Quick Facts Population: 7.1 million GDP (PPP): $302.0 billion -2.7% growth 3.

1% 5-year compound annual growth $42,748 per capita Unemployment: 5.3% Inflation (CPI): 0.5% FDI Inflow: $48.4 billion

Hong Kongs economic freedom score is 89.7, making its economy the freest in the 2011 Index. Its overall score is unchanged from last year, with small declines in the government spending score and labor freedom offsetting improvements in fiscal freedom, monetary freedom, and freedom from corruption. Hong Kong is ranked 1st out of 41 countries in the Asia Pacific region. Hong Kong, one of the worlds most competitive financial and business centers, demonstrated a high degree of resilience during the global financial crisis. Effective legal and regulatory frameworks and openness to global commerce strongly support entrepreneurial dynamism, while overall macroeconomic stability minimizes uncertainty. For the 12th consecutive year, Hong Kong has been Asias second largest destination for foreign direct investment, trailing only mainland China. Hong Kongs economic interaction with China has become more intense and sophisticated, chiefly through strengthened financial linkages. Hong Kongs economy has taken some populist policy turns in 2010. Vagueness lingers concerning potential applications of the competition law that was introduced in July 2010, and the introduction of a statutory minimum wage aimed at reducing inequality runs the risk of becoming a drag on business activity and employment, particularly for small-scale enterprises.

Summary

.. The Hong Kong economy remained robust in the third quarter of 2010. Real GDP expanded briskly further by 6.8% year-on-year, following a strong growth of 7.2% in the first half of 2010. On a seasonally adjusted quarter-to-quarter comparison, real GDP expanded further by 0.7%. .. Merchandise exports maintained strong momentum in the third quarter. The strong domestic demand and further expansion in intra-regional production activity in the Asian markets provided the main impetus. The further recovery in the US and European markets was also contributory, though demand in these markets had yet to return to their pre-crisis peaks in 2008. .. Exports of services were likewise vibrant. Inbound tourism thrived on the surge in visitor arrivals from the Mainland and other Asian markets. Exports of trade-related and transportation services continued to benefit from the resurgence in trade flows. Exports of financial and business services grew solidly further.

Domestic sector held up rather well. Private consumption expenditure picked up further, riding on improving employment situations and rising incomes. Investment saw a modest growth, mainly due to the relapse in machinery and equipment acquisition after three quarters of very fast growth. Construction activity grew notably further, as the surge in public sector works went on. Labour market continued to improve on a broad front. Total employment rose to a new high since early 2009, pushing the seasonally adjusted unemployment rate down to 4.2%. Underemployment rate also improved further to 1.9%. Labour income continued to increase.

Local stock market was range-bound in July and August, then rallied in September alongside other markets worldwide on increasing market expectations of a new round of monetary easing in the United States. Local property market made further gains in July and August, yet turned quieter inSeptember. Underlying consumer price inflation notched up to 2.0% in the third quarter, as both domestic and external cost pressures continued to feed through. Yet overall price pressures remained moderate so far, particularly when viewed alongside the brisk economic expansion.

The Special Administrative Region of Hong Kong is part of the Peoples Republic of China, but it governs its own affairs on a day-to-day basis and enjoys a wide range of freedoms under the territorys mini-constitution, the Basic Law. The government has promised democratic reforms, but implementation has been delayed. Hong Kong boasts one of the worlds most prosperous economies, thanks to small government, low taxes, and light regulation. Major industries include financial services and shipping; manufacturing has migrated largely to the mainland. Ongoing concerns include cronyism in government policymaking, government control of land, and restrictions on the free flow of information.

 Business

freedom in Hong Kong is well protected within an efficient regulatory framework. Transparency encourages entrepreneurship, and the overall environment is conducive to the formation and operation of start-up businesses in various sectors of the economy.

 Hong

Kongs weighted average tariff rate was 0 percent in 2009. Restrictive pharmaceuticals regulation, market access restrictions for some services, and food and energy labeling regulations add to the cost of trade. Ten points were deducted from Hong Kongs trade freedom score to account for nontariff barriers.

