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.
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.
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.
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.
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.
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.