China - Hong Kong Special Administrative Region
Recent Economic Developments

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.


In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

I. Introduction

1. Since mid-1997, the Asian financial crisis has had a major impact on the Hong Kong SAR economy. External demand has weakened dramatically, the Hong Kong dollar has come under speculative pressure, and economic activity has fallen sharply. Under the linked exchange rate system, the economy has adjusted very rapidly to these shocks, demonstrating its remarkable flexibility. Asset prices have dropped sharply, consumer prices and housing rentals have started to decline, and labor costs are moderating. Nevertheless, the costs of adjustment have been substantial—unemployment has risen sharply and the fiscal position has weakened.

2. With international financial markets starting to stabilize, economic activity in Hong Kong SAR is expected to begin to recover in 1999, once the adjustment process reaches completion. The outlook over the medium term looks promising. Hong Kong SAR’s rales-based economic policy framework and its position as an international financial center will allow the economy to benefit from the vast growth potential of the Mainland.

3. Developments over the past year in the real and external sectors are outlined in Chapter II, while Chapter III summarizes recent property market developments. Chapter IV discusses recent budgetary trends. Developments in financial markets and in the banking and corporate sectors are reviewed in Chapter V. Data reported in this paper are based on information available as of mid-December 1998.

II. Real and External Sector Developments

A. Overview

4. Following a period of above-trend growth and a sharp runup in asset prices, the Hong Kong SAR economy was hard hit by the Asian financial crisis. The weakening of external demand—together with the increase in interest rates and the appreciation of the Hong Kong dollar in real effective terms—caused economic activity to slow sharply and triggered the deflation of the asset price bubble that had emerged over the previous year. Real GDP growth fell markedly in the third quarter of 1997 (based on seasonally adjusted data), and turned negative in the fourth quarter (Chart 1, Table 1, and Appendix Tables 10 and 11).

Chart 1
Chart 1

Hong Kong Sar Real GDP Growth, 1988-98

Citation: IMF Staff Country Reports 1999, 034; 10.5089/9781451816822.002.A001

Sources: Quarterly Report of GDP estimates; and staff extimations.1/ Potential output exlimated by applying Hodrick-Prescott filter.
Table 1.

Hong Kong SAR: Gross Domestic Product by Expenditure Component at Constant (1990) Market Prices, 1993-98

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Sources: Census and Statistics Department, Quarterly Repmt of GDP Estimates, Second Quarter 1998.

Percentage changes calculated over January-June 1997.

Table 10.

Hong Kong SAR: Gross Domestic Product by Expenditure Component at Current Market Prices, 1993-98

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Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1996; and Quarterly Report of GDP Estimates, Second Quarter 1998.
Table 11.

Hong Kong SAR: Gross Domestic Product by Sector at Current Prices, 1992-96

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Source: Census and Statistics Department, Quarterly Report of Gross Domestic Product Estimates, Second Quarter, 1998.

An imputed rental charge for owner-occupied premises.

An imputed service charge, equal to net interest receipts for the banking sector.

Difference between production-based estimates and expenditure-based estimates reflects statistical discrepancy.

Measured relative to production-based GDP at factor cost.

5. Activity continued to contract in the first three quarters of 1998, as external demand continued to weaken and domestic demand fell sharply. By the end of the third quarter, a sizable gap between actual and estimated potential output had emerged. The deflation in asset prices spread to consumer and factor prices, causing inflation to turn negative and wages to slow markedly. The unemployment rate rose to its highest level in 17 years.

B. Domestic Demand

6. The boom in domestic demand in 1997—which followed a prolonged period of negative real interest rates and was fueled by rapidly escalating asset prices—collapsed in 1998. The contribution of domestic demand to real GDP growth fell from 9 percentage points in 1997 to -5 percentage points in the first half of 1998, with consumption and investment growth both moderating rapidly.

