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  • Type: Journal Issue x
  • Hong Kong Special Administrative Region, People's Republic of China x
  • Macroeconomics: Consumption; Saving; Wealth x
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Mr. Pau Rabanal
During the last decade, Hong Kong SAR has experienced a large increase in house prices and credit, prompting the authorities to respond with several rounds of tightening macroprudential rules and increasing stamp duty taxes. This paper provides a Dynamic Stochastic General Equilibrium (DSGE) model for Hong Kong SAR and analyzes the effectiveness of these measures, and finds that they have helped reduce house price appreciation and household leverage. A baseline small open economy real business cycle model is extended by including a housing sector, financial frictions, foreign demand for the domestic housing stock, and is estimated using Bayesian methods and data for Hong Kong SAR between 1996 and 2017. The paper finds that, without these policies, house prices would have been 10.5 percent higher, and the household credit-GDP ratio 14 percent higher.
Mr. Geoffrey J Bannister and Mr. Alex Mourmouras
We present estimates of welfare by country for 2007 and 2014 using the methodology of Jones and Klenow (2016) which incorporates consumption, leisure, mortality and inequality, and we extend the methodology to include environmental externalities. During the period of the global financial crisis welfare grew slightly more rapidly than income per capita, mainly due to improvements in life expectancy. This led to welfare convergence in most regions towards advanced country levels. Introducing environmental effects changes the welfare ranking for countries that rely heavily on natural resources, highlighting the importance of the natural resource base in welfare. This methodology could provide a theoretically consistent and tractable way of monitoring progress in several Sustainable Development Goal (SDG) indicators.
Ezgi O. Ozturk and Xuguang Simon Sheng
Motivated by the literature on the capital asset pricing model, we decompose the uncertainty of a typical forecaster into common and idiosyncratic uncertainty. Using individual survey data from the Consensus Forecasts over the period of 1989-2014, we develop monthly measures of macroeconomic uncertainty covering 45 countries and construct a measure of global uncertainty as the weighted average of country-specific uncertainties. Our measure captures perceived uncertainty of market participants and derives from two components that are shown to exhibit strikingly different behavior. Common uncertainty shocks produce the large and persistent negative response in real economic activity, whereas the contributions of idiosyncratic uncertainty shocks are negligible.
International Monetary Fund. Asia and Pacific Dept
This paper outlines that the banking sector remains healthy, backed by high capital, liquidity, provisioning and profitability ratios. Sector-wide nonperforming loans (NPLs) have increased slightly (to 2 percent in 2017:Q1), due largely to stresses in the Oil and Gas (O&G) services sector. Banks have responded by increasing provisions (using forward-looking measures of impairment) and restructuring their loans. Overall, the banking sector is well-positioned to withstand shocks. Capital and liquidity positions are sufficiently strong and well above regulatory requirements. Capital and liquidity positions of the local banking groups remain strong. Liquidity coverage ratios (LCR) of all three major banks remained high and rose in 2016:Q4, remaining well above the regulatory limits. The turnaround in bank’s profitability (especially the strong performance in 2017:Q1) is attributed to two factors: an acceleration in credit growth and increases in fee income from wealth management services. Local banks have been a key factor behind the wealth management sector’s growth and its main beneficiary.
Mr. Ranil M Salgado


Although Asia remains a growth leader in the global economy, growth is expected to ease slightly to 5.5 percent during 2016, with countries affected to varying degrees by a still weak global recovery, slowing global trade, and the short-term impact of China’s growth transition. Structural reforms are needed if Asia is to maintain its position in the global economy, including reforms aimed at enhancing productive capacity. Needed reforms range from state-owned enterprise and financial sector reform in China to labor and product market reforms in Japan and reforms to remove supply bottlenecks in India, ASEAN, frontier economies, and small states.

Mr. Joong S Kang
As the U.S. Fed begins to increase the Federal Funds rate, interest rates in Hong Kong SAR will rise in tandem under the Currency Board system. While domestic economic activity in Hong Kong SAR remained resilient in previous rate hike cycles, there is a concern that the impact of higher interest rates would be larger this time due to historic high levels of leverage in both household and corporate sectors. However, macroprudential measures have contained the debt service burden among new borrowers and leverage quality of corporate sector is healthier than its peers in the region. Empirical estimations of aggregate consumption and corporate investment show that private domestic demand is likely to remain robust with the anticipated gradual increase in interest rates over the next few years and taking into account the buffers in the system.
Mr. Dong He, Wei Liao, and Tommy Wu
This paper investigates the synchronization of Hong Kong SAR’s economic growth with mainland China and the United States. This paper identifies trends of economic growth based on the permanent income hypothesis. Specifically, the paper confirms whether real consumption in Hong Kong SAR and mainland China satisfy the permanent income hypothesis, at least in a weak form. It then identifies the permanent and transitory components of income of each economy using a simple state-space model. It uses structural vector autoregression models to analyze how permanent and transitory shocks originating from mainland China and the United States affect the Hong Kong economy, and how such influences evolve over time. The paper’s main findings suggest that transitory shocks from the United States remain a major driving force behind Hong Kong SAR’s business cycle fluctuations. On the other hand, permanent shocks from mainland China have a larger impact on Hong Kong SAR’s trend growth.
Ding Ding, Mr. Waikei R Lam, and Mr. Shanaka J Peiris
There is a role for Asia’s financial sector to play to address the challenges associated with the region’s changing demographics and infrastructure investment needs. Enhancing financial innovation and integration in the region could facilitate intra-regional financial flows and mobilize resources from the aging savers in industrialized Asia to finance infrastructure investment in emerging Asia. Strengthening the financial ties within the region as well as with the global financial markets alongside appropriate prudential frameworks could also help diversify sources of financing and reduce the cost of funding in emerging Asia. Finally, financial deepening could help ease the potential overheating from scaling up infrastructure investment and hence achieve a more balanced growth in the region.