HONG KONG

Policy respond
to covid-19
 The world economy is experiencing an unprecedented shock amid the novel coronavirus (COVID-19) pandemic. The current r
ecession is the deepest since the Great Depression and the path to recovery is subject to substantial uncertainty.
While large-scale fiscal and monetary accommodation has helped mitigate the impact on the economy and financial conditio
ns, the potential longer-term side effects stemming from the debt build-up and “low-for-long” monetary policy remain to be
seen. The Hong Kong foreign exchange and money markets continued to operate in a smooth and orderly manner. With the r
Overview: epeated triggering of the strong-side Convertibility Undertaking and growth in total deposits in the first seven months of 202
0, no significant outflows from the Hong Kong dollar or the Hong Kong banking system were observed during the review peri
od. Total loan growth increased slightly during the first half of the year, while activities in the residential property market pick
ed up in the second quarter before moderating again in July and August.
Looking ahead, uncertainties over the path of global and domestic economic recovery amid the pandemic, and rising US-Chin
a tensions will continue to pose significant challenges to the Hong Kong banking sector. As these risk factors may continue to
linger, banks should carefully assess the longer-term impact on the asset quality of their loan portfolios, particularly as the re
cession may weaken corporates’ and households’ repayment ability
COVID-19 IMPACT ON
GDP
• Hong Kong’s economic recession deepened in the
first half of 2020 amid the COVID-19 outbreak.
• Compared with a year ago, real gross domestic pr
oduct (GDP) dropped by about 9% in the first half
of the year, the steepest decline on record.
• The trade, retail and tourism-related sectors were
particularly hard hit, recording a double-digit decli
ne in activities. On a sequential basis, real GDP als
o declined at a record rate of 5.5% in the first quar
ter and roughly stayed at that subdued level in the
second quarter.
• The outbreak had an adverse impact on almost all
components of GDP – disrupting consumption, inv
estment and external trade, and bringing tourism
to a standstill.
Economic monetary • On 15 March, following moves by the Fed, the Hong Kong Monetary Autho
rity lowered its countercyclical capital buffer imposed on banks to 1% from
stimulus measures 2%, and reduced its base rate by 64 basis points to 0.86%. This freed up H
KD 500 billion in capital.
 • With a low base rate 0.86% set by the Hong Kong
Monetary Authority
• the cost of borrowing are lightly to reduce
• And the reward for saving will decreases
• The decrease in interest rate causes a ripple effect
• As AD=C+G+I+(X-M)
• Business investment will increases because it is mor
e attractive for firms to borrow money,

- More consumer spending and more

confidence among consumers and firm
- Consumption increases
- Leading to an increase in domestic
demand
Expansionary mone
- Lower interest rate will also generally
mean a fall in exchange rate

tary policy - Which leads to an increased demand

for Hong Kong export
- As a result, the total demand in the
economy increse and stimulate
economic growth
 • Cheaper borrowing costs. Lower interest r
ates make the cost of borrowing cheaper.
It will encourage consumers and firms to t
ake out loans to finance greater spending
and investment.

Impact on • Lower mortgage interest payments. A fall i

n interest rates will reduce the monthly co

private co st of mortgage repayments. This will leave

householders with more disposable inco
me and should cause a rise in consumer s

nsumption pending
• Rising asset prices. Lower interest rates m
ake it more attractive to buy assets such a
s housing. This will cause a rise in house p
rices and therefore rise in wealth. Increas
ed wealth will also encourage consumer s
pending as confidence will be higher
Impact on Investme
nt

 Capital Investment
      
The period of low-interest rates m
akes investment financed by borr
owing more attractive. With lower
interest rates investment gives a
relatively better rate of return bec
ause the cost of borrowing is low.
At a low rate of investment, more
projects will have a rate of return
higher than the cost of borrowing
Impact on exchange rate
• The Hong Kong dollar exchange rate has strengthene
d since March. Underpinned by equity-related Hong
Kong dollar demand and carry trade activities as ind
uced by the positive Hong Kong dollar-US dollar inter
est rate spreads, the Hong Kong dollar exchange rate
strengthened to 7.7500 in April.
• The strong-side Convertibility Undertaking (CU) was
triggered six times between 21 April and 27 April. Th
ereafter, the Hong Kong dollar exchange rate stayed
strong at near the 7.75 levels and the strong-side CU
was further triggered 44 times between 4 June and
22 September, underpinned by equity-related dema
nd including initial public offering activities, the sout
hbound Stock-Connect and dividend payments.
• Despite market volatilities arising from the COVID-19
outbreak, the Hong Kong dollar continued to trade i
n a smooth and orderly manner.
 • As the Hong Kong dollar is pegged to
the US dollar, Hong Kong must follow
US monetary policy.
• Hong Kong cannot cut its benchmark
Evaluation interest rate singlehandedly without
hurting its linked exchange rate syste
m. Without independent monetary p
olicy, aggressive fiscal stimulus beco
mes even more necessary.
 • Hong Kong’s economic performance for the
rest of 2020 is still highly challenging given t
he lingering pandemic, which poses substan
Evaluatio tial downside risks to the global and domesti
c economies.
n • On the external front, exports will continue t
o struggle because of a standstill in inbound
tourism and weak global demand.
• Domestically, weak private consumption will
likely persist amid social distancing, weakeni
ng labour market conditions and easing hou
sehold income
• fragile business confidence may dampen ca
pital expenditure, as well as building and co
nstruction activities
 Economic Fiscal s
timulus measures
• Hong Kong in early March launched a fis
cal stimulus of approximately 10000HKD
(GBP 1000) cash payout scheme for each
of Hong Kong's 7 million residents, as we
ll as targeted income tax cuts and rent s
uspension for a portion of the populatio
n, for a total of around USD 15 billion.
• Hong Kong will run its first budget deficit
in years, and is projected to continue to
run this deficit for the coming five years
at least.
Counter cyclical stimulus
• counter-cyclical fiscal stimulus was essential to ensure the smooth functio
ning of the economy after a large negative shock.
• This year’s stimulus alone cost HK$137.5 billion (US$17.74 billion) — nearl
y 5 per cent of GDP. Total fiscal stimulus since mid-2019 has amounted to
more than HK$300 billion (US$38.7 billion), more than 10 per cent of GDP.
• Hong Kong’s estimated fiscal deficit in 2020–2021 will likely increase to ab
out HK$290 billion (US$37.4 billion) , or 10 per cent of GDP. Yet with HK$1
.1 trillion (US$141.9 billion) in fiscal reserves, Hong Kong has the fiscal spa
ce to manoeuvre without resorting to debt financing.
 Expansionary
fiscal polic
y