Private consumption

7. The loss in wealth associated with the collapse in asset prices—estimated at well over 100 percent of GDP—weakened consumer sentiment and, together with the rise in unemployment and higher real interest rates, caused private consumption to fall. Private consumer spending, which accounts for around 60 percent of GDP, declined by 3¾ percent in real terms in the first half of 1998, in relation to the first half of 1997. In the third quarter, the volume of retail sales plummeted by around 20 percent over a year earlier. Sales of durables and nondurables other than food fell particularly sharply, while sales of food items declined modestly and sales of services were flat.2

8. The close relation between asset prices and interest rates on the one hand, and private consumer spending on the other, was highlighted by developments during the past year (Chart 2). In seasonally adjusted terms, private consumption and retail sales plunged in the last quarter of 1997 and the first quarter of 1998, following the sharp correction in stock and residential property prices and the steep rise in interest rates. By the second quarter of 1998, as asset prices stabilized and interest rates eased, consumer spending started to recover. However, with the onset of renewed financial market turbulence in July-August, the volume of retail sales fell back in the third quarter.

Chart 2
Chart 2

Hong Kong Sar Domestic Demand Developments, 1992-98

Citation: IMF Staff Country Reports 1999, 034; 10.5089/9781451816822.002.A001

Sources: Hong Kong Monthly Digest of Statistics, Hong Kong Census and Statistics Department; and staff estimations.

Private investment

9. The growth of gross fixed investment by the private sector, which had averaged around 20 percent in real terms in 1997, fell to almost zero in the first half of 1998 in response to higher interest rates and weaker economic conditions. The weakening in the property market led to a steady deceleration in private construction activity, following the expansion of construction spending of 20 percent during the boom in 1997 (Appendix Table 12). Investment spending on transportation equipment fell, notwithstanding increased imports of transport equipment in the first quarter of 1998.

Table 12.

Hong Kong SAR: Gross Fixed Capital Formation, 1993-98

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Sources: Census and Statistics Department, Annual Digest of Statistics, Estimates of Gross Domestic Product, 1961-96; and Quarterly Report of GDP Estimates, Second Quarter 1998.

10. Swings in inventory accumulation have had a sizable impact on measured GDP growth in recent years. The contribution of stock building to GDP growth, after recovering steadily in 1997 as increased imports helped replenish inventories, fell in the first half of 1998, reflecting the sharp decline in retained imports. For the half year, inventory decumulation accounted for 3 percentage points of the contraction in GDP.

Public consumption and investment

11. Public investment, after contracting by percent in 1997 as the airport project neared completion, fell by a further 1½ percent (year-on-year basis) during the first half of the year, notwithstanding the flurry of activity in the second quarter to complete the airport in advance of its opening in early July. Government consumption, measured on a national accounts basis, also fell by 1½ percent in the first half of 1998.

C. External Demand

12. After widening to 12¼ percent of GDP in 1997 with the upswing in domestic demand, the merchandise trade deficit narrowed to 11 percent of GDP in the first half of Notwithstanding the deterioration in export performance, the contribution of net exports to GDP growth rose from -3½ percentage points last year to 1 percentage point in the first half of this year. Despite weaker net exports of services, the deficit on goods and nonfactor services trade narrowed in the first half of 1998 (Table 2 and Appendix Table 13).

Table 2.

Hong Kong SAR: External Balances, 1994-98

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Sources: Census and Statistics Department, Hong Kong Annual Digest of Statistics, Estimates of GrossDomestic Product, 1961 to 1996, and Quarterly Report of GDP Estimates, Second Quarter, 1998; Ma and Hawkins (1997); and staff estimates and projections.

Domestic exports less retained imports.

Reexports less nonretained imports.

Estimates provided by the HKMA in Ma and Hawkins (1997).

Table 13.

Hong Kong SAR: Estimates of External Factor Income Flows by Income Component and by Business Sector, 1993-96

(At current market prices, in millions of Hong Kong dollars)

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Source: Census and Statistics Department, Monthly Digest of Statistics.


13. Overall export performance deteriorated steadily in 1998 as import demand in the region weakened (Chart 3). A disruption in air cargo handling services at the new airport also affected exports in July-August,3 as did the severe flooding in central Mainland China, which hampered land delivery of exports to the Mainland. The volume of exports fell by 2¼ percent in the first nine months of 1998, following a 6 percent expansion in 97 as a whole (Table 3). Export unit values also declined, by close to 3½ percent in the first three quarters of the year.

