SUBSCRIBE TO THE BULLETIN TODAY!

HKGCC CEO Dr Eden Woon (left) and the Chamber’s Chief Economist David O’Rear, unveiled the findings of the Chamber’s sixth annual Business Prospects Survey at a press conference at the Chamber on December 4. Slides    Press Release >>

HKSAR Firms in 'Optimistic Mood'

Prospects for businesses in Hong Kong are looking up, reveals HKGCC's annual Business Prospects Survey

The prospects for Hong Kong's economy are at their brightest in years, according to the Chamber's Annual Business Prospects Survey, unveiled earlier this month.

Overall business conditions are expected to be "good" or "very good" next year and the economy will be on track for a spurt of reasonably healthy growth.

"Over 80 percent of respondents believe our GDP will rise between 1 and 4 percent in real terms in 2004," Chamber Chief Economist David O"Rear said. "At the other end of the scale, just 6.3 percent think a contraction is likely."

The survey, which was conducted from mid-October to mid-November 2003, polled HKGCC members on a broad range of issues impacting the SAR's business community.

"The numbers tell us that a sense of optimism and improved confidence in the economy has returned. Interestingly, CEPA (Closer Economic Partnership Arrangement) seems to have played an important role in that, with nearly 60 percent of respondents saying the agreement will figure in their business plans, in one way or another, next year," he said.

Despite the rosy outlook, Mr O'Rear said the survey also shows a number of issues affecting the overall health of Hong Kong's economy need to be resolved.

Business conditions

Almost 60 percent of members predict Hong Kong's economy will be "stronger" or "much stronger" next year, and over two-thirds (68 percent) believe deflation will come to an end. Further out, 49.5 percent of companies predict inflation to reach between 1 and 4 percent in 2005.

Unemployment is also expected to continue to improve. Some 48.2 percent of survey respondents believe the number of jobs available will increase, 13.5 percent expect fewer jobs to be around, and 38 percent predict there will be little or no change. Respondents reckon job prospects will continue to improve in 2005 with 66 percent saying employment will rise.

Those with jobs, however, will need to perform better, because 42.6 percent of companies said they will base pay increments on employees' individual results. Only 7.3 percent said they are planning a general pay increase.

"Forty-eight percent of the companies responding said they plan to freeze wages next year, and 1.7 percent said they would be looking to cut pay," Mr O'Rear said. "Despite five years of deflation, frozen or in many cases reduced salaries, 33 percent of members who responded to our survey still say payroll costs remain a challenge to their business."

Over half of the companies polled say they are generally dissatisfied with business costs. Maintaining prices (45.2 percent) and finding new orders (38.6 percent) are two key concerns that companies worry about in the coming year, even though 65.6 percent see a rise in exports in 2004. Interestingly, rental costs in this year's survey are less of a worry, with 17.8 percent of respondents saying property and housing costs are an issue, down from 23.3 percent in last year's survey.

The decline in property prices is not reflected in views on Hong Kong's competitiveness, with 35.6 percent of respondents saying they feel the SAR's level of competitiveness declined last year. Businesses are more optimistic further out, with 58.4 percent predicting Hong Kong's overall competitiveness will improve in the next three to five years.

Mainland operations

China continues to play a key role in Hong Kong firms' business development plans, especially the Closer Economic Partnership Arrangement (CEPA), with nearly 60 percent of respondents saying CEPA will figure, in one way or another, in their business plans next year.

Among these, the largest group saw easier investment access as the most important contribution. On the goods side, 27.6 percent were looking forward to profiting from zero tariffs on imports to the rest of China, and 17.1 percent think increased tourism flows will help their business.

Some 77.5 percent of those polled also said they plan to expand their operations in the Mainland next year, up from 72.8 percent in the 2002 survey. Just 2.7 percent said they planned to downscale their operations in China in the coming year.

China's membership in the World Trade Organisation (WTO) is viewed as generally positive (86.8 percent) for Hong Kong businesses' development. Some 67.3 percent believe it is positive for their own specific businesses.

The HKSAR's fiscal situation

The SAR's fiscal situation received considerable attention in the survey. The clear message that came through in the findings was that there is very strong support for reducing spending, through civil service reform and greater cooperation between the public and private sectors.

Overall, 21.8 percent of respondents said they were satisfied with the SAR Government's performance during the year, 1 percent were very satisfied, and 76.6 percent said they were dissatisfied.

A total of 77.9 percent of respondents support reducing the size of the civil service, and 73.3 percent a cut in civil service pay and, or, benefits.

However, it is possible that expenditure-cutting solutions will not be able to resolve the deep structural imbalance, therefore, solutions on the revenue side are still needed.  The respondents' views on what revenue enhancing measures are best were mixed. Increasing "sin taxes" on alcohol, tobacco, gambling and the like was favored by 73.6 percent, and opposed by just 12.2 percent.

Some 39.6 percent of respondents were opposed to raising salaries taxes, but members seemed evenly split on the issue of raising profits taxes, with 29.4 percent for and 30.4 percent against the idea.

The eventual imposition of a Goods and Services Tax (GST) or Value Added Tax (VAT) -- perhaps in conjunction with lowering other taxes -- was seen as a more palatable option with 46.9 percent favouring it, and 25.1 opposing it. If such a tax were to be implemented, 86.5 percent thought it should be levied at no more than 5 percent of the sales price.

"Again, we must stress that respondents believe that expenditure cutting is the priority of the SAR Government, and only if that is not sufficient to resolve the deficit problem do they grudgingly agree to the government increasing revenue," Mr O'Rear said.

"Also note that we did not go in depth into an analysis of GST and ask the respondents how their views would change if the GST were coupled with other tax concessions," he added.