Via IMF (Den Internationale Valutafond)

People’s Republic of China—Hong Kong Special Administrative Region: Staff Concluding Statement of the 2019 Article IV Consultation Discussions

December 4, 2019

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The Hong Kong SAR economy has been hit hard by both external and
domestic shocks and fell into a technical recession in the third
quarter. The recovery is expected to be gradual and both near- and
medium-term risks have increased. With significant buffers in
place, securing sustainable growth and maintaining the city’s
long-term competitiveness require stabilizing the economy with
short-term stimulus while addressing underlying structural
challenges through a comprehensive policy package. Despite the
slowing economy, financial markets remain resilient and the Linked
Exchange Rate System remains the appropriate arrangement for Hong
Kong SAR.

Slowing Growth Amid Rising Uncertainty


After robust growth of 3 percent in 2018, economic activity weakened
significantly in 2019
and the economy fell into a technical recession in Q3.

Rising trade tensions between the U.S. and China and heightened uncertainty
have taken a toll on exports and investment. Private
consumption and visitor arrivals have declined significantly due to the
social unrest that started this summer. There are signs of
moderation in the housing sector with property prices declining by about 4
percent between May and September, but housing affordability remains
stretched and income inequality high. The unemployment rate remained low at
2.9 percent in Q3.


The economy is expected to start recovering next year, but the pace is
expected to be gradual with a negative output gap over the medium term.

As the cyclical downturn continues, GDP is expected to
contract by 1.2 percent in 2019. Growth is projected to rise to 1 percent
in 2020 led by a recovery of private consumptionbut remain well below potential growth of about
2½ percent.


With increased trade barriers and disruptions to global supply chains as a
persistent drag on trade-related activities, growth would recover at a
slower pace than in previous recoveries. The slowing economy is expected to
shed jobs, thus raising unemployment, though the flexible labor market should allow for a significant share of affected
to be absorbed by the public and other services sector
With an estimated negative output gap of about 2¾ percent of GDP in
inflation is projected to fall to around 2½ percent as food prices

Risks to outlook are tilted to the downside.

  • Downside.
    On the external side, further escalation of trade tensions between the
    U.S. and China could dampen global trade and lower the volume of trade
    passing through the city, with negative spillovers for business and
    employment in trade-related industries. Additional barriers, including
    potential restrictions by the U.S. against China in technology and the
    financial sectors, could reduce growth through adverse confidence
    effects and greater financial market volatility. A significant slowdown
    of Mainland China or a disorderly adjustment in its financial markets
    could exert significant impact on Hong Kong SAR given the close
    connectedness through both real and financial channels. On the domestic
    side, a deterioration of the sociopolitical situation and delays in
    addressing structural
    challenges of insufficient housing supply and high income
    could further weaken economic activity and negatively affect the city’s
    competitiveness in the long term. As house prices are highly
    procyclical, a significant slowdown of the economy could trigger an
    adverse feedback loop between house prices, the real economy and the
    financial sector.
  • Upside.
    An easing of trade tensions between the U.S. and China could lift
    global trade and spur confidence and investment, including in Hong Kong
    SAR. The development of the Greater Bay Area could further improve
    medium-term growth prospects.


A history of prudent macroeconomic policies has left Hong Kong SAR with
significant buffers to address both cyclical and structural challenges.

FX reserves at around 120 percent of GDP or twice the monetary base,
together with a large net international investment position of about 390
percent of GDP, provide a strong buffer against external shocks. Enhanced
regulatory and supervisory frameworks have built up banks’ strong capital
and liquidity buffers, with both capitalization and liquidity levels well
above international standards. Prudent fiscal management under the balanced
budget principle and strong revenue growth during the real estate market
boom have helped accumulate large fiscal reserves of about 40 percent of

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Policy Recommendations

Fiscal Support for Macroeconomic Stability


Greater countercyclical fiscal support would help the economy navigate
through negative shocks while maintaining long-term sustainability.

With a comfortable level of fiscal reserves, expansionary fiscal policy is
needed to support the slowing economy in the near term. The authorities
should balance the near-term need of boosting aggregate demand against
longer-term weakening of the structural fiscal position arising from rapid
population aging and the corresponding increase in social expenditure. This
can be achieved by aligning short-term measures with long-term goals and
shifting spending forward (e.g., on identified infrastructure projects) in
a manner that helps ensure long-term sustainability.

