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Asia: Inward investment in Hong Kong and Singapore

Hywel Lewis is a freelance journalist specialising in family businesses.

The influence of China may be felt beyond the political sphere but that hasn't stopped Hong Kong's domestic economy from roaring ahead. Meanwhile, in Singapore it's all change as the government bows to calls for economic reform. Hywel Lewis reviews the economic and political climate in both countries

While real GDP growth in Hong Kong may have hit its highest ebb in three-and-a-half years in the first quarter of the year, political unrest and government spending issues have ensured the economic and political climate in the administrative region has not been altogether calm.

Political tensions in Hong Kong have recently been heightened with allegations that mainland China is intervening excessively in the territory's affairs. China holds many of the cards regarding Hong Kong's future political development – it may legally 'interpret', or even amend outright, the territory's constitution, and furthermore has the important support of Hong Kong's tycoons. The widespread dissatisfaction with Chinese influence was starkly illustrated when the July 1 pro-democracy demonstration drew more than 250,000 out onto the streets of the territory.

While the opposition Democratic Party have steered away from confrontation by helping to pass a motion calling for political unity and co-operation with the central government, a popular base supports the push for democratic reforms, and so the period up to the Legco (Legislative Council) election on September 12 will be the key to the political future of Hong Kong. While China appears to fear gains by pro-democracy concerns, it is unlikely that these parties will gain overall control of the Legco, as only 30 of the 60 legislators are to be directly elected on this occasion.

The fundamental issue underpinning democratic dissatisfaction concerns the undemocratic means used to select the chief executive of the territory, which are difficult to reconcile with the existence of an executive-led government. The present incumbent of the chief executive position is Tung Chee-hwa, an unpopular leader whose term of office does not expire until 2007. Beijing's decision to block reforms that would have allowed for direct elections of Hong Kong's leader and legislature after this date caused widespread anger.

China's presence
The influence of China may be felt beyond the political sphere, as it is feared that macro-economic tightening measures on the mainland may well cause a hard landing of the economy, resulting in a dampening of Hong Kong's export levels, which are underpinned by the mainland's rapidly growing imports. However, in the first quarter of this year, exports increased by a considerable 4.9% quarter-on-quarter.

Financial secretary Henry Tang did not alter Hong Kong tax law to any great extent on the occasion of his first budget in March 2004. Corporate profits tax remained unchanged at 17.5%, while a 0.5 percentage point increase in profits tax for non-corporate taxpayers to 16% was confirmed. However, there remains the spectre of the imposition of a goods and services tax (GST), to broaden Hong Kong's narrow tax base and in so doing protecting government finances from the volatility of economic cycles. A total of 100,000 individuals and 600 companies currently pay 60% of total salaries tax and profits tax respectively, while each percentage point of sale tax would increase government revenue by approximately HK$6bn per annum.

The government plans to cut spending by around HK$12bn by 2008/09, but the mechanism for doing so remains vague. Government spending in the administrative area sped from 14.5% of GDP in 1997/98 to 20% of GDP in 2003/04, and the spending cuts are needed to reach a target of bringing spending down to 16.9% of GDP by 2008/09 are unlikely to be announced soon due to the lack of a popular mandate for the government and the upcoming Legco elections.

On the positive side, such spending cuts have been rendered less pressing in light of the improving economy. Mr Tang still believes that he is on target to balance the budget after a revision in the medium GDP growth forecast from an average of 3.5% to 3.8% over the next few years. Increased spending of up to HK$500m will promote certain industries and welfare sectors.

Rosy picture
Hang Seng Bank showed faith in this relatively rosy picture at the end of June this year, when it revised its original forecast of 5.5% real GDP growth for Hong Kong in 2004 up to 6%. This revision was based upon the rapid 6.8% year-on-year growth in the first quarter of 2004, and estimated double-digit growth in the second quarter.

Looking by sector, retail sales are growing exponentially. Even given the fact that sales in April 2003 were severely depressed by the Sars crisis, that sales were up by 23% a year later is still significant. This boom in retail can be attributed both to increased spending by locals, and to the upsurge in tourists from the mainland, as a result of the easing of travel restrictions to Hong Kong by the Chinese government. Spending on machinery, equipment and computer software climbed by 15.9% in Q1 2004 quarter-on-quarter, although building and construction dipped by 10.5% in the same period.

The period of deflation, predicted to end soon by the chief executive of the Hong Kong Monetary Authority, could last for a while longer as a result of persistent unemployment and wage increases. Even if deflationary pressures do ease in the short term. However, downward pressure on prices will continue in the long term due to increasing integration with China, where property, goods and services are significantly cheaper than in Hong Kong.

