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on China |
| By: | Dong He (Research Department, Hong Kong Monetary Authority); Wenlang Zhang (Research Department, Hong Kong Monetary Authority); Jimmy Shek (Research Department, Hong Kong Monetary Authority) |
| Abstract: | China's investment has been growing very strongly. The share of gross capital formation in GDP in China has also been higher than in other East Asian economies during their high growth period in the 1970s-80s. Many commentators have argued that such high rates of investment growth have been driven by irrational incentives and have been largely inefficient, will cause a build up of non-performing loans in the banking system, and will also lead to over-capacity and deflation. Others, however, have argued that China is still capital scarce, returns to capital are high, and therefore high rates of investment are both desirable and sustainable. This paper attempts to shed new light on the debate. We analyse both the allocative efficiency and the dynamic efficiency of China's spending on capital. The allocative efficiency measures the extent to which resources have been invested in places where potential rates of return on capital are high. The potential rates of return can be calculated as the marginal products of capital derived from an aggregate production function. The dynamic efficiency measures the extent to which the capital-output ratio exceeds the optimal level. The optimal level of the capital stock is determined by a rate of investment, at which level the Chinese residents at the present enjoy the highest level of consumption without sacrificing the level of consumption in the future. We first construct China's total capital stock at national and provincial levels, estimate the Cobb-Douglas and CES production functions, and compute the marginal products of capital. Assuming that the Chinese economy was operating on the production frontier, the marginal products of capital at the aggregate level have been relatively high in the past two decades, and have not shown clear signs of decline in recent years. We find that China's marginal product of capital compares favourably with those observed in the major industrialised economies and in the Asia region. We also find that the marginal products of capital have been higher in the coastal areas than in the less developed areas of western and central China, but the marginal products of infrastructure capital have been higher in the inland areas than in the coastal areas. These results are robust to different assumptions made in constructing the data of capital stock. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0619&r=cna |
| By: | Bruce Blonigen; Alyson Ma |
| Abstract: | Foreign-invested enterprises (FIEs) account for well over half of all Chinese exports and this share continues to grow. While the substantial presence of FIEs has contributed greatly to the recent export-led growth of China, an important objective of the Chinese government is to ultimately obtain foreign technologies and develop their own technological capabilities domestically. This paper uses detailed data on Chinese exports by sector and type of enterprise to examine the extent to which domestic enterprises are "keeping up" or even "catching up" to FIEs in the volume, composition and quality of their exports. We also use a newly-created dataset on Chinese policies encouraging or restricting FIEs across sectors to examine the extent to which such policies can affect the evolving composition of Chinese exports. |
| JEL: | F14 L11 L15 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13376&r=cna |
| By: | Li-gang Liu (Research Department, Hong Kong Monetary Authority); Kevin Chow (Research Department, Hong Kong Monetary Authority); Unias Li (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper applies a gravity model to investigate the determinants of foreign direct investment (FDI) in East Asia. We find that economic fundamentals (such as market size, per capita income, and country risk indicators), economic and cultural ties, and information asymmetry are important determinants for FDI. Of the sub-components that measure country risks, we find that both the level and the volatility of exchange rate matter in attracting FDI, as do some institutional quality indicators such as government stability and the degree of corruption in recipient countries. Globally, it appears that inward FDI among high-income OECD economies declined substantially on average over the sample periods under investigation. Meanwhile, inward FDI of the high-income OECD economies in emerging market economies, particularly those in Latin America and Asia, gained substantially relative to their economic fundamentals. Our empirical results indicate that the ASEAN-4 (Indonesia, Malaysia, the Philippines, and Thailand) received above-average inward FDI from the high-income OECD economies, even over the period of the 1997-98 Asian financial crisis, after controlling for their economic fundamentals. By contrast, China¡¦s FDI from the high-income OECD economies was below-average relative to its economic fundamentals. Thus, it is difficult to establish that China has crowded out FDI from her developing ASEAN neighbours. Both Hong Kong and Singapore have received more FDI on average from the European Union (EU), the US, and Japan. The FDI from these three economies in ASEAN-5 (Singapore plus ASEAN-4) was above the average over the sample periods studied. In contrast, only Japan invested more than the average in Greater China (Mainland China plus Hong Kong) in the 1990s. However, this was not the case for either the EU or the US. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0617&r=cna |
| By: | Li-gang Liu (Research Department, Hong Kong Monetary Authority); Wenlang Zhang (Research Department, Hong Kong Monetary Authority); Jimmy Shek (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper develops a composite real activity index (RAI) using eight monthly activity indicators for the Mainland economy based on the methodology of the Conference Board. The RAI appears to be able to track the Mainland GDP growth quite well. The results from a logit regression indicate that the RAI can correctly predict the next movement of the quarterly GDP growth rate with a probability of up to 68 percent. In addition, the RAI can beat a random walk process when used to conduct forecasts. Compared with indexes constructed using alternative methods, the RAI has economic properties that are easier to interpret. While the predictability of the RAI can be enhanced further with better data, it is a useful leading indicator to help monitor the momentum of the aggregate activities of the Mainland economy before the official release of the quarterly GDP data. |
| Keywords: | Real Activity Index, China, Dynamic Factor Model |
| JEL: | C43 C53 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0707&r=cna |