In the near term, government spending should be increased significantly
to cope with the cyclical downturn and address structural challenges of
insufficient housing supply and high income inequality.

In addition to one-off relief measures included in the 2019/20 budget,
the authorities have announced new fiscal stimuli to help the slowing
economy, including support for the SMEs, further tax relief, extra social
security payments, and subsidies for households, which the mission
supports. Despite these announced measures, we project the fiscal surplus
to remain at about 1 percent of GDP over the medium term and would
 an additional comprehensive medium-term fiscal package,
including another fiscal stimulus in the current fiscal year targeted
to vulnerable households and SMEs
Spending increases of around 1½ percent of GDP per year (8 ppt of GDP
in total over 2019–24),
relative to the projected baseline
, would help close the negative output gap over the medium term with a
drawdown of fiscal reserves of about 5½ ppt of GDP. Such a package could

  • Targeted transfers. Additional fiscal spending of about 2½ ppt of GDP over two years,
    that is significantly frontloaded to the current fiscal year, would
    those severely affected by the cyclical downturn
    . As overall tax rates are already low, fiscal stimulus could be better
    delivered by targeted spending to vulnerable households and SMEs,
    including through extra allowances, rent relief, and subsidies for low-income students.
  • Housing/infrastructure.
    Given the urgent need to increase housing supply, additional
    spending on housing and related infrastructure developments is
    Bringing forward planned spending on infrastructure projects and scaling it up
    after the above-mentioned targeted transfers are unwound would not only
    expedite the supply of land and housing but would avoid an early
    withdrawal of the fiscal impulse needed to close the negative output
    gap over the medium term. Cumulative increase in spending of 3½ ppt of
    GDP over the next five years would increase real GDP by about 2¼ ppt
    during this period.
  • Education/training.
    Despite the very flexible labor market, unemployment is expected to
    increase given the significant slowdown of the economy and the
    persistence of external headwinds, highlighting the urgency of
    retraining the affected workers
    As Hong Kong SAR faces increased competition from
    other financial centers, it is also important to upgrade “soft”
    infrastructure through education and R&D to further improve
    competitiveness. Increasing spending on education and job training,
    cumulatively by 2 ppt of GDP over the next five years, would increase
    real GDP by about 2½ ppt in the long run through higher productivity
    and increased labor supply.

mcs120419 figure 1

If growth falters more than expected, the authorities should
provide more near-term fiscal support.

Additional targeted spending to vulnerable households and SMEs could help
cushion the negative impact of a more severe economic downturn. Retraining
programs as well as housing and infrastructure projects could be scaled up
further to support the displaced workers and expedite the supply of land
and housing.

In the medium term, the authorities should also consider structural
measures to ensure fiscal sustainability and greater equity.

The economy faces challenges of rapid population aging
and the corresponding increase in social expenditures in the medium to
long term. Thus, the authorities could consider the following measures to avoid
scaling back the social safety net, which would incur undesirable social
costs and hinder inclusive growth.

  • Raising revenues.
    International benchmarking with other global financial centers suggests
    that there is room to introduce a VAT, raise excise taxes, and increase
    the top personal income tax (PIT) rate and the tax rate under personal
    assessment while maintaining competitiveness. The lowering of the
    effective PIT rates since 2018 should also be reversed once
    macroeconomic conditions improve. Introducing a carbon tax for some
    sectors (e.g., energy, building, and transportation) may help reach the
    2030 carbon intensity target laid out in the government’s Climate
    Action Plan 2030+ and raise revenues in the long run.
  • Optimizing spending.
    Regular fundamental expenditure reviews would help identify any
    wasteful spending and ensure that long-term goals of increasing
    productivity, raising labor force participation, and tackling income
    inequality are addressed. The authorities should also prepare a
    long-term healthcare spending strategy.
  • Improving the effectiveness of budget planning and execution.
    Reducing reliance on property-related revenues and avoiding
    systematic under-execution of operating expenditures would help
    increase the countercyclicality of fiscal policy and ensure the
    effectiveness of the fiscal response to the economic downturn.
  • Increasing labor force participation.
    Measures to increase the provision of childcare services, especially
    for children below two years of age and at subsidized rates for
    poor/single parent families,
    would help encourage female labor force participation.
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B.Containing Housing Market Risks

The three-pronged approach to containing housing market risks and
increasing housing affordability remains valid and should continue.