Chart 3
Chart 3

Hong Kong Sar External Trade, 1992-98

Citation: IMF Staff Country Reports 1999, 034; 10.5089/9781451816822.002.A001

Sources: Hong Kong Monthly Digest of Statistics, Hong Kong Census and Statistics Department; and staff estimates.
Table 3.

Hong Kong SAR: Foreign Trade Developments, 1993-98

(Percentage change)

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Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics, and Quarterly Report of GDP Estimates, Second Quarter 1998; and Financial Services Bureau, Third Quarter Economic Report 1998.

Average of 12-month percentage changes.

Data for 1998 are for the first half of 1998 over first half of 1997.

Hong Kong SAR: Direction of Exports, 1996-98

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Source: International Monetary Fund, Direction of Trade Statistics.

14. The weak economic conditions in the region were reflected in the sharp decline in exports to many of Hong Kong SAR’s trading partners in Asia. Exports to the ASEAN-4 and Korea fell by 38 percent and 24 percent, respectively, in the first half of 1998 (year-on-year basis), while exports to Japan and Singapore also shrank markedly. However, exports to Mainland China—Hong Kong SAR’s most important trading partner—and Taiwan Province of China were flat, while exports to the United States and the European Union rose.

15. Hong Kong SAR’s reexport trade, which had decelerated markedly in 1996-97, shrank in 1998. For the first nine months of the year, reexports were 4¾ percent lower than in the corresponding period of 1997, with the volume of reexports falling by almost 2 percent and unit values by 3½ percent. While the Mainland remained the most important trading partner for reexports—accounting for 59 percent of reexports by source and 35 percent of reexports by destination—reexports to the ASEAN—4, Korea, Japan, and Singapore fell sharply, reflecting the weak demand for imports in the region. By category of goods, reexports of consumer goods fell relatively sharply, while there was a more moderate decline in reexports of raw materials and intermediate goods and an increase in reexports of capital goods.

16. Domestic exports suffered an even steeper decline than reexports. In the first nine months of 1998, domestic exports fell by 8 percent, with most of the decline due to a reduction in export volume. Exports to all major markets except the United States—which accounts for close to 30 percent of Hong Kong SAR’s total domestic exports—shrank. Domestic exports to the ASEAN-4, Korea, Japan, and Singapore declined particularly sharply.


17. Overall imports shrank by 9 percent in value and 4¾ percent in volume in the first three quarters of 1998 (year-on-year) as domestic demand and reexport activity fell. The decline was even more marked for retained imports, which plummeted by 11 percent in real terms. By category, retained imports of consumer goods fell by almost a quarter in real terms, on account of the slackening in consumer demand, the precipitous decline in wealth, and rising unemployment. Imports of raw materials and intermediate goods declined by 15 percent, curbed by weaker export activity, and imports of food by decreased almost 10 percent. Imports of capital goods were flat. By contrast, fuel imports rose by almost 50 percent, due to increased stocking to take advantage of the marked decline in world oil prices.


18. The deterioration in external demand was also reflected in the net surplus on nonfactor services, which narrowed from 8¾ percent of GDP in 1997 to 654 percent of GDP in the first half of 1998. Nonfactor services exports fell by 8 percent in real terms (year-on-year), with the number of tourists visiting Hong Kong SAR falling by over 20 percent. Exports of trade-related and other business services—particularly financial services—also weakened as a result of weaker activity and financial market turbulence in the region. However, this was partly offset by a deceleration in services import growth, which moderated from 4 percent in 1997 to 3¾ percent in the first half of 1998. While outward tourism by Hong Kong SAR residents increased in response to the depreciation of regional currencies against the Hong Kong dollar,4 overall services import growth moderated.

D. Inflation and External Competitiveness

19. With the value of the Hong Kong dollar against the U.S. dollar fixed by the exchange rate link, adjustment to the shocks over the past year has taken place through price deflation to restore external competitiveness. By the last quarter of 1998, asset prices were sharply lower than a year earlier, consumer price inflation was negative, and—while firm data on recent developments are not yet available—anecdotal evidence suggests that wages and bonuses are being cut back.


