People’s Republic of China—Hong Kong Special Administrative Region Selected Issues

This Selected Issues paper characterizes the rapid expansion of Hong Kong Special Administrative Region’s (Hong Kong SAR) economic ties with the Mainland over the last two decades. It examines the possible impact on Hong Kong SAR of policy developments in the Mainland. The paper concludes that as integration has progressed, developments in various sectors of the Hong Kong SAR economy have become increasingly tied to developments on the Mainland. This paper also analyzes the initial episode of strong-side pressures on the Hong Kong dollar and, in particular, the Hong Kong Monetary Authority response.


This Selected Issues paper characterizes the rapid expansion of Hong Kong Special Administrative Region’s (Hong Kong SAR) economic ties with the Mainland over the last two decades. It examines the possible impact on Hong Kong SAR of policy developments in the Mainland. The paper concludes that as integration has progressed, developments in various sectors of the Hong Kong SAR economy have become increasingly tied to developments on the Mainland. This paper also analyzes the initial episode of strong-side pressures on the Hong Kong dollar and, in particular, the Hong Kong Monetary Authority response.

IV. Recent Labor Market Developments in Hong Kong SAR 1

A. Introduction

1. Hong Kong SAR’s labor market performed well for the two decades following the onset of reforms on the Mainland in the late-1970s. Hong Kong SAR’s investments in the Mainland—mainly in the Pearl River Delta (PRD) region—generated substantial cross-border flows in goods and, to a lesser extent, services, creating considerable employment opportunities. On average, the unemployment rate remained at around 2½ percent between 1981 and 1997.

2. By contrast, in the post-Asian crisis period, labor market outcomes deteriorated markedly. The unemployment rate rose substantially and peaked at 8.6 percent in mid-2003 in the aftermath of the outbreak of Severe Acute Respiratory Syndrome. While the unemployment rate had dropped by 2 percentage points to 6.5 percent by December 2004 and is projected to fall below 6 percent by end-2005 reflecting the strong economic rebound, it remained considerably higher than the pre-1997 levels. Structural unemployment appears to have increased, reflecting skills mismatches stemming from globalization and closer integration with the Mainland, which has reduced the relative demand for unskilled labor.

3. In recent years, the government has taken a number of measures to address the skills mismatch problem and improve labor market performance. The measures include increasing the number of professionals through admission schemes of talents and professionals in the short run and education reforms in the long run, which should, in turn, increase demand for local services that will absorb low-skilled workers.

4. This paper reviews recent labor market developments and the government’s policy response. Section B outlines the major effects of rising integration with the Mainland on Hong Kong SAR’s labor market. Section C describes the measures taken by the government to address these challenges. Section D concludes.

B. Rising Integration with the Mainland and Hong Kong SAR’s Labor Market

5. High operating costs in Hong Kong SAR led to the outsourcing of low value-added manufacturing activities to the PRD from the late 1970s onwards. When the Mainland authorities began their reform program in 1978, Hong Kong SAR already had the highest operating costs among the “four dragons.”2 Apart from an abundant supply of land and labor, geographical proximity made the PRD a natural location for Hong Kong SAR to outsource its low value-added activities.3 Between 1978 and the mid-1990s, the relocation of factories to the PRD caused more than 500,000 factory jobs to move across the border. As a consequence, the share of manufacturing employment in total employment in Hong Kong SAR dropped from 38 percent in 1982 to 11 percent in 1996.

6. As a result of this outsourcing, demand for Hong Kong SAR’s services blossomed. The large industrial base in the PRD created by Hong Kong SAR investment generated a jump in demand for Hong Kong SAR-based services since the Mainland’s service sector was at that time underdeveloped. By transforming itself into the main service hub for Mainland China, many new jobs were created in Hong Kong SAR’s tertiary sector, and a low average unemployment rate of 2½ percent was maintained despite the severe job loss in the manufacturing sector during the period.

