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Analysis of Hong Kong Situation in 2000


Hong Kong was under a strong economic position before Asian economic crisis with strong foreign reserves[1], healthy and transparent financial regimes, and no foreign debt.  It was successfully changed the economy from manufacturing-based to active investment-based as demonstrated in AD/AS diagram (Figure 1).  Expected inflation, future income and profit caused general price level to soar (P0 to P1) and aggregate demand to increase (AD0 to AD1).  The situation was above full employment equilibrium and in inflationary gap (Qf-Q1) as no cyclical unemployment (Q1>Qf).  The unemployment rate[2] was only 2.2 percent in third quarter of 1997 representing high demand of labor indicated from reducing structural unemployment (Qf-Qp to Q1-Qp).  Hence, economy activity was above potential output and real gross domestic product (GDP)[3] increased (Q0 to Q1).

The Asian economic crisis arose by last quarter of 1997 and Hong Kong was under severe recession as described in AD/AS diagram (Figure 2).  Economic activity was below potential output.  Third quarter GDP in 1998 shrank to ¡V6.8 percent (Q1 to Q2), which further slackened in both consumer demand and export performance (AD1 to AD2).  The situation was at unemployment equilibrium (Q2<Qf).  Cyclical unemployment increased (Q2-Qf) and seasonally adjusted unemployment rate (Q2-QP) climbed up to 6.2 percent in first quarter of 1999.  General price level dropped significantly (P1 to P2).

Consumption fell significantly.  Property prices tumbled due to high interest rates[4] (10.25 percent in first quarter 1998) and tight mortgage lending. Fluctuation in stock market (Figure 3) further depreciated national wealth (Figure 4).  Hong Kong became a target in the stock market due to its fixed exchange rate system, until the government¡¦s intervention at its new low of 6660 of Hang Seng Index.  Lost confidence about future due to high unemployment rate and low job security dampened consumer spending.  Retail was at its bottom with 20 percent drop in sales in August 1998, a dip in both value and volume to $16.5 billion[5].

Investment was declined significantly in 1998, which was weakened by higher interest costs and pessimistic outlook. The HKSAR has committed to defend pegged exchange rate (HK$7.80=US$1) in spite of the devaluation of currencies in its neighbor countries contributing high interest rates throughout 1998.

Net export decreased as a lost of competitiveness due to currency depreciation in Hong Kong and mainland RMB.  Tourism industry, a sector to provide synergy with every other sector particularly its networked dependency in labor-intensive industries, also declined significantly.  Total tourism receipts[6] were down a disastrous 28.8 percent in first three quarters 1998.

Under the fixed exchanged rate system, the HKSAR had hardly adjusted fiscal policy to rescue the economy through government expenditure.  Adjusted monetary policy was also impossible because of sensitivity of international capital flows to interest rates forcing to maintain domestic interest rates close to the levels as in the United States.  This had lowered the real GDP and also decreased government revenue resulting difficulties to remain balance budget.

Hong Kong economy has been adjusted starting second quarter of 1999 as shown in AD/AS diagram (Figure 5).  Wages, rental and property prices are down (P2 to P3).  Inflation[7] fell to a new low of deflation rate ¡V3.2 percent in 1999.  It means that input cost of doing business in Hong Kong have come down increasing aggregate supply (SRAS-0 to SRAS-1, output from Q2 to Q3).  A leaner economy predisposes the HKSAR to reap greater advantages in the early stages of any regional recovery in face of its devaluated neighbor countries. 

Three major disadvantages under the fixed exchange rate system have limited the government¡¦s policy in dealing with the crisis.  First, devaluation of the currency may reduce the acceptability of the currency and create political instability.  Second, interest rates have to remain close to the United States due to the sensitivity of international capital flows to interest rates thus monetary policy is difficult to be adjusted.  Third, strict fiscal discipline to remain balanced budgets is required so have to avoid loans and money printing.  At last, the fixed exchange rate was not off pegged due to strong foreign reserves in Hong Kong.  In return, Hong Kong has to tolerate the slow economy recovery in comparison with its devaluated neighbor countries. 


