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Analytical study on the trade relations between the People’s Republic of China and Hong Kong Liu, Francis King-Yin 1977

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A N A N A L Y T I C A L STUDY ON THE TRADE R E L A T I O N S BETWEEN THE P E O P L E ' S R E P U B L I C OF CHINA AND HONG KONG F R A N C I S K I N G - Y I N L I U B . S c , C a l i f o r n i a S t a t e U n i v e r s i t y , S a c r a m e n t o , 1975 A T H E S I S S U B M I T T E D I N P A R T I A L F U L F I L L M E N T OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF S C I E N C E I N B U S I N E S S A D M I N I S T R A T I O N i n t h e F a c u l t y o f C o m m e r c e a n d B u s i n e s s A d m i n i s t r a t i o n We a c c e p t t h i s t h e s i s a s c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d THE U N I V E R S I T Y OF B R I T I S H COLUMBIA J a n u a r y , 1977 F r a n c i s K i n g - Y i n L i u , 1977 In presenting th i s thes is in pa r t i a l fu l f i lment of the requirements for an advanced degree at the Un ivers i ty of B r i t i s h Columbia, I agree that the L ibrary sha l l make it f ree ly ava i l ab le for reference and study. I further agree that permission for extensive copying of th is thesis for scho lar ly purposes may be granted by the Head of my Department or by his representat ives. It is understood that copying or pub l i ca t ion of th is thesis for f inanc ia l gain sha l l not be allowed without my writ ten permission. Department of Commerce and Business Administration The Univers i ty of B r i t i s h Columbia 2.075 W e s b r o o k P l a c e V a n c o u v e r , C a n a d a V 6 T 1WS Date January 14, 1977 i i ABSTRACT This study w i l l examine the trade r e l a t i o n s between the People's Republic of China (P.R.C.) and Hong Kong, hypothesizing that the future trade relationship with each other w i l l be maintained and w i l l not be changed i n the near future due to the P.R.C.'s need f o r foreign exchange and Hong Kong's need f o r foodstuffs. I t i s further hypo-thesized that t h i s economic coexistence s i t u a t i o n w i l l con-tinue to exist regardless of the P.R.C.'s di r e c t trade with the West. F i r s t , a description and analysis of the growth and development of the P.R.C.'s foreign trade with Hong Kong w i l l be presented. Second, the role of Hong Kong's trade with the P.R.C. and t h e i r trade rel a t i o n s h i p w i l l be evaluated. L a s t l y , opinions and insights w i l l be given regarding the p o t e n t i a l trade rel a t i o n s h i p between the P.R.C. and Hong Kong i n the near future. Hong Kong's present significance i n the P.R.C.'s trade i s the role she plays as a major source of foreign exchange f o r the P.R.C, which i s the r e s u l t of the trade imbalance and the remittance from overseas Chinese. As the i i i P.R.C. continues to do more business with the West, she has to obtain more foreign exchange to f u l f i l l the payments. Therefore, the t i e between the two trade partners i s expected to strengthen and w i l l not be changed i n the foreseeable future. i v T A B L E OF CONTENTS C h a p t e r P a g e I . I N T R O D U C T I O N 1 P u r p o s e o f t h e S t u d y -R e s e a r c h M e t h o d o l o g y S c o p e o f t h e I n v e s t i g a t i o n H y p o t h e s i s I m p o r t a n c e o f t h e S t u d y I I . M A I N L A N D C H I N A ' S NEED FOR F O R E I G N EXCHANGE . . . . 8 S i t u a t i o n C o n f r o n t i n g t h e C o m m u n i s t i n 1949 C r e a t i o n o f H u g e D e b t Due t o S o v i e t A s s i s -t a n c e " G r a i n I m p o r t " P o l i c y a s a M a j o r D r a i n o n F o r e i g n E x c h a n g e R e n m i n b i ' s I n c o n v e r t i b i l i t y H o n g K o n g a s a n I d e a l S u p p l i e r o f F o r e i g n E x c h a n g e t o C h i n a I I I . HONG K O N G ' S NEED FOR IMPORTED F O O D S T U F F S 16 P o p u l a t i o n G r o w t h L i m i t e d A r a b l e L a n d F o o d P r o b l e m I V . HONG K O N G ' S TRADE WITH M A I N L A N D C H I N A ( 1 9 4 9 -1 9 7 5 ) 32 T r a d e H i s t o r y B e f o r e 1952 T r a d e U n d e r t h e F i r s t F i v e Y e a r P l a n ( 1 9 5 3 -1 9 5 7 ) T r a d e U n d e r t h e S e c o n d F i v e Y e a r P l a n ( 1 9 5 8 - 1 9 6 2 ) T r a d e R e l a t i o n s h i p F r o m 1 9 6 3 To 1966 R e c e n t T r a d e D e v e l o p m e n t F r o m 1 9 6 7 To 1975 V . C O N C L U D I N G REMARKS 5 3 V VI. A MULTIPLE REGRESSION ANALYSIS OF CHINA'S EXPORT TO HONG KONG 64 Objectives Rationale In Selecting Variables For Pre-d i c t i o n and Correcting Time Series Limitations S t a t i s t i c a l Methodology Summary of Results S t a t i s t i c a l Interpretation Comments APPENDIX ... BIBLIOGRAPHY 70 76 v i LIST OF TABLES Table Page 1. Grain Exports to Communist China, 1960/61-1963/64 12 2. Crude B i r t h , Crude Death, Natural Increase and Population Growth Rates, 1945-1971 17 3. Future Mid-Year Population Projection for Hong Kong 21 4. Food Situation of Hong Kong i n 1960 25 5. Projected Aggregate Food Consumption, Produc-t i o n , and Import Requirement, 1970, 1975, and 1980 27 6. Employment by I n d u s t r i a l Group, 1961 and 1970 29 7. Hong Kong's Trade With Mainland China, 1949-1952 33 8. Hong Kong's Trade With Mainland China, 1953-1957 34 9. Composition of Hong Kong's Imports from China, 1953-1957 36 10. Overseas Chinese Remittances, 1950-1967 39 11. China's Receipts From Food Parcels, 1959-1964 40 12. Hong Kong's Trade With Mainland China, 1958-1962 41 13. Composition of Hong Kong's Imports from China, 1960 43 14. Hong Kong's Trade With Mainland China, 1963-1966 45 v i i 15. General Consumer Price Index i n Hong Kong, 1964, and 1970-1973 47 16. Grains Imported from Canada and A u s t r a l i a , compared with Money Earned from Hong Kong, 1958-1970 48 17. Potential Balance of Direct Merchandise Trade Between the United States and China i n 1980 59 18. U.S.-China Trade, 1971-1975 59 v i i i ILLUSTRATIONS Figure page 1. Crude B i r t h and Death Rates, 1948-1971 20 2. Population Growth Rates, 1948-1971 20 3. The Growth of Hong Kong's Population 22 4. Hong Kong Trade With China, 1950-1973 54 5. China's Trade Organization i n Hong Kong 57 Map 1. D i s t r i b u t i o n of Arable Land and Swamp i n Hong Kong 24 CHAPTER I INTRODUCTION Purpose of the Study The Chinese readiness to trade with Hong Kong, a B r i t i s h colony, not only would seem extraordinary i n the post-colonial era wherever i t were situated, but su p e r f i -c i a l l y such i m p l i c i t acceptance of the s i t u a t i o n appears incredible when one considers Hong Kong's position as an enclave on what the Chinese regard as t h e i r t e r r i t o r y . China has been so e x p l i c i t l y h o s t i l e towards "the i m p e r i a l i s t s , " the Colonial system, and the "unequal t r e a t i e s " and so vehemently intent on redressing the wrongs of the past that i t s forbearance on t h i s issue i s very s i g n i f i c a n t . 1 The reason f o r China's willingness to l i v e with the*;status quo i n Hong Kong can be found i n the very impor-tant trade surplus that i t enjoys with the colony. Large quantities of foodstuffs, l i v e animals, and even drinking water are imported into Hong Kong and paid for i n converti-ble currency. In addition, the Colony serves as a funnel for the transfer of funds to i n d i v i d u a l Chinese from t h e i r 1 2 overseas r e l a t i v e s . I t also, s u r p r i s i n g l y , serves as a con-duit for investment i n China because of i t s balance of pay-ments implications. I t i s Hong Kong i t s e l f , as a large urban population area, rather than as a f i n a n c i a l centre or a focus for entre-pot trade, that i s important to China as a source of foreign exchange. The s i t u a t i o n , i n e f f e c t , i s that of a metro-p o l i t a n region that pays f o r a l l kinds of current goods and services i n foreign currencies to the mainland. Hong Kong's own trade d e f i c i t with China can be estimated to finance some 80 per cent of China's t o t a l trade d e f i c i t with Western Countries. The purpose of t h i s study i s to determine the rea-sons f o r the growth and development of the P.R.C.'s trade with the Colony of Hong Kong fo r the past twenty-six years (1950-1975), as well as i t s prospects i n the future. This study also conveys the idea that Communist China simply cannot afford to consistently disregard economic r e a l i t i e s f o r the sake of p o l i t i c a l gains. Research Methodology The p r i n c i p a l method of research i s a survey of h i s t o r i c a l materials. Sources of h i s t o r i c a l data on the P.R.C.'s trade with Hong Kong include p e r i o d i c a l and 3 government documents published by the Chinese government and Hong Kong government. S t a t i s t i c s and other supporting i n -formation have been consolidated from publications of the Chinese and Hong Kong government, newspapers, and related academic research. Some analysis of the problems i s f u r -nished by the United Nations and certa i n government agencies. A f i n a l part of the study provides a backward step-wise regression analysis of China's exports to Hong Kong, which to a certa i n extent, helps to explain and determine the important factors for her increasing exports to the Colony. Scope of the Investigation This study w i l l cover the trade r e l a t i o n s between the P.R.C. and Hong Kong for a period of twenty-six years, i . e . from 1950 to 1975. F i r s t , the underlying reasons for China's need for foreign exchange w i l l be discussed. Second, the factors that contribute to Hong Kong's reliance on im-ported foodstuffs w i l l be presented. Third, a h i s t o r i c a l description and detailed analysis of the growth of the P.R.C.'s export trade with Hong Kong w i l l be demonstrated. Furthermore, t h e i r trade r e l a t i o n s : Hong Kong's role as a major supplier of foreign exchange to the P.R.C, and the P.R.C as an important exporter of foodstuffs to Hong Kong w i l l be described and evaluated. F i n a l l y , the "near future" trade aspects between these two trade partners w i l l be covered. Hypothesis This study w i l l examine the h i s t o r i c a l trade r e l a t i o n between the P.R.C. and the Colony of Hong Kong. Because of t h e i r past mutual trade t i e s and t h e i r present trade depen-dency, i t i s hypothesized that the future trade r e l a t i o n s h i p between these two trading partners w i l l continue and expand as long as Hong Kong r e l i e s on imported foodstuffs and the P.R.C.'s continuous need for foreign exchange to finance her imports. I t i s further hypothesized that t h i s expansion w i l l continue regardless of China 1s dir e c t trade with the West. As China imports more from the West, she has to export more so as to obtain enough foreign exchange to f u l f i l her payment oblig a t i o n . Importance of the Study Western