7. From the mid-1990s onwards, service sector jobs began to migrate as well, as Hong Kong SAR lost its service supply monopoly to the Mainland. Given that the bulk of manufacturing operations had already been relocated, only around 150,000 manufacturing jobs were lost between 1996 and 2003. However, as Mainland China moved up the value-added chain, relatively low-skilled service sector jobs began to move across the border as well. A notable case is the diversion of Guangdong province’s trade and international cargo from Hong Kong SAR ports to ports in Shenzhen, which rose to prominence in the 1990s, again with the help of Hong Kong SAR-based investment. The share of Mainland exports that pass through Hong Kong SAR jumped from 5 percent in 1979 to a peak of 66 percent in 1993, but declined thereafter to 28 percent in 2003. Employment in Hong Kong SAR’s import/export trades peaked at about 18 percent of total employment in 1996, and declined to 16 percent in 2003.4 Hong Kong SAR still retains a comparative advantage in high value-added services such as in the financial sector.

8. There has been a marked increase in structural unemployment since the mid-1990s. Specifically, the structural unemployment rate is estimated to have risen from 2 to 3 percent in the late 1980s to 3½ to 5 percent in recent years.5 As the quality of human capital in the Hong Kong SAR economy did not keep pace with the need of economic restructuring, a skills mismatch resulted. This is evidenced on one hand by the much higher unemployment rate in the lower-skilled segments of the labor market and amongst workers that have lower educational attainment (Figures IV.1 and IV.2), and on the other hand by an increase in wage disparity and a rise in the return to education (Iakova, 2001).

Figure IV.1.
Figure IV.1.

Unemployment Rate by Occupation Category

Citation: IMF Staff Country Reports 2005, 062; 10.5089/9781451816914.002.A004

Figure IV.2.
Figure IV.2.

Unemployment Rate by Educational Attainment

Citation: IMF Staff Country Reports 2005, 062; 10.5089/9781451816914.002.A004

9. The inflow of low-skilled arrivals from the Mainland has aggravated the skills mismatch problem.6 One aspect of closer integration with the Mainland is exemplified by the immigrants from the Mainland through the One-Way Permit Scheme.7 The 2001 Population Census data showed that, among new arrivals from the Mainland aged 15 and above, only 30 percent had upper secondary education or higher, compared with 52 percent for the same age group in Hong Kong SAR. From 1999 to 2001, it was estimated that these immigrants contributed to some 30 percent of the annual growth of the labor force. The task of training and upgrading the skills of adult new arrivals to meet the demand of the local economy poses a serious challenge for Hong Kong SAR.

C. Measures to Address Hong Kong SAR’s Labor Market Challenges

10. Looking ahead, employment challenges created by rising integration between Hong Kong SAR and the Mainland are formidable. According to the Hong Kong SAR Government’s latest projections of manpower requirement and supply, there will be a surplus of 230,000 low-skilled workers and a shortfall of 100,000 highly skilled workers by 2007 (box1).

11. To improve the functioning of the lower-skilled end of the labor market, the government has undertaken the following initiatives, which are aimed at both the supply and demand sides:

  • Providing retraining to disadvantaged workers who are displaced or unemployed. The Employees Retraining Board (ERB) was set up in 1992 to provide retraining to assist low-skilled displaced or unemployed workers in adjusting to changes in the economic environment. By end-December 2004, the ERB had provided retraining to 824,000 persons. About 70 percent of the retrained workers have been able to secure employment.

  • Undertaking infrastructure projects. Most notably, the Government is working closely with the authorities in Macau SAR and Guangdong province on the Hong Kong SAR-Zhuhai-Macau SAR Bridge project. The project will not only facilitate physical linkages amongst the three destinations, but is expected to create considerable employment opportunities for unskilled labor as well.

  • Identifying tourism as a core economic sector. The Government has identified tourism as one of the core economic sectors that Hong Kong SAR will focus on to maintain growth.8 The further development of this sector will increase the demand for relatively lower-skilled workers.

12. In addition, the government has taken the following steps to address the shortage of high-skilled labor:

  • Doubling the proportion of senior secondary school leavers to receive tertiary education within 10 years 9 This will be achieved through education reforms. Since October 2000, the Government has implemented a comprehensive education reform package with a view to better equipping future generations to cope with the advent of a knowledge-based economy. The reform covers a wide range of initiatives, including the curriculum, teaching practices, admission systems and assessment mechanisms.

