External Direct Investment of Hong Kong in 2008

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Wing Yan Tong at 415-835-9315

December 10, 2009 - Hong Kong’s external direct investment (DI) statistics for 2008 are released today by the Census and Statistics Department (C&SD).

Stocks of Inward and Outward DI
At the end of 2008, the stock of Hong Kong’s inward DI decreased by 31.1% from a year earlier to HK$6,325.8 billion (US$811 billion) at market value. Its ratio to GDP stood at 377% in 2008. In 2008, the decrease in inward DI position was mainly attributable to the decrease in market values of some Hong Kong enterprises, alongside the correction in the local equities market.

Analyzed by immediate source of investment, the mainland of China (the Mainland) accounted for the largest share of the total stock at end-2008, at 36.5%, reflecting the importance of investment from the Mainland in Hong Kong. Mainland's investment in Hong Kong covered a wide range of economic activities, including investment holding, real estate, and various business services; wholesale, retail and import/export trades; and transport and related services.

The British Virgin Islands (BVI) and Bermuda took up another 32.3% and 5.7% respectively of the total stock of inward DI at end-2008. This mirrored partly the common practice of Hong Kong enterprises in setting up non-operating companies in offshore financial centers (commonly known as tax haven economies) for re-channeling DI funds back to Hong Kong, and partly the means by which foreign enterprises channeled their funds to Hong Kong. Other major investor countries/territories included the Netherlands and the United States of America, accounting for 6.5% and 3.9% respectively of the total.

Analyzed by economic activity of Hong Kong enterprise groups (HKEGs) having received inward DI, those engaged in investment holding, real estate and various business services attracted the largest share of 67.5% of the total stock at end-2008. A significant proportion of such investment was related to funds originated from Hong Kong and re-channeled through tax haven economies back to Hong Kong. Wholesale, retail and import/export trades also represented a major recipient sector of inward DI, with a share of 11.0% of the total. Banks and deposit-taking companies took up another 9.8%.

At the end of 2008, the stock of Hong Kong’s outward DI decreased by 25.1% from a year earlier to HK$5,906.2 billion (US$757.2 billion) at market value. Its ratio to GDP was 352% in 2008. Similar to inward DI, the decrease in outward DI position in 2008 was mainly attributable to the decrease in market values of foreign affiliates of Hong Kong enterprises, alongside the correction in overseas equities markets.

Analyzed by immediate destination of investment, the Mainland was the most important destination for Hong Kong’s outward DI, with a share of 44.4% of the total stock at end-2008. Guangdong Province remained a popular location for Hong Kong's investment in the Mainland, accounting for 30.4% (or HK$798.4 billion [US$102.35 billion]) of the total stock of outward DI to the Mainland. The most common economic activities undertaken by Hong Kong's direct investment enterprises in the Mainland were communications; investment holding, real estate and various business services; and manufacturing.

The BVI remained the most popular tax haven economy for indirect channeling of DI funds, accounting for 43.8% of the total stock of Hong Kong's outward DI at end-2008.

Analyzed by economic activity of HKEGs having made outward DI, those engaged in investment holding, real estate and various business services took up the largest share, at 75.2% of the total stock at end-2008. This was followed by wholesale, retail and import/export trades (with a share of 8.7%), and banks and deposit-taking companies (with a share of 3.5%).

Flows of Inward and Outward DI
DI inflow to Hong Kong increased from HK$423.9 billion (US$54.34 billion) in 2007 to HK$464.3 billion (US$59.52 billion) in 2008. The Mainland was the most important supplier of Hong Kong's DI inflow in 2008, amounting to HK$179.7 billion (US$23.03 billion). The BVI came next, at HK$110.5 billion (US$14.16 billion). Analyzed by economic activity of HKEGs receiving DI inflow, those engaged in investment holding, real estate and various business services took up the largest share of the total DI inflow in 2008, at HK$232.4 billion (US$29.79 billion).

On the other hand, DI outflow from Hong Kong decreased from HK$476.5 billion (US$61.08 billion) in 2007 to HK$393.9 billion (US$50.5 billion) in 2008. The Mainland accounted for a predominant part of Hong Kong's DI outflow in 2008, at HK$215.2 billion (US$27.58 billion). Analyzed by economic activity of HKEGs making DI outflow, those engaged in investment holding, real estate and various business services was the most prominent supplier, amounting to HK$307.4 billion (US$39.41 billion).

Taking DI inflow and outflow together, a net inflow of HK$70.4 billion (US$9.02 billion) was recorded in 2008.

Commentary
A Hong Kong Special Administrative Region Government spokesman says that the stocks of inward and outward direct investment at end-2008 were both notably lower than their corresponding year-ago levels due to the impact of the financial tsunami, which led to declines in market values of the companies concerned. Yet the spokesman points out that the high ratios of inward and outward direct investment to the size of the Hong Kong economy, at 377% and 352% respectively, continued to underline Hong Kong’s status as a regional business hub and an international financial center.

The spokesman notes that the Mainland continued to feature prominently in Hong Kong's external direct investment, both as a source and a destination. Going forward, the investment links between the Mainland and Hong Kong should continue to go from strength to strength, amidst the rapid economic integration between the two places.

DI represents investment which allows investors in one economy to have a lasting interest and a significant degree of influence or an effective voice in the management of an enterprise in another economy. For statistical purpose, an effective voice is taken as equivalent to a holding of 10% or more of the equity in an enterprise.

Hong Kong compiles DI statistics in conformity with the prescriptions in the Fifth Edition of the Balance of Payments Manual of the International Monetary Fund (IMF). The DI statistics are compiled on the basis of data obtained from the Survey of External Claims, Liabilities and Income (SECLI), supplemented by data from other sources.

Further details of DI statistics for 2008 are published in a report entitled “External Direct Investment Statistics of Hong Kong 2008”. The publication is available for downloading, free of charge, from the Web site of the C&SD at [www.censtatd.gov.hk/products_and_services/products/publications/statistical_report/index.jsp].