Statement by the IMF Staff Representative

This paper examines the People’s Republic of China’s Hong Kong Special Administrative Region’s 2008 Article IV Consultation. Growth has slowed in the first half of the year, as external conditions have worsened. Inflation remains elevated, driven by food prices and housing costs. The fallout from the global credit turmoil has spilled into local markets, with equity prices falling markedly and signs of stress in interbank markets. The authorities have responded with a range of measures to provide liquidity, stimulate domestic demand, and bolster confidence.

Abstract

This paper examines the People’s Republic of China’s Hong Kong Special Administrative Region’s 2008 Article IV Consultation. Growth has slowed in the first half of the year, as external conditions have worsened. Inflation remains elevated, driven by food prices and housing costs. The fallout from the global credit turmoil has spilled into local markets, with equity prices falling markedly and signs of stress in interbank markets. The authorities have responded with a range of measures to provide liquidity, stimulate domestic demand, and bolster confidence.

December 1, 2008

The information below, which has become available following the issuance of the staff report, does not alter the thrust of the staff appraisal.

1. Growth. On a seasonally adjusted basis, GDP contracted by 0.5 percent in the third quarter, following a decline of 1.4 percent in the second quarter. While weak consumption had been the leading downward force in the first half, third quarter data revealed an unexpected fall in investment, concentrated in weakening construction activity. A modest increase in private consumption only partially offset this lower investment while net exports continued to contribute little to growth. The outturn was below staff’s growth forecast of 0.2 percent.

2. Inflation. Headline consumer price inflation fell to 1.8 percent in October. After netting out the impact of fiscal measures, underlying inflation continued to moderate to 5.9 percent, due to lower energy and fuel costs.

3. Labor markets. Unemployment moved marginally higher to 3.5 percent in October (from 3.4 percent in the previous month) with job losses concentrated in the retail sector, transportation, trade, and hotels. Private sector vacancies declined by 13 percent in October over the previous month.

4. Exchange rate. The Hong Kong dollar has continued to trade close to the strong side of the band with the Hong Kong Monetary Authority selling local currency repeatedly as the exchange rate has hit the band.

5. Money markets. Interbank lending has continued to normalize. Volumes for term lending have risen and rates have declined alongside reductions in U.S. dollar rates. Yields on Exchange Fund Paper have, however, remained close to zero for shorter maturities. The Hong Kong Monetary Authority recently announced a sale of HK$8 billion of 3-month Exchange Fund Bills and a special issue of 98-day Exchange Fund Bills to meet the increased demand for these instruments.

People’s Republic of China: Hong Kong Special Administrative Region: 2008 Article IV Consultation Discussions: Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund