{
  "title": "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",
  "publication": "IMF News, February 11, 1999",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/pn9910",
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  "summary": "Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies.",
  "publishDate": "1999-02-11",
  "sections": [
    {
      "heading": "Background and economic impact of the 1997–98 shocks",
      "content": "- Asian financial crisis severely affected Hong Kong SAR; Hong Kong dollar came under speculative pressure on several occasions since October 1997.\n- 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.\n- External demand declined sharply, domestic exports and reexports declined, private consumption turned negative, and private investment decelerated.\n- Real GDP contracted by 7 percent year-on-year in Q3 1998.\n- Consumer price index began to decline in July 1998, with inflation turning negative in October 1998.\n- Wage growth moderated; unemployment rate rose to 5¾ percent, the highest level in 17 years."
    },
    {
      "heading": "Policy response and market operations",
      "content": "- 1998 budget (announced February) included tax concessions and higher capital spending.\n- In June 1998, government land sales suspended for remainder of fiscal year; additional tax cuts and spending increases announced.\n- Government intervened directly in stock and futures markets in August 1998 to counter heavy speculative attacks and perceived market manipulation.\n- Stock market operations have since ceased; regulatory changes to enhance transparency and increase cost of speculative activity announced and some implemented.\n- Independent company established to manage and work out a liquidation strategy for the government’s share holdings.\n- Technical measures introduced to strengthen transparency and operation of the linked exchange rate system, including a rediscount facility aimed at reducing interest rate volatility."
    },
    {
      "heading": "Financial market developments and banking sector",
      "content": "- Financial conditions stabilized aided by appreciation of the yen, interest rate cuts in major industrial countries and mainland China, and steady mainland China performance.\n- Interbank interest rates eased; at the shorter end are at levels equal to those in the U.S.\n- Year-on-year broad money growth fell to 10½ percent at end–1998, from 15 percent in mid–1997.\n- Money and credit growth has begun to pick up, although credit growth remains very weak.\n- Local stock index at end–January 1999 was around 40 percent higher than in the trough in mid–August 1998.\n- Number of property transactions rose sharply in November 1998 and remained stable in December 1998.\n- Banking system financial position remains strong, though nonperforming loans have risen and profits have come under pressure.\n- Offshore lending fell as many foreign banks, especially Japanese banks, scaled back Hong Kong SAR branches’ lending operations."
    },
    {
      "heading": "Executive Board assessment and guidance",
      "content": "- 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.\n- Rapid adjustment demonstrated economic flexibility; asset prices and labor costs fell, inflation declined, and external competitiveness improved with appreciation of regional currencies.\n- Expectation that recovery signs could emerge in the second half of 1999, but short-term outlook remained uncertain.\n- 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.\n- Concern expressed about government operations in stock and futures markets: potential conflicts of interest and technical problems should be addressed quickly.\n  - Recent establishment of an independent corporation to manage and dispose of government holdings welcomed.\n  - Directors stressed Hong Kong SARG should refrain from further intervention in equity markets to preserve a rules-based policy framework.\n- Call for increased transparency and data disclosure by private investors and enhanced public sector transparency.\n- Support for:\n  - Strengthening transparency in securities market regulation.\n  - Review of existing legislation and improved coordination among regulatory bodies.\n  - Tightening enforcement against illegal trading.\n  - Strengthening regulatory and supervisory framework for nonbank financial institutions.\n  - Closer monitoring of corporate sector financial positions.\n- Fiscal policy guidance:\n  - Commended consistent fiscal prudence and accumulation of substantial fiscal reserves.\n  - Suggested it would be undesirable to tighten fiscal policy in the next fiscal year given growth and unemployment outlook for 1999.\n  - Recommended any deficit be set within a medium-term framework aimed at returning to budget balance and be clearly temporary.\n  - Additional revenues from asset sales should be used to rebuild fiscal reserves.\n- Banking system and systemic risks:\n  - Financial position of banks and regulatory/supervisory quality noted as high by international standards and further strengthened.\n  - Pressures on banks expected to continue in 1999 but situation viewed as manageable.\n  - Impact of GITIC bankruptcy and associated mainland-related enterprise pressures should be carefully monitored.\n  - High exposure to property lending calls for close monitoring of banks and the Hong Kong Mortgage Corporation.\n- Labor market and social policy:\n  - Unemployment to remain a pressing issue.\n  - Endorsement of measures to accelerate infrastructure and labor-intensive projects and expand retraining and job placement schemes.\n  - Comprehensive Social Security Assistance Scheme provides a safety net while seeking to avoid reducing labor market flexibility; support for maintaining these principles in review."
    },
    {
      "heading": "Data provision and transparency",
      "content": "- 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.\n- Looked forward to publication of data on external current and capital accounts in 1999, consistent with Hong Kong SAR’s commitment under the SDDS.\n- Urged publication of more timely and detailed fiscal data."