  • Promoting skills upgrading and continuing education among the existing workforce. In order to help upgrade the skills of in-service workers with secondary or lower education, the government launched the HK$400 million “Skills Upgrading Scheme” in September 2001. Courses are developed through close collaboration between employers, employees, training providers and government officials. The scheme now covers 20 industries. A HK$5 billion Continuing Education Fund was also launched in June 2002 to subsidize the enrolment of adults in continuing education courses. 10

  • Importing talented people and professionals. The Hong Kong SAR Government operates various admission schemes for skilled personnel from overseas and the Mainland. For the admission of foreign professionals, there are no quotas or job sector restrictions and, from 1997 to 2003, an average of about 16,600 foreign professionals have come to work in Hong Kong SAR each year. Similar schemes have been set up for admitting Mainland professionals as well but, due to restrictions, only about 600 applications were approved between December 1999 and July 2003.11 These restrictions were relaxed in mid-2003 and, as a result, the number of professionals from the Mainland admitted to Hong Kong SAR jumped sharply to 4,564 by October 2004. The academic research and education sector absorbs 68 percent of these immigrants.

13. Increasing the supply of highly-skilled workers is likely to have positive spillover effects on the demand for low-skilled workers. There are considerable economic benefits in terms of consumption and creation of jobs, which skilled personnel could bring to Hong Kong SAR. For example, a Hong Kong SAR Government survey showed that, on average, 2.7 new jobs were created by the importation of each talent through the Admission of Talents Scheme during 2000 and 2001. Furthermore, a larger professional sector will increase demand for other personal services.

14. Broader initiatives such as the Closer Economic Partnership Arrangement (CEPA) and Pan-Pearl River Delta Cooperation Initiative are also likely to improve labor market outcomes in Hong Kong SAR.12 Indeed, the Individual Visit Scheme implemented in August 2003 under CEPA has already benefited the tourism industry tremendously: the unemployment rate in wholesale and retail, restaurants and hotels, and transport, dropped from a peak of 10.5 percent, 15.7 percent, and 7.7 percent respectively in mid-2003 to 6.9 percent, 9.5 percent and 4.3 percent respectively within one year.

D. Conclusions

15. As integration with the Mainland deepens, pressures to outsource lower value-added activities are likely to continue. This, combined with the government’s desire to transform Hong Kong SAR into a knowledge-based economy, implies that the demand for professionals and other skilled workers will remain relatively high, and that the skills mismatch problem is likely to persist.

16. The policy challenge is to facilitate the necessary labor market adjustment while minimizing distortions. The policy measures taken to date by the government underscore the view that the “market leads and the government facilitates.” That said, it will be important to maintain a well-targeted and efficient social safety net that protects the most vulnerable members of society, who are most likely to feel the negative effects of integration with the Mainland.

Hong Kong SAR Government’s Report on Manpower Projections through 2007

The Hong Kong SAR Government has undertaken periodic reviews and updates of its manpower requirements since 1999. The latest manpower projection (through 2007) was carried out in 2002.

The projections show that manpower requirements will increasingly favor the higher-skilled, better-educated and more experienced workers. The finance, insurance, real estate and business services sectors are expected to have the fastest increase in manpower requirements. In contrast, the manpower requirement for the local manufacturing sector is projected to continue to shrink. The manpower requirements for managers and professionals are projected to grow moderately, compared to a decline projected for workers below these levels (e.g. clerks, plant and machine operators and assemblers, etc,). Manpower requirements for persons at post-secondary level and at first degree level and above are projected to grow strongly. At the same time, manpower requirements for persons at lower secondary level and below and at upper secondary level is projected to decline.

In addition, the educational attainment requirement within different occupational categories is expected to be upgraded across-the-board. For example, there will be increase in demand for managers and administrators who have attained first degree level and above, and workers in elementary occupations (e.g. messengers, watchmen, etc) to have attained upper secondary level.

