/vacancy*

* Private sector vacancies posted by the Labour Department.

0

2

4

6

8

10

12

14

16

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

Unemployment rate (%)

-80

-40

0

40

80

120

160

200

Jan02

Jul02

Jan03

Jul03

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Year-on-year rate of change in vacancies (%)

Aug-Oct

Nov

1998AFC

2001global

downturn

2003SARS

Currentglobalcrisis

-18%

25

Real estate and construction sector

26

40

60

80

100

120

140

160

180

200

Jan97

Jan98

Jan99

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Residental Price Index (Overall) Residental Price Index (Large) Residental Price Index (Small)

Indexx

0

50

100

150

200

250

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

Residential propertytransaction (value)

HK$ Bn

OctSep-Nov

Property market down further; Transactions fell back to 2003 average

1998 AFC

2001 global

downturn

2003 SARS

Current global crisis

27

-40

-30

-20

-10

0

10

20

30

40

50

Q197

Q397

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

Q103

Q303

Q104

Q304

Q105

Q305

Q106

Q306

Q107

Q307

Q108

Q308

Building & construction expenditure

Building consents (8-quarter moving average)

Year-on-year rate of change in real terms (%)

Construction sector output remainson a downtrend

1998 AFC

2001 global

downturn

2003 SARS

Current global crisis

28

Real estate and construction sector: unemployment/vacancy*

0

2

4

6

8

10

12

14

16

18

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

Unemployment rate (%)

-60

-40

-20

0

20

40

60

80

100

120

Jan02

Jul02

Jan03

Jul03

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Year-on-year rate of change in vacancies (%)

Aug-Oct

Nov

1998AFC

2001global

downturn

2003SARS

Currentglobalcrisis

-30%

* Private sector vacancies posted by the Labour Department.

29

Feedback from SMEs

30

Impact on business receipts

SMEs by sectors

% decline as compared to normal situation forweek 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 -8.3

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

31

Impact on employment

SMEs by sectors

% decline as compared to normal situation forweek ending 28 Nov

Expected further % decline in

one month's time

Wholesale trade 0 0

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 -0.5

Insurance agents and brokers 0 -0.5

Construction and related activities -7.6 -3.6

Business services -4.5 -0.9

All the above sectors -2.5 -0.8

32

Impact on access to credit

SMEs by sectorsTighter than normal for

week ending 28 Nov

Expected furthertightening in

one month's time

(% of SMEs) (% of SMEs)

Wholesale trade 12.0 12.0

Retail trade 10.0 7.5

Import/export trades 17.1 16.2

Restaurants 19.0 12.1

Transport services 0 8.3

Travel agents 3.3 3.3

Financing institutions 12.5 10.0

Insurance agents and brokers 15.0 15.0

Construction and related activities 11.4 5.7

Business services 5.7 0

All the above sectors 12.5 10.7

33

Outlook for HK

34

Latest 2009 forecasts vary widely

Standard Chartered: 2.3% Fitch: -1.2%

IMF: 2% Morgan Stanley:

-1.2%

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%

35

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

36

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

37

End