traders have been watching the development of China's trade pattern and speculating on i t s prospects for the future. To appraise the P.R.C.'s a b i l i t y to finance a substantial inflow of Western producer goods and perhaps also of food grain, a knowledge of i t s past balance of 5 payment experience, and of the present condition, i s essen-t i a l . However, developments i n recent years p l a i n l y i n -dicate that p o l i t i c a l motives have not been the dominant factor i n Peking's trade with non-Communist countries. For the major part of China's trade with the West, i t i s s t i l l true that imports are primarily directed towards breaking economic bottlenecks and exports towards r a i s i n g the means of payments f o r imports. For instance, China has been im-porting large quantities of food grains from Canada and A u s t r a l i a to a l l e v i a t e domestic food shortages, and exporting large quantities of consumer goods to Kong Kong, Singapore and Malaysia to augment her foreign exchange earnings from these countries. Only Hong Kong has diplomatic re l a t i o n s with Peking, yet no p o l i t i c a l pressures have been applied to any of these nations. (Canada recognised the Peking govern-ment on October 13, 1970, but during the previous decade, Sino-Canadian trade had been carried on without diplomatic recognition.) It i s the author's desire to bring forward the idea that the success of China's future trade with the West rests on the assumptions that the Chinese must be w i l l i n g to r e l y on Western sources f o r high-technology imports, and they must be prepared to engage i n trade i n such a way as to 6 maximize t h e i r own exports and foreign-currency earnings and thereby enhance t h e i r a b i l i t y to fiance imports. 7 CHAPTER I NOTES Claude E. Forget, China's External Trade: A  Canadian Perspective. (Montreal: Private Planning Association of Canada, 1971), p. 43. CHAPTER II MAINLAND CHINA'S NEED FOR FOREIGN EXCHANGE Situation Confronting the Communists i n 1949 By the end of 1949, the Communists had to deal with the problem of r e h a b i l i t a t i n g t h e i r domestic economy which was i n a chaotic state a f t e r more than three decades of de-vastating c i v i l upheaval and foreign wars. The central task f o r the Chinese Communists was the consolidation of power through s t a b i l i z a t i o n and development of the national economy. In order to achieve economic recovery and develop-ment, the Communists looked to the Soviet Union as a model. From 1949 to 1954, the Korean War remains the single factor which made i t impossible f o r China to i n i t i a t e any other foreign p o l i c y than the 'lean-to-one-side' p o l i c y proclaimed by Chairman Mao i n 1949. Immediately a f t e r the outbreak of the Korean War, China's p o l i c i e s were neces-s a r i l y dictated by her primary needs, both f o r self-defence, and for the rebuilding of her devastated economy and the setting up of an i n d u s t r i a l base. Moreover, a U.N. embargo had been placed upon her by the United states. She was, 8 9 therefore, almost compelled to continue 'leaning-to-one-side, 1 that i s to Soviet Russia. The untested commonality i n ideology also contributed to t h i s dependence. Creation of Huge Debt Due to Soviet Assistance Starting from the year 1953, Soviet Union's a s s i s -tance resulted i n the formation of China's 'lean-to-one-side' foreign p o l i c y and the creation of substantial debt. During China's F i r s t Five Year Plan (1953-1957), 141 indus-t r i a l enterprises were b u i l t with the Soviet Union's help. The l a t t e r also provided China with more than 21,000 sets of s c i e n t i f i c and technical documents. More than 10,000 Soviet experts were dispatched to China i n t h i s period.* The year 1956 marked the turning point i n Sino-Soviet r e l a t i o n s . After 1959, not only were Soviet loans suspended, but China was also forced to increase exports i n order to repay former debts due for Soviet assistance. In July 1960, 1,390 Soviet experts were withdrawn from China, and 343 contracts and supplementary agreements as well as 257 technical contracts were u n i l a t e r a l l y can-2 c e l l e d . To counteract the Soviet withdrawal, since 1961, China had broadened her economic re l a t i o n s with B r i t a i n , Germany, Japan, France and Canada. From those countries, China imported a large amount of machinery and equipment 10 to b u i l d up her economy. Again, t h i s i s i n d i c a t i v e of China's pot e n t i a l demand for foreign currency. "Grain Import" Policy as a Major Drain on Foreign Exchange In the period of 1959-1963, China's p o l i c y of concentrating investment i n industry led to the neglect of agriculture. This unbalanced economic po l i c y , combined with the f a s t growing population, resulted i n the i n a b i l i t y of agriculture to support i n d u s t r i a l development. The biggest changes i n the import b i l l , however, came about not because of the successes i n the machinery sector but because of a^majoreshift i n the economic p r i o r i -t i e s of the planners i n Peking. In the 1950s agriculture had been l e f t to i t s own resources, i n the hope that output could be raised by means of the mass mobilization of labor for construction of i r r i g a t i o n and drainage works. But the r e s u l t s were disappointing; and i n 1959 bad weather and bad management combined to cause a sharp decline of over 20 per cent i n farm output, greatly contributing to a c r i s i s throughout the economy that lasted u n t i l 1962. By 1961 China's economic leadership knew that modern resources, i n -cluding scarce foreign exchange, had to be invested i n agriculture, even i f t h i s meant diversions from the heavy 11 i n d u s t r i a l program. The r e s u l t was a decision to import 5 to 6 m i l l i o n tons of wheat a year and also to expand f e r t i l i z e r imports and domestic f e r t i l i z e r production. At t h e i r peak i n 1962, foodstuff imports accounted for nearly 3 40 per cent of a l l Chinese purchases abroad. It i s known that i n China, on average, 10 per cent of cropland i s affected by natural calamities each year. When t h i s average increased to 15 or 20 per cent during 4 the three bad years, agriculture was seriously affected. Thus the Chinese Communist leadership had to face up to the f u l l dimension of a c r i s i s i n ag r i c u l t u r e . As a r e s u l t , Chinese leaders were forced to commit the country to a grain import p o l i c y and signed three-year contracts for large scale shipments of grains from Canada and A u s t r a l i a plus add i t i o n a l purchases from Argentina and France, (see Table 1 on page 12) Because of these purchases, China has had large d e f i c i t s i n her trade with Canada and A u s t r a l i a — a b o u t $220 m i l l i o n i n 1962 and nearly $300 m i l l i o n i n 1963. 5 Whatever the terms of payment, there i s no question that machinery imported from B r i t a i n and Japan, or the grains imported from Canada and A u s t r a l i a represent a major drain on foreign exchange. 12 Table 1. Grain Exports to Communist China, 1960/61-1963/64a A l l Grains ( i n thousands of metric tons) 1960/61 1961/62 1962/63 1963/64 Canada 1,139.9 2,471.7 1,701.3 1,276.6 A u s t r a l i a 1,449.1 2,137.8 2,085.5 2,661.9 Argentina 29.5 300.5 291.1 1,259.5 France 26.8 487.0 994.0 350.1 West Germany- 10.3 387.2 119.8 -Other 0.2 12.1 266.4 450.0 TOTAL 2,655.8 5,796.3 5,458.1 5,998.1 The data i n t h i s table are f o r years running from July to , June. Including sorghum and m i l l e t s i n 1962/63 and 1963/64. Note: - stands f o r "none". Source: Food and Agriculture Organization of the United Nations, World Grain Trade S t a t i s t i c s f o r 1960/61,  1961/62, 1962/63, and 1963/64~ Renminbi's I n c o n v e r t i b i l i t y Since the Renminbi was of no value i n the i n t e r -national money market, i . e . there was no established market or price, Shinafhad5tehfindhadway £6ris^lvea;thfc ypayiheiitt.'^t; pi5ob.l,em^pro "bl a n * The Renminbi i s not o f f i c i a l l y linked to the gold standard. Payment i s made i n foreign exchange at a current rate of about 2.3 Renminbi to the U.S. d o l l a r . But the currency cannot be tendered on world markets." At the pre-sent time the People 1s Republic of China i s not a member of the International Monetary Fund, and i t s currency i s not re a d i l y convertible into Western currencies. Since Chinese currency i s not re a d i l y convertible, the P.R.C. uses widely acceptable Western currencies i n trading with Western nations and Japan. Hong Kong as an Ideal Supplier of Foreign Exchange to China China has managed to obtain an ample amount of hard currencies through trade with Hong Kong. As Hong Kong i s a member of the S t e r l i n g Bloc as well as a free port, China can obtain any kind of currencies under the 'no exchange control' p o l i c y of the Hong Kong government. For i t s part, Hong Kong r e l i e d heavily on imports of foodstuffs from Mainland China as the Colony's economic growth and her population increased. In fact the increase resulted i n a growing demand for foodstuffs year aft e r year. At the same time, Hong Kong's dependence on China's food supplies was counter-balanced by China's dependence on Hong Kong as the p r i n c i p a l source of foreign exchange. To conclude, Communist China also has sizeable i n t e r e s t s i n Hong Kong. In 1973 there were 78 branches of P.R.C. or pro-P.R.C. banks operating i n the Colony, about 14 17 per cent of a l l deposits i n the Colony. China has other assets i n Hong Kong, including department stores, property, schools and trading o f f i c e s . Some observers have estimated that around 1972 China was deriving as much as 40-50 per cent of i t s foreign exchange from Hong Kong, either d i r e c t l y or i n d i r e c t l y ( i . e . from exports to or v i a Hong Kong, remit-tances from Hong Kong, sales i n Communist-owned stores, banking and trade operations). 15 CHAPTER II NOTES *Chu-Yuen Cheng, Economic Relations Between Peking  and Moscow, 1949-1963. (New York: Praeger Publishers, 1964), pp. 2-7. o Suyin Han, China i n the Year 2001. (Harmondsworth, Middlesex: Penguin Books Ltd., 1970), p. 79. 3 Alexander Eckstein, Communist China* s Economic  Growth and Foreign Trade. (New York: McGraw H i l l , 1968), p. 107. 4 Jan S. Prybyla, The P o l i t i c a l Economy of Communist  China. (Scranton: International Textbook Company, 1970), p. 349. 