The projections of manpower requirements and supply suggest that in 2007, there will be a surplus in manpower at low education levels but a distinct shortfall in manpower at high education level. In other words, skill mismatch will be the major challenge facing the labor market in the coming future.

Projected manpower resource balance by broad educational attainment in 2007

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Excluding foreign domestic helpers and imported workers.

Including all employed Hong Kong SAR residents, regardless of their place of work, and excluding foreign domestic helpers.

Including the upper secondary and craft levels.

Including the matriculation, technician and sub-degree levels.

Including the first degree and postgraduate levels.

Surplus in manpower supply against requirement.

Shortfall in manpower supply against requirement.


  • Fan, Kelvin, 2004, “Sources of Unemployment,” Hong Kong Monetary Authority Quarterly Bulletin, June.

  • Hong Kong SAR Government, 2002, “Report on the Task Force of Population Policy”.

  • Hong Kong SAR Government, 2003, “Report on 2002 Establishment Survey on Manpower Training and Job Skills Requirements.”

  • Hong Kong SAR Government, 2003, “Report on Manpower Projection to 2007”, June.

  • Iakova, Dora, 2004, “Trends in Wage Inequality, 1981-2001”, IMF Occasional Paper 226 Hong Kong SAR: Meeting the Challenges of Integration with the Mainland.

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  • Kwan, Vincent, 2004, “Employment Challenges,” Hang Seng Economic Monthly, Hang Seng Bank, March.

  • Kwan, Vincent, 2001, “Processing Relocation: From Manufacturing to Services,” Hang Seng Economic Monthly, Hang Seng Bank, October.

  • Lui, Francis T., and William W. Chow, 2004, “Economic Outlook 2004,” Hong Kong’sEconomic Forecast, Center for Economic Development, Hong Kong University of Science and Technology, January.

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  • Sung, Yun-Wing, 2004, “Hong Kong’s Economic Integration with the Pearl River Delta: Quantifying the Benefits and Costs,” study commissioned by the Central Policy Unit of the Hong Kong SAR government, February.

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  • Yam, Denise, 2004, “Pan-Pearl River Delta: From Diversity to Cooperation,” Greater China Economics, Morgan Stanley, September.


Prepared by Ida Liu Kit-ying of the IMF Resident Representative Sub Office in Hong Kong SAR.


The “four dragons” are Hong Kong SAR, Korea, Singapore, and Taiwan.


Firm ownership and control remained with Hong Kong SAR residents, meaning that the impact on GDP stemming from this outsourcing was much greater than on GNP.


There is considerable anecdotal evidence of migration of low-end services jobs in other sectors to the Mainland. For example, the number of persons engaged in the radio paging services sector dropped from the peak of nearly 9,000 in 1995 to less than 300 in 2004 is due in part to the relocation of radio paging companies to Shenzhen and Guangzhou.


The HKMA estimates the structural unemployment rate at 3½ to 4½ percent while the Hong Kong University of Science and Technology puts it at around 5 percent. In the services sector, which employs 85 percent of the labor force, the HKMA estimates that the structural unemployment rate has risen from 1½ percent to 2¾ percent between 1982 and 2003.


“New arrivals” are defined as immigrants who have resided in Hong Kong SAR for less than seven years.


The scheme is devised primarily to facilitate family reunion. Indeed, many new families are created every year through intermarriage between Hong Kong SAR permanent residents and Mainland residents.


The other sectors include financial services, producer services, and logistics.


The government expanded basic education opportunities in the late 1970’s by providing free and universal education, but only up to the level of junior secondary school. By 2003, only about 27 percent of the population of aged 15 and above have attained post-senior secondary qualifications.


The specific sectors include logistics, financial services, business services, tourism, language, design and interpersonal and intrapersonal skills for the workplace.


Restrictions include not allowing successful applicants under the Admission of Mainland Professional Scheme to bring in their dependants, and limiting the scheme to applicants in the information technology and the financial services sectors.


See Chapter I for a detailed analysis of these initiatives.