Hong Kongs effective tax rates are among the lowest in the world. Individuals are taxed either progressively, between 2 percent and 17 percent on income adjusted by deductions and allowances, or at a flat 15 percent of gross income, depending on which liability is lower. The top corporate income tax rate is 16.5 percent. Unincorporated businesses enjoy a lower rate of 15 percent. Excise duties on beer and wine were removed in 2008. In the most recent year, overall tax revenue as a percentage of GDP was 13 percent.

In the most recent year, total government expenditures, including consumption and transfer payments, amounted to 18.6 percent of GDP. Sound fiscal management has helped Hong Kong to weather the global downturn. Altogether, discretionary stimulus measures taken since 2008 total an estimated 5 percent of GDP. The government has tried to maintain a balanced budget.

Inflation has been low, averaging 1.6 percent between 2007 and 2009. Since the Hong Kong dollar maintains a fixed exchange rate with the U.S. dollar, interest rates and currency movements follow trends in the United States. Hong Kong has efficient clearing and settlement systems. The government regulates the prices of public transport and electricity and some residential rents. Five points were deducted from Hong Kongs monetary freedom score to account for measures that distort domestic prices.

Foreign capital receives domestic treatment, and foreign investment is strongly encouraged. There are no limits on foreign ownership and no screening or special approval procedures to set up a foreign firm except for certain legal services and in broadcasting, where foreign entities may own no more than 49 percent of local stations. There are no controls or requirements on current transfers, access to foreign exchange, or repatriation of profits. Bureaucracy is efficient and transparent.

Hong Kongs financial regulatory and legal environment focuses on ensuring transparency and enforcing prudent minimum standards. Overall, the system has weathered the global financial turmoil quite well, and the banking sector remains well capitalized. Hong Kong has further solidified its competitive status as a dynamic international financial center. In terms of initial public offerings, it topped other competing global financial hubs for the second year in a row in 2010. Banks are overseen by the independent Hong Kong Monetary Authority. Credit is allocated on market terms. There are no restrictions on foreign banks, which are treated the same as domestic institutions. The Hong Kong Stock Exchange remains one of the worlds most capitalized and vibrant.

Contracts are strongly protected. Hong Kongs legal system is based on common law, and its constitution strongly supports private property and freedom of exchange. Despite government public awareness campaigns, pirated and counterfeit products such as CDs, DVDs, software, and designer apparel are sold openly, and pressure has been building for changes in the Copyright Ordinance. The government controls all land and, through public auctions, grants renewable leases that are valid up to 2047.

 Corruption

is perceived as minimal. Hong Kong ranks 12th out of 180 countries in Transparency Internationals Corruption Perceptions Index for 2009. Giving or accepting a bribe is a criminal act.

 The

labor market is supported by flexible labor regulations and a highly motivated workforce. The labor code is strictly enforced but not burdensome. The non-salary cost of employing a worker is low, and regulations on work hours are flexible. Hong Kongs first minimum wage law was passed in July 2010 and is expected to come into effect in 2011.

GDP (purchasing power parity): $323.3 billion (2010 est.) country comparison to the world: 38 $305.9 billion (2009 est.) $314.7 billion (2008 est.) **note: data are in 2010 US dollars GDP (official exchange rate): $226.5 billion (2010 est.) GDP - real growth rate: 5.7% (2010 est.) country comparison to the world: 43 -2.8% (2009 est.) 2.2% (2008 est.)

GDP - per capita (PPP): $45,600 (2010 est.) country comparison to the world: 11 $43,400 (2009 est.) $44,800 (2008 est.) **note: data are in 2010 US dollars GDP - composition by sector: agriculture: 0.1% industry: 7.6% services: 92.3% (2010 est.)

Labor force: 3.7 million (2010 est.) country comparison to the world: 92 Labor force - by occupation: manufacturing: 6.1% construction: 1.9% wholesale and retail trade, restaurants, and hotels: 42.9% financing, insurance, and real estate: 21.4% transport and communications: 7.9% community and social services: 19.7% **note: above data exclude public sector (2008 est.)