5 Eckstein, op. ext., p. 229. Louis J. Mulkern, "The F i n a n c i a l Aspects of China Trade," i n Trade With China. (New York: American Manage-ment Association Research Report, 1972), p. 20. CHAPTER III HONG KONG'S NEED FOR IMPORTED FOODSTUFFS Population Growth The population growth rate f o r Hong Kong over the past two decades has been very e r r a t i c and at times extreme-l y high (see Table 2 on page 17). Prior to 1964, with 1951 the only exception, the population growth rate exceeded 3 per cent i n every year. For twelve of these years i t \iras equal to or greater than 4 per cent per annum and i n several years above 5 per cent. As a r e s u l t , the population grew from 600,000 at the end of the World War II to nearly 4 m i l l i o n i n 1970. Today, the population i s around 4.2 m i l -l i o n . For Hong Kong, population growth i s the re s u l t of three factors: net immigration, n a t a l i t y , and mortality. Population growth during the 1950's was dominated by immi-gration; however from 1960 onward, the natural population increase has been the primary factor i n determining the growth rate. From Table 2, which distinguishes immigration from natural increase i n the population, i t can be seen that 16 17 Table 2. Crude B i r t h , Crude Death, Natural Increase and Population Growth Rates, 1945-1981 Natural B i r t h rate Death rate Population rate of per per Population growth increase thousand thousand: Year at mid-year (per cent) (per cent) population population 1945 600, 000 n.a. n.a. n.a. n.a. 1946 1,550, 000 158.3 0.9 20.1 10.8 1947 1,750, 000 12.9 1.7 24.3 7.6 1948 1,800, 000 2.9 1.9 26.4 7.5 1949 1,857, 000 3.2 2.1 29.5 8.8 1950 2,237, 000 20.5 1.9 27.1 8.3 1951 2,015, 300 -9.9 2.4 34.0 10.2 1952 2,125, 900 5.5 2.5 33.9 9.2 1953 2,242, 200 5.5 2.6 33.7 8.2 1954 2,364, 900 5.5 2.7 35.2 8.2 1955 2,490, 400 5.3 2.9 36.3 7.7 1956 2,514, 600 5.0 3.0 37.0 7.4 1957 2,736, 300 4.7 2.9 35.8 7.1 1958 2,854, 100 4.3 3.0 37.4 7.2 1959 2,967 400 4.0 2.8 35.2 6.8 1960 3,075 ,300 3.6 3.0 36.0 6.2 1961 3,168 ,600 3.4 2.9 35.1 6.1 1962 3,294 ,600 4.0 2.8 34.1 6.4 1963 3,411 ,500 3.5 2.8 33.6 6.0 1964 3,493 ,500 2.4 2.6 30.8 5.3 1965 3,585 ,800 2.6 2.3 28.2 5.1 1966 3,617 ,400 0.9 2.0 25.4 5.3 1967 3,708 ,900 2.5 1.8 23.8 5.5 1968 3,787 ,200 2.1 1.7 22.1 5.1 1969 3,847 ,700 1.6 1.6 21.4 5.0 1970 3,941 ,600 2.4 1.5 20.1 5.1 1971 4,045 ,300 2.6 1.5 19.7 5.0 1976 4,503 ,000 n.a. n.a. n.a. n.a. 1981 4,934 ,000 n.a. n.a. n.a. n.a. Source: 1945: E. F. Szczepanik, The Economic Growth of Hong Kong. (London: Oxford University Press, 1958), p. 153. 1946-1960: Hong Kong Government, Hong Kong S t a t i s - t i c s . 1947-1967. 1961-1970: Hong Kong Government, Hong Kong Monthly Digest of S t a t i s t i c s . July 1971. 1971: Ibid., January 1972. 1976«& 1981: Hong Kong Government 1966 By-Census: Population Projections, 1966-1981. 18 immigration was the prime cause of the e r r a t i c course of population growth. The mass immigration into Hong Kong from China i n the post-war period, 1945-1954, which increased the popula-t i o n by almost 300 per cent i n those nine years, can be d i -vided into two d i s t i n c t waves. The f i r s t wave of immigrants came immediately a f t e r the war, 1945-1947. According to the Hambro Report, "immediately a f t e r the war, i n 1945, 1946 and 1947, the majority of immigrants belonged to the Hong Kong-born group or to the pre-war immigrants who had l e f t Hong Kong during the war and returned aft e r the Colony's l i b e r a -t i o n . " 1 Hambro also estimated that over 1.25 m i l l i o n people moved into Hong Kong during t h i s period before the new com-munist government on the mainland imposed e f f e c t i v e r e s t r i c -tions i n 1950. The second wave of immigrants came i n 1949 and 1950 as the Chinese C i v i l war spread south and the Com-munists took power. As the Hambro Report states (see also Table 2) "a large proportion of these immigrants came merely out of fear of the m i l i t a r y operations and returned to the mainland as soon as the si t u a t i o n was more or less s e t t l e d . " After 1952, migration from China gradually declined as authorities on both sides of the border began to enforce tigh t e r controls. The dra s t i c exception to t h i s rule came i n 1962 when the Chinese authorities threw open the gates at the border and allowed tens of thousands of people to f l e e to Hong Kong ( i t was believed that China was attempting to lessen the economic burden and release dissenters against the disastrous Great Leap Forward). In f a c t , so many people f l e d to the Colony that the Hong Kong government was forced to temporarily abandon i t s established p o l i c y of harboring p o l i t i c a l refugees and f o r c i b l y returned many of them. Even with close control of the border, i l l e g a l immigration s t i l l occurs as thousands of people st e a l into the Colony every year. Naturally,.the i l l e g a l nature of immigration into Hong Kong makes population estimation very hazardous. More-over, the f i r s t o f f i c i a l Census i n the post-war period was not conducted u n t i l 1961. Since that time, one By-Census was conducted i n 1966 and a f u l l Census i n 1971. Natural increase also contributed s i g n i f i c a n t l y to population growth. The rate of natural increase rose to 3 per cent i n 1960, but has steadily declined since then. I f t h i s rate i s separated into i t s two components, n a t a l i t y and mortality, i t appears that Hong Kong has experienced a demographic revolution, (see Figure 1 on page 20) From 1960 to 1970 the crude b i r t h rate has f a l l e n 44 per cent. The rate of natural increase i s high and the average age of the population low. Partly because of a high b i r t h rate, partly because of the selective effect of immigration, only Figure 1. Crude B i r t h and Death Rates, 1948-1971 (per 1,000 population) A: Crude b i r t h rate B: Crude death rate Source: Table 1 A: Total population B: Natural increase Source: Table 1 21 about half of the urban population now are of Hong Kong b i r t h . However, the problems which have resulted from the o v e r a l l population r i s e since 1945 are much wider i n scope and have been exacerbated by the r e s t r i c t i v e physical setting of Hong Kong. The 398 square miles contain many steep sided h i l l s so that the amount of available f l a t land i s l i m i t e d , p a r t i c u l a r l y near the harbour. Yet i t i s pr e c i s e l y t h i s l a t t e r area around which metropolitan Hong Kong has developed, and the three m i l l i o n people crammed onto the Kowloon penisula and the northern shore of Hong Kong Island have produced some of the highest population densities i n the world.^ Due to the high density and li m i t e d arable land, Hong Kong w i l l have to face a severe food problem. As population continues to expand (see Table 3 and Figure 3 on page 22), the demand for imported food w i l l c e r t a i n l y increase, (see Table 5 on page 27) Table 3. Future Mid-Year Population Projection for Hong Kong % increase from 1976 1966 % increase from 1981 1966 •High" Projection 4, 926,000 32.0 5, 706,000 52.9 F i r s t 'Medium' Projection 4 , 729,000 26.7 5, 330,000 42.8 Second 'Medium' Projection 4, 622,000 23.8 5, 145,000 37.9 Third 'Medium' Projection 4, 572,000 22.5 5, 061,000 35.6 'Low' Projection 4, 503,000 20.7 4, 934,000 32.2 Source: Hong Kong Government 1966 By-Census: Populations  Projections 1966-1981. POPULATION ( i n m i l l i o n ) 5m. Figure 3. The Growth of Hong Kong's Population 4.5m. -4m. -3.5m. -3m. -2.5m. -2m. -Source: Projected Increase ("Low" Projection), (see Table 3) James Reidel: The I n d u s t r i a l i z a t i o n of  Hong Kong. (Tiibingen: Mohr, 1974), p. 49. 1.5m. -lm. -0.5m. . 1 r 1 • 1 — - 1 — I 1 1 1931 1941 1951 1961 1976 198 Year 1871 1901 Limited Arable Land Hong Kong's arable land i s mainly situated i n the plains and valleys below the 50 metre contour, (see I l l u s -tration—Map 1 on page 24) Of the 33,225 acres of arable land i n the Colony's of 398 square miles, about 64 per cent i s under r i c e ; 29 per cent i s given over to vegetables, f i e l d crops and orchards, and the rest i s abandoned or fallow land. Hong Kong r i c e i s consumed l o c a l l y but production s t i l l f a i l s to meet the requirements of the ever-increasing population. The s i t u a t i o n has been aggravated by the change-over i n recent years of some paddy f i e l d s into vegetables land by farmers to whom vegetable growing brings quicker and higher returns. In spite of the intense demand for food, about 2,119 acres of arable land was c l a s s i f i e d i n 1959-1960 as abandoned, due p a r t l y to an inadequate supply of water for i r r i g a t i o n and p a r t l y to the urban d r i f t of the r u r a l popu-l a t i o n . A g r i c u l t u r a l development i n the past was mainly i n the New T e r r i t o r i e s and to some extent on Hong Kong Island. It i s generally r e s t r i c t e d to the a l l u v i a l lowlands and the lower ends of v a l l e y s , where there i s a s u f f i c i e n t depth of s o i l and water, so important i n r i c e c u l t i v a t i o n . The Hong Kong Annual Report for 1960 states: From a farmer's veiwpoint, a l l the r e a d i l y c u l t i v a b l e land i s already being 24 Map 1. D i s t r i b u t i o n of Arable and Swamp i n Hong Kong Arable Swamp Source: C. S. Liang, Hong Kong, A Physical, Economic and Human Geography.(Hong Kong:Cheong Ming Press Factory, 1965), p. 51. 25 exploited and what i s l e f t , apart from land alienated to i n d u s t r i a l and urban use, i s marginal. Pressure comes on the land from two dir e c t i o n s , the continued and steady-demand for land for industry and the need to meet the growing needs of the r u r a l com-munity. I t i s important to remember that 82 per cent of the t o t a l area of the t e r r i -tory i s marginal land, i n d i f f e r i n g degree of sub-grade character. The arable land already exploited comprise only 13 per cent of the t o t a l area and the expanding urban areas, the remaining 5 per cent tend to en-croach more d i r e c t l y upon arable rather than open marginal land The Colony produces approximately 3.5 per cent of the r i c e consumed, 70-75 per cent of vegetable consumption, and as f a r as can be ascertained 25 per cent of a l l the meat and poultry consumed. The food s i t u a t i o n i n 1960 based on value may be summarized as follows:^ Table 4. Food Situation of Hong Kong i n 1960 Imports $1,353,232,495 less re-exports 180.526.644 $1,172,705,851 Local primary production 271,139,000 less exports 129.959.394 141.179.606 Imports over exports $1,031,526,245 Note: figures are i n Hong Kong Dollars. The l o c a l production of a l l kinds would thus account for 12 per cent of the food requirements of the Colony, though t h i s not to say esse n t i a l food, as the above figures include forest products. 