20. Inflationary pressures eased as domestic demand and economic activity weakened, aided by the strength of the Hong Kong dollar and the softening of world commodity prices. Consumer price inflation, which had averaged 5¾ percent in 1997, moderated steadily in (Chart 4 and Appendix Table 14). By midyear, the seasonally-adjusted consumer price index (CPI) started to decline, and inflation turned negative on a year-on-year basis by October.5

Chart 4
Chart 4

Hong Kong Sar Inflation and External Competitiveness, 1988-98

Citation: IMF Staff Country Reports 1999, 034; 10.5089/9781451816822.002.A001

Sources: Consumer Price Index Report: Census and Statistics Department, IMF: INS, Census and Statistics Department; and staff estimates.1/ Data for 1998 Q4 refer to October 1998.
Table 14.

Hong Kong SAR: Selected Price Indicators, 1993-98.

(Percentage changes)

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Sources: Census and Statistics Department, Consumer Price Index Report, Hong Kong Monthly Digest of Statistics; and Quarterly Report of GDP Estimates, Second Quarter 1998.

Average of four-quarter percentage changes.

Based on the October 1989-September 1990 series of CPI through 1995 and the October 1994-September 1995 series since 1996.

Data are on a national accounts basis.

21. Within the components of the index, food prices exhibited a strong downward trend during the course of the year, while durables price inflation also edged lower. The rate of increase of the housing component of the index, while moderating markedly during the first three quarters, remained relatively high as adjustment of rentals in many cases could only be undertaken once existing leases expired. However, by October-November, a full year after the deflation of residential property prices had commenced, housing price inflation fell sharply.


22. The persistence of higher consumer price inflation than in trading partners over the past 15 years has led to a steady and sizable real appreciation of the Hong Kong dollar, as measured by the Fund’s CPI-based real effective exchange rate (REER) index. This appears to have reflected an equilibrating phenomenon consistent with rapid productivity growth as Hong Kong SAR transformed from a manufacturing-based economy to a services-based international financial center.

23. Econometric estimates indicate that the equilibrium REER has appreciated in line with the actual REER, with the structural shift of the economy accounting for roughly 90 percent of the appreciation between 1982 and mid-1997. Developments in Hong Kong SAR’s terms of trade and fiscal policy, as well as world inflation, have also affected the equilibrium REER. The estimates indicate that deviations between the actual and equilibrium REERs have generally been small and short-lived, suggesting that goods and factor prices in Hong Kong SAR are relatively flexible.6

24. The sharp depreciation of regional currencies, including the yen, over the past year -opened up a sizable gap between the actual and estimated equilibrium REERs of the Hong Kong dollar. By August 1998, with deteriorating market sentiment in the region placing downward pressure on partner currencies, the Hong Kong dollar became overvalued by around 10 percent in relation to its estimated equilibrium level. However, following the subsequent appreciation of the yen and other regional currencies, together with moderating consumer price inflation in Hong Kong SAR, this gap narrowed. By October, the deviation between the actual and estimated equilibrium REERs was less than 5 percent.

25. It should be noted that different indices of the REER yield sharply different conclusions about the extent, and even the direction, of real exchange rate changes in Hong Kong SAR. For example, the index based on export unit values, rather than the CPI, has remained broadly stable in recent years, implying that any real appreciation has been confined to the nontradables sector. By contrast, the manufacturing unit labor cost-based index indicates that the Hong Kong dollar has depreciated in real effective terms and, despite the appreciation since 1995, remains well below the level in the early 1990s.

E. Labor Market Developments and Policies

26. The adjustment of the economy to the shock over the past year has entailed a substantial cost in terms of rising unemployment. Measures taken by the authorities in response have aimed at mitigating this cost while maintaining labor market flexibility.


27. The unemployment rate, after trending downward to 2¼ percent in late 1997, rose sharply to 5¼ percent in the third quarter of 1998 (Chart 5 and Appendix Table 15). While unemployment rose for all occupations, the increase was relatively high among unskilled and semi-skilled workers. Unemployment rates in the third quarter were highest for craft and related workers, and for those in service and shop sales.

