Hong Kong's Faulty Economic Data

Hong Kong government data continues to give what is almost certainly an exaggerated view of the economy's growth. For almost every year since 1997 the GDP deflator, which measures the ratio of the current-year price of goods against their price in a base year, has varied widely, not only with the trend in consumer prices but with the broader domestic demand deflator.

That may seem arcane to some, but it is not arcane to workers in some industries who have done spectacularly badly. For instance truck drivers working on public sector construction projects have seen their wages fall from HK$632 a day to HK$585 because of the way the data is computed.

When prices were falling, the GDP deflator fell faster and now that prices are rising again the GDP deflator is rising more slowly than the CPI. This process is expected to continue in 2010, with the government forecasting a 0 percent rise in the GDP deflator but a 1.5 percent rise in the CPI.

Since 1997 the implicit GDP deflator has fallen from 122 to 102, a decline of 16.4 percent. But over the same period the Composite CPI has gone from 114 to 109.5, a fall of only little over 4 percent. The domestic demand deflator has fallen somewhat more but for most people the CPI is what matters. The average annual rate of change for the ten years to 2009 has been minus 1.5 percent for the GDP deflator, minus 0.6 percent for the domestic demand deflator and a mere minus 0.2 percent for the composite CPI. For the past five years, the GDP deflator has been up just 0.8 percent annually while the domestic demand deflator has risen by 1.6 percent and the CPI by 1.9 percent.

Over both periods Hong Kong's terms of trade have fallen by 0.3-0.4 percent a year which has further undercut the real income of the people and makes the GDP data even more dubious.

Whilst it is unsurprising that on a year to year basis different price indices diverge significantly, a near constant trend over a decade and more translates into a huge difference between official pronouncements of Hong Kong's total income and peoples' perceptions of their actual standards of living and levels of real wealth.

The Hong Kong data also tend to exaggerate actual domestic investment so the data is at odds with what is actually going on, at least in the construction sector.

De-construction of the data shows that there has been negligible overall gain in income per worker and, as even some officials acknowledge perhaps 30 percent are actually worse off than in 1997 because of the trend towards greater income inequality – now worse in Hong Kong than anywhere in Asia and any developed economy the world over.

In current dollars, the territory's GDP has grown by 19.6 percent since 1997 – from HK$1,365 billion to HK$1,633 billion. But measured by the so-called chain deflator based on 2007 the so-called real GDP has gone from HK$1,113 billion to 1,606, a rise of no less than 43 percent! On a per capita income basis that translates into a rise of 34 percent compared to one of only 11 percent in current dollars.

Even the 11 percent on a per capita basis exaggerates the improvement per worker as the working age population has increased from 71 percent to 75 percent over that time an extraordinarily high level which cannot be sustained as the population is aging fast unless there is a big increase in immigration.

As for actual monthly earnings, the median of those employed has risen by just 5 percent since 1998 to HK$10,500. Most of this has been concentrated in the middle income groups. The numbers earning less than HK$6,000 a month actually rose steeply – from 440,000 to 630,000 over the period. Those earning HK$25,000 or more rose from 419,000 to 583,000. Household incomes have remained unchanged at median 18,000 but again the distribution has become ever more unequal with numbers at the higher and lower brackets both increasing sharply as a percentage of the total.

Unemployment and low wages in the construction sector have become politically quite sensitive. But that reality is obscured by seemingly buoyant Gross Domestic Fixed Capital Formation which rose steadily from HK$289 billion in 2005 to HK$340 billion last year when it showed a small increase at current prices. However, it is inflated by the item “Costs of Ownership Transfer” – which includes tax – stamp duties on transfers of land and buildings – and legal and agent fees. All told those came to HK$24 billion.

Supposedly private sector construction (in current dollars) has risen from HK$67 billion in 2004 to HK$97 billion in 2009. This data sits oddly with the persistent decline in housing completions over this period. They fell from 26,000 in 2004 to 7,000 last year. Completions are picking up again but will still only average 12,000 over the next two years. Although commercial property development has partly compensated for this decline much of the illusion of strength in the capital spending comes from the Real Estate Developers Margin (REDM) – a figure which reflects profit margins not actual construction. Historically they have been as high at 9 percent of total GDP.

The government does not publish the developer margin data any longer though it must collect it data as it is referred to in notes to the GDP figures. A guesstimate derived from the past would now put it in the region of HK$50 billion or 60 percent of the real estate services contribution to GDP of HK$84 billion in 2008 or some 3 percent of total GDP.

The GDP data is also heavily influenced by movements in property values in another way – ownership of premises. Value added under this heading rose from 9.8 percent of GDP in 2004 to 11.4 percent in 2008. In the latter year the increase contributed 1.4 percentage points to an increase of 3.7 points increase in current price GDP rise that year.

These increases matter in practice to landlords and property developers but at best they are neutral for the majority, and simply transfer income from renters (including business) of property and first time home buyers to landlords and developers.