Hong Kong's Strong Fundamentals Bode Well For Smooth Transition

• Author: IMF Asia and Pacific Department
• Pages: 65-67

Page 65

Hong Kong has turned in a strong economic performance over the past decade and a half. Since the initiation of economic reforms in China in 1978, real GDP growth has averaged nearly 7 percent a year, while exports have increased more than sixfold. Hong Kong has evolved into a service-based economy and an important international financial center. Its per capita GDP- $22,770 in 1995, versus $5,500 as recently as 1980-is comparable to all but the wealthiest industrial countries. Hong Kong's gains have been achieved in the context of a massive, market-driven economic restructuring that has also reflected an increasing degree of integration with China.

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During the 1990s, Hong Kong's growth rates havePage 66 tended to moderate, with economic activity becoming more stable. The external-demand-led growth of the 1980s has given way to predominantly domestically led growth, with the main growth impetus provided by consumer spending. In 1994-95, growth slowed in response to high U.S. interest rates and a downturn in asset markets, with the slowdown continuing into the first half of 1996. During the second half of the year, however, growth revived moderately; real GDP grew by 5.1 percent in the third quarter, buoyed by private consumption and investment and a rebound in asset markets.

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A sharp deceleration in imports helped to narrow the merchandise trade deficit by some 2!/2 percent of GDP in 1996 to about $17.8 billion (equivalent to 11!/4 percent of GDP). Services exports have been strong and the balance on goods and nonfactor services is estimated to have reached a surplus of about 1 percent of GDP at the end of 1996. Moderate domestic demand, combined with falling import prices resulting from exchange market developments and some labor market slack, led to a decline in inflation-to about 6 percent in 1996-with unemployment remaining low, at about 2!/2 percent. And Hong Kong's official reserves stood at nearly $64 billion at the end of 1996-a 15 percent gain over a year earlier.

Continuation of the improving economic trends evident in the second half of 1996 would support real GDP growth for Hong Kong of about 5 percent in 1997, with inflation remaining in the 6-7 percent range. The pace of Page 67 the recovery will depend critically on the expected resurgence in exports. The key challenge for policymakers is to maintain business confidence-most effectively by...