 Unemployment

rate: 4.6% (2010 est.) country comparison to the world: 44 5.2% (2009 est.) below poverty line:

Population

NA%

Household income or consumption by percentage share: lowest 10%: NA% highest 10%: NA% Distribution of family income - Gini index: 53.3 (2007) country comparison to the world: 16 Investment (gross fixed): 22.2% of GDP (2010 est.) country comparison to the world: 64 Public debt: 18.2% of GDP (2010 est.) country comparison to the world: 111 37.4% of GDP (2009 est.)

Inflation rate (consumer prices): 2.2% (2010 est.) country comparison to the world: 65 -0.5% (2009 est.) Central bank discount rate: 0.5% (31 December 2009) country comparison to the world: 138 0.5% (31 December 2008) Commercial bank prime lending rate: 5% (31 December 2009 est.) country comparison to the world: 150 5% (31 December 2008 est.)

Stock of narrow money: $84.88 billion (31 December 2010 est) country comparison to the world: 34 $75.49 billion (31 December 2009 est) Stock of broad money: $850.8 billion (31 December 2009) country comparison to the world: 18 $808.8 billion (31 December 2008) Stock of domestic credit: $374.8 billion (31 December 2010 est.) country comparison to the world: 29 $351.2 billion (31 December 2009 est.)

Market value of publicly traded shares: $2.292 trillion (31 December 2009) country comparison to the world: 8 $1.32 trillion (31 December 2008) $1.163 trillion (31 December 2007 est.) Agriculture - products: Fresh vegetables; poultry, pork; fish Industries: textiles, clothing, tourism, banking, shipping, electronics, plastics, toys, watches, clocks

Industrial production growth rate: -0.3% (2010 est.) country comparison to the world: 156 Electricity - production: 39.4 billion kWh (2009 est.) country comparison to the world: 57 Electricity - consumption: 42.1 billion kWh (2009 est.) country comparison to the world: 49 Electricity - exports: 3.926 billion kWh (2009 est.) Electricity - imports: 11.7 billion kWh (2009 est.)

Oil - production: 0 bbl/day (2009 est.) country comparison to the world: 185 Oil - consumption: 359,000 bbl/day (2009 est.) country comparison to the world: 35 Oil - exports: 160,000 bbl/day (2009) country comparison to the world: 53 Oil - imports: 440,000 bbl/day (2009) country comparison to the world: 29

Oil - proved reserves: 0 bbl (1 January 2010 est.) country comparison to the world: 169 Natural gas - production: 0 cu m (2009 est.) country comparison to the world: 175 Natural gas - consumption: 2.83 billion cu m (2009 est.) country comparison to the world: 75 Natural gas - exports: 0 cu m (2009 est.) country comparison to the world: 171

Natural gas - imports: 2.83 billion cu m (2009 est.) country comparison to the world: 41 Natural gas - proved reserves: 0 cu m (1 January 2010 est.) country comparison to the world: 167 Current account balance: $18.07 billion (2010 est.) country comparison to the world: 18 $18.28 billion (2009 est.)

Exports: $382.6 billion (2010 est.) country comparison to the world: 12 $321.8 billion (2009 est.) Exports - commodities: electrical machinery and appliances, textiles, apparel, footwear, watches and clocks, toys, plastics, precious stones, printed material Exports - partners: China 51.2%, US 11.6%, Japan 4.4% (2009 est.)

Imports: $413 billion (2010 est.) country comparison to the world: 10 $348.7 billion (2009 est.) Imports - commodities: raw materials and semi-manufactures, consumer goods, capital goods, foodstuffs, fuel (most is re-exported) Imports - partners: China 46.4%, Japan 8.8%, Taiwan 6.5%, Singapore 6.5%, US 5.3% (2009) Reserves of foreign exchange and gold: $262.7 billion (31 December 2010 est.) country comparison to the world: 8 $255.8 billion (31 December 2009 est.)