Chart 5
Chart 5

Hong Kong Sar Labor Market Developments, 1992-98

Citation: IMF Staff Country Reports 1999, 034; 10.5089/9781451816822.002.A001

Sources: Hong Kong Monthly Digest of Statistics, Hong Kong Census and Statistics Department; and staff estimations.
Table 15.

Hong Kong SAR: Labor Force: Employment, and Unemployment, 1993-98

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Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics.

Based on data on persons engaged by industry sector.

Wholesale, retail, import and export trade, restaurants, and hotels.

28. Contributing to rising unemployment was the steady increase in labor force growth, which reached 6 percent in the third quarter (year-on-year basis). This growth was underpinned by continued strong return immigration of Hong Kong SAR residents that had previously emigrated, as well as by the influx of 150 migrants per day from the Mainland.7 The labor participation rate edged up, mainly on account of higher participation among middle-aged women, many of whom entered the workforce as uncertainty regarding their spouses’ employment rose.

29. Employment growth slowed sharply to around 2½ percent in 1998, from 4½ percent - in 1997. Data from the Quarterly Survey of Employment and Vacancies, which do not exactly match those from the General Household Survey (on which unemployment figures are based), indicate that employment in the construction sector contracted particularly sharply, partly due to the completion of the airport project.8

30. Press reports in recent months indicate increased layoffs, wage freezes, and sharp cuts in bonuses. Wage data, which are available only through March 1998 on a semiannual basis, indicated that both nominal and real wage growth has moderated since late 1997 (Appendix Table 16). Nominal wages have decelerated most sharply in the trade and tourism sectors, while wage growth in the financial services sector, while moderating markedly in comparison with previous years, remained relatively high through the first quarter of 1998. In real terms, wages in the manufacturing and trade and tourism sectors declined in the first quarter, while real wage growth in the financial services sector slowed.

Table 16.

Hong Kong SAR: Wages, Labor Productivity, and Unit Labor Costs, 1993-98

(Percentage change)

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Sources: Census and Statistics Department, Hong Kong Annual Digest of Statistics; Hong Kong Monthly Digest of Statistics; Estimates of Gross Domestic Product, 1961 to 1995; Quarterly Report of GDP Estimates, Second Quarter 1996; and staff estimates.

Data on wages are based on March 1998 wage indices; data on productivity are based on data for the first half of 1998; data on unit labor costs are for the first quarter of 1998. Percentage changes are calculated over corresponding year-earlier periods.

Based on September data.

Includes wholesale, retail, import and export trades, restaurants, and hotels.

Includes financing, insurance, real estate, and business services.

Based on employment data; data on person-hours are unavailable.

Labor policies

31. The principal focus of recent labor policy initiatives has been to improve the existing employee retraining and vocational training programs, with the objective of helping the unemployed rejoin the workforce as soon as possible, and to ensure that their employability is sustained in the longer term. In the face of rising unemployment, the government set up in April 1998 a Task Force on Employment, led by the Financial Secretary and comprising representatives of employers, employees, academics, and government officials to study the unemployment problem. The Task Force has so far announced a series of measures, which can broadly be divided into the following categories:

  • Measures to create jobs. The government is pressing ahead with a number of infrastructure and public works projects, and 25 projects have been advanced. The authorities estimate that, outside the civil service, 89,000 new jobs will be created between mid-1998 and end-1999 as a result of the policy initiatives;9

  • Strengthening employment services. A strengthened Job Matching Program has been put into effect;

  • Enhancing vocational training and employee retraining. Additional resources have been directed toward providing extra training programs and related services for both the unemployed and school leavers.10 The government will provide another capital grant of HK$500 million to the Employees Retraining Board (ERB) to ensure adequate funding for an expansion of training capacity and quality. Among the additional training programs being offered is a Certificate of Skills Training (Service Industries) Course for 1,000 unemployed persons; the Construction Industry Training Authority will also provide extra training places;

  • Promoting further education by increasing the number of places in government evening schools, increasing enrollment at universities, and raising the availability of student loans; and

  • Tightening measures to combat illegal employment, particularly with regard to imported labor.

