Front Matter

Front Matter Page

© 2006 International Monetary Fund

February 2006

IMF Country Report No. 06/50

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2005 Article IV consultation with the People’s Republic of China—Hong Kong Special Administrative Region, the following documents have been released and are included in this package:

  • the staff report for the 2005 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on October 25, 2005, with the officials of the People’s Republic of China—Hong Kong Special Administrative Region on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 6, 2006. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its January 23, 2006 discussion of the staff report that concluded the Article IV consultation.

The document listed below has been or will be separately released.

  • Selected Issues Paper

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

E-mail:• Internet:

Price: $15.00 a copy

International Monetary Fund

Washington, D.C.

Front Matter Page



Staff Report for the 2005 Article IV Consultation Discussions

Prepared by the Staff Representatives for the Consultation Discussions Held in 2005 In Respect of the Hong Kong Special Administrative Region

Approved by Wanda Tseng and Juha Kähkönen

January 6, 2006

  • The consultation discussions were held in the Hong Kong Special Administrative Region of the People’s Republic of China during October 13–25, 2005. The staff team comprised Mr. Aziz (Head), Messrs. Aitken, Goldsworthy and Leigh (all APD). Ms. Tseng participated in the concluding policy discussions. Mr. Gruenwald (Resident Representative) also participated in the mission. Messrs. Wang and Chen (OED) attended key meetings.

  • The mission met with Financial Secretary Henry Tang, Chief Executive of the Hong Kong Monetary Authority Joseph Yam, Secretary for Financial Services and the Treasury Frederick Ma, Chairman of the Securities and Futures Commission Martin Wheatley, and other senior government officials and private sector representatives.

  • Both the Executive Board and the staff have generally endorsed the authorities’ macroeconomic policies and structural reforms. Directors have commended the authorities for their skillful conduct of economic policy in the face of external shocks, including in reining in the fiscal deficit. Directors and staff have noted that the LERS remained appropriate and reiterated their support for the authorities’ commitment to the currency board. On the need to broaden the tax base, the staff and the authorities agree in principle, but the staff have deferred to the authorities on the timing of implementing measures to do so, such as introducing a Goods and Services Tax (GST).

  • The authorities have indicated their intention, as in the past, to publish the staff report.

  • The principal author of this report is Lamin Leigh.


  • Executive Summary

  • I. Introduction

  • II. Recent Economic Developments: A Recovery Turning into Sustained Expansion

  • III. Report on the Discussions

    • A. Fiscal Policy—What Lies Ahead?

    • B. Exchange Rate Regime—A Stronger Currency Board

    • C. Structural Policies—Continuing to Reinvent the Economy

    • D. Other Issues

  • IV. Staff Appraisal

  • Boxes

  • 1. Impact of Aging

  • 2. Hong Kong SAR’s Labor Market

  • 3. Recent Property Market Developments

  • Tables

  • 1. Selected Economic and Financial Indicators, 2002–2006

  • 2. Consolidated Government Accounts, FY2002–FY2009

  • 3. Standard Vulnerability Indicators, 2000–2005

  • 4. Medium-Term Macroeconomic Framework, 2002–2010

  • 5. Medium-Term Balance of Payments, 2002–2010

  • Annexes

  • I. Fund Relations

  • II. Statistical Issues

Executive Summary

State of the Economy and Outlook

Hong Kong SAR’s economic expansion that began in mid-2003 has now been sustained for 9 consecutive quarters. Real GDP grew by about 7¼ percent (year-on-year) in the first three quarters of 2005, boosted, in part, by strong exports and to some extent private consumption. Inflation remained mild during the first half of 2005 and has increased modestly in recent months, mainly due to the pick up in housing rentals and higher import prices. Reflecting the economic expansion, the unemployment rate has fallen by more than 3 percentage points from its peak in 2003 to 5¼ percent in September-November. Real GDP growth is expected to moderate to about 5½ percent in 2006 with some easing of external demand. The risks to this central scenario are broadly balanced.

Policy Discussions

Given Hong Kong SAR’s rules-based macroeconomic framework, short-term discretionary policy has played a relatively smaller role compared to long-term reforms. Thus, the mission’s discussions were focused on the longer-term fiscal strategy and measures needed to foster robust and sustainable growth over the medium term.

On fiscal policy, it is likely that the budget will return to balance in the current fiscal year, significantly ahead of schedule, because of buoyant revenues and continued expenditure restraint. With the objective of returning to budget balance nearly achieved, the staff encouraged the authorities to develop a longer-term fiscal strategy taking into account fiscal pressures that are likely to arise from an aging population. The staff also reiterated the need to broaden and stabilize the revenue base through the introduction of a goods and services tax (GST).

With regard to the exchange rate regime, the staff reiterated its support for the authorities’ commitment to the linked exchange rate system (LERS). By removing the uncertainties about the extent to which the Hong Kong dollar could appreciate, the May 2005 refinements have successfully dampened speculative inflows related to market expectations of a renminbi appreciation and helped to keep financial markets calm following the changes in the renminbi regime in July.

On structural policies, there was agreement that the importance of the financial sector for Hong Kong SAR reinforces the need to continue to strengthen its market infrastructure and supervisory systems in order to maintain financial stability. Over time, as Hong Kong’s financial markets are expected to play a more direct role in Mainland China’s financial intermediation, coordination of supervisory activities between the respective agencies will become increasingly important. Tackling the problem of long-term unemployment also remains a key policy priority.

Front Matter Page

Public Information Notice (PIN) No. 06/16

For Immediate Release

February 13, 2006

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

People’s Republic of China—Hong Kong Special Administrative Region: Staff Report for the 2005 Article IV Consultation Discussions
Author: International Monetary Fund