The service sector dominates the Hong Kong economy. In the absence of a significant agriculture and a large and growing industrial base, it has become the largest economic sector in terms of income-generation, employment, and contribution to GDP. The contraction of the manufacturing sector has contributed to further enlargement of the service sector to absorb the growing number of those laid off from manufacturing jobs, a continuing trend since the 1980s. So far, this strategy has been successful, but there are concerns about the future ability of the service sector to absorb manufacturing job losses, especially because many of the affected workers are middle-aged and/or unskilled or poorly skilled. The contribution of services to GDP was 84.7 percent (equal to US$129 billion) in 1998, when they employed roughly the same proportion of the workforce.
The service sector consists of a wide range of companies of various sizes—local and foreign, including multinational corporations (MNCs)—interested in Hong Kong for its many opportunities for service activities. The major services are financial, trade, tourism, retail, real estate, and transportation.
Finance, insurance, real estate, and investment services are the most viable economic activities, which have made Hong Kong a major global financial center. These services accounted for 26.2 percent of GDP and employed 390,454 people (11.6 percent of the workforce) in 1998. The number of employees rose to 415,326 (11.9 percent of the workforce) in 1999, and to 429,300 (about 12 percent) in June 2000.
Banking is the heart of Hong Kong's financial services. In terms of the volume of external transactions, Hong Kong is the ninth-largest international banking center in the world. It is home to many local and foreign-owned banks. Banking makes a major contribution to the growth of the Hong Kong economy, and the huge revenues generated in this sector help the territory to tolerate fluctuations in its manufacturing exports and pay its foreign debt.
Hong Kong does not have a central bank, but the Hong Kong Monetary Authority (HKMA) assumes some of the functions of a central bank, namely monetary management, supervision of the banking sector, and regulating financial institutions. However, the issuance of bank-notes is the task of 3 banks: the Hong Kong and Shanghai Banking Corporation (HSBC), the Standard Chartered Bank, and the Bank of China. In 2000, Hong Kong's banking system consisted of 285 authorized banks and 127 representative offices of other financial institutions. Of Hong Kong's 158 licensed (full-service) banks, 125 were registered outside Hong Kong.
Most major American, Japanese, and European banks operate in Hong Kong. There are also Thai and Taiwanese banks as well as 3 major state-owned banks from mainland China. In general, foreign banks concentrate mainly on large business clients (such as MNCs), unlike local banks, which tend to be more interested in small- and medium-size clients. Apart from its importance as an international trading center, Hong Kong's access to the growing market of China is the major reason for its attractiveness to foreign banks, through which they can enter the Chinese market. Foreign banks have a free hand for banking operations. The only restriction on their activities is a limit on their branch operations, meaning that in 2000 they could have only 3 branches.
The large and efficient insurance industry of Hong Kong is among the best such industries in Asia. This growing segment of the economy consists of 204 authorized insurers, of which 148 are general insurers, 43 long-term insurers (mostly life insurers), and 19 combined life and non-life insurers. The insurance companies include foreign ones, e.g., American (22) and British (18). In general, the industry has experienced growth over the last decade, excluding the year 1999, when the economy was not performing well. Its average annual growth rate was 10.7 percent during the period 1993 to 1998.
Hong Kong's retail sector is well developed. The total value of retail sales was about US$25 billion in 1998, equal to 15 percent of GDP. The industry includes a wide range of establishments, including small privately-owned stores, foreign department store chains (e.g., British and Japanese), supermarkets, and domestic retail chains. There are also many large shopping malls housing a wide range of stores. The retail industry includes a large network of restaurants, including international franchises.
Hong Kong's transportation industry, including storage and communications, has developed over the last few decades to meet growing demand in international trade and internal movement of goods and people. As mentioned previously, the territory has an advanced land, sea, and air transportation infrastructure. This industry is a major contributor to GDP, accounting for 9.1 percent in 1998 (equal to US$14.88 billion), and a large employer with 175,000 employees in the same year. The number of employees jumped to 180,600 in June 2000, which indicated 3.2 percent growth from 1998.
The vivid night-life of Hong Kong, including its numerous night clubs and restaurants, and its low-priced imported goods (thanks to the absence of tariffs) attracts millions of tourists to this small territory every year. To host and entertain them, Hong Kong's tourist industry has become extensive and highly developed. The industry makes a significant contribution to GDP (4.15 percent in 1998 and 4.09 percent in 1999) and generates employment for a large portion of the workforce. Restaurants and hotels are major employers of this industry. Together with trade, they accounted for 27.2 percent (equal to 913,070 jobs) and 28.8 percent (equal to 1,002,263 jobs) of the workforce in 1998 and 1999, respectively. There are many hotels, including local and foreign five-star hotels, with 35,420 total rooms in 1999, which are fully capable of providing high-quality services to tourists. In the same year, 10,678,000 tourists visited Hong Kong and generated US$6.5 billion in revenues. In comparison to 1998, this showed an increase of 1,103,000 tourists, but a decrease of US$300 million in revenue. The major factors responsible for this phenomenon were an increase in the number of low-income Chinese visitors at the expense of high-income non-Chinese visitors that led to an overall fall in spending per head from US$715 in 1998 to US$615 in 1999.
A decline in the number of non-Chinese tourists and in the average amount of tourists' spending has created a concern about the declining interest in Hong Kong as a tourist destination. Apart from short-term reasons, 2 major factors endanger the industry in the long run. One factor is the existence of less expensive destinations in Asia offering the same quality of services (such as Singapore). Another is the expected easing of travel restrictions between China and Taiwan. This development may diminish the attractiveness of Hong Kong for the Chinese and especially for high-spending Taiwanese who have had to go through points such as Hong Kong to get to each other's countries, because of the current travel restrictions between China and Taiwan. To address this concern and to ensure a significant increase in tourism, the Hong Kong government has sought to attract more tourists through a joint venture with an American company, Walt Disney, to establish a theme park. It is expected to bring 5 million visitors in its first year of operation (2005) and 10 million by 2020.