The combination of macroprudential measures and stamp duties has helped
limit household vulnerabilities and contain risks to the financial sector.
However, housing prices remain overvalued and affordability stretched.
A sustained supply increase remains the most needed course of action
to alleviate price pressures and improve affordability.

  • Increasing housing supply is critical to resolving the structural
    supply-demand imbalance and should be accelerated by increasing
    land allocation for residential housing.

    While housing production has increased in recent years, it has fallen
    short of housing demand as well as the government’s target in the
    Long-Term Housing Strategy. The recent announcement of various measures
    to increase land supply for residential housing is welcome and should
    be implemented as planned. Given the difficulties in meeting the
    housing supply target, it is urgent to expedite the process for
    identifying land and building sites, together with streamlining the
    environmental, transportation, and other relevant assessments.

  • The macroprudential stance should stand ready to adjust to address
    financial stability risks.

    Despite weak economic activity and some signs of housing market
    stabilization, adjustments to macroprudential measures should be based
    on evolving financial stability risks. If housing prices and mortgage
    lending start to increase rapidly again, further tightening would be
    warranted, with due attention paid to the emerging risk of regulatory
    leakages to the non-banks
    (e.g., mortgage financing by property developers)
    . International experience suggests that regulators
    should apply the same macroprudential policies to all mortgage
    providers to prevent leakages and strengthen the effectiveness of the

  • Stamp duties have helped contain house price growth by curbing
    excess demand, especially from cash buyers
    and, consequently, helped contain household leverage and
    systemic risks

    The New Residential Stamp Duty (NRSD) continues to be appropriate as
    systemic risk from the housing market remain elevated. However, under
    the IMF’s Institutional View on capital flows, as NRSD is levied at a
    higher rate on non-residents than on first-time resident home buyers,
    going forward, it should be phased out and replaced with alternative
    non-discriminatory macroprudential measures when systemic risks from
    the non-resident inflows dissipate.


The eligibility criteria of the mortgage insurance program (MIP) were
adjusted for first-time home buyers.

While the LTV limit without the MIP remains unchanged at 60 percent, the
maximum property values eligible for higher LTV ratios with the MIP were
raised from HKD 4 to 8 million (LTV ratio of 90 percent) for first-time
home buyers and from HKD 6 to 10 million (LTV ratio of 80 percent) for all
home buyers considering recent appreciation of property prices. While this
could also help reduce mortgage financing by non-banks, given that a
significant portion of new mortgages are financed with this insurance
(about 9 percent for the first nine months of 2019), the authorities should
carefully monitor and assess the overall impact of the policy changes on
the housing market and household leverage, and stand ready to adjust the
policy mix of macroprudential policies and the MIP.

Safeguarding Financial Stability

The authorities have strengthened the regulatory and supervisory

Key Basel III standards, including minimum capital and liquidity
requirements, have been implemented. The countercyclical capital buffer was
lowered from 2.5 to 2.0 percent in October to support bank lending as
credit growth has declined sharply since the second half of 2018 and
remains subdued. The Hong Kong Monetary Authority (HKMA) updated its
liquidity facilities framework to reduce the stigma and provide more
operational flexibility for banks accessing business-as-usual facilities
and introduced a new resolution facility. The Securities and Futures
Commission has capped total margin lending to clients by brokers for stock purchases at
five times of the brokers’ capital since October 2019, which should help
safeguard financial stability when facing adverse shocks. The Insurance
Authority is on track to implement a risk-based capital regime for
insurance companies with the third quantitative impact study launched in
August 2019.