26 Farming i n Hong Kong, i t may be argued, i s a quaint phenomenon which must give way and die f o r the sake of i n -d u s t r i a l progress. The destruction of a g r i c u l t u r a l land i s to be deplored on aesthetic and p r a c t i c a l grounds. The New T e r r i t o r i e s have responded to the v a s t l y increased urban population by a greater i n t e n s i f i c a t i o n of farming and a more economic land use. Whereas almost a l l non-perishable foods have to be imported, a large proportion of fresh foods such as vegetables and li v e s t o c k are produced l o c a l l y . This small measure of s e l f support i n vegetables, pork, and poultry does not r e a l l y suggest that Hong Kong can be inde-pendent i n her food supply. In recent years, more and more arable land i s being used up for housing, squatter huts, roads and reservoirs. With the continuous expansion of industries and urbanization i n the r u r a l areas, good a g r i c u l t u r a l land has been decrea-sing i n area. Under heavy population pressure, once land has been withdrawn from agriculture i t w i l l not go back to c u l t i v a t i o n . Food Problem Hong Kong would, i n any circumstances, have had to import the vast bulk of her requirements (see Table 5 on page 27), because of the very high r a t i o of population to Table 5. Projected aggregate Food 1970,1975 and 1980 Consumption, Production, and Import Requirement, (In 1964 Prices) Item 1962-1964 1970 1975 1980 Consumption Per capita consumption (HK$) 476.3 592.9 666.5 739.1 Population (thousands) 3,552 4,020 4,540 5,260 To t a l Consumption ( m i l l i o n HK$) 1,691.8 2,383.5 3,025.8 3,887.8 Production T o t a l domestic output ( m i l l i o n HK$) 325.3 456.7 549.2 645.2 Import Requirements Consumption minus output ( m i l l i o n HK$) 1,366.5 1,926.8 2,476.6 3,242.6 Source: The Economic Research Centre of the Chinese University of Hong Kong, Long  Term Economic and A g r i c u l t u r a l Commodity Projections for Hong Kong, 1970,  1975. and 1980. (Hong Kong: Chinese University Press, 1969), p. 56. t o - 0 28 arable land, and the rate at which urban development i s covering what l i t t l e of such land i s av a i l a b l e . With a booming market for food on the doorstep, and with prices free to r i s e u n t i l supply meets demand, there seems to be some hiatus i n the working of the market i n Hong Kong. I t may be that the prices at which the very heavy food imports from mainland China are delivered make competition impossi-ble. I f and when the communist development plans gather s u f f i c i e n t momentum f o r them to be able to a f f o r d to consume the meat, f r u i t and vegetables x^hich they now export to pay fo r grain imports, i t w i l l become clear how f a r these prices are u n r e a l i s t i c a l l y low. Another l o c a l element i n the s i t u a t i o n , p a r t i c u l a r l y i n the Hakka v i l l a g e s , i s the increased prosperity of male emigrants who have t r a d i t i o n a l l y worked away from home leaving agriculture to t h e i r women. Many of them are now involved i n operating restaurants i n B r i t a i n instead of working i n the mercant marine. The increased size of t h e i r remittances may i n a few cases act as a disincentive and lead to the f a i l u r e to c u l t i v a t e land. Recent trends have shown that low income food producers are tending to leave the t r a d i t i o n a l occupations of f i s h i n g and agriculture, (see Table 6 on page 29) As a r e s u l t , Hong Kong's a g r i c u l -t u r a l production now covers an even smaller part of i t s 2f Table 6. Employment by I n d u s t r i a l Group, 1961 and 1970 196l a 1970 b I n d u s t r i a l Group number employed per cent of. t o t a l number employed per cent of t o t a l Farming and Fishing 37,581 7.3 81,300 5.2 Services 265,323 22.3 375,440 24.1 Communication 86,740 7.3 106,660 6.8 Public U t i l i t i e s 18,978 1.6 15,210 1.0 Commerce 131,279 11.0 259,690 16.7 Construction 58,209 4.9 96,000 6.1 Manufacturing 526,361 44.2 613,620 39.4 Unc l a s s i f i e d 16,628 1.4 10,640 0.7 TOTAL 1,191,099 100.0 1,558,500 100.0 Note: ,1961 i s based on Census. °1970 i s an estimate based on the pattern of employ-ment revealed i n the 1966 By-Census. Source: 1961: Commissioner of Census and S t a t i s t i c a l Planning, Report of the Census, 1961, Volume I I I , Hong Kong. 1970: Hong Kong, Annual Report, 1970. 30 t o t a l food consumption and greater imports of food from mainland China seems to be the only solution. 31 CHAPTER III NOTES 1Edv/ard Hambro, The Problem of Chinese Refugees i n  Hong Kong. Report submitted to the United Nations High Commissioner f o r Refugees, (Leyden, 1955) c i t e d Hambro-Report, p. 18. 2 Ibid., p. 18. 3 D. ¥. Drakakis, et a l . , Housing Provision i n Metro- p o l i t a n Hong Kong. (Hong Kong: Centre of Asian S t u d i e s — University of Hong Kong, 1973), p. 58. 4 S. G. Davis, Land Use and Mineral Deposits i n Hong  Kong, Southern China and South-East A s i a . (Hong Kong: Hong Kong University Press, 1964), p. 26. CHAPTER IV HONG KONG'S TRADE WITH MAINLAND CHINA (1949-1975) Trade History Before 1952 When the i s l a n d of Hong Kong was ceded to the B r i -t i s h i n 1843 by vthe Treaty of Nanking i t had already become, i n the three years a f t e r i t s occupation i n 1840, of some importance as a centre of trade. Before the embargoes were imposed i n 1951, Hong Kong's p r i n c i p a l market was China. Hong Kong's exports to China nearly doubled China's exports to Hong Kong. By 1952, however, China's exports to Hong Kong were well above Hong Kong's exports to China. These changes are shown i n Table 7 on page 33 which c l e a r l y indicate that while Hong Kong imports from China stayed at about the same l e v e l , the s i g n i f i c a n t factor i n t h i s changed balance of trade was the dramatic decline i n China's imports from Hong Kong. Embargoes were one reason for t h i s state of a f f a i r s , but equally important was China's change i n p o l i c y a f t e r the Communists took control. Communist China's main aim was to obtain Hong Kong d o l l a r s i n exchange for Chinese goods. 32 33 Where they were able to, the Communists put pressure upon Hong Kong's merchants to promote China's products even before l o c a l ones, throughout South-east Asia, and at the same time were r e d i r e c t i n g r e c i p r o c a l trade from Hong Kong i n order to trade d i r e c t l y from Canton, Shanghai and other ports of t h e i r own. Hong Kong was then l i t t l e more than a receiver of China's excess a g r i c u l t u r a l produce and manu-factured goods. Table 7. Hong Kong's Trade With Mainland China, 1949-1952 Exports to China Imports from China Balance of Trade HK $ M i l l i o n Year HK $ M i l l i o n Percentage of Percentage of t o t a l exports HK $ t o t a l imports from Hong KQng M i l l i o n from Hong Kong 1949 585 25.2 593 21.5 -8 1950 1,460 39.3 860 22.7 600 1951 1,604 36.2 863 17.6 741 1952 520 18.3 830 21.9 -310 Source: Hong Kong Government, Trade Returns. The 1952 nation-wide anti-corruption drive i n China also reduced purchases from Hong Kong and contributed to the favorable trade balance for the Communist nation. Trade Under the F i r s t Five Year Plan (1953-1957) In 1953, China began the F i r s t Five Year Plan for 34 t h e d e v e l o p m e n t o f h e r e c o n o m y , a n d i n a c c o r d a n c e w i t h i t s p r i n c i p l e s , C h i n a g a v e f i r s t p l a c e t o t r a d e w i t h t h e S o v i e t B l o c a n d a n i n c r e a s e d t r a d e w i t h S o u t h e a s t A s i a , w h i l e c o n -f i n i n g i m p o r t s f r o m t h e W e s t e r n c o u n t r i e s t o c e r t a i n n e e d e d m a t e r i a l s . A f t e r 1955, H o n g K o n g ' s i m p o r t s f r o m C h i n a b e g a n t o g r o w . S i m u l t a n e o u s l y t h e r e w a s a s t e a d y g r o w t h o f H o n g K o n g ' s t r a d e d e f i c i t w i t h M a i n l a n d C h i n a — a n i n d i c a t i o n o f t h e r a t e o f a c c u m u l a t i o n o f f o r e i g n e x c h a n g e b y C h i n a i n t h e H o n g K o n g m a r k e t . ( s e e T a b l e 8) T a b l e 8. H o n g K o n g ' s T r a d e W i t h M a i n l a n d C h i n a , 1953-1957 E x p o r t s t o C h i n a I m p o r t s f r o m C h i n a B a i a n c e P e r c e n t a g e o f P e r c e n t a g e o f o f T r a d e HK $ t o t a l e x p o r t s HK $ t o t a l i m p o r t s HK $ Y e a r M i l l i o n f r o m H o n g K o n g M i l l i o n f r o m H o n g K o n g M i l l i o n 1953 540 19.7 857 22.1 -317 1954 391 16.2 692 20.2 -301 1955 182 7.2 898 24.1 -716 1956 136 4.2 1 ,038 22.7 -902 1957 123 4.1 1 ,131 22.0 -1,008 S o u r c e : H o n g K o n g G o v e r n m e n t , T r a d e S t a t i s t i c s . I n 1957, H o n g K o n g ' s t r a d e d e f i c i t ( o r C h i n a ' s t r a d e s u r p l u s ) w i t h C h i n a i n c r e a s e d t o a b o u t U . S . $200 35 m i l l i o n a year. This was due to the decline of Hong Kong's exports to China, while imports from China remained at a steady l e v e l . The aggregate amount of foreign exchange earned by China i n the Hong Kong market during the F i r s t Five Year Plan period was about U.S. $568 m i l l i o n . This formed appro-ximately three-quarters of the t o t a l net export surplus r e a l i z e d by China on her trade account with the non-Commu-n i s t countries. This surplus of foreign exchange could have been used by China either to cover her trade d e f i c i t with the Communist countries ( e s p e c i a l l y the Soviet Union) or as a fund to finance China's purchases from the West i n the course of the Second Five Year Plan, (by 1957 v i s i b l e trade with Hong Kong was already meeting a quarter to a t h i r d of China's hard currency commitment—U.S. $177 m i l l i o n out of U.S. $617 m i l l i o n 1 ) From Hong Kong's point of view, trade with China was an important channel supply of foodstuffs and raw materials, (see Table 9 on page 36) Trade Under the Second Five Year Plan (1958-1962) In China's Second Plan, foreign trade was made sub-ordinate to the r e a l i z a t i o n of national i n d u s t r i a l i z a t i o n plans and simultaneous development of industry and 36 Table 9. Composition of Hong Kong's Imports from China, 1953-1957 Percentage of Commodity Group the T o t a l 1. Foodstuffs Live animals, c h i e f l y for food 15.0 F r u i t and vegetables 13.9 Dairy products, eggs and honey 5.5 Animal and vegetable o i l , f a t s , greases 5.2 Fish and f i s h preparations 4.2 Cereals and cereal preparations 3.7 Meat and meat preparations 1.9 49.4 2. Raw Materials and Manufactured Goods T e x t i l e yarn, f a b r i c s , made up a r t i c l e s and related products 14.3 Animal and vegetable crude materials, inedible 10.7 Paper, paper board and manufactures thereof 2.9 O i l seeds, o i l nuts and o i l kernels 2.8 Non-metallic mineral manufactures 2.3 33.0 3* Other Items (belonging to either group 1 or 2 above but not specified) 17.6 TOTAL 100.0 Source: E. F. Szczepanik, 'Foreign Trade of Mainland China 1 i n Contemporary China. Vol. I I I . 