Debt - external: $69.86 billion (31 December 2010 est.) country comparison to the world: 45 $655.1 billion (30 September 2009) Stock of direct foreign investment - at home: $962.2 billion (31 December 2010 est.) country comparison to the world: 5 $912.2 billion (31 December 2009 est.) Stock of direct foreign investment - abroad: $873.1 billion (31 December 2010 est.) country comparison to the world: 6 $834.1 billion (31 December 2009 est.) Exchange rates: Hong Kong dollars (HKD) per US dollar - 7.78 (2010), 7.7518 (2009), 7.751 (2008), 7.802 (2007), 7.7678 (2006)

1.1 The Hong Kong economy continued to see a robust recovery in the third quarter of 2010. Private consumption picked up further, thanks to improving income and job prospects. While business sentiments remained sanguine in general, investment expanded modestly further after three quarters of notable growth. The strong growth momentum in the external sector extended well into the third quarter. Merchandise exports continued to perform very well in the Asian markets. Further revival in demand in the US and Europe also rendered additional support to the overall export performance. Exports of services were vibrant across the board, driven by buoyant inbound tourism, surging trade flows, as well as thriving fundraising and other commercial activities. Nevertheless, external trade environment remained subject to considerable headwinds, amid more volatile movements in the currency markets, rise in protectionist sentiment, and increasing signs of advanced economies losing steam. Local stock market was range-bound in July and August, but embarked on an uptrend during September alongside other market rally worldwide on expectations of an imminent round of quantitative easing in the US. Inflation notched up further, but remained moderate when viewed against the brisk economic expansion.

1.2 In the third quarter of 2010, the Gross Domestic Product (GDP)(1) leaped by 6.8% in real terms over a year earlier, following a 6.5% growth in the second quarter (unchanged from the earlier estimate). On a seasonally adjusted quarterto-quarter comparison(2), GDP grew by 0.7% in real terms in the third quarter, the sixth consecutive quarter of expansion. As a result, the seasonally adjusted GDP level in the third quarter surpassed the pre-crisis peak in the first quarter of 2008 by some 2.3%.

1.3 Total exports of goods maintained strong momentum in the third quarter. Exports to major Asian markets continued to be the growth driver, thanks to the strong domestic demand in these economies and also the increase in intra-regional production activity. Exports to the US and Europe also improved further, as their import demand continued to rise back from their troughs in 2009. The global economic recovery remained uneven across regions(3). Asia was the bright spot, with strong domestic demand and thriving exports. Hong Kong was no exception. In the third quarter, total exports of goods surged by 20.8% in real terms over a year earlier, further to the 20.1% growth in the second quarter. Yet the fundamentals of advanced markets remained rather fragile, and the pace of expansion in economic activities tended to decelerate more recently. The near-term trade outlook in the Asia region has dimmed somewhat and remains subject to potential headwinds from the weakening recovery in the advanced economies.

1.4 Exports of services continued to perform well in the third quarter, up14.0% in real terms over a year earlier, after the 17.1% increase in the second quarter. Exports of travel services were buoyed by robust growth in incoming visitors across most major markets, in particular the Mainland and other Asian markets. Exports of transportation and trade-related services continued to benefit from the vibrant trade flows in the region and the resurgence in trade with the rest of the world. Exports of financial and business services expanded solidly further from the higher base of comparison a year earlier.

1.5 The domestic sector held up rather well in the third quarter. Supported by improving job and income prospects, private consumption expenditure picked up further in the third quarter, growing by 5.7% year-on-year in real terms, following the 4.4% growth in the second quarter. Government consumption expenditure also grew steadily further in the third quarter.

1.6 Overall investment spending in terms of gross domestic fixed capital formation increased modestly by 0.3% in real terms in the third quarter of 2010 over a year earlier, after a strong growth of 15.6% in the second quarter. The more moderate growth in the third quarter was mainly due to a relapse in machinery and equipment acquisitions, a highly volatile component which can show big fluctuations from quarter to quarter. For the third quarter specifically, there was a decline of 6.4% in real terms over a year earlier, after three quarters of double-digit year-on-year growth. On the whole, business sentiments were still sanguine. The latest Quarterly Business Tendency Survey results indicated that the large enterprises remained positive about the nearterm business outlook, while the views of small and medium enterprises (SMEs) were a bit mixed (See Box 1.1 for details of the survey on SMEs).

1.7 The labour market improved further on a broad front, thanks to an increasingly entrenched economic recovery. Total employment continued to climb back, pushing the seasonally adjusted unemployment rate down further to 4.2% in the third quarter of 2010, the lowest level since end-2008. The underemployment rate also continued its downtrend, reaching 1.9% in the third quarter. Meanwhile, labour wages and earnings rose further in the second quarter.