32. In addition, the 1998 Policy Address outlined a number of medium-term initiatives to enhance the overall vocational education and training system in Hong Kong SAR. These include integrating the Vocational Training Council’s (VTC) existing two technical colleges and seven technical institutes into a single structure by FY 2001/02 to enhance the VTC’s. cost effectiveness and responsiveness; and launching aHK$176 million upgrade of the VTC’s information technology infrastructure and services over a period of three years.

III. The Property Market, Land Policy, and Housing Policy

A. Developments in the Property Market

33. Following a downturn in 1994-95, residential property prices staged a strong rebound beginning in early 1996 and continuing through mid-1997, rising by over 60 percent trough-to-peak (see Chart 6 and Appendix Table 17). The rebound reflected a shift in market sentiment in early 1996, when the outlook for the labor market brightened and Hong Kong SAR banks reduced their lending rates. The turnaround was underpinned by rapid population growth owing to the return of emigrants, a sustained increase in household income together with a steady decline in unemployment, and negative real interest rates. The demand/supply imbalance that emerged was exacerbated by the reduction in housing supply during 1995-97, reflecting the earlier slowdown in housing starts during the cyclical downturn in 1994-95.

Chart 6
Chart 6

Hong Kong Sar the Property Market, 1990-1998


Citation: IMF Staff Country Reports 1999, 034; 10.5089/9781451816822.002.A001

Source: Jones Lang Wootton, Research and Consultancy: JLW Property Index, Hong Kong; and Monthly Digest of Statistics.1/ Index 1: Jones Lang Wootton data; index 2: Rating and Valuation Department data.
Table 17.

Hong Kong SAR: Property Market Developments, 1994-98 1/

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Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics; and Rating and Valuation Department.

Data are period averages.

34. While fundamentals in part were responsible for the rapid increase in prices, there were clear signs of an asset price bubble.11 Indeed, prompted by concerns that the price gains were being driven by speculative activities, especially for luxury properties, the government took measures in March 1997 to curb speculation. In particular, the government announced that it would further restrict activity in the forward market for apartments. Prices stabilized briefly following the announcement, but rose again in the run up to the handover. In July 1997, the government announced that it would implement a rolling five-year land disposal program aimed at providing sufficient land for housing development and a clear picture on land supply over a five-year horizon.

35. The Asian financial crisis hit confidence hard in Hong Kong SAR, with consequent severe downward adjustments in asset prices as interest rates rose following repeated speculative attacks on the Hong Kong dollar. Residential property prices declined by about 40 percent from their peak in the third quarter of 1997, while rents-which typically adjust more slowly than prices owing to the prevalence of 2-3-year lease contracts—fell by about 20 percent.12 This reflected the combination of the bursting of the asset price bubble and the price adjustment required to restore competitiveness under the linked exchange rate system. Other contributing factors included increasing supply; declining affordability, due to a combination of high prices, rising interest rates, and slowing wage growth; weakening consumer confidence, owing in part to rising unemployment; and a tightening in banks’ provision of liquidity.

36. With successive and substantial price cuts, intensive sales promotion packages, and flexible mortgage arrangements offered by developers failing to rejuvenate the market, the government announced, in May and June 1998, two packages of measures to stabilize the property market, which included, inter alia, the suspension of most of the anti-speculation measures previously imposed on the sales of pre-completion flats, the imposition of a moratorium on all government land sales by auction and public tender until March 31,1999, and an increase in the allocation of concessionary loans to eligible home buyers for the purchase of flats.

37. These measures seem to have helped stabilize market sentiment in the months following the announcement of the packages. There have been some signs of a tentative recovery in the residential market, as reflected in a pickup in sale and purchase agreements, and anecdotal evidence that prices have begun to stabilize amidst a rise in primary market activity. The improvement in affordability—which measures the ratio of the monthly mortgage repayment of flat buyers to average household income—augurs well for a near-term recovery, and an emerging supply shortage beyond 2000 will also help underpin prices. Nevertheless, downside risks remain and a number of market analysts expect further price declines (ranging from 15 percent to 30 percent) in the near term.

