Public Information Notice: IMF Concludes Article IV Consultation held in 1998 with the People's Republic of China in Respect of the Hong Kong Special Administrative Region
IMF News, February 11, 1999
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- Published: February 11, 1999
Background and economic impact of the 1997–98 shocks
- Asian financial crisis severely affected Hong Kong SAR; Hong Kong dollar came under speculative pressure on several occasions since October 1997.
- Asset price bubble deflated; by mid–1998 the local stock index and residential property prices had fallen by over 50 percent from their peak in 1997, reducing wealth by more than 100 percent of GDP.
- External demand declined sharply, domestic exports and reexports declined, private consumption turned negative, and private investment decelerated.
- Real GDP contracted by 7 percent year-on-year in Q3 1998.
- Consumer price index began to decline in July 1998, with inflation turning negative in October 1998.
- Wage growth moderated; unemployment rate rose to 5¾ percent, the highest level in 17 years.
Policy response and market operations
- 1998 budget (announced February) included tax concessions and higher capital spending.
- In June 1998, government land sales suspended for remainder of fiscal year; additional tax cuts and spending increases announced.
- Government intervened directly in stock and futures markets in August 1998 to counter heavy speculative attacks and perceived market manipulation.
- Stock market operations have since ceased; regulatory changes to enhance transparency and increase cost of speculative activity announced and some implemented.
- Independent company established to manage and work out a liquidation strategy for the government’s share holdings.
- Technical measures introduced to strengthen transparency and operation of the linked exchange rate system, including a rediscount facility aimed at reducing interest rate volatility.
Financial market developments and banking sector
- Financial conditions stabilized aided by appreciation of the yen, interest rate cuts in major industrial countries and mainland China, and steady mainland China performance.
- Interbank interest rates eased; at the shorter end are at levels equal to those in the U.S.
- Year-on-year broad money growth fell to 10½ percent at end–1998, from 15 percent in mid–1997.
- Money and credit growth has begun to pick up, although credit growth remains very weak.
- Local stock index at end–January 1999 was around 40 percent higher than in the trough in mid–August 1998.
- Number of property transactions rose sharply in November 1998 and remained stable in December 1998.
- Banking system financial position remains strong, though nonperforming loans have risen and profits have come under pressure.
- Offshore lending fell as many foreign banks, especially Japanese banks, scaled back Hong Kong SAR branches’ lending operations.
Executive Board assessment and guidance
- Directors noted Hong Kong SAR’s strong fundamentals but severe effects from regional shocks, asset-price adjustment, and pressures on the linked exchange rate system.
- Rapid adjustment demonstrated economic flexibility; asset prices and labor costs fell, inflation declined, and external competitiveness improved with appreciation of regional currencies.
- Expectation that recovery signs could emerge in the second half of 1999, but short-term outlook remained uncertain.
- Strong support for Hong Kong SARG’s commitment to maintaining the linked exchange rate system and for actions to defend it, including allowing interest rates to rise.
- Concern expressed about government operations in stock and futures markets: potential conflicts of interest and technical problems should be addressed quickly.
- Recent establishment of an independent corporation to manage and dispose of government holdings welcomed.
- Directors stressed Hong Kong SARG should refrain from further intervention in equity markets to preserve a rules-based policy framework.
- Call for increased transparency and data disclosure by private investors and enhanced public sector transparency.
- Support for:
- Strengthening transparency in securities market regulation.
- Review of existing legislation and improved coordination among regulatory bodies.
- Tightening enforcement against illegal trading.
- Strengthening regulatory and supervisory framework for nonbank financial institutions.
- Closer monitoring of corporate sector financial positions.
- Fiscal policy guidance:
- Commended consistent fiscal prudence and accumulation of substantial fiscal reserves.
- Suggested it would be undesirable to tighten fiscal policy in the next fiscal year given growth and unemployment outlook for 1999.
- Recommended any deficit be set within a medium-term framework aimed at returning to budget balance and be clearly temporary.
- Additional revenues from asset sales should be used to rebuild fiscal reserves.
- Banking system and systemic risks:
- Financial position of banks and regulatory/supervisory quality noted as high by international standards and further strengthened.
- Pressures on banks expected to continue in 1999 but situation viewed as manageable.
- Impact of GITIC bankruptcy and associated mainland-related enterprise pressures should be carefully monitored.
- High exposure to property lending calls for close monitoring of banks and the Hong Kong Mortgage Corporation.
- Labor market and social policy:
- Unemployment to remain a pressing issue.
- Endorsement of measures to accelerate infrastructure and labor-intensive projects and expand retraining and job placement schemes.
- Comprehensive Social Security Assistance Scheme provides a safety net while seeking to avoid reducing labor market flexibility; support for maintaining these principles in review.
Data provision and transparency
- Directors considered Hong Kong SAR’s data provision to the Fund adequate for surveillance and commended dissemination of a wide range of high quality economic and financial data on a timely basis.
