Hong Kong Business Projection Industry Update Quarter 3 2012

Executive Summary 5
Core Views 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Economic Significance To Prevail Over Political Concerns
Contrary to some observers, we do not believe there to be any tightening of Hong Kong's political environment by Beijing. We believe
that the economic significance to the Mainland far outweighs any political considerations that the central government may have towards
the city. Consequently, we expect Hong Kong to maintain the attractiveness of its business environment and any adverse reaction to
Beijing's recent rhetoric is likely to, at worst, manifest itself through a transitory increase in public protests.
TABLE: POLITICAL OVERVIEW 8
Long-Term Political Outlook 9
Benign Outlook Despite Democratic Reform Uncertainty
While we believe Hong Kong will remain at or near the top of our political risk ratings table over the next decade, a number of risks
could lead to rising political instability. The sluggish pace of democratic reforms will continue to cause anger among pro-democracy
supporters, and there is the potential for large-scale public protests. A lack of affordable housing and rising income inequality also could
pose threats to social stability.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Property: Justifiably Expensive
Both Singapore and Hong Kong have enacted the harshest set of real estate cooling measures to date in an effort to keep a lid on
skyrocketing property prices. While the measures will likely result in considerably lower property transaction volumes over the coming
months, we do not believe that a substantial sell-off is nigh. Instead, the real trigger for a correction in the two markets is more likely
to be the eventual normalisation of interest rates, which will stretch the affordability of mortgage payments and negate rental profits.
However, we believe that both cities' property markets boast strong underlying fundamentals that will continue to support price
appreciation over the long-term.
TABLE: ECONOMIC ACTIVITY 14
Balance Of Payments 16
China Slowdown: Taking Cues From Hong Kong
In addition to factors that we have identified within China's domestic economy, we look to Hong Kong for evidence of impending
economic weakness on the Mainland. On top of a reversal in the city's PMI trajectory, a growing disparity between bilateral trade data
recorded in China and Hong Kong suggest to us that the pickup in external demand for Chinese goods may not have been as solid as
some market observers have suggested and that growth momentum may be starting to wane.
TABLE: CURRENT ACCOUNT 17
Fiscal Policy 18
Is The Tax Regime Starting To Hurt Competitiveness?
Hong Kong's recently introduced 2013/14 budget was largely conservative and reflected the government's staunch stance towards fiscal
discipline. However, we believe that a gravitation towards social welfare-oriented policies in the longer term is likely to be in order as the
country's demographics start to deteriorate. Pertinently, we highlight that the city's antiquated tax regime is starting to hurt its business
environment, and if left unchanged, will also increasingly strain public finances over the longer term.
TABLE: FISCAL POLICY 18
Monetary Policy 20
Macroprudential Measures Unlikely To Trigger Correction
Inflationary pressures have been relatively well-contained in Hong Kong so far and we expect price pressures to remain subdued
through the rest of 2013, on the back of our expectations for further macro weakness and imported inflation. While we believe that
the property market is set to undergo a correction, we believe that the time is not yet ripe for such a development to take place. The
macroprudential measures enacted thus far will help to stabilise the market and curtail the pace of growth in prices. Any price declines
are likely to come as a result of a normalisation in the interest rate cycle as well as the ramping up of housing supply, which, we expect
to take place in 2014/15.
TABLE: INFLATION 20
Chapter 3: 10-Year Forecast 23
The Hong Kong Economy To 2022 23
Integration With Mainland Key To Growth
Hong Kong's long-term outlook remains reasonably bright. While a developed economy, increased cooperation between Hong Kong
and China offers a unique opportunity for the Special Administrative Region to benefit from the Mainland to further drive economic
growth. We therefore expect Hong Kong to resume its strong economic expansion over the coming years and average 3.5% real GDP
growth over the next decade. However, Hong Kong needs to maintain its competitive edge or risk being overshadowed by fast-rising
Chinese cities.
TABLE: LONG-TERM MACROECONOMIC FORECASTS 23
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Business Environment Outlook 26
Institutions 26
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 26
TABLE: BMI LEGAL FRAMEWORK RATING 27
Infrastructure 28
TABLE: LABOUR FORCE QUALITY 28
TABLE: ASIA - ANNUAL FDI INFLOWS 29
Market Orientation 30
TABLE: TRADE AND INVESTMENT RATINGS 30
TOP EXPORT DESTINATIONS 31
Operational Risk 32
Chapter 5: Key Sectors 33
Freight Transport 33
TABLE: AIR FREIGHT 35
TABLE: INLAND WATERWAY FREIGHT 36
TABLE: MARITIME FREIGHT 36
TABLE: RAIL FREIGHT 37
TABLE: ROAD FREIGHT 37
Tourism 38
TABLE: INBOUND ARRIVALS, 2010-2017 39
Other Key Sectors 41
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 41
TABLE: PHARMA SECTOR KEY INDICATORS 41
TABLE: AUTOS SECTOR KEY INDICATORS 41
TABLE: FOOD & DRINK SECTOR KEY INDICATORS 41
TABLE: TELECOMS SECTOR KEY INDICATORS 42
Chapter 6: BMI Global Assumptions 43
Global Outlook 43
Lowering Our US And Eurozone Growth Forecasts
TABLE: GLOBAL ASSUMPTIONS 43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 44
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 45