38. Other sectors of the property market also suffered significant declines following the onset of the Asian crisis. Since the 1997 second quarter peak, prices in the office sector have fallen by nearly 50 percent reflecting excess supply conditions. Rents in the office sector have declined by 16 percent amidst corporate downsizing.13 With additional office space coming on stream over the next few years, exacerbating the supply/demand imbalance, the downward adjustment process is likely to continue for some time.

39. Property prices in the retail sector have fallen by about 40 percent since the third quarter 1997 peak, attributable to excess supply conditions. Depressed retail activity combined with a slowdown in inbound tourism have caused rents to fall by 10 percent.

40. Prices in the industrial sector have fallen by 27 percent since early 1997, as demand was dampened by the ongoing relocation of production processes to Mainland China and the general slowdown in economic activity. Rentals have also adjusted downwards, though by a lesser amount. Given poor prospects, many proposed industrial projects have been changed to other types of development, resulting in a substantial reduction in completions.

B. Land Policy

41. Land policy has always played a key role in Hong Kong SAR’s property market because of limited land supply, difficult terrain, and the locational preferences of the population and businesses. However, the sizable gyrations in property prices in the last two years, combined with the crucial importance of the property market to the Hong Kong SAR economy, has prompted the government to pursue a more activist land policy recently.

42. A significant change for land policy came when the annual 50-hectare limit on land - disposal, which was provided for in the Joint Declaration, was abandoned.14 Specifically, the authorities elaborated in July 1997 their first five-year land disposal program. As part of the program, details of land sales for the next two fiscal years were announced and the types and amounts of land to be disposed of over the following three fiscal years were outlined. The program envisaged a significant increase in the supply of land for housing development (to a total of 690 hectares) between 1997 and 2002. The adoption of this program ensured a steady supply of land for development, which has remained the principal objective of the government’s land policy.

43. Subsequently, the severe impact of the Asian crisis on property prices in Hong Kong SAR prompted the government to announce a number of measures aimed at stabilizing the property market:

  • On June 22, 1998, the government announced—as part of a broader set of measures—that it would suspend all land sales by auction or public tender for the remainder of FY 1998/99 (i.e., until end-March 1999) and freeze Private Treaty Grants for Sandwich Class Housing.15 The government said it would decide in early 1999 whether to resume land sales in FY 1999/00. In making its announcement, the government noted that while moderation in an overheated property market was in Hong Kong SAR’s long-term interest, the drastic reduction in prices that had occurred recently negatively affected many sectors of the economy;

  • The quotas for the Home Starter Loan Scheme and the Home Purchase Loan Scheme were expanded, thus allowing families in the low-and middle-income groups to take advantage of current market conditions as flats have become more affordable;

  • In addition, the government announced on May 29,1998 and September 12,1998 the relaxation of some anti-speculation measures, as speculation was deemed to no longer be a problem;16

  • Furthermore, the Hong Kong Monetary Authority announced on July 28,1998 that its 40 percent guideline on the property exposure of authorized institutions was withdrawn with immediate effect.

44. Moreover, on December 3,1998, the Hong Kong Mortgage Corporation (HKMC)—established in 1997 to catalyze the development of a secondary mortgage market—announced a scheme under which the HKMC will provide a guarantee at a fee to lending banks for an amount up to 15 percent of the value of the property. The scheme will enable home buyers to secure mortgages with up to 85 percent loan-to-value ratios (compared with 70 percent previously).

C. Housing Policy

45. The Hong Kong SAR government operates an extensive public housing program, which covers almost half of the population.17 The broad aim of housing policy is to help all households gain access to adequate and affordable housing and to encourage home ownership in the community. In line with this objective, the White Paper on Long Term Housing Strategy, published in February 1998, set out the government’s housing targets, the most important of which are:18

  • To produce 85,000 flats a year in the public and private sectors, starting from 1999/2000, as a long-term target to meet the future housing needs of the population. Of this total, 35,000 flats are to be supplied by the private sector. In the 1998 Policy Address, Chief Executive Tung Chee-Hwa noted the significant change in property market conditions that had occurred since the announcement of the target, including a reduction in the demand for private sector residential property. Against the background of these developments, he stressed the long-term nature of the target;

  • To achieve a home ownership rate of 70 percent by 2007 (from 52 percent in 1997);. and

  • To reduce the average waiting time for public rental housing to three years by 2005.