Lower income tax rates increa

se the spending power of con
sumers and can increase aggr
egate demand, leading to hig
her economic growth (and po
ssibly inflation). On the suppl
y side, income tax cuts may al
so increase incentives to work
– leading to higher productivi
ty.
Effects of cash payout scheme and tax c
ut

• Increased spending. Workers will see an increase in their discretionary income. With l
ower income tax rates, they would keep more of their gross income, so effectively the
y have more money to spend.
• Higher economic growth. With lower tax rates, we could expect to see a rise in consu
mer spending because workers are better off. Because consumers spending is a comp
onent of aggregate demand (AD) ,then a rise in consumer spending should cause a ris
e in AD, leading to higher economic growth.
• Government borrowing. Tax will cuts, ceteris paribus, lead to lower tax revenue and th
is is likely to cause higher borrowing. , the government is injecting unused resources in
to the circular flow
Criticism of fis
cal policy
• Government failure - The government ma
y have poor information about the state
of the economy during the pandemic and
struggle to have the best information abo
ut what the economy needs. For example
, not equally distributed to all industry
• Time lags. To increase government spend
ing will take time. It could take several m
onths for a government decision to filter
through into the economy and time to ac
tually affect AD to stimulate growth
Criticism of fiscal policy (high budget
deficit)

• Hong Kong’s estimated fiscal deficit in 2020–2021 will likely increase to abo
ut HK$290 billion (US$37.4 billion) , or 10 per cent of GDP Budget Deficit.
• Expansionary fiscal policy (cutting taxes and increasing G) will cause an incr
ease in the budget deficit which has many adverse effects. A higher budget
deficit will require higher taxes in the future and may cause crowding out.
• Crowding Out. Expansionary fiscal policy of increased government spending
(G) to increase AD may cause “Crowding out” Crowding out occurs when in
creased government spending results in a decrease in the size of the private
sector.
Evaluation

• Higher income tax rates decrease

the incentive to work and invest c
ompared lower rates. If this effect
is large enough, it means that at s
ome tax rate, and further increas
e in the rate will actually lead to d
ecrease in total tax revenue. For e
very type of tax, there is a thresh
old rate above which the incentiv
e to produce more diminishes, th
ereby reducing the amount of rev
enue the government receives.
Evaluation
• It depends on consumer and business confidence. If consumer confiden
ce is low during pandemic , then a reduction in tax may not increase sp
ending because they prefer to save the extra income for safety uses. Alt
ernatively, some argue, that lower tax will increase confidence and gen
eral motivation because they feel less government intervention.
• It depends what else is happening in the economy. If we cut tax, during
a global recession, AD may continue to fall. Even though tax cuts are hel
ping to increase disposable income, we will see a decline in exports, fall
in house prices, and a rise in unemployment. In other words, the expan
sionary effects of tax cuts are outweighed by other factors such as pand
emic in the economy.
 • In response to the pandemic, the Government
swiftly launched relief measures of unpreceden
ted scale to support enterprises and individuals
and to safeguard jobs, including the HK$10,000
Cash Payout Scheme and the provision of wage
subsidies through the Employment Support Sc
heme. The HKMA has also taken a three-prong

Conclusion ed approach to bolster the banking sector in su

pport of the real economy. The measures comp
rise proactive coordination with the banking se
ctor to ease cash-flow pressures on enterprises
and households, releasing buffers to boost the
lending capacity of banks and ensuring that Pa
ge 5 banks have abundant liquidity to meet the
ir needs and support domestic economic activi
ties.
Conclusion
• Local economic performance for the rest of 2020
is still highly challenging given the lingering pand
emic. Nonetheless, increased public demand (e.
g. government consumption) and the massive re
lief measures introduced by the authorities are a
nticipated to provide some support to the dome
stic economy. Taking into account the multiple h
eadwinds, the Government and private-sector a
nalysts revised downward their forecasts of real
GDP growth for the whole of 2020 to a range bet
ween -6% and -8% and a mean of -6.8% respecti
vely. This subdued economic outlook is subject t
o a number of risks and uncertainties as discusse
d above.