Appendix 1

Unemployment and Underemployment Rate

Period

Unemployment rate (Seasonally adjusted) (%)

Underemployment rate (%)

Q1 97

2.5

1.1

Q2 97

2.4

1.3

Q3 97

2.2

1.0

Q4 97

2.5

1.3

Q1 98

3.5

1.9

Q2 98

4.4

2.6

Q3 98

5.0

2.7

Q4 98

5.7

3.0

Q1 99

6.2

3.0

Q2 99

6.1

2.9

Q3 99

6.1

3.1

Source: ¡¥Frequently Asked Statistics¡¦ (2000), [online accessed on 11 January 2000].
http://www.info.gov.hk/censtatd/hkstat/fas/tlabour.htm


Appendix 2

GDP Growth

Period

Year-on-Year % change in the original GDP series

Quarter-to-Quarter % change in the seasonally adjusted GDP series

Q1 97

5.7

2.5

Q2 97

6.7

2.0

Q3 97

6.0

0.8

Q4 97

2.8

1.8

Q1 98

-2.6

2.9

Q2 98

-5.1

1.0

Q3 98

-6.8

1.4

Q4 98

-5.7

0.6

Q1 99

-3.4

0.3

Source: Chick, Agnes & Premji, Abdul (2000), ¡¥Cash Management in the Hong Kong SAR¡¦, HSBC¡¦s Guide to Cash and Treasury Management in Asia 2000.


Appendix 3

Interest Rates (HKD, % per annum)

Effective from Year

Month

Day

Savings deposits rate

Best lending rate

1994

8

22

3.00

7.75

 

10

1

3.00

7.75

 

11

21

3.75

8.50

1995

1

3

3.75

8.50

 

2

6

4.25

9.00

 

11

2

4.25

9.00

 

12

27

4.00

8.75

1996

2

5

3.75

8.50

1997

3

27

4.00

8.75

 

10

24

4.00

9.50

 

10

27

4.75

8.75

1998

1

12

5.50

10.25

 

3

30

5.25

10.00

 

10

19

5.00

9.75

 

11

23

4.75

9.50

 

12

7

4.50

9.25

 

12

21

4.25

9.00

1999

1

11

4.00

8.75

 

4

12

3.75

8.50

 

5

3

3.50

8.25

Source: Chick, Agnes & Premji Abdul (2000), ¡¥Cash Management in the Hong Kong SAR¡¦, HSBC¡¦s Guide to Cash and Treasury Management in Asia 2000.