1.8 Local stock market showed some rebound in July but fell again in August, generally range-bound as market sentiments remained under the influence of the ongoing sovereign debt problem in Europe and the bumpy recovery in the advanced economies. Nevertheless, local stock market resumed an uptrend alongside other major markets worldwide on entering September, on expectations of an extension of the super-loose monetary stance in the advanced economies and in particular, a new round of quantitative easing by the United States. Hang Seng Index rallied during September, closing the month at 22 358, up 11% and 2% respectively over end-June this year and end-2009.

1.9 Residential property market remained vibrant in July and August, gaining in both prices and transaction volume, before turning somewhat quieter in September, after the Financial Secretary announced further measures in mid-August to control the potential risks of asset market bubble in the property sector. Overall flat prices rose by 5% between June 2010 and September 2010, following a cumulative increase of 29% during 2009 and a further rise of 9% during the first half of 2010. Transactions in the third quarter leaped by 18% over the preceding quarter, reflecting the active trading amid positive market sentiment. With the exceptionally low mortgage interest rates, home purchase affordability (i.e. the ratio of mortgage payment for a 45-square metre flat to median income of households, excluding those living in public housing) was still below the long-term average of 53% over 1989 to 2008, but has risen further to around 42% in the third quarter. Meanwhile, rentals for flats, offices and shops notched up further, along with the pickup in leasing demand and commercial activities.

of 2010, as the reflationary process that accompanied the economic recovery went on. On the external front, renewed weakening of the US dollar during the third quarter, rising global food prices and higher inflation in Asia all added to the price pressure from imported sources. Yet hefty productivity growth in the overall economy has provided an effective cushion, which was the major contributory factor behind the still relatively moderate inflation notwithstanding the rapid economic growth so far this year. Underlying consumer price inflation, which nets out the effect of Governments relief measures to provide a more accurate indicator of the inflation trend, averaged at 2.0% in the third quarter, up from 1.5% in the second quarter. Taking into account the effect of Governments one-off measures, headline consumer price inflation stood at 2.3% in the third quarter as compared to 2.6% in the second quarter. The narrowing gap between the headline and underlying inflation rates in the third quarter was largely due to the dissipation of the low base effect created by the electricity subsidy with the final payment ended in August last year, as well as an extra month of public housing rental waiver in the third quarter this year

1.10 Consumer price inflation climbed up further in the third quarter

1.11 The GDP deflator went up by 2.5% in the third quarter as compared to a year earlier. The faster increase as compared to virtually flat in the second quarter was due mainly to a reversion to improvement in the terms of trade, brought about by a narrower increase in the prices of imports of goods and services. Domestic demand deflator continued to rise in the third quarter, as inflationary pressure from domestic sources sustained alongside the economic recovery.

1.12 With the economic recovery becoming more entrenched, activity across most major sectors saw further expansion by varying extents in the second quarter of 2010. The manufacturing sector expanded moderately further by 2.5% in the second quarter, after reverting to growth in the first quarter. Construction sector expanded robustly by 16.2% over a year earlier, helped mainly by the surge in public sector works. The services sector, the mainstay of Hong Kongs economy, leaped further by 6.2% in the second quarter over a year earlier. Thanks to thriving trade flows and business activity, import and export trade continued to see the sharpest growth, followed by wholesale and retail trades, and transport and storage. Growth in financing and insurance decelerated notably alongside the intensification of the European sovereign debt problem in the earlier part of the second quarter. Real estate fell modestly further by 1.8% during the quarter.

1.13 The Government announced further measures in August to control the potential risks and curb speculative activities in the property market. The measures include increasing the land supply, disallowing confirm or transactions of first-hand uncompleted flats, raising the forfeiture in cancelling property transactions to 10%, and monitoring the implementation of earlier measures to enhance the transparency of property information and transactions.

1.14 The 2010-11 Policy Address announced by the Government pledged to give priority to livelihood issues of principal concern to the community. These included housing, the ageing population and the wealth gap. The Policy Address also outlined continued efforts to promote the development of a diversified economy, while building on the strengths of the pillar industries and enhancing Hong Kong competitiveness. Specific measures, among others, are as follows