Hong Kong: Macroeconomic Policy Response in 2008 Global Financial Crisis

Tian TianChisheng Li

Aili Zhou

04/11/2012

Country SnapshotSmall Land Mass: 426 sq mi (smaller than

D.C.)7.07 millions populationGDP: $224.46 billion (2012 est.)GDP per capita: $49,300 (10th highest in the

world)

Background of Hong Kong Economy Small Open Economy The world’s most laissez-faire economy

Small government: --low taxation --Government consumption is below 10 percent of GDP

Free trade --Highly dependent on international trade and finance left it

exposed to the external fluctuations Fixed Exchange Rate Hong Kong Dollar has been pegged to the United States dollar since

1983, restricting the exchange rate to within 7.75 to 7.85 Hong Kong dollars (HK$) to each United States dollar.

Economic integration with Mainland China 1997 Asian Financial Crisis

2008 Global Financial Crisis

Overview: Hong Kong’s Economic Slowdown

GDP growth rate: 2.5% in 2008 (1.7% in the third quarter, -2.5% in the fourth quarter), down from 6.4% in 2007

Unemployment rate:5% for the period ending Feb 2009,compared to 3.3% a year earlier

Main Attributes of the Economic Slowdown A deepening global economic downturn reduced the

external demand for Hong Kong exports: Total export of goods in 2008 grew by 2% in real terms, a notable drop from the 7% increase in 2007, registering a year-on-year decrease of 4.9% in the fourth quarter . Exports of services rose by 5.6% over the year 2008, much slower than the 14.1% in 2007. In the last quarter of 2008, exports of services declined by 0.2%

Domestic demand shrunk with weaker consumer :Private consumption grew by 1.8% in real terms for 2008 as a whole, down from a robust 8.5% rise in 2007

Due to the cooling down of the local property market from the second half of 2008 and the tighter credit market, overall investment remained sluggish and registered a marginal decline of 0.3% for the year.

Main Attributes of the Economic Slowdown (cont.) Of the -2.5% GDP contraction in the last quarter of 2008,

net export contributed 3.7%, government spending 0.2% while investment -4.5% and private consumption -1.9%.

Fiscal policy Support enterprises: HKD 100 billion with the provision

of up to 70% guarantee to participating lending institutions granting loans to Hong Kong companies.

Create employment: More than 60,000 employment opportunities in 2009

through expediting projects, recruiting civil servants and creating temporary and other posts.

HKD 1.6 billion to create 62,000 jobs over three year; HKD 36,000/HKD 24,000 annual internship subsidy to employers who hire university graduated for jobs in the mainland/ Hong Kong; 14,000 jobs in the next two year with subsidies for building maintenance and culture events.

Boost consumption: an one-off rebate of 50% of salary tax paid up to a maximum of HKD 6,000, an exemption of property rates for two quarters for 2009/10, capped at HKD 1,500 and to freeze government fees and charges until March 2010.

Fiscal policy (cont.)

Develop the cooperation with Mainland: Long-term projects including the 29 km Hong Kong-Zhuhai-Macau Bridge to commence construction by 2010 and complete in 2016, and the Guangzhou-Shenzhen-Hong Kong Express Rail Link to start in end 2009.

These infrastructure projects will boost investment, offer job opportunities, stimulate both public and private consumption in the short run and foster closer economic integration with the Mainland in the long run.

Monetary policy Hong Kong does not have an independent

monetary policy because it pegged its currency to the US$.

Hong Kong’s interest rates are aligned with the US federal fund rate, and decreased from 6.75% to 0.5% in 2008.

As the US increased its foreign exchange reserves, the Hong Kong Monetary Authority purchased the US$ and increased its monetary base.

The Hong Kong Monetary Authority also increased its issuance of exchange fund paper.

Mundell-Fleming Model after the 2008 Crisis

Mundell-Fleming Model After the Policy Responses

Hong Kong GDP Annual Growth Rate

Hong Kong Unemployment Rate

Government Debt to GDP Ratio

Conclusion Hong Kong maintains favorable position as a

financial center because of its strategic location for foreign companies to establish business with China and other Asian countries, openness to capital flows, stable society and transparent governance system.

Hong Kong’s banking sector weathered through the 2008 global financial crisis and remained well-capitalized.

We believe Hong Kong has achieved effective recovery from the 2008 financial crisis as a result of its prudently designed policies