IMF Executive Board Concludes 2023 Article IV Consultation Discussions with the People’s Republic of China—Hong Kong SAR

IMF News, May 31, 2023

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Published: May 31, 2023

Executive summary

The Executive Board concluded the 2023 Article IV consultation discussions with Hong Kong SAR and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
The Hong Kong SAR economy is recovering strongly with post-COVID normalization of economic activity.
Near-term risks to the growth outlook are balanced; systemic risk in the financial sector is manageable given significant buffers.

Economic outlook and inflation

Real GDP is projected to grow by 3.5 percent in 2023.
Exports of tourism services and private consumption are expected to normalize as border control and other COVID-related restrictions have been lifted in both Hong Kong SAR and Mainland China.
CPI inflation is expected to gradually rise to about 2¼ percent by the end of 2023.
On a preliminary basis and adjusting for remaining transitory pandemic-related factors, the external position in 2022 is assessed to be broadly in line with the level implied by medium-term fundamentals and desirable policies.

Risks and scenarios

Downside risks:
- A sharper-than-expected global growth slowdown.
- Escalation of regional conflicts and resulting disruptions in trade.
- A sharp rise in global risk premia amid renewed stress in the global banking system and further tightening of monetary policy in major advanced economies, with adverse spillovers through financial channels.
Upside scenario:
- Transition to the post-pandemic new normal in both Hong Kong SAR and Mainland China could be smoother and more rapid than anticipated with strong pent-up demand, leading to a faster-than-expected economic recovery including inbound tourism.

Financial sector assessment and recommendations

The financial system remains resilient and continues to serve as an international financial center, supported by strong institutional frameworks and substantial capital and liquidity buffers.
The Linked Exchange Rate System continues to function smoothly, providing a solid anchor to the economy and the financial system.
Recommendations:
- Further strengthen the robust regulatory and supervisory framework to maintain financial sector resilience amid renewed stress in the global banking system.
- Continue supervisory focus on ensuring banks’ proper credit loss recognition and provisioning as credit risk materializes after years of domestic economic contractions, rising interest rates, and ongoing stress in Mainland China’s real estate sector.
- Establish a comprehensive and risk-based regulatory framework related to virtual assets to safeguard financial stability and ensure investor protection.

Fiscal policy recommendations

With remaining slack in the economy, gradual fiscal consolidation would help secure a sustained and inclusive recovery.
Pandemic-era measures to support vulnerable households and affected SMEs could be unwound gradually.
Additional household support could be provided in a targeted manner to low-income households.
Expand social safety nets by:
- Further increasing the adequacy and coverage of social assistance benefits.
- Introducing a dedicated unemployment benefit system to enhance automatic stabilizers.
Undertake a comprehensive tax reform over the medium term to broaden the tax base and provide a stable source of revenue to meet long-term spending needs while ensuring fiscal sustainability.

Housing, macroprudential measures, and innovation

Housing prices declined by about 16 percent by end-2022 from the peak in September 2021 and have started to recover in early 2023.
Increasing housing supply is critical to resolving the structural supply-demand imbalance.
Housing-related macroprudential measures should be maintained and can be recalibrated if housing-related stress materializes.
The BSD and NRSD, assessed to be CFM/MPMs, need to be phased out once systemic risk from non-resident and speculative demands dissipates.
Promote innovation and technological development as additional growth engines amid geoeconomic fragmentation.
The newly launched government investment fund should operate with a clear mandate and strict standards for governance, accounting, and public reporting to minimize potential capital misallocation while effectively supporting new innovative industries.

Selected economic indicators (highlights from table)

Real GDP (percent change): 2018: 2.8; 2019: -1.7; 2020: -6.5; 2021: 6.4; 2022: -3.5; 2023: 3.5; 2024: 3.1; 2025: 2.9; 2026: 2.7.
Private consumption (percent change): 2018: 5.3; 2019: -0.8; 2020: -10.6; 2021: 5.6; 2022: -1.0; 2023: 5.8; 2024: 2.4.
Output gap (in percent of potential GDP): 2018: -2.5; 2019: -7.3; 2020: -2.3; 2021: -3.9; 2022: -2.1; 2023: -1.1; 2024: -0.7; 2025: -0.3.
Unemployment rate (percent, period average): 2018: 5.2; 2019: 4.3; 2020: 3.4; 2021: 3.3; 2022: 3.2; 2023: 3.0.
Inflation (consumer prices, percent change): 2018: 1.9; 2019: 2.3.
Consolidated budget balance (percent of GDP) 2/: 2018: -9.4; 2019: -6.7; 2020: -4.0.
Revenue (percent of GDP): 2018: 21.2; 2019: 20.8; 2020: 21.1; 2021: 24.2; 2022: 22.0; 2023: 21.5; 2024: 23.2; 2025: 24.0; 2026: 24.6.
Expenditure (percent of GDP): 2018: 18.8; 2019: 21.4; 2020: 30.5; 2021: 28.7; 2022: 25.5; 2023: 24.3; 2024: 23.8; 2025: 23.6.
Fiscal reserves (as of end-March, percent of GDP): 2018: 41.3; 2019: 40.8; 2020: 34.7; 2021: 33.4; 2022: 29.5; 2023: 26.1; 2024: 25.1; 2025: 25.0; 2026: 25.9; 2027: 27.4; 2028: 28.3.
Loans for use in Hong Kong SAR (excl. trade financing, percent change): 2018: 7.4; 2019: 0.9; 2020: 8.6; 2021: 8.4.
House prices (year-on-year percent change for last quarter): 2018: -13.6; 2019: 5.7; 2020: 7.3.
Credit-to-GDP gap 3/: 2018: 12.5; 2019: 23.9; 2020: 11.5; 2021: -14.5; 2022: -11.3; 2023: -7.4.
Current account balance (percent of GDP): 2018: 7.0; 2019: 11.8; 2020: 10.7; 2021: 8.0; 2022: 6.5; 2023: 5.5; 2024: 4.5.
Foreign exchange reserves (in billions of U.S. dollars, end-of-period): 2018: 425; 2019: 441; 2020: 492; 2021: 497; 2022: 424; 2023: 420; 2024: 432; 2025: 443; 2026: 455; 2027: 464; 2028: 471.
Foreign exchange reserves (in percent of GDP): 2018: 117; 2019: 121; 2020: 143; 2021: 135; 2022: 110; 2023: 107; 2024: 104; 2025: 102; 2026: 99; 2027: 96.
Net international investment position (percent of GDP): 2018: 354; 2019: 615; 2020: 574; 2021: 486; 2022: 468; 2023: 451; 2024: 434; 2025: 419; 2026: 404; 2027: 390.
Market rate (HK$/US$, period average): 2018: 7.839; 2019: 7.836; 2020: 7.757; 2021: 7.774; 2022: 7.832.
Real effective rate (period average, 2010=100): 2018: 113.2; 2019: 117.7; 2020: 117.2; 2021: 111.8; 2022: 115.4.

IMF Executive Board concludes Article IV consultation discussions with the People’s Republic of China—Hong Kong Special Administrative Region; staff appraisal endorsed (Press Release No. 23/186, May 31, 2023).