    },
    {
      "heading": "Selected Economic and Financial Indicators (People’s Republic of China, Hong Kong Special Administrative Region)",
      "content": "- Real GDP (percent change): 1995: 3.9; 1996: 4.6; 1997: 5.3; 1998: -5.0 (Staff estimates).\n- Real domestic demand: 1995: 7.1; 1996: 2.5; 1997: 8.6; 1998: -6.2.\n- Foreign balance (contribution): 1995: -3.3; 1996: 2.0; 1997: -3.6; 1998: 1.6.\n- Saving-investment balance (percent of GDP): 1995: -4.3; 1996: -1.4; 1997: -3.5; 1998: -0.4.\n- Gross domestic saving: 1995: 30.5; 1996: 30.7; 1997: 31.9; 1998: 33.\n- Gross domestic investment: 1995: 34.8; 1996: 32.1; 1997: 35.4; 1998: 33.4.\n- Inflation (percent change) — Consumer prices: 1995: 8.7; 1996: 6.0; 1997: 5.7; 1998: 2.6.\n- GDP deflator: 1995: 5.8; 1996: 7.2; 1997: 3.6; 1998: (blank).\n- Employment (percent change): 1995: 1.1; 1996: 3.5; 1997: 1.8; 1998: (blank).\n- Unemployment rate (percent): 1995: 3.2; 1996: 2.8; 1997: 2.2; 1998: 4.7.\n- Real Wages: 1995: -1.0; 1996: 0.4; 1997: 1.0; 1998: ...\n- Government budget (percent of GDP) — Fiscal year begins April 1:\n  - Revenue: 1995: 16.7; 1996: 17.5; 1997: 20.4; 1998: 15.6.\n  - Expenditure: 1995: 17.0; 1996: 15.3; 1997: 14.4; 1998: 18.3.\n  - Consolidated budget balance: 1995: -0.3; 1996: -2.7; 1997: (blank); 1998: (blank).\n  - Note: Excludes change in the net worth of the Land Fund.\n- Reserves at March 31: 1995: 13.7; 1996: 14.6; 1997: 34.0; 1998: 31.6.\n  - Fiscal reserves at end-FY 1997 include the HK$203 billion balance in the Land Fund (15.1 percent of GDP).\n- Money and credit (percent change, end-period):\n  - Narrow money (M1): 1995: 14.2; 1996: (blank); 1997: (blank); 1998: (blank).\n  - Broad money (M3): 1995: 10.5; 1996: 8.2; 1997: 10.6; 1998: (blank).\n  - Loans for use in Hong Kong SAR: 1995: 11.1; 1996: 17.1; 1997: 24.4; 1998: -3.9.\n- Interest rates (percent, end-period):\n  - Best lending rate: 1995: 8.8; 1996: 8.5; 1997: 9.5; 1998: 9.0.\n  - Three-month HIBOR: 1995: 5.9; 1996: 5.5; 1997: 9.1; 1998: 5.1.\n- Merchandise trade (percent change):\n  - Export volume: 1995: 12.0; 1996: 4.8; 1997: 6.1; 1998: -3.2.\n  - Domestic exports: 1995: 1.9; 1996: (blank); 1997: -8.4; 1998: -4.9.\n  - Reexports: 1995: 14.3; 1996: 7.5; 1997: 6.8; 1998: -2.9.\n  - Import volume: 1995: 4.3; 1996: (blank); 1997: -4.2; 1998: (blank).\n  - Export value: 1995: 14.9; 1996: 4.0; 1997: 4.2; 1998: -7.4.\n  - Import value: 1995: 19.2; 1996: 3.0; 1997: 5.2; 1998: -11.5.\n- External balance (in billions of US$):\n  - Merchandise trade balance: 1995: -19.6; 1996: -18.4; 1997: -21.1; 1998: -11.0.\n  - In percent of GDP: 1995: -14.1; 1996: -11.9; 1997: -12.1; 1998: -6.4.\n  - Goods and nonfactor services balance: 1995: -6.1; 1996: -2.2; 1997: -6.0; 1998: 0.0.\n- Foreign exchange reserves (in billions of U.S. dollars, end of period): 1995: 55.4; 1996: 63.8; 1997: 92.8; 1998: 89.6.\n  - (In months of retained imports): 1995: 10.7; 1996: 14.7; 1997: 17.7; 1998: (blank).\n- Sources: Data provided by the Hong Kong SAR authorities; and IMF staff estimates and projections.\n- Notes:\n  - 1 Staff estimates.\n  - 2 Fiscal year begins April 1.\n  - 3 Excludes change in the net worth of the Land Fund.\n  - 4 Fiscal reserves at end-FY 1997 include the HK$203 billion balance in the Land Fund (15.1 percent of GDP).\n  - 5 National account basis.\n\nPublic Information Notice — February 11, 1999; IMF Executive Board considered the report on January 29, 1999.\n\n---\n\n\n References\n\n- People's Republic of China - Hong Kong Special Administrative Region and the IMF\n- Public Information Notices\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn9910"
    }
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    "Published: February 11, 1999",
    "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.",
    "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 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.",
    "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.",
    "Call for increased transparency and data disclosure by private investors and enhanced public sector transparency.",
    "Support for:",
    "Fiscal policy guidance:",
    "Banking system and systemic risks:",
    "Labor market and social policy:",
    "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.",
    "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:",
    "Reserves at March 31: 1995: 13.7; 1996: 14.6; 1997: 34.0; 1998: 31.6.",
    "Money and credit (percent change, end-period):",
    "Interest rates (percent, end-period):",
    "Merchandise trade (percent change):",
    "External balance (in billions of US$):",
    "Foreign exchange reserves (in billions of U.S. dollars, end of period): 1995: 55.4; 1996: 63.8; 1997: 92.8; 1998: 89.6.",
    "Sources: Data provided by the Hong Kong SAR authorities; and IMF staff estimates and projections.",
    "Notes:",
    "[People's Republic of China - Hong Kong Special Administrative Region and the IMF](http://www.imf.org/external/country/HKG/index.htm)",
    "[Public Information Notices](https://www.imf.org/en/news/searchnews)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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