1958- 1959. (Ohio: Charles E. M e r r i l l Publishing Company, 1972), pf 38. •m agriculture. Through foreign trade China intended to eliminate the gap between the supply and demand fo r c e r t a i n raw materials. Imports of c a p i t a l goods f o r heavy industry were to be reduced but more raw materials and equipment f o r l i g h t industry were to be imported. During the "trade offensive" of 1958, many Chinese products were sold i n Southeast Asia at extremely low p r i c e s . In Hong Kong, Chinese cement and r o l l e d s t e e l were sold at prices 10 per cent below the Japanese prices and prices of l i v e animals and dairy products were reduced by 30 per cent 2 below the 1957 l e v e l . Several new department and provision stores were set up i n Hong Kong and the South Sea Company was established to re-export Chinese commodities. Agents for Chinese products i n Hong Kong as well as i n other coun-t r i e s of Southeast Asia were given special f a c i l i t i e s , such as c r e d i t and deferred payments. As a r e s u l t , the value of Hong Kong's imports from China increased by almost 24 per cent i n comparison with 1957. To mainland China, the importance of her p o s i t i v e balance of trade with Hong Kong i s very great. In 1958, t h i s surplus, amounted to U.S. $217 m i l l i o n and covered about 80 per cent of China's t o t a l estimated d e f i c i t i n trade with Western Europe (U.S. $270 m i l l i o n ) . The rest could have been paid easily from the foreign exchange earned i n the 38 Hong Kong market under the F i r s t Five Year Plan. Thus, China 1s need to balance i n t e r n a t i o n a l payments does seem to make Hong Kong a partner of great importance for the Commu-ni s t nation. In 1959, the "trade offensive" came to an abrupt end due most probably to the shortage of exportable commodities. The main decline was i n such items as t e x t i l e products and base metals. Thus Chinese exports to Hong Kong were about 25 per cent below the 1958 l e v e l . During the early 60's, when China had suffered from natural disasters for several years i n succession, t h i s re-sulted i n the Hong Kong Chinese sending food parcels to t h e i r r e l a t i v e s and friends i n Mainland China. Consequently, Communist China benefited by receiving foreign exchange and through the c o l l e c t i o n of import duties. The collapse of the Great Leap Forward i n 1960 i n -creased the importance i n the P.R.C.'s eyes of the question of overseas Chinese remittances, (see Table 10 on page 39) In 1961 i t began to encourage overseas Chinese to send food parcels to r e l a t i v e s on the mainland, and Chinese with r e l a -t i v e s overseas wrote to them to the same e f f e c t . G i f t par-cels were guaranteed prompt delivery, and i t was promised that an equivalent amount of food would not be deducted from the r e c i p i e n t s ' regular rations. In 1962, when the food si t u a t i o n began to improve, the Chinese government encouraged ,39. Table 10. Overseas Chinese Remittances, 1950-1967. ( i n U.S. 1 i> m i l l i o n ) Year Family-Remittances Investment Remittances Total 1950 91.1 a • * • 91.1 1951 101.7 • • • 101.7 1952 103.3 • • • 103.3 1953 76.0 1.3 77.3 1954 69.2 0.5 69.7 1955 64.1 6.7 70.8 1956 54.8 8.4 63.2 1957 38.3 11.4 49.7 1958 36.0 6.7 42.7 1959 26.2 6.4 32.6 1960 33.5 ... 33.5 1961 a • * • (30.0) b 1962 • • • (30.0) 1963 • • • (40.0) 1964 • • • (50.0) 1965 • • • (67.0) 1966 • • • (60.0) 1967 • • • ... (30.0) Note: foNot available Estimates Source: Feng-hwa Mah, The Foreign Trade of Mainland China. (Chicago: Aldine and Atherton Inc., 1971), p/ 173. remittances i n the form of funds, which could be used f o r extra food, rather than food parcels. (see Table 11) Table 11. China's Receipts from Food Parcels, 1959-1964 ( i n U.S. $million) Taxes on Food Total Year Food Parcels Remittances Receipts : S1959 1.1 - 1.1 1960 4.6 4.6 9.2 1961 16.4 16.4 32.8 1962 16.7 16.7 33.4 1963 11.0 11.0 22.0 1964 7.1 7.1 14.2 Source: Feng-hwa Mah, The Foreign Trade of Mainland China. (Chicago: Aldine and Atherton Inc., 1971), p. 176. In dealing with the period of bad harvests, China looked f o r the purchase of grain from Canada and A u s t r a l i a . In s e t t l i n g the future payment of t h i s unexpected debt, the foreign exchange gained from Hong Kong's trade contributed the most probable monetary resource, (see Table 12 on page 44) From Hong Kong's standpoint, i t appeared that i n 1960 about 63 per cent of l i v e animals, 57 per cent of f i s h and 50 per cent of meat were imported from China. Hong Kong's dependence on other food imports from China was Table 12. Hong Kong's Trade With Mainland China, 1958-1962 Gross Trade Balance Net Trade as % of Chinese Balance D e f i c i t with Year Hong Kongjs Imports ( m i l l i o n $) Hong Kong's Exports ( m i l l i o n $) Gross Trade Balance ( m i l l i o n $) as % of Balance (50 Western Countries (%) 1958 244.5 27.3 -217.2 73 73.1 1959 181.0 20.0 -161.0 91 81.0 1960 207.5 21.0 -186.5 92 139.4 1961 180.0 17.3 -162.7 93 89.2 1962 212.3 14.9 -197.4 92 87.4 Source : Claude E. Forget, China's External Trade: A Canadian Perspective. (Montreal: Private Planning Association of Canada, 1971), p. 45. 42 smaller but quite s i g n i f i c a n t , about 46 per cent of f r u i t and vegetables, 35 per cent of dairy products and tea, 28 per cent of animal and vegetable o i l s and almost 20 per cent of cereals imported into Hong Kong came from China, (see Table 13 on page 43) Trade Relationship from 1963-1966 The Sino-Soviet s p l i t forced China to turn more to the West for trade. Since China incurred huge debts from the grain purchases, she had to increase her export earnings. In A p r i l 1963 a Chinese Vice-Minister for Foreign Trade, Lu Hsu-Chang, v i s i t e d B r i t a i n , Switzerland, and the Netherlands, came to Hong Kong, and held u n o f f i c i a l con-sultations with the Hong Kong government's Commerce and Industry Department. He met with representatives from the trade and banking world. Communist business i n Hong Kong began to grow r a p i d l y . By the end 6S6 1964 there were ten s p e c i f i c a l l y communist shops i n the Colony, more than twice the number i n 1962. By the end of 1965 the number through-4 out the Colony had r i s e n to 34. In 1967 a huge new em-porium on a key s i t e opened to exploit to the f u l l Hong Kong's booming t o u r i s t industry. Starting from 1964, there was an increase i n exports 43 Table 13. Composition of Hong Kong's Imports From China, 1960 (Percentages of the t o t a l ) Commodity Group Share of Imports From Share i n China i n Total Total Imports H.K. Imports From China Food-stuff s Live animals, c h i e f l y f o r food 62.9 F r u i t s and vegetables 45.8 F i s h and f i s h preparations 56.9 Cereals and cereal pre-parations 19.7 Dairy products, eggs and honey 34.7 Meat and meat preparations 50.0 Coffee, tea, cocoa, spices 35.3 Animal and vegetable o i l s 28.3 Raw materials and manu- factured goods Te x t i l e yarns, f a b r i c s , made up a r t i c l e s and related products 26.1 Animal and vegetable crude materials 54.7 Non-metallic mineral manu-factures 41.9 Paper, paper board and manu-factures thereof 24.4 Miscellaneous manufactured a r t i c l e s 18.0 Clothing 31.7 Mineral f u e l s , lubricants and related materials 7.0 O i l seeds, o i l nuts and o i l kernels 33.3 Base metals 3.6 13.6 10.3 5.5 5.5 3.9 3.6 1.7 1.7 45.8 Other items TOTAL 23.4 7.1 3.9 2.9 2.2 1.9 1.2 1.0 0.9  44.5  9.7 100.0 Source: Hong Kong Government, Trade S t a t i s t i c s . 44 to Hong Kong possibly due to China's economic recovery and improved harvest. But there i s no doubt that more foreign exchange was a necessity. China did continue the imports of cheap grain from abroad while exporting expensive r i c e under a deliberate economic po l i c y . Due to the substantial debts from the grain pur-chases, China had to increase her export earnings by making extra e f f o r t s to maximize her trade with Hong Kong. For instance, China operated the special " l i v e and fresh" t r a i n service from Wuhan (center of China) d i r e c t l y to Canton which resulted i n a reduction of the usual transportation time from eight days to fifty-two hours.^ Also there was the building of a cold storage plant at Shun Chun (on the border between Mainland China and the Colony of Hong Kong) for keeping vegetables and f r u i t fresher for a longer period of time. These moves are a clear i n d i c a t i o n of China's deter-mination to expand her trade with Hong Kong and at the same time control t h i s trade by withholding goods u n t i l the most suitable time f o r her o\ra best i n t e r e s t s . In 1965, China's debts to the Soviet Union were f i n a l l y cleared and Hong Kong became the single most impor-tant market for Chinese goods. In 1966, i n the trade sector alone, Hong Kong was s t i l l accounting for nearly a t h i r d of China's t o t a l hard-currency commitments, i . e . U.S. $473 45 m i l l i o n out of U.S. $1,530 m i l l i o n . 6 (see Table 14) Table 14. Hong Kong's Trade With Mainland China, 1963-1966 Gross Trade Balance as % of Net Trade Chinese Gross Balance D e f i c i t with Hong Kong's Imports Year ( m i l l i o n $) Hong Kong's Exports ( m i l l i o n $) Trade Balance ( m i l l i o n $) as % of Balance (%) Western Countries (*) 1963 260.2 12.3 -247.9 88 107.2 1964 344.8 10.4 -334.4 n.a. 144.6 1965 406.3 12.5 -393.8 n.a. 154.6 1966 484.6 12.1 -472.5 n.a. 140.8 Source: Claude E. Forget, China's External Trade: A Canadian Perspective. ( M o n t r e a l : P r i v a t e Planning Association of Canada, 1971), p. 45. Recent Trade Development from 1967-1975 Internal troubles i n China often disrupted production and d i s t r i b u t i o n and f i n a l l y resulted i n a serious decline i n her exports to Hong Kong. Examples of such disruptions were the nation-wide "anti-corruption drive" i n 1952, and the f a i -lure of the "Great Leap Forward" i n 1958. After each cam-paign was over, China exported more goods to the Colony and steadily increased the trade volume to compensate for foreign exchange l o s t i n the chaotic year. As a re s u l t of the Cultural Revolution i n 1967, there was a boycott of goods to the "Hong Kong B r i t i s h Imperialists". 