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IMF Survey: Hong Kong Economy Sound, but at Risk from a Euro Area Crisis
December 9, 2011
- Outlook solid, but economy faces risks from euro area crisis
- Property market cools, but outlook remains uncertain
- Hong Kong benefits from role as premier offshore renminbi center
Hong Kong Special Adminstrative Region has benefited greatly from China’s robust growth, and has successfully navigated a path through the current global uncertainty, but the fallout from the European debt crisis could negatively impact the region, say IMF economists.
Chinese bank employee counts renminbi. Hong Kong has become the top offshore market for the Chinese currency (photo: Qilai Shen/Corbis)
Economic Health Check
In their annual assessment of Hong Kong’s economy, the economists suggest the region’s strong balance sheets and robust policy framework make it well placed to cope with even a very large shock to external demand. Although the region’s economy is slowing, it is expected to post a respectable 4 percent growth rate next year.
But the report warns that if a crisis in Europe reverberates through the global economic and financial system, depressing growth worldwide, Hong Kong could find itself facing its second recession in three years.
“As a small, very open, economy that is reliant on trade and financial services, Hong Kong is highly exposed to a downturn in the global economy. A one percentage point loss of global growth easily knocks 1½ percent or more off Hong Kong’s growth performance,” said the IMF’s mission chief, Nigel Chalk.
“In the current global environment, it is hard to overinvest in contingency planning,” he added.
Property market cools
In recent years, there have been concerns about the possibility of an emerging bubble in Hong Kong’s housing sector, but over the last 12 months a combination of policy actions by the authorities, rising mortgage rates, and concerns about the global outlook have reduced that threat.
But the report warns that there are also powerful drivers still in place—including a very tight near-term supply of new apartments and a strong domestic economy with low unemployment—that could create the conditions for property price increases to resume.
“Recent data clearly point to a slowdown in the market,” said Chalk.
“But we are cautious about concluding that this is a definitive turning point. The housing market has the potential to continue its rise, so it is worth watching very carefully,” he added.
The IMF report also highlights the social costs of high property prices. Despite government investments in public housing, many people in Hong Kong are facing rising rents and finding it increasingly difficult to buy a home.
The IMF economists, therefore, backed the government’s efforts to provide more public housing and programs to help partially overcome the rising barriers to home ownership.
Support for the Linked Exchange Rate System
The IMF also reaffirmed its support for the current system of pegging the Hong Kong dollar to the U.S. dollar. Hong Kong has kept this system for 28 years, supported by fiscal prudence, very flexible labor, goods and asset markets, and a rigorous financial regulatory framework.
“Clearly, any choice of currency regime involves trade-offs,” said Chalk, “but it is pretty clear to us, after examining the alternatives, that the pros of the current arrangement far outweigh the cons.”
The IMF report also drew attention to the benefits to Hong Kong of having established itself as the top offshore market for the Chinese currency, the renminbi.
This was creating new opportunities for Hong Kong and providing real benefits to mainland China, said the annual report, which highlighted the potential for increased connectivity between financial markets in Hong Kong and the Mainland.
The economists also pointed to the need to carefully transition to a market where the offshore renminbi could increasingly be deployed for use into productive investment projects on the Mainland.
http://www.imf-wb.2012tokyo.mof.go.jp/english/