- Looked forward to publication of data on external current and capital accounts in 1999, consistent with Hong Kong SAR’s commitment under the SDDS.
- Urged publication of more timely and detailed fiscal data.
Selected Economic and Financial Indicators (People’s Republic of China, Hong Kong Special Administrative Region)
- Real GDP (percent change): 1995: 3.9; 1996: 4.6; 1997: 5.3; 1998: -5.0 (Staff estimates).
- Real domestic demand: 1995: 7.1; 1996: 2.5; 1997: 8.6; 1998: -6.2.
- Foreign balance (contribution): 1995: -3.3; 1996: 2.0; 1997: -3.6; 1998: 1.6.
- Saving-investment balance (percent of GDP): 1995: -4.3; 1996: -1.4; 1997: -3.5; 1998: -0.4.
- Gross domestic saving: 1995: 30.5; 1996: 30.7; 1997: 31.9; 1998: 33.
- Gross domestic investment: 1995: 34.8; 1996: 32.1; 1997: 35.4; 1998: 33.4.
- Inflation (percent change) — Consumer prices: 1995: 8.7; 1996: 6.0; 1997: 5.7; 1998: 2.6.
- GDP deflator: 1995: 5.8; 1996: 7.2; 1997: 3.6; 1998: (blank).
- Employment (percent change): 1995: 1.1; 1996: 3.5; 1997: 1.8; 1998: (blank).
- Unemployment rate (percent): 1995: 3.2; 1996: 2.8; 1997: 2.2; 1998: 4.7.
- Real Wages: 1995: -1.0; 1996: 0.4; 1997: 1.0; 1998: ...
- Government budget (percent of GDP) — Fiscal year begins April 1:
- Revenue: 1995: 16.7; 1996: 17.5; 1997: 20.4; 1998: 15.6.
- Expenditure: 1995: 17.0; 1996: 15.3; 1997: 14.4; 1998: 18.3.
- Consolidated budget balance: 1995: -0.3; 1996: -2.7; 1997: (blank); 1998: (blank).
- Note: Excludes change in the net worth of the Land Fund.
- Reserves at March 31: 1995: 13.7; 1996: 14.6; 1997: 34.0; 1998: 31.6.
- Fiscal reserves at end-FY 1997 include the HK$203 billion balance in the Land Fund (15.1 percent of GDP).
- Money and credit (percent change, end-period):
- Narrow money (M1): 1995: 14.2; 1996: (blank); 1997: (blank); 1998: (blank).
- Broad money (M3): 1995: 10.5; 1996: 8.2; 1997: 10.6; 1998: (blank).
- Loans for use in Hong Kong SAR: 1995: 11.1; 1996: 17.1; 1997: 24.4; 1998: -3.9.
- Interest rates (percent, end-period):
- Best lending rate: 1995: 8.8; 1996: 8.5; 1997: 9.5; 1998: 9.0.
- Three-month HIBOR: 1995: 5.9; 1996: 5.5; 1997: 9.1; 1998: 5.1.
- Merchandise trade (percent change):
- Export volume: 1995: 12.0; 1996: 4.8; 1997: 6.1; 1998: -3.2.
- Domestic exports: 1995: 1.9; 1996: (blank); 1997: -8.4; 1998: -4.9.
- Reexports: 1995: 14.3; 1996: 7.5; 1997: 6.8; 1998: -2.9.
- Import volume: 1995: 4.3; 1996: (blank); 1997: -4.2; 1998: (blank).
- Export value: 1995: 14.9; 1996: 4.0; 1997: 4.2; 1998: -7.4.
- Import value: 1995: 19.2; 1996: 3.0; 1997: 5.2; 1998: -11.5.
- External balance (in billions of US$):
- Merchandise trade balance: 1995: -19.6; 1996: -18.4; 1997: -21.1; 1998: -11.0.
- In percent of GDP: 1995: -14.1; 1996: -11.9; 1997: -12.1; 1998: -6.4.
- Goods and nonfactor services balance: 1995: -6.1; 1996: -2.2; 1997: -6.0; 1998: 0.0.
- Foreign exchange reserves (in billions of U.S. dollars, end of period): 1995: 55.4; 1996: 63.8; 1997: 92.8; 1998: 89.6.
- (In months of retained imports): 1995: 10.7; 1996: 14.7; 1997: 17.7; 1998: (blank).
- Sources: Data provided by the Hong Kong SAR authorities; and IMF staff estimates and projections.
- Notes:
- 1 Staff estimates.
- 2 Fiscal year begins April 1.
- 3 Excludes change in the net worth of the Land Fund.
- 4 Fiscal reserves at end-FY 1997 include the HK$203 billion balance in the Land Fund (15.1 percent of GDP).
- 5 National account basis.
Public Information Notice — February 11, 1999; IMF Executive Board considered the report on January 29, 1999.