46 The decline of exports to Hong Kong resulted i n a decrease i n the supply of foreign exchange to China. Thus i n 1967 China f a i l e d to balance her world trade and showed a trade d e f i c i t of U.S. $30 m i l l i o n . Lost earnings i n the trade with Hong Kong were pa r t l y responsible. Hong Kong's role as a major supplier of foreign ex-change was again proved by the Cultural Revolution d i s t u r -bances and the significance of her role was further shown by the fact that China t r i e d to r e d i r e c t her trade to Singapore i n 1967, but without much success. The Peking authorities f i r s t believed that the existence of a Chinese community i n Singapore might bring about a demand for Chinese goods. Unfortunately f o r China, the Singapore government did not allow an invasion of her domestic market by imported Chinese goods. The reason was simply because the Singapore govern-ment did not want trade that was widely out of balance and was extremely unfavorable to her balance of payment s i t u a t i o n . As a r e s u l t of the unsuccessful attempt on the Singapore market, the Chinese government then diverted i t s attention to the strengthening of her marketing system and the c o n t r o l l i n g of prices i n her export trade with Hong Kong. China knows that Hong Kong has no alternate supplier which i s capable of providing Hong Kong with the huge amounts of Chinese foodstuffs that she needs. China also has a geo-graphical advantage i n competition for s e l l i n g i n the Hong 47 Kong market. Communist China controlled the Hong Kong food market through the following means: (1) Ng Fung Hong (the sole agent) determines the qu a l i t y and kind of goods i t imports and supervises the food marketing channels i n Hong Kong. (2) Practising a p r i c i n g strategy to defeat the l o c a l farmers and independent food importers. (3) Using a dumping strategy to i n t e r f e r e with or prevent importation from other countries. (4) In order to earn more money from exports which had a price i n e l a s t i c demand China no longer undercut prices f o r such products i n Hong Kong (see Table 15). Thus she could make more money while s e l l i n g l e s s goods. Table 15. General Consumer Price Index i n Hong Kong, 1964, and 1970-1973 (1964 = 100) Year Food A l l Items 1964 100.0 100.0 1970 145.0 126.5 1971 150.3 130.8 1972 161.0 139.8 1973 200.1 164.0 Source: Hong Kong Government: Hong Kong Annual Report  1964, and 1970-1973. 48 China's trade with Hong Kong rose sharply a f t e r 1968, the amount of foreign exchange she earned from the Hong Kong market was more than enough to cover the cost of imported grain, (see Table 16) Once again i t was clear that Hong Kong needs a food supplier and China needs a poten-t i a l consumer market which binds these two trade partners t i g h t l y together. Table 16. Grains Imported from Canada and A u s t r a l i a , compared with money earned from Hong Kong, 1958-1970 ( i n m i l l i o n s of U.S. d o l l a r s ) Wheat Imported From Money Earned From Year Canada A u s t r a l i a Hong Kong 1958 7 27 245 1959 2 30 181 1960 9 24 208 1961 1121 162 180 1962 137 97 212 1963 97 202 260 1964 126 153 345 1965 98 168 406 1966 171 83 485 1967 84 195 397 1968 151 89 401 1969 114 117 446 1970 136 147 467 TAX 1,253 1,494 4,233 Source: Arthur A. Stahnke, China's Trade With The West. (New York: Praeger Publishers, 1972), p. 179. 49 The importance of the trade r e l a t i o n s between Hong Kong and China as well as Hong Kong's huge payment obliga-t i o n to China can best be explained by the 1967 pound ster-l i n g devaluation case. The Hong Kong do l l a r i s d i r e c t l y related to the S t e r l i n g Bloc, and the Colony had maintained more than £350 m i l l i o n reserves i n the Bank of England. The Hong Kong government at f i r s t decided to devalue the Hong Kong d o l l a r at the same rate as the pound s t e r l i n g , but l a t e r i t was decided that the Hong Kong d o l l a r should be re-7 valued by 10 per cent. This came about as a re s u l t of i t s great need to pay for import of Chinese goods. By the same token, the 1972 U.S. d o l l a r devaluation case further r e f l e c t e d the payment obligation of Hong Kong to China. When the United States devalued i t s currency twice i n 1972, the Hong Kong government did not follow suit although the U.S. market accounted f o r more than 45 per cent of Hong Kong's t o t a l exports. Since Hong Kong's major com-pe t i t o r s , Taiwan and South Korea both devalued t h e i r curren-cies at the same rate as did the U.S., Hong Kong ran the r i s k of losing her competitiveness i n s e l l i n g to the U.S. market. YBt, the Hong Kong government could not devalue the Hong Kong d o l l a r because i t would mean paying more money to buy the same amount of goods from Communist China once de-valuation had taken place. 50 Mainland China was almost certain not to devalue against the Hong Kong d o l l a r i n substance, i f not i n formal monetary action. The importance of Hong Kong as a source of China's foreign exchange earnings to her i s well known. As a supplier of foodstuffs and other necessities whose con-sumption i s not apt to decline much under higher prices, i t i s to China's advantage to exact increased prices ( i n Hong Kong do l l a r s ) for i t s exports. At the moment Hong Kong i s China's largest and most pro f i t a b l e export market. In 1973, China's net foreign ex-change on sales to Hong Kong was about U.S. $1,000 m i l l i o n . The Hong Kong d o l l a r s earned are exchanged f o r i n t e r n a t i o n a l currencies, primarily i n Hong Kong to meet other currency requirements, or held i n account by the Bank of China. It has been China's p o l i c y to refuse loans and to avoid taking long positions i n foreign currencies i n the face of unstable markets. Exports are sold and imports are bought with cash, though there i s now a trend to pay for large purchases (U.S. $10 m i l l i o n and above) under f i v e year or longer instalment plans. As a r e s u l t of these p o l i c i e s , Hong Kong has played a role i n financing China's exports. In 1974, China sold goods worth U.S. $1,198 m i l l i o n to the B r i t i s h colony while exports and re-exports i n the other d i r e c t i o n t o t a l l e d $59 m i l l i o n . V i s i b l e trade from 51 Hong Kong alone provided China with a net $1,139 m i l l i o n or g about 18 per cent of the t o t a l i t earned worldwide. To sum up the 26 years trading h i s t o r y between Hong Kong and China, Hong Kong, as a trading partner to China, i s unique i n two ways: F i r s t , the t e r r i t o r y provides an e s t i -mated 40 per cent of China's foreign exchange earnings every year; and secondly, no other market could substitute f o r Hong Kong. 52 CHAPTER IV NOTES 1 Arthur A. Stahnke, China's Trade With The West. (New York: Praeger Publishers, 1972), p. 189. 2 Hong Kong Economic Association, Hong Kong Economic  Paper. (Hong Kong, 1960-1970), p. 69. 3»The C 1963, pp. 9-10. 3 hina Market, 1962," Current Scene. July 1, 4. South China Morning Post, Hong Kong, December 7, 1965. ^Yung Wei, Communist China, (Ohio: Charles E. Mer-r i l l Publishing Company, 1972), p. 85. Alexander Eckstein, Communist China's Economic  Growth and Foreign Trade. (New York: Praeger Publishers, 1972), p. 93. 7 Wah Kiu Yat Po. Hong Kong, October 27, 1967. 8 China Trade Report. Hong Kong, Novemberv1975. CHAPTER V CONCLUDING REMARKS For the past twenty-six years, the trade between Hong Kong and Mainland China has been continuing despite many p o l i t i c a l upheavals l i k e the 1lean-to-one-side' of China 1s foreign p o l i c y with the Soviet Union, the American embargo, the Cultural Revolution and the l o c a l communists disturbances i n Hong Kong, (see Figure 4 on page 54) These disturbances only succeeded i n slowing down but did not en-t i r e l y stop the trade between China and Hong Kong. This i s because such a trade provides China with a valuable source of foreign exchange she needs. At the same time, Hong Kong's need for China's foodstuffs grew as her population increased. These mutual needs only made the trade r e l a t i o n s h i p between these two trading partners closer during the past years. In recent years, China has continued to trade with the West. In early 1972, a new phase developed when the U.S. government relaxed i t s p o l i c y of an embargo on trade to China. Consequently, China began to place large orders to buy aeroplanes, i n d u s t r i a l equipment and whole plants from 53 54 TRADE VOLUMI $ i n U.S. * Figure 4. Hong Kong Trade ¥ith China, 1950-1973 ( i n m i l l i o n of U.S. $) 700 H 600 H 500 J 400 -J 300 J 200 A 100 A Imported from China Exported to China T — 1 « 1 • • | — B *—i—i—i 1950 55 60 65 70 - i - M ™ t + ~ r - ~ + T - 4 l-r-H h-+1— 75 T POLITICAL) SITUATION IN CHINA Economic Recovery-Cultural Revolution Economic Recovery A g r i c u l t u r a l C r i s i s Great Leap Forward —A n t i - C o r r u p t i o n Campaign ^Embargo Economic Re h a b i l i t a t i o n Source: Census & S t a t i s t i c s Department, Hong Kong Government "Hong Kong S t a t i s t i c s 1947-1967", Hong Kone Annual  Reports. 1968-1973. the United States. This raises the question of whether t h i s kind of new Sino-American action would a f f e c t the future trade rel a t i o n s h i p between China and Hong Kong. The answer seems to be "NO". The following analysis and facts may help to explain the above answer: (1) Trade between Hong Kong and China consists mainly of goods exported from China to Hong Kong, (only about 0.3 per cent of Hong Kong's exports of goods go to China) But China's trade with the West consists mainly of buying or importing of durable goods and grain. However, China's exports to the Colony are foodstuffs and some commodity goods. (Hong Kong i s completely dependent on China f o r 79 per cent of i t s l i v e animals, 56 per cent of i t s meat and more than 60 per cent of i t s r i c e every year) Chinese exports to the non-Communist world consist l a r g e l y of raw and processed a g r i c u l t u r a l products, the main categories being fresh meat, fresh f i s h , r i c e , fresh f r u i t , fresh vegetables, o i l seeds, t e x t i l e yarn and thread, and cotton f a b r i c s . None of these commodities (except t e x t i l e s ) suggests trade of much pot e n t i a l i n t e r e s t to American importers. 1 (2) The trade relationship between Hong Kong and China has been established f o r twenty-six years. The maintenance of the long-standing and f i r m r e l a t i o n s h i p with the 56 Colony appears to be highly valued by Communist China. There are some important points about Hong Kong's China trade. F i r s t l y , i t i s overwhelmingly i n China's favour. Secondly, Hong Kong cannot switch or become s e l f - s u f f i c i e n t . I t s main imports from China are food l i n e s at prices that cannot possibly be matched else-2 where. The Chinese government has a unique trade system i n the Colony and can control the l o c a l market, (see Figure 5 on page 57) Therefore, China has no immediate intention of l o s i n g t h i s valuable market to r i s k dealing with other uncertain markets, such as the U.S. market. Only China can provide the large quantities of t r a d i -t i o n a l Chinese-type of goods which the Hong Kong market r e a d i l y accepts. Moreover, no other country could pro-vide the same kind of goods at such a huge volume to the Colony on a d a i l y basis. As the Chairman of Jar-dine Matheson, David Newbigging said " I t seems worth pointing out that foodstuffs comprised the major part, with l i v e animals alone worth $200 m i l l i o n , cereals and f r u i t and vegetables both worth $100 m i l l i o n and so on. Other important items are t e x t i l e yarns and f a b r i c s worth $135 m i l l i o n , cement, clothing, paper, steel rods and bars and miscellaneous items including f u e l o i l and Figure 5. 