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Country Briefs: Hong Kong SAR’s Prospects Linked to Deepening Integration with Mainland

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
July 2006
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According to the most recent data for the first quarter of 2006, Hong Kong SAR has enjoyed 11 consecutive quarters of sustained growth, reflecting a supportive global environment, sound domestic macroeconomic policies, continued structural reforms, and growing links with mainland China. GDP grew by 7¼ percent in 2005—slightly lower than the growth rate of 8½ percent recorded for 2004.

According to the IMF’s recent economic review, strong real GDP growth—projected to be about 6 percent—and modest inflation are expected to continue in 2006. Given the economy’s general openness and its strong links with the mainland, growth prospects will depend on external conditions and mainland developments—particularly, the economy’s effectiveness in further integrating with the mainland. Hong Kong SAR’s future success as a global financial center will hinge on its ability to assist in the mainland’s financial intermediation, and progress will depend on the pace of China’s financial liberalization.

Hong Kong SAR
200320042005Proj.

2006
(percent change)
Real GDP3.28.67.36.0
Consumer prices–2.6–0.40.92.3
(percent of GDP)
Current account balance10.49.611.47.6
Consolidated budget balance1–3.3–0.31.00.5
Foreign exchange reserves74.774.569.967.3
Data: Hong Kong SAR authorities and IMF staff estimates and projections.

The IMF’s Executive Board commended the authorities for their skillful macroeconomic management in the face of external shocks over the past few years. Competitiveness will continue to rely on maintaining traditional strengths—namely, flexible product and factor markets—and developing new areas of growth. Directors particularly welcomed the improved fiscal position, which resulted in the first budget surplus (in fiscal year 2005-06) since the Asian crisis—three years ahead of schedule.

Commending the authorities’ commitment to the Linked Exchange Rate System, a currency board that keeps the value of the Hong Kong dollar in terms of the U.S. dollar within a narrow trading band, Directors noted that fine-tuning the currency board had reduced uncertainties. Initiatives to strengthen financial market infrastructure and supervisory systems were welcomed, particularly progress toward a deposit protection scheme; preparations for the implementation of Basel II, a multilateral effort to revise international standards for risk management; and the establishment of the Financial Reporting Council. Directors supported the strategy to reduce low-skilled unemployment through training and placement assistance.

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