Appendix 4

Tourism

Total Tourism Receipts

Receipts from

Jan-Sep 1997

Jan-Sep 1998

% Growth

$Million

$Million

Visitors

53,753.78

37,814.69

-29.7

Servicemen

139.81

115.18

-17.6

Aircrew Members

975.38

998.13

+2.3

Transfer Passengers

 504.25

477.63

-5.3

Total Tourism Receipts

55,373.22

39,405.63

-28.8

Total Visitor Spending by Major Market Areas

Major Market Areas

Jan-Sep 1997

Jan-Sep 1998

% Growth

$Million

% #

$Million

% #

The Americas

5,166.08

9.6

4,259.51

11.3

-17.5

Europe, Africa and Middle East

5,913.32

11.0

4,138.37

10.9

-30.0

Australia, New Zealand and South Pacific

1,715.28

3.2

1,195.41

3.2

-30.3

North Asia

9,155.20

17.0

4,377.20

11.6

-52.2

South and Southeast Asia

8,044.48

15.0

4,060.47

10.7

-49.5

Taiwan

9,366.49

17.4

7,685.54

20.3

-17.9

All Others

2,776.35

5.2

1,779.25

4.7

-35.9

Sub-total

42,137.20

78.4

27,495.75

72.7

-34.7

Mainland China

11,616.58

21.6

10,318.94

27.3

-11.2

Total

53,753.78

100.0

37,814.69

100.0

-29.7

#Column totals may not add up to 100% due to rounding

Per Capita visitor Spending by Major Market Areas

Major Market Areas

Jan-Sept 1997

Jan-Sep 1998

% Growth

$

$

The Americas

6,685

5,846

-12.6

Europe, Africa and the Middle East

6,599

5,545

-16.0

Australia, New Zealand and South Pacific

6,446

4,796

-25.6

North Asia

6,545

5,286

-19.2

South and Southeast Asia

6,987

4,897

-29.9

Taiwan

7,029

5,719

-18.6

All Others

6,766

5,442

-19.6

Sub-total

6,766

5,442

-19.6

Mainland China

6,871

5,436

-20.9

Total

6,788

5,440

-19.9

Source: ¡¥Tourism¡¦ (1999), Hong Kong Business Annual 1999


Bibliography

Chick, Agnes & premji, Abdul (2000), ¡¥GDP Growth ¡V Cash Management in the Hong Kong SAR¡¦, HSBC¡¦s Guide to Cash and Treasury Management in Asia 2000.

¡¥Hong Kong¡¦s Annual Economic Data¡¦ (2000), Global FX Outlook & Strategy, Deutsche Bank.

Husted, Steven & Melvin, Michael (1998), International Economics, 4th edition, Addison-Wesley Longman, Inc., U.S.A.

Jackson, J., Mclver, R., McConnell, C. & Brue, S. (1998), Economics, 5th edition, McGraw-Hill, Sydney.

Krugman, Paul R. & Obstfeld, Maurice (1997), International Economics ¡V Theory and Policy, 4th edition, Addison Wesley Longman, Inc., U.S.A.

Lipsey, Richard G.; Purvis, Douglas D. & Steiner, Peter O. (1988), Macroeconomics, 6th edition, Harper Collins Publishers, N.Y.

Newson, John (1999), ¡¥Riding a Poisoned Tiger¡¦, Hong Kong Business Annual 1999.

Salvatore, Dominick (1998), International Economics, 6th edition, Prentice Hall, Inc., N.J.

¡¥Tourism¡¦ (1999), Hong Kong Business Annual 1999.

¡¥Unemployment and Underemployment Rate¡¦ (2000), Frequently Asked Statistics, [accessed on 11 January 2000].
http://www.info.gov.hk/censtatd/hksat/fas/tlabour.htm


Footnotes:

[1] ¡¥Hong Kong¡¦s Annual Economic Data¡¦ (2000), Global FX Outlook & Strategy, Deutsche Bank.

Foreign Reserves (US$ billion):         1994   1995   1996   1997   1998   1999

                                           49.30  55.4    63.4    92.8    89.6    82.0

[2] ¡¥Unemployment and Underemployment Rate¡¦ (2000), Frequently Asked Statistics, [accessed on 11 January 2000].

http://www.info.gov.hk/censtatd/hksat/fas/tlabour.htm

(see appendix 1)

[3] Chick, Agnes & Premji, Abdul (2000), ¡¥GDP Growth - Cash Management in the Hong Kong SAR¡¦, HSBC¡¦s Guide to Cash and Treasury Management in Asia 2000.  (see appendix 2)

[4] Chick, Agnes & Premji Abdul (2000), ¡¥Interest Rates, Cash Management in the Hong Kong SAR¡¦, HSBC¡¦s Guide to Cash and Treasury Management in Asia 2000.  (see appendix 3)

[5] Newson, John (1999), ¡¥Riding a Poisoned Tiger¡¦, Hong Kong Business Annual 1999.

[6] ¡¥Tourism¡¦ (1999), Hong Kong Business Annual 1999.  (see appendix 4)

[7] ¡¥Hong Kong¡¦s Annual Economic Data¡¦ (2000), Global FX Outlook & Strategy, Deutsche Bank.

Inflation Rate:      1994   1995   1996   1997   1998   1999

                     9.6      7.2      6.6      5.8      2.6      -3.2


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