Singapore's prime minister, Goh Chok Tong, is to step down before the end of 2004 to make way for his current deputy, Lee Hsien Loong, keeping the People's Action Party (PAP) firmly in control of the country. This handover is a significant change as far as the country's economic health is concerned, and as regards the existing social controls that will probably have to be dismantled in order to transform Singapore into a more innovative society. Such a dismantling would seem to be alien to the incoming premier's previously hardline stance on social issues, but the ironic fact is that solid, conservative leaders are often in the best position to implement change towards more liberal climes.

Geopolitically, tension has continued over a proposal to allow the US navy to patrol the Malacca Strait, which Singapore shares with Malaysia and Indonesia. Malaysia and Indonesia feel that such a move would infringe their sovereignty, but there is nonetheless a general sense amongst regional governments that cross-border co-operation is necessary in dealing with possible terrorist threats.

Let's go shopping
Strong GDP growth is forecast for 2004, supported by positive consumer and business confidence surveys. GDP is expected to accelerate from 1.1% in 2003 to an annual average of 5.7% in 2004/05, in line with an improvement in the global economy and a recovery in domestic demand. This recovery will begin when the recovery in external demand, based upon economic recoveries in Singapore's main export markets, begins to feed into the domestic economy. Singapore's growth potential in the coming years may not compare with an average pace of 8% between 1960 and 2003, but this reflects "Singapore's success in converging to per capita income levels of the world's wealthiest nations," says the IMF. The IMF has thus estimated Singapore's medium-term growth potential at 4-5%, based upon the assumption that the contribution of capital and labour continues to decline as the country moves into the league of highly-developed nations.

The synchronised upturn in the global economy and the pickup in global IT demand have seen Singapore retain a strong growth momentum into 2004. Quarter-on-quarter growth reached 11% in Q1 2004, with strong performance recorded in both the manufacturing and service sectors, these enjoying growth of 17% and 4.4% respectively quarter-on-quarter. Both the value and the volume of stock market turnover surged by around 200% in the first quarter.

Total employment numbers were up by 14,300 quarter-on-quarter in the first three months of the year, and the Monetary Authority of Singapore believes that the unemployment rate will dip to 4% by the end of the year. As the most export-dependent economy in Asia, Singapore's ongoing prospects will depend upon continued growth in the global electronics market, and upon robust growth in the American, Chinese and other major world economies.

Thus far, these conditions are being met. In the first quarter of the year, the US economy continued to grow, at a pace of 4.2% quarter-on-quarter. Japan's GDP expanded by 5.6% in the same period, and positive signs appeared in the Eurozone, with key member countries registering a pick-up in growth. Global chip sales surged by 22% in the first quarter, following 41% growth in the last three months of 2003. This upturn in the electronics industry has also been a factor in the expansion of the manufacturing sector.

Hard as nails
A recent IMF report notes that Singapore's financial sector has "proven resilient and remains robust despite a series of economic downturns". That same report praises many aspects of Singapore's business and financial infrastructure, describing its payment infrastructure as one of the best in the world, with no major vulnerabilities having been identified. According to stress tests carried out by the IMF, the local and foreign banks and insurance companies considered systemically important would be able to withstand significant shocks. Underlying these strengths is a sound and comprehensive legal, institutional, policy and supervisory framework for anti-money laundering and countering the financing of terrorism.

To further bolster the economy's resistance to external shocks, Singapore's government is seeking to nurture new sources of growth, with the development of knowledge-intensive activities and of the service sector. This approach has led to the more rapid expansion of the biomedical and chemical industries in recent years, although it carries the risk of increased structural unemployment, a factor that has necessitated renewed focus upon education and training in the long-term development strategy.

The government's 15-year long-term development strategy also aims to enhance Singapore's integration with other economies through bilateral and multilateral trade arrangements that will link the economy closely to global economic networks, especially the regional production network centred around China and India.

Not so taxing
It is heartening for potential entrants into the market that, at 20%, Singapore has the most competitive corporate tax rate in the Asia-Pacific region, save Hong Kong. The cut in the corporate tax rate from 22% is a bid to keep business costs down as regional rivals stepped up their challenge to Singapore in the aviation, shipping and manufacturing industries, among others.

A good number of tax incentives, tax treaties and free trade arguments complement the low tax rate. Multi-nationals that have recently established their regional headquarters in Singapore are able to enjoy a 15% rate for five years instead of the previous three, while the Pioneer Incentive scheme targets expansion projects in Singapore in new areas such as technology, and now awards a 0% tax rate to companies with qualifying activities for up to 15 years. However, enthusiasm for these schemes is not universal, as some believe that schemes such as the Pioneer really only help companies that are profitable.

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