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Continued efforts are necessary to maintain financial sector resilience
and safeguard financial stability amid rising global financial
. Following the preliminary assessment of the ongoing FSAP mission:

  • Private non-financial sector debt remains elevated, with pockets of
    vulnerability in certain corporate sectors. Sectoral macroprudential
    measures (e.g., sectoral risk weights or caps on total sectoral exposures)
    could be considered to limit concentration risk of financial institutions.
  • With a resolution regime for financial institutions in place,
    the resolution authorities should maintain close coordination with home
    country authorities of Hong Kong SAR-based subsidiaries or branches of
    global banks, including in the areas of resolution planning and the
    roll-out of loss-absorbing capacity requirements.
  • The recently-concluded assessment of the Financial Action Task Force
    found that Hong Kong SAR has a solid anti-money laundering/combating
    the financing of terrorism (AML/CFT) system that is delivering good
    results. Hong Kong SAR has a strong legal and institutional framework.
    The authorities generally have a good understanding of the money
    laundering and terrorist financing risks they are exposed and actively
    prosecute money laundering from domestic offences. They should enhance
    prosecution of money laundering involving crimes committed abroad and
    strengthen supervision of certain non-financial businesses.
    Implementation of the priority actions identified in the Mutual
    Evaluation Report on AML/CFT, including with respect to transparency of
    corporate and trusts, would be crucial in helping to sustain Hong Kong
    SAR’s reputation as a leading global financial center.

In light of the growing role of fintech in the banking sector, the HKMA
stepped up the supervision of technology risk management and
operational resilience.

While granting eight banking licenses to virtual banking operators, which
are expected to become operational from late 2019, the HKMA required
virtual banks to meet the same supervisory rules as conventional banks, and
to establish the appropriate risk management framework. The authorities aim
to achieve a balance between innovation and regulation
, including by implementing the Cybersecurity Fortification Initiative.
Close collaboration across regulatory agencies should help the Council of
Financial Regulators and the Financial Stability Committee identify and
close potential regulatory loopholes in a timely manner.

The development of green finance and the Greater Bay Area offers
opportunities to maintain Hong Kong SAR’ competitiveness as a global financial center

The three green finance initiatives launched in May 2019, including
promoting Green and Sustainable Banking, aim to address the climate
change-related risks facing the banking sector and achieve sustainable
green financing. Following the announcement of the Outline Development Plan
for the Greater Bay Area in February 2019, the authorities have announced
new measures to improve cross-border cooperation, including allowing the
city’s residents working in high-tech sectors and living in the Mainland to
pay Hong Kong SAR’s taxes. To promote financial integration, the HKMA has
worked with the Mainland authorities to allow the use of e-wallets in Hong
Kong SAR for cross-border payment and to streamline the process of opening
Mainland bank accounts by Hong Kong SAR residents on a pilot basis.

D. Preserving an Anchor of Stability


The LERS remains the appropriate arrangement for Hong Kong SAR.

The Linked Exchange Rate System (LERS) anchors the stability of Hong
Kong SAR’s highly-open economy with its large and globally integrated
financial services industry. The currency board arrangement has
anchored the city’s monetary and financial stability against external
shocks, including the Asian Financial Crisis and Global Financial
Crisis. The credibility of the currency board arrangement has been
ensured by
a transparent set of rules governing the arrangement, ample fiscal and
FX reserves, strong financial regulation and supervision, the flexible
economy, and a prudent fiscal framework.

16. The

LERS continues to function well despite increased global financial
market volatility.

The interbank rates have remained stable, net capital outflows have been
limited, and market expectations of HKD/USD exchange rate have remained
well anchored. Hong Kong SAR’s external position remains broadly in line
with medium-term fundamentals and desirable policy settings. The
authorities should continue implementing policies aimed at supporting
smooth functioning of the LERS. In particular, maintaining the strong track record of public
communications on the functioning of the arrangement and the HKMA’s
corresponding FX operations as well as enhanced communication on overall FX
and money market developments will help ensure credibility of the

In closing, the mission would like to thank the Hong Kong SAR
authorities, Shenzhen Central Sub-Branch of the People’s Bank of China,
and Shenzhen Municipal Financial Regulatory Bureau for their kind
hospitality and open and productive discussions


The growth forecasts are based on the data that were available at
the time of the mission.

IMF Communications Department


Phone: +1 202 623-7100Email: