Hong Kong’s industrial sector will face severe challenges in 2008, said Clement Chen, chairman of the Federation of Hong Kong Industries, at a press conference held (Thursday) to review the economic performance of Hong Kong in 2007 and forecast what the new year has in store.

He is worried if no immediate remedial measures are taken, Hong Kong export growth as well as other sectors of the local economy will be adversely affected.

“As we expect the sector will be impeded by a number of external uncertainties, we have taken a more prudent approach in this year’s economic outlook.

Hong Kong is a small and open economy which is highly affected by the external economic environment. According to a recent OECD report, the economic growth of 30 OECD member countries in 2008 is forecast to stand at 2.3%.

In view of this, we anticipate the growth of Hong Kong export this year will slow down slightly,” Mr Chen said.

The surge in production costs is another increased burden of Hong Kong manufacturers. These include rise in costs of energy, raw materials and labour, coupled with the appreciation of Renminbi.

At the same time, China-made products are facing hardship caused by the upsurge of protectionism in overseas markets. Hong Kong companies with products made in China are likewise affected.

Moreover, the recent recall incidents of China-made products (in particular China-made toys) in overseas markets is posing another challenge to Hong Kong exporters.

Mr Chen pointed out that given the close economic relationship between Hong Kong and the Mainland, changes of policies implemented by the Central Government has significant impacts on Hong Kong.

Since the second half of 2006, the Central Government has started a number of processing trade policy changes, and announced several lists of restricted and prohibited category for processing trade activities
The latest prohibited category for processing trade was just announced late last month. It is expected that more new measures are in the pipeline this year.

Any adjustments to processing trade policy would have substantial impacts on the operation of over 10,000 Hong Kong enterprises.

Confronting the possible rise in production costs, SMEs with limited resources may find it hard to survive and have to wind up.

The Mainland’s Labour Contract Law, effective from January 2008, is another concern of Hong Kong manufacturers operating in the Mainland.

Enterprises are worried that it will hamper company management’s flexible deployment of human resources and may bring extra costs.

In addition, under the new Corporate Income Tax Law, tax concessions for general manufacturing and export businesses of foreign investors will gradually phase out. Foreign-invested enterprises can only enjoy tax concessions through investments on R&D activities.

“Fortunately, despite all these factors, the Mainland economyis forecasted to continue its rapid growth in 2008 and that will benefit Hong Kong.

For external trade, China’s export will inevitably be affected by the weakened overseas market demand. However, the diversification of export products and higher added value will help sustain a stable growth of export.

The continual rise in the disposable income of both city and rural population in the Mainland, plus the positive effects the Beijing Olympics brings to the domestic market, will maintain a fast growth of the Mainland market.

Hong Kong enterprises targeting the Mainland market can ride on the wave of such growth. Moreover, if the Mainland allows the outflow of capital to Hong Kong’s financial market in a gradual and orderly manner, Hong Kong’s economy will be boosted,” Mr Chen noted.

“In general, Hong Kong’s economy is expected to grow steadily in 2008, yet the core manufacturing industry will have to face and carefully tackle uncertainties such as changes in regulations, cost increase and possible weakening of exports.

Therefore, the pace of growth will slow down slightly. We estimate the growth rate of GDP for 2008 will be 4.5%,” he concluded.

As for the major work of the FHKI this year, Mr Chen said the focus will be on three main areas, which include, most importantly, assisting member enterprises adapt to changes in the Mainland’s investment environment, secondly, encouraging member enterprises to enhance their environmental performance and thirdly, providing comprehensive supports to cater members’ needs to explore and expand into the Mainland’s domestic market.