20220307-IMF-People_s_Republic_of_China—Hong_Kong_Special_Administrative_Region_2022_Article_IV_Consultation_Discussions-Press_Release_and_Staff_Report_81页_2mb

Summary of IMF 2022 Article IV Consultation with Hong Kong SAR

Core Content

The IMF conducted the 2022 Article IV consultation with the People's Republic of China—Hong Kong Special Administrative Region (SAR) and concluded that the economy is recovering strongly, though the recovery remains unbalanced. The consultation highlighted the role of swift and bold policy responses, particularly during the pandemic, and provided an assessment of the economic outlook, risks, and policy recommendations.

Main Points

Economic Recovery

• Real GDP Growth: Hong Kong SAR's real GDP increased by 6.4% in 2021, driven by strong policy responses and a rebound in external demand. In 2022, growth is expected to moderate to 3%.
• Private Consumption: Private consumption has lagged behind, due to the zero-COVID policy and the slow resumption of cross-border travel.
• Public Demand: The recovery has been largely supported by public demand, with a gradual shift to private demand expected in 2022.
• Labor Market: Employment growth was positive in 2022, with the unemployment rate decreasing to 3.0% by December 2021, though the labor force has declined by about 3% since the pandemic.

Financial System

• Resilience: The financial system remains resilient, supported by significant policy buffers, a strong external position, and robust institutional frameworks.
• Exchange Rate: The Linked Exchange Rate System (LERS) continues to function smoothly and is considered appropriate for maintaining economic and financial stability.
• Housing Market: Housing prices increased by about 4% in 2021, but concerns remain over affordability and potential market corrections.

Risks

• Downside Risks: The balance of risks is tilted to the downside, with pandemic-related uncertainty, slower-than-expected global recovery, and supply chain disruptions posing challenges.
• Capital Flows: A sharp rise in global risk premia and disorderly monetary tightening in major economies could affect capital flows.
• Systemic Risks: Increased financial linkages with Mainland China create macro-financial vulnerabilities, especially in the property and technology sectors.

Policy Recommendations

• Fiscal Policy: Should return to a balanced budget gradually, with targeted support for low-income households, unemployed workers, and SMEs. A comprehensive tax reform is needed to broaden the tax base and maintain fairness and competitiveness.
• Financial Sector: Focus should shift to addressing solvency issues for corporates and individuals. Regulatory and supervisory frameworks should be strengthened, and macroprudential oversight should be enhanced.
• Housing Policy: Continue the three-pronged approach of increasing housing supply, implementing macroprudential measures, and adjusting stamp duties. The New Residential Stamp Duty should be phased out once systemic risks from non-resident inflows are mitigated.
• Climate Change: The updated action plan for carbon neutrality by 2050 is welcomed. Additional carbon pricing mechanisms and a green and sustainable finance ecosystem should be developed to support global green initiatives.

Key Information

• IMF Staff Report: Completed on January 26, 2022, based on discussions ending on December 15, 2021.
• Fiscal Reserves: As of November 2021, fiscal reserves stood at about 30% of GDP, and FX reserves at 135% of GDP.
• Fiscal Stimulus: In 2020, the fiscal stimulus was 12.3% of GDP, and in 2021, it was 3.5% of GDP.
• Financial Buffers: The countercyclical capital buffer was reduced from 2.0% to 1.0%, and regulatory reserves for credit loss provisions were cut by half.
• Housing Prices: Increased by about 4% in 2021, following a less than 1% decline in 2020.
• Exchange Rate: The Hong Kong dollar has remained stable within the Convertibility Zone, with the market rate at 7.773 HKD/USD as of November 2021.
• Capital Flows: Hong Kong SAR remains a major financial gateway for Mainland China, with over 60% of direct investment flowing through the region.
• Climate Action: The government has announced a Climate Action Plan to achieve carbon neutrality by 2050, with an emphasis on green finance and sustainable development.

Conclusion

The IMF's Executive Board endorsed the staff appraisal, emphasizing the need for continued policy support to ensure a balanced and inclusive recovery, safeguard financial stability, and leverage opportunities from increased financial linkages with Mainland China. The report also underscores the importance of addressing climate-related risks and strengthening the regulatory and supervisory framework to support long-term growth and resilience.