57 China's Trade Organization i n Hong Kong State Operated Foreign Trading Corporation i n China Head Off i c e Bank of China Peking China Resource Co. of Hong Kong A sole buying and s e l l i n g agent of State Foreign Trading Corp. Dept. of] Animal by Products! Dept. of General Merchan-dise Dept. of T e x t i l e s I Dept. of] Cereal O i l I Dept. of In d u s t r i a l l Product & I Mineral Bank of China Hong Kong Branch financing a l l transactions Ng Fung Hong An agent for handlig a l l food products & operated the whole-sale market Local Communists a f f i l i a t e d banks i n Hong Kong Ret a i l e r s Source: Ying, Hsin: The Foreign Trade of Communist China. Hong Kong: The Union Research I n s t i t u t e , 1954. 58 drinking water. Most of these would be d i f f i c u l t , i f 3 not impossible, to market elsewhere than i n Hong Kong." (4) Robert Denberger (an economist from the University of Michigan) made a series of projections concerning the U.S.-China trade volume for 1980 based on various assumptions regarding the Chinese economy, Chinese trade p o l i c i e s , and p o l i t i c a l r e l a t i o n s h i p s . The study which covered a spectrum of p o s s i b i l i t i e s , concluded that as far as trade volume i s concerned, China's exports to the U.S. w i l l be n e g l i g i b l e as compared with those of Hong Kong. In the year 1973, China's exported goods to the Colony amounted to U.S. $730 m i l l i o n , and from 1969 to 1973, the rate of trade between Hong Kong and China grew at an average of 17 per cent a year. At t h i s rate by 1980, the trade volume between Hong Kong and China would be more than U.S. $2,200 m i l l i o n , but that with the U.S. would be only U.S. $250 m i l l i o n under an optimistic estimate, (see Table 17 on page 59) Denberger's conclusion was therefore that the trade rel a t i o n s h i p between Hong Kong and China would not change i n the foreseeable future, even though China began to trade with the United States, (see Table 18 on page 59) As the China Trade Report commented, Hong Kong i s 59 Table 17. Potential Balance of Direct Merchandise Trade Between The United States and China i n 1980 ( i n $ m i l l i o n ) Imports from Exports to China i n 1980 China i n 1980 "Most pessimistic" estimate 0 0 "Relatively pessimistic" estimate (exports = imports) 25 25 "Least pessimistic" estimate 200 325 "Optimistic" estimate 250 650 Source: These estimates were made by Robert F. DeMfrerger^, "Prospects f o r Trade Between China and the United States, i n Alexander Eckstein, ed., China Trade  Prospects and U.S. China Policy. (New York: Praeger Publishers, 1971), p. 258. Table 18. U.S.-China Trade, 1971-1975 ( i n $ m i l l i o n ) U.S. exports U.S. imports Total Trade 1971 - 4.9 4.9 1972 63.5 32.4 95.9 1973 739.7 63.9 803.6 1974 820.5 114.7 935.2 1975 250.0 150.0 400.0 Source: China Trade Report. Hong Kong, December 1975. 60 l i k e l y to maintain i t s p o s i t i o n as the most important gate-way c i t y to a growing China trade despite the fact that Peking i s opening i t s door to more and more foreign business-4 men. The Hong Kong-China rela t i o n s h i p i s a f i n e example of coexistence f o r economic reasons. A Colonial t e r r i t o r y and the most extreme l e f t i s t nation now exist side by side and have done so for many years i n r e l a t i v e harmony. One wonders how long the precarious state of existence would l a s t i f the Chinese government maintained that Hong Kong must revert to China at a time when i t suits China best. But t h i s does not suit them now because China s t i l l f inds Hong Kong useful as an important source of foreign exchange. Therefore, the Chinese government i s happy at present to l e t Hong Kong remain as a colony. However, Huang Hua, Permanent Representative of the People's Republic of China to the United Nations (of now head of ministry of foreign a f f a i r ) made the following comment with regard to China's position on Hong Kong, "With regard to the questions of Hong Kong, the Chinese government has consistently held that they should be se t t l e d i n an appropriate way when conditions are ripe."*' The future of Hong Kong depends i n very great mea-sure upon the future development of China and i t s role i n the international p o l i t i c a l and economic system. China's 61 p o l i c y toward Hong Kong would very l i k e l y be determined l a r g e l y by considerations of r a t i o n a l i n t e r e s t — t h a t i s , of the net balance of costs and benefits i n economic and p o l i -t i c a l terms. In present circumstances, China obtains be-tween a t h i r d and a half of i t s foreign exchange earnings by s e l l i n g a g r i c u l t u r a l products, i n d u s t r i a l raw materials, low-priced clothing and other consumer goods, and t r a d i t i o n a l Chinese commodities to Hong Kong. In turn, because i t can export i t s own products to the rest of the world. China's foreign-exchange earnings from Hong Kong provide i t with the means fo r importing the machinery, equipment and technology essential f o r i t s own development. The chances seem quite good that, i n the shorter term—the next 5 or 10 years—Hong Kong's p o l i t i c a l l s t a t u s w i l l remain unchanged under the above assumptions. And, the continued investment i n Hong Kong by i t s inhabitants and by foreigners c e r t a i n l y validates t h i s judgment. As Jimmy McGregor, Director of the Hong Kong General Chamber of Com-merce said recently, "While the business community could now c l e a r l y see that conditions f o r investment i n Hong Kong would remain a t t r a c t i v e for the next 10 to 15 years He pointed out that Dow Chemical P a c i f i c had made a long-term commitment when i t decided to b u i l d i t s polystyrene factory on Tsing Y i Island. 'I'm sure they've taken t h i s into t h e i r c a l c u l a t i o n s . ' " President of Dow Chemical Paci-f i c Bob Lundeen who was also on the panel, confirmed that the question of the New T e r r i t o r i e s leased had loomed large i n his board's discussion of the proposed polystyrene plant. But he said the r i s k s had to be considered i n r e l a t i v e terms. Compared to many other countries Hong Kong offered r e l a t i v e l y 7 good p o l i t i c a l r i s k s . For the longer term—from the mid 1980s on—the p o l i t i c a l outlook becomes increasingly uncertain since i t depends upon developments i n China and i n the world p o l i t i -c a l and economic system that cannot be forecast so f a r into the future with a high p r o b a b i l i t y of accuracy. The longer the time span of any such projection, the greater the pro-b a b i l i t y that unforeseeable events w i l l s ubstantially a f f e c t the nature of the outcome. Hong Kong's present significance for China i s as a source of foreign exchange, a r i s i n g both from the huge trade d e f i c i t and from the remittances of Overseas Chinese. There are le s s tangible advantages, too, for a country as i s o l a t e d as China i n having an ear on the outside world. 6 3 CHAPTER V NOTES Lawrence C. McQuade, "The Future of Sino-American Relations," i n Trade With China, (AMA Research Report, 1972), p. 41. 2 China Trade Report, Hong Kong, May 1975. 3 China Trade Report, Hong Kong, December 1975. 4 I b i d . ^Hong Kong Research Project, Hong Kong: A Case to  Answer. (United Kingdom: Russell Press, 1974), p. 49. Hong Kong Economic Association, Hong Kong Economic  Paper. (Hong Kong, 1960-1970), p. 135. 7 China Trade Report, Hong Kong, June 1976. CHAPTER VI A MULTIPLE REGRESSION ANALYSIS OF CHINA'S EXPORT TO HONG KONG Objectives The objectives of the f i n a l part of t h i s study were as follows: (1) To examine d i f f e r e n t factors and evaluate t h e i r s i g n i -ficance i n determining China's exports to Hong Kong. (2) To explain the phenomenon that China's capacity to im-port i s influenced by her poten t i a l to export to Hong Kong. (3 ) To attempt to formulate a regression equation which could be used as a predictive model f o r China's exports to Hong Kong i n the near future. Rationale i n Selecting Variables f o r Prediction and Cor- recting Time Series The primary i n t e r e s t i s not i n hypothesis testing, or i n assessing the r e l a t i v e importance of independent v a r i -ables, but rather i n making as good a predic t i o n as possible on the basis of several predictor variables (which have been 64 6S involved i n the previous discussion). Under these circum-stances, e f f o r t s were directed towards obtaining as high a squared multiple c o r r e l a t i o n as possible. Because many of the variables i n the data set are inter c o r r e l a t e d , i t i s possible to select from a pool of variables a smaller set, 2 which w i l l y i e l d an R almost equal i n magnitute to the one obtained by using the t o t a l set. The idea of time series c o r r e l a t i o n i s to correlate absolute f i r s t differences (the amounts of change are obtained by subtracting each year's value from the next) to p a r t i a l l y eliminate trend e f f e c t s . Limitations ( 1 ) The variables being included into the regression analysis only consist of the economic data which have been i l l u s t r a t e d i n the thesis discussion. Of course, there are other factors such as p o l i t i c a l , s o c i a l and , c u l t u r a l to be considered. But the main theme of the thesis focussed on the economic coexistence between China and Hong Kong as well as the import and export functions between these trading partners. Using economic factors exclusively i s j u s t i f i a b l e only when we interpret the regression r e s u l t under such assump-tions. (2) With regard to the actual figures i n the data set, 6 6 neither i n f l a t i o n a r y nor deflationary effects have been taken into consideration due to modification d i f f i -c u l t i e s . (3) The complete set of data being used i n the analysis i s derived from numerous sources and missing data i n some cases s t i l l e x i st. Thus, the i n c l u s i o n of such figures into the data set i s based p a r t i a l l y on value judgments. S t a t i s t i c a l Methodology A backward stepwise regression analysis of China's exports to Hong Kong was c a r r i e d out i n which: (1) The backward solution starts out with the squared mul-t i p l e c o r r e l a t i o n (RSQ) of a l l independent variables with the dependent variable. ( 2 ) Each independent variable i s deleted from the regres-2 sion equation one at a time, and the loss to R due to the deletion of the variable i s studied. The c r i t e r i o n f o r selecting which variable to delete next i s based 2 on the concept of loss i n the R (or the proportion of variance accounted f o r ) . The l e s s e r the l o s s i n the 2 R , the greater the chance the variable can be deleted without meaningful l o s s . The F P r o b a b i l i t y i s set at the l e v e l of 0.01 ( m u l t i c o l l i n e a r i t y amongst the inde-pendent variables could only be tested under such a ¥ 7 r e s t r i c t i v e b a s i s ) . In other words, each variable i s treated as i f i t were entered l a s t i n the equation. I t i s thus possible to observe which variable adds the 2 le a s t when entered l a s t . The loss i n R that occurs as a r e s u l t of the deletion of a variable may be assessed against a c r i t e r i o n of meaningfulness. A variable con-sidered not to add meaningfully to prediction i s deleted. (3) I f no variable i s deleted, the analysis i s terminated. (4) The remaining variables appear therefore to contribute meaningfully to the prediction of the c r i t e r i o n variable. Summary of Results A f u l l e r account of the re s u l t s i s given i n Appendix. When F Pr o b a b i l i t y was set at the 0.01 l e v e l : 2 Variable Step R Deleted Loss i n R 1 0.6577 2 0.6569 X c 0.0008 6 3 0.6458 X„ 0.0111 4 4 0.6331 X 3 0.0127 5 0.6021 X r 0.0310 The analysis i s terminated leaving X^ and X. behind. 