46. To achieve the above targets, the government will continue to provide housing loans to encourage home ownership and supply sufficient flats for allocation to applicants waiting for public rental housing.

IV. Public Finance

A. Overview

47. Fiscal policy in Hong Kong SAR has traditionally followed a noninterventionist approach, aimed at maintaining a small and efficient government and supporting private sector activity. The basic approach to taxation has been to derive revenue from a limited number of sources and to maintain low tax rates with a flat profile. Government spending as a share of public expenditure has also been kept low, largely reflecting the absence of high spending on social welfare and defense. Thus, over the period FY 1984-97, Hong Kong SAR established an outstanding record of fiscal prudence, achieving an average annual budget surplus of about 2 percent of GDP.

48. Following the transfer of sovereignty in July 1997, fiscal policy in Hong Kong SAR has been guided by the Basic Law. Article 107 of the Law states that “the Hong Kong Special Administrative Region shall follow the principle of keeping expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits, and keep the budget commensurate with the growth rate of its gross domestic product.” While the outcome in FY 1997 was considerably stronger than had been expected, the outlook for the current fiscal year looks decidedly less rosy, as the slowdown in the real economy owing to the Asian financial crisis negatively affects revenues.19

B. Recent Budgetary Developments

49. Budgetary performance in FY 1997 was, as in the previous fiscal year, considerably stronger than expected, mainly reflecting better-than-expected revenues. The fiscal surplus was HK$86.8 billion (6½ percent of GDP), compared with the HK$31.7 billion surplus projected in the FY 1997 Budget (Chart 7, Table 4, and Appendix Tables 18,19, and 20).20 Expenditures reached HK$194.4 billion (14½ percent of GDP), roughly HK$9 billion below the budget projection; the underspending reflected lower outlays on public works projects by the Capital Works Reserve Fund and across the board underspending on recurrent expenditure from the GRA. Revenues rose sharply to HK$275.2 billion (20½ percent of GDP),21 over HK$40 billion higher than the budget projection. The stronger-than-expected revenue performance was due to a surge in stamp duty receipts from the buoyant stock and property markets, strong receipts from land transactions, and higher-than-anticipated revenues from the earnings and profits tax.

Chart 7
Chart 7

Hong Kong Sar Fiscal Developments, FY 1990 - FY 1997

Citation: IMF Staff Country Reports 1999, 034; 10.5089/9781451816822.002.A001

Sources: Data provided by the Government Secretariat, Finance Bureau.1/ Fiscal reserves at the end of FY 1997 include the balance in the Land Fund (HK$ 197 billion as of July I, 1997), which reverted to the Hong Kong SAR on July 1, 1997.
Table 4.

Hong Kong SAR: Consolidated Government Account, FY 1994-FY 1998 1/

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Sources: Data provided by the Government Secretariat, Finance Bureau; and staff projections.

The fiscal year begins April 1.

Revenue from land sales is credited to the Capital Works Reserve Fund. The only exception is for the period from July I, 1997 to December 31, 1997 when land revenue was credited to General Revenue Account pending amendment of the Capital Works Reserve Fund resolution.

Consists of the Capital Works Reserve Fund; Capital Investment Fund and Loan Fund beginning in 1990/91; Disaster Relief Fund beginning in 1993/94; and Civil Service Reserve Fund beginning in 1994/95.

Excludes repayment of government bond but includes direct financing of airport-related projects as well as government equity injections into the Airport Authority, the Kowloon-Canton Railway Corporation, and the Mass Transit Railway Corporation. SI For FY 1997/98, includes net worth ofHK$197.1 billion received from the trustee of the former SARG Land Fund on July l, 1997.

SI For FY 1997/98, includes net worth ofHK$197.1 billion received from the trustee of the former SARG Land Fund on July l, 1997.

Revenue ratios are calculated using revenues plus changes in net worth of Land Fund. Also, note that ratios for