Hong Kong's rebound from the damage wreaked by the global financial crisis has been dynamic and compelling, the IMF maintains. Growth has continued, aided by concerted policy efforts, Hong Kong's flexible economic system, and strong up-drafts from Mainland China.
Unemployment has fallen and incomes have increased while living standards have generally improved. However, even Hong Kong is not immune to the new wave of economic turmoil sweeping the globe.
The IMF says external demand is weakening the momentum in Hong Kong's economy. As a result, growth is likely to ease to 5.75% this year, the IMF says, slowing further to 4% in 2012.
Even as Hong Kong's economy experienced robust growth and rising living standards, this has brought with it inflationary pressures. And while property markets appear calmer future fiscal support should be focused on lower income groups, the IMF report says.
Government measures in the Special Administrative Region [SAR] have helped tackle soaring house prices but it would be premature to assume that the prospects for a property bubble have dissipated. Housing costs remain at a premium in Hong Kong, placing a huge social
burden on those renting out accommodation renters and for new households that do not yet own a property.
But the risks stretch beyond Hong Kong's borders. The key risk ahead is from an external shock emanating from Europe, the IMF says in its report compiled in October. A slowdown in the Mainland economy may also sharply affect the economic outlook for the SAR.
The IMF says that policymakers have a formidable arsenal of policies at their disposal to tackle any potential crisis, but a Linked Exchange Rate System remains the best option for Hong Kong.
Hong Kong has established itself as the premier offshore renminbi center. However the channels for "financial spillovers between the Mainland and Hong Kong" are widening, the IMF states.
Going forward, the offshore market will need to be supported by a progressive opening to renminbi capital flows and an improvement in the provision of information, the IMF insists.
Indeed, Hong Kong has a relatively bright future, despite contagion risks. As the renminbi market develops further there will be greater avenues for spillovers between Hong Kong and Mainland as their financial markets become ever more interconnected. However the IMF concedes that this is dependent on "liberalization and reform of the Mainland's financial system".
There also needs to be a greater flow of information to help investors better understand the workings of the fast-developing offshore renminbi market, the IMF says. As the offshore renminbi market expands, more information could help facilitate further market development. This could include regular reporting on the direction of renminbi settlement in goods and services, on renminbi capital flows, and on the renminbi assets and liabilities of Hong Kong's financial institutions.
Mainland China is the fly in the ointment here, however. The Beijing government is often less than transparent in its economic policy, and its dithering on whether to float the renminbi on global markets creates its own problems for outside investors and markets [More reports: Bloomberg / WSJ].
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