6~8 S t a t i s t i c a l Interpretation 2 The r e s u l t i n g R = 0.6021 meant that approximately 60 per cent of the variance of Y was accounted by X^ and X 2 i n combination. There were only two variables l e f t , X^ and X2 with R 2y.l2 = 0.6021, 2 2 9 Deleting X ^ R u - r J2 = 0.6021 - (0.4999) = 0.3522 Deleting X 2: R 2 y 1 2 - r 2 y 1 = 0.6021 - (0.1945) 2 = 0.5643 In view of the fac t that the deletion of either X^ or X 2 r e s u l t s i n a meaningful loss i n the variance accounted for (about 35 per cent f o r X^, and about 56 per cent f o r X 2 ) , i t was decided not to delete any of the remaining variables. X^ and X 2 were retained, the regression equation was calcu-lated, and the analysis was terminated. Y = 11.4267 + 0.1538X1 + 0.1038X2 t 44.8332 Comments (1) In the analysis, China's World Imports (X 2) and China's Trade Balance (X^) are the most s i g n i f i c a n t factors i n determining China's exports to Hong Kong. (Normalized C o e f f i c i e n t as shown i n the computer printout i n Appen-dix indicated that the r e l a t i v e strength of X 2 i s 1.3 times stronger than X^). (2) I t can be concluded that as China imports more from 69 the world, she has to obtain more foreign exchange to finance her debts. Exports to Hong Kong seems to be the solution. Stated d i f f e r e n t l y , as China exports more to Hong Kong, she has a better chance to maintain a positive trade balance. ( 3 ) Due to data gathering d i f f i c u l t i e s , regression analysis should not be given too much emphasis i n forecasting and the use of the derived regression equation as the predictive t o o l should be handled with great caution. For example, the equation above implies a negative effect of a change i n exports upon imports which i s most u n l i k e l y to occur and i s probably an uncontrolled effect of double counting i n variable X t. 70 APPENDIX D e f i n i t i o n of Variables VAR 1 = Y = China's Exports to Hong Kong VAR 2 = = China's Trade Balance ('-' denotes d e f i c i t ) VAR 3 = X 2 = China's World Imports VAR 4 = Xo = China's Imports from the Machinery and Equip-ment Exporting Countries ( i . e . West Germany, Great B r i t a i n , France and Japan) VAR 5 = X. = China's Imports from the Grain Exporting Countries ( i . e . Canada and Au s t r a l i a ) VAR 6 = X 5 = China's Grain Output VAR 7 = Xg = Hong Kong Population Note: A l l figures are i n m i l l i o n . * I N M S U C » FORMAT CARDS (bF6.0,F6.2,Ffe .Q) I N P U T D A T A VARl VA.^2 VAR3 VARU VARb VAR6 VAR7 150,0 30,00 590,0 27,00 2,000 1O1.0 2.300 162,0 - 3 0 0 , 0 1120, " 32.00 1,000 155,0 2.020 j 115,0 -110,0 1015, 20.00 1,000 l 6 t , 0 2,130 • 150,0 -215,0 1255. 60.00 5,000 170.0 2 . 2 1 0 1 121,0 -230,0 1290, 69,00 3,000 176,0 2,370 157,0 -285,0 1660, 8".00 7,000 182,0 2.190 j 185.0 150.0 U B S . 157,0 13.00 188,0 2.620 1915.0 175,0 1 1 1 0 , 161.0 23.00 187.0 2,700 ! 2U5.0 115.0 182S, . 203,0 35,00 205,0 2.850 181 iO 170.0 2060, 201 ,0 32,00 170.0 2,970 208,0 -70,00 2030 , 20 1,0 33,00 150,0 3,080 180,0 35.00 1U95, 121.0 283.0 160,0 3,170 212.0 375.0 1150. 137.0 235.0 170.0 3,300 280,0 370 ,0 1200, 172.0 299,0 182,0 3,010 3 1 5 , 0 280,0 1U70, 208,0 279,0 195,0 3,090 0 0 6 , 0 190,0 1815, (156,0' 263.0 200.0 3.590 1 6 5 , 0 175.0 2035, 630,0 255,0 220.0 3.620 3 9 7 ,0 -5,000 1950, 696,0 276,0 231 .0 3.710 0 0 1 , 0 125.0 1820, 657 ,0 200,0 225.0 • 3.790 11146,0 200,0 1830, 72«,0 232.0 230,0 3.850 067 ,0 -190.0 2170, 921.0 135.0 210,0 3.9O0 5 1 1 , 0 110,0 2305, 1300 . 200,0 250,0 0,050 631,0 250,0 2823, 1 320, 193,0 210,0 1,080 730 ,0 -17 0,0 4975, 1761, 213.0 255,0 1,110 670 ,0 -975.0 7000 , 1790, 2 2 0 , 0 260,0' 1,150 1123, -100,0 7030, 1769. 205,0 265.0 . 0,200 26 25 OBSER^ATIUNS TOTAL DEGREES OF FREEDOM NAME VAR 1 MEAN 361.500 S T D , D E V . 252.011 VAR2 V A R 3 VARO V A R 5 VAR6 V A R 7 1 , 15385 2202,62 _5j i , o o o_ 101,650 200,615 3.20269 282,582 1680.19 J 6 6 . 7 3 6 1 Y e , 281 3 6 , 9 0 6 7 CORRELATION VARIABLE MATRIX VAR 1 VAR2 VAR3 VARU VAH5 VAR6 VAR7 VARl V AR 2 VAR3 1,0000 -0,2570 0,9092 1,0000 -0.5017 1.0000 V A R O V A R 5 V A H b 0,9535 0,5253 0 , 6 8 0 0 -0,3128 0,2850 -0,1698 0,8715 0,2968 0.7260 1,0000 0,0690 0,9133 1 ,0000 0,5319 1,0000 VAR7 0,6253 0,0618 0,6280 0,8363 0,7995 0,8521 1,0000 ARRAY WRITTEN IN AREA 1 I** I 72 CO -O O U . a. «! © © o o o © © o © o CS o —• —• r\j r o rvj o o Ot o o o © o ©• © o © o © 0 1 o o o | — o; o o o 3^ £ O -O -« o o ! o o o o o ! o o o O O j O o * j i • •> • »o » 3 r y q ^ ^> — o o o l o o o o o o l o o o • o l • • o r\i o • un m o o ©! o o o o i n r-> r - un — i r v r o j r o ~« a 3 O • o o | o • • t n i n j i n r o i n i r - - * i n ^ AJ r- • O -o co r o i n n j r o A i —• o o o o o o 0 0 0 , 0 0 0 —• O l «-«-0 rO O O O O c o © o © o o o o o o o o o o o X> — -O 0>- X) -O o o o j o O O O O O j O o o o o o | • o o • o o j o * - r o —«/VI ^ -£> o o o o • o or- • © ; O J -c m! r\i • -* —. I o o o o © o o i n _ n - m m cO rO O ' f O O •O ftJ fO U l fO ifi o o o l o O O © © •! • • © • • o i i n o o © i n O J — " o ^n o o oi© o o o o o j o o o o o o l o O O • o • o o T •oj—» • « — >n o n ^ * © i n o o © © © © o o o ! o o o • o i • * o O -O • « •© • r \ j —« co OJ rO c u I t I © o © o o o 5 • - O O O • X> -TT ' • « x> o r - ; •© o r-f - o j —• u o r o x> © © © © o o o m ©! • o N N a i t n ^ o OJ fO —• !<0 —• — o o o jo o o o o o ; • • • • o o © j ^ i - o ro i n • • I o o o l i t AJ J J j j o o o o o o o o o o o | o — o o o o ^ - . -o y i 3 m l © o o ; o o o O O Ol o © © o o ' © o o ©I • • • © 0 | o o o ' m » in o o ot© © o o o ©;o o o • o • o r- un »•'© < -O r - j O j r-- — I o o o o © © • o ; »o ©! ~D m\zr O H o r- o | J D • —»j rvj rO f\Ji=T OJ O O O ; • • i n i n - j o m a o - o j O J ©I 3 — o r o i n j o j n j ^ © o O !© O O O O O ' O 'J> / I ( \ J o N -n -O — ; TJ T> X) . I o © © o o o O O O © i • - • - O K»| — r» r - c r a i n r u N a ) <r — r u <I o O UJ O r u r o • m © o o • o x ( O » O J •O P O o o |2 M O <a o - o o j • r \ j x c c r o i n UJ C CT »^ if- CT-o jn — - o c r c r r o r v 3 o • • >o c r i n rO s o — X) o o o jo ; OJ O © (© i X) O •© < • X) O J =J ; r\i • — x» r - o - • l ru O X> Tf •4 -4 4 «X -4 o * © X) O <£> O =J o t> O CO — o r>- o o m oj —« o o < —• A J PO ^3 pr. *-* c c ct tr o r a : a r < < <x P 4 >• > > o i n o © -* ^ i© o j 4 © o i n ® i n O J J j f l r o © — r o o i a - rOj |r*- -o — . r*- o © I rO O OJ OJ co O l -O r - XJ o - l C O OJ £ o j r o — r\j — BACKWARD STEPWISE REGRESSION ANALYSIS UF CHINA'S EXPORTS TU H,K, CONTROL CARD NO", 3 ~~' " * STPREG * r ARRAY RESTORED FROM AREA 1 CONTROL CARD NO, 1 * STPREG * FPRUB LEVEL ACCEPT REJECT O.O10OO 0.01001 DEPENDENT VARIABLE IS VARl STEP NO, 1 RSQ s 0,6577 FPR08, a STD ERR YS 0,0018 15.9719 VAR CONST, V A H 2 COEFF 12 , 1 3 3 9 0,1575 STD ERR 11,8755 0.0363 F-RATIO 18,8158 FPROB, 0,0001 NORM COF.rF , 0,7155 V A R 3 VARU V A R 5 0,1069 -0,0781 -0.1?12 0,0220 0,0913 0,1616 23.6266 0.7321 0,5691 0.0002 0.1078 0.1662 0,9163 -0.1171E+00 -0.1082E+00 V AR 6 VAR7 1.3159 -23,2729 0.8698 116,5893 2,2885 0,0398 0,1113 '0.8212 0,2310 -0.3027E-01 STEP NU, 2 RSQ s FPROB, = STO ERR Ys 0,6569 0,0006 11.7982 VAR CONST, COEFF 10.5108 STD ERR 11.1666 F-RATIO FPROB, NORM COEFF . . VAR2 • VAH3 VARl 0,1565 0,1079 -0.0822 0,0350 0,0208 0.0868 19,9833 26,7989 0,6975 0.0003 0,0001 0,3581 0,7108 0,9573 -0, 1550E + 00 VAR5 VAR6 -0.1258 1 .3520 0,1602 0,8290 0,6169 2,6600 0,1171 0,1159 •0.1097E+00 0,2371 POTENTIAL INDEPENDENT VARIABLES) PARTIAL CORR. TOLERANCE FPROB VAR7 0,0170 0,8270 0,82(12 STEP NO, 3 RSQ s FPROB, s STO EKR ys 0,6158 0,0003 11,3670 <1 63 f VAR CONST, VAR2 COEFF 8 ,9667 0.1570 STD ERR 10,8796 0.0147 F-RATIO 20,4892 FPROB, 0,0002 NORM COEFF 0,7428 VAR3 VARU VAR6 0,109(1 - 0 . 0 7 2 0 1 .2318 0 ,0205 0,0850 0,8069 28 ,3719 0,7176 2,3306 0,0000 0,41 15 0,1390 0,9711 -0 ,1357E+00 0,2162 . < POTENTIAL INDEPENDENT VARIABLES) PARTIAL CORR, TOLERANCE FPROB VARS 0 ,1773 0,9263 0,4474 VAR7 0,0550 0,8291 0,7985 STEP NO, tt RSQ 0.6331 FPROB, STO ERR a 0,0001 « t t , 0 6 7 6 VAR CONST, VAR2 COEFF 7.1056 0 .1539 STD ERR 10,5835 0 ,0343 F-RATIO 20.1887 FPROB, 0,0002 NORM COEFF 0.7284 V A R 3 VAR6 0.1018 1.0075 0 ,0183 0,7571 30.8290 1.7710 0,0000 0,1949 0,9033 0,1769 POTENTIAL INDEPENDENT VARIABLES! PARTIAL CURR. TOLERANCE FPROB VARtt VARS 0,1861 0, 1(1(13 0,6898 0,9(177 0 . « 1 1 5 0.528(1 VAR 7 0 ,0933 0 ,8703 0,6815 STEP NO. 5 RSQ 3 0.6021 FPROB, STD ERR ys 0 ,0000 « « , 6 3 3 2 VAR CONST, V AR 2 COEFF 11,4267 0.1538 STO tRR 10,2481 0,03(19 F-RATIO 19.4757 FPROB, 0,0003 NORM CUEfF 0.7279 VAR3 0,1038 0 ,0186 31 .2049 0,0000 0,9213 POTENTIAL INDEPENDENT VARIABLES) PARTIAL CORR, TOLERANCE FPROB VARtt VARS V A R 6 0 ,0773 0 .0973 0 .2789 0,7731 0 ,9675 0 ,9892 0,7236 0,6619 0.1949 V AR 7 0 .1269 0 ,8869 0,5704 NO, 1, OBSERVED 12.000 CALCULATED 9.5115 RESIDUAL 2.4585 NORMALIZED RES 0.54837E-01 2. -17,000 31.288 •48,268 -1,0771 3. 5,0000 21,808 -19,808 •0.44181 1. -29.000 12.753 -41.753 -0.93130 / > 5. 6. 36,000 28,000 11,381 60,166 •5.3806 -32,166 -0,12001 •0,71745 7, 13.000 10,600 2.1000 0.53532E-01 : 8, 17,000 12.169 4.8311 0,10776 j <». •61,000 11,284 -108,28 -2,4153 j 10. 27.000 -28.603 55.603 1.2402 • 11. •28,000 -27.967 -0.32852E-01 -0.73276E-03 | 12. 32,000 27,904 4,0957 0.91355E-01 1 J . 18,000 15,819 32.151 0.71713 I H . 15. 1*. 85,000 61,000 79,000 25,615 36,516 28.845 . 59,385 24,481 50.155 1,3246 0,5461 1 1.1167 17, -88,000 -25,081 •62,916 -1,4033 18. 1,0000 17,925 -13.925 •0,31060 19. 15,000. 21.001 20.999 0,46839 20. 21,000 -13.261 34.261 0,76418 21. 77,000 71,566 .5,4144 0,1207 7 22. 87.000 86.739 0.26086 0.58165t-02 2 J . 99,000 167.44 -68,445 -1,5266 24. 110,00 97,845 42.155 0,94025 25. 253,00 190.65 62.346 1,3906 AUTOCORRELATION COEFF, •0,040 DURBIN-xATSON D STATISTIC 1,992 PR0BABILITV(<SPW3) 0.130 -i i 1-3 76 BIBLIOGRAPHY Books American Management Association. 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