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International Monetary Fund. External Relations Dept.

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

International Monetary Fund
Hong Kong has grown strongly as a result of its successful transformation from a manufacturing presence to a services hub over past decades. Executive Directors support the government’s commitment for the Linked Exchange Rate System. Hong Kong’s future as a financial center is linked to its expanding role in mainland intermediation. Although the current fiscal stance is appropriate, some fiscal reforms remain pending. The government is aware of the central importance of Hong Kong’s traditional strengths to its ongoing success.
International Monetary Fund. Asia and Pacific Dept
This Selected Issues paper analyzes Hong Kong Special Administrative Region (SAR) banks’ exposure to nonbanking businesses in Mainland China. Hong Kong SAR banks are generally less exposed to riskier Mainland businesses. Despite that, a sharp deterioration in the balance sheet of Mainland businesses, as well as a sharper-than-expected downturn in the Mainland economy could negatively affect Hong Kong SAR banks, raising debt at risk well above suggested estimates. As Hong Kong SAR banks generally have sizable buffers against downside risks, the best approach to such a scenario is vigilance, including maintaining high origination and underwriting standards.
Mr. Jack Bame
The relevance of the standard measures of international transactions in goods and services as reflected in the fifth edition of the IMF Balance of Payments Manual (BPM) and in the 1993 System of National Accounts (SNA) has been questioned in several recent studies and articles. Alternative measures have been proposed, that either (i) substitute an ownership basis for transactions for the long-established residency basis; (ii) maintain the residency basis but combine net direct, investment income with goods and services; or question the validity of any measures in the form of net balances as a guide to policy. This paper affirms the central role of residency in the international accounts, discusses the supplementary value of alternative proposals, and notes the importance of international efforts to improve and refine the measurement of external transactions based on the principles of the BPM and SNA.
Assaf Razin, Mr. Ashoka Mody, and Efraim Sadka
We develop a simple information-based model of FDI flows. On the one hand, the abundance of "intangible" capital in specialized industries in the source countries, which presumably generates expertise in screening investment projects in the host countries, enhances FDI flows. On the other hand, host-country corporate-transparency diminishes the value of this expertise, thereby reducing the flow of FDI. Empirical evidence (from a sample of 9 source countries and 13 host countries over the 1980s and 1990s), analyzed in a gravity-equation model, provides support for the theoretical hypotheses. The model also demonstrates that the gains for the host country from FDI (over foreign portfolio investment (FPI)) are reflected in a more efficient size of the stock of domestic capital and its allocation across firms. These gains are shown to depend crucially (and positively) on the degree of competition among FDI investors.
John S. Smith

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