International Monetary Fund: Hong Kong Special Administrative Region. Report No. 16/17

hong kongOn January 11, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation discussions1 with Hong Kong Special Administrative Region (SAR). Hong Kong SAR’s growth is expected at 2.25 percent in 2015, with domestic demand acting as the principal source of momentum. Growth is likely to pick up modestly to 2½ percent in 2016, with a smaller drag from external demand reinforcing resilient domestic demand. Inflation has declined and is expected to remain below 3 percent in 2015/16 on softer commodity prices. The current account has dropped to around 2.50 percent of GDP, but is projected to improve to around 3½ percent over the medium term as the global economy recovers.

The economy has operated with low interest rates for seven years and is now likely to see rates increase with the Fed liftoff. Generally, favorable spillovers from Mainland China thus far may also turn more challenging going forward with the ongoing transition to slower, but more sustainable, growth in the Mainland. The domestic property sector has experienced a renewed run-up in prices since mid-2014, but there are some signs evident now of a pause in momentum.

Considering the fiscal and financial buffers in place in Hong Kong SAR, these risks are likely to have limited impact on the economy and financial system provided the increase in interest rates is gradual (and in line with the path envisaged in the U.S. Federal Reserve’s FOMC median forecasts for the Federal Funds rate), and Mainland China’s growth slows in orderly fashion. Nevertheless, if growth slows more than expected in early 2016, fiscal policy will need to provide additional support in the February budget with an emphasis on expanded relief measures for vulnerable households, small businesses, and accelerated urban renewal and infrastructure spending where possible. While property prices are showing some early signs of leveling off, the propensity for further increases remains because of the underlying shortfall in supply. Sustained efforts to ensure that the targets of the 2014 Long-Term Housing Strategy are met will be important for managing public expectations regarding supply and affordability.

Hong Kong SAR has a strong track record of filling regulatory and data gaps, and assessing systemic risks in the financial system. Essential infrastructure support for healthy market development has been provided, for instance in offshore RMB services. The resilience of the economy and financial system was displayed during the past summer when markets functioned in orderly fashion even as volatility in equity and currency markets increased substantially after the correction in the Mainland indices.

Further strengthening aspects of the defenses will require completing the process underway for enacting legislation on a comprehensive recovery and resolution framework; continuing to strengthen the oversight regime for securities markets, broker dealers and asset managers as their business model evolves with new channels connecting Hong Kong SAR and Mainland markets; and fully implementing a risk-based capital regime for insurance companies.

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