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The road to recovery
KPMG's Hong Kong Budget Commentary

Hong Kong, 24 February 2010

The timing of this latest budget, presented by the Financial Secretary, comes off the back of an economy hard hit by the global financial crisis and against a background of massive stimulus measures launched by governments around the world. In Hong Kong, the Government introduced a number of stimulus measures to combat the global financial crisis, including providing liquidity to banks; a full deposit guarantee for depositors; loan guarantee schemes for small and medium enterprises; and fiscal stimulus, job creation and relief measures totalling HKD 87.6 billion. Although the impact of the global financial crisis was much more serious on global trade and growth than the Asian financial crisis in the late 1990's, the Hong Kong economy, which is heavily reliant on global trade and financial services, proved remarkably resilient.

For 2009 as a whole, GDP is forecast to grow between 4 to 5 percent for the year. Hong Kong's fiscal reserves are estimated to be HKD 483 billion by the end of March 2011, representing approximately 28 percent of GDP and equivalent to 18 months of government expenditure.

The Government's stimulus measures have focused on maintaining and further improving employment in Hong Kong. The jobless rate for the latest quarter of 2009-10 remained at 4.9 percent, the lowest since the beginning of 2009. The spectre of deflation, which proved so painful in the late 1990's and early 2000's, has also eased in Hong Kong with mild inflation expected to return this year. The underlying inflation rate for 2010 as a whole is forecast to average 1.5 percent, while the average headline inflation rate will be 2.3 percent.

In his Budget Speech, the Financial Secretary reaffirmed the mantra of "Market Leads, Government Facilitates" and "Big Market, Small Government" and that the Government will continue to create conditions for market development. These include maintaining the rule of law and a simple and low tax regime, nurturing talent, investing in infrastructure, and helping enterprises tap markets outside Hong Kong. This is a welcome focus on the fundamentals as is the Government's continued investment in education and training.

The Hong Kong property market rebounded strongly in 2009, fueled by record low interest rates and a massive influx of capital to Hong Kong. This has led to fears of a potential bubble developing in asset prices. To address public concerns over a bubble forming in the property market, the Government has stated that it would ensure a "healthy and stable" development of the property market by implementing four measures. First, it will address the fundamental issue of the supply of properties entering the market. Second, it will increase the transaction cost of property speculation with appropriate tax measures. Third, it will ensure transparency in property transactions and transaction prices to facilitate effective operation of the market. Lastly, the Government will strive to prevent excessive expansion in mortgage lending.

The Financial Secretary only announced a limited number of fiscal incentives, which largely reflected 'informed' comments made in the media prior to the Budget annoucement. These included:

• a reduction of 75 percent of Salaries Tax and tax under personal assessment for 2009-10, subject to a ceiling of HKD 6,000;
• a waiver of the business registration fees for one year; and
• a waiver of rates for 2010-11, subject to a ceiling of HKD 1,500 per quarter for each rateable property.

The Financial Secretary noted that the above measures, introduced on top of the current expenditure on health, housing, education and social welfare, should be effective in stimulating the economy and safeguarding social stability and people's livelihood in the aftermath of the financial tsunami. However, he stressed that the exceptional measures employed by the Government cannot continue for too long into the future.

The Financial Secretary foreshadowed a number of amendments to the tax law to encourage the development of Hong Kong's asset management and knowledge based businesses. This is a welcome acknowledgement of the importance tax plays in business decision-making in a competitive world.

About KPMG

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

KPMG China has 12 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Shenzhen, Hong Kong and Macau, with more than 9,000 professionals.

For media enquiries, please contact:

Pearl Fan
Senior Manager, Market Services
KPMG China
Tel: +852 2826 7111
e-Mail: pearl.fan@kpmg.com.hk

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