| By: | Lillian Cheung (Research Department, Hong Kong Monetary Authority); Kevin Chow (Research Department, Hong Kong Monetary Authority); Jian Chang (Research Department, Hong Kong Monetary Authority); Unias Li (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper aims to provide an analytical framework for an educated guess of the potential volume of outward portfolio investment from Mainland China and how large a share Hong Kong could capture, should the Mainland's capital account be as open as any other developed economies. Based on our counterfactual scenario for 2005, total outward portfolio investment from Mainland China is expected to increase from the current 5% of GDP to 15%, should its capital account be as liberalised as in an average OECD country. Assumptions based on our projections for the future suggest that the amount could reach 23% to 54% of GDP. Hong Kong could capture around 10% of such investment. These scenarios appear reasonable when compared with outward portfolio investment position of major economies and past liberalisation experience in Japan. Our findings suggest that while Hong Kong's comparative advantage lies mainly in its proximity and cultural affinity with the Mainland, according to our model estimates, the most important determinant of bilateral portfolio investment is the domestic share of world stock market capitalisation, in which Hong Kong lags behind relative to other major financial markets. Our projections show that an increase in Hong Kong's stock market size to that of Japan could almost double the share captured by Hong Kong. The potential increase in portfolio investment from the Mainland is expected to benefit the financial services industry in Hong Kong, and increase the contribution from this sector to GDP. It would not only boost securities market activities, but could also foster the wealth-management and custodian services industries in Hong Kong. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0613&r=cna |
| By: | Dong He (Research Department, Hong Kong Monetary Authority); Lillian Cheung (Research Department, Hong Kong Monetary Authority); Jian Chang (Research Department, Hong Kong Monetary Authority) |
| Abstract: | It has often been argued that East Asia needs to switch from an export-led growth model to a domestic-demand led growth model so as to reduce its vulnerability to a sharp slowdown in the US economy. This paper argues that, indeed, in the foreseeable future, East Asia's business cycle is unlikely to decouple with that of the US, but the switch-of-growth-model argument is problematic because it mixes up the effects of external trade on an economy's cyclical developments and its long-term growth potential. The paper argues that the desirable way to reduce external vulnerabilities is to diversify export markets and to further strengthen domestic institutions and policies in order to reduce the impact of temporary shocks, not by reducing the degree of openness or the share of exports in GDP. The paper further argues that the rising size of domestic demand in Mainland China will overtime help the rest of the region to diversify its export markets away from the major industrialized countries. |
| Keywords: | Export-led growth, domestic demand-led growth, decoupling |
| JEL: | F13 F43 O24 O11 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0703&r=cna |
| By: | C. Randall Henning (Peterson Institute for International Economics) |
| Abstract: | The controversy within the United States over Chinese exchange rate policy has generated a series of legislative proposals to restrict the discretion of the Treasury Department in determining currency manipulation and to reform the department’s accountability to Congress. This paper reviews Treasury’s reports to Congress on exchange rate policy—introduced by the 1988 Trade Act—and Congress’s treatment of them. It finds that the accountability process has often not worked well in practice: The reports provide only a partial basis for effective congressional oversight. For its part, Congress held hearings on less than half of the reports and overlooked some important substantive issues. Several recommendations can improve guidance to the Treasury, standards for assessment, and congressional oversight. These include (1) refining the criteria used to determine currency manipulation and writing them into law, (2) explicitly harnessing US decisions on manipulation to the International Monetary Fund’s rules on exchange rates, (3) clarifying the general objectives of US exchange rate policy, (4) reaffirming the mandate to seek international macroeconomic and currency cooperation, (5) requiring Treasury to lead an executivewide policy review, and (6) institutionalizing multicommittee oversight of exchange rate policy by Congress. Legislators should strengthen reporting and oversight of broader exchange rate policy in addition to strengthening the provisions targeting manipulation. |
| Keywords: | Exchange rate policy, currency manipulation, accountability, congressional oversight, China,Treasury, International Monetary Fund |
| JEL: | F31 F33 F42 F51 F53 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp07-8&r=cna |
| By: | Li-gang Liu (Research Department, Hong Kong Monetary Authority); Kelvin Fan (Research Department, Hong Kong Monetary Authority); Jimmy Shek (Research Department, Hong Kong Monetary Authority) |
| Abstract: | A salient feature of Hong Kong's external trade is its intermediation role. As the entrepot for Mainland China, Hong Kong helps channel raw materials and semi-manufacturing products from the rest of the world to the Mainland for further processing and then helps re-export the processed goods and final products to the rest of the world. Economic theory suggests that the effect of a real exchange rate depreciation on trade balance can be ambiguous. However, if the Marshall-Lerner condition is satisfied, a depreciation of the real exchange rate would lead to an improvement in the trade balance under normal circumstances. Partly because of the complicated nature of re-exports, there has not been adequate study on whether the Marshall-Lerner condition holds for an entrepot economy such as Hong Kong. This paper applies an error-correction model to examine Hong Kong's long-run price and income elasticities as well as its short-run dynamics. Our empirical estimates indicate that the sum of the absolute values of the estimated price elasticities of Hong Kong's direct imports and exports is greater than one, thus implying that the Marshall-Lerner condition holds for Hong Kong. Moreover, changes in re-exports and the re-export earnings are found to be sensitive to changes in the real effective exchange rate of the renminbi and income growth of the Mainland's trading partners. The movement in the real exchange rate between the Hong Kong dollar and the renminbi is found to have a significant influence on merchandise trade flows between Hong Kong and the Mainland, thus indicating the processing trade activities are quite sensitive to changes in the real exchange rate. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0618&r=cna |
| By: | Hans Genberg (Research Department, Hong Kong Monetary Authority); Li-gang Liu (Research Department, Hong Kong Monetary Authority); Xiangrong Jin (Research Department, Hong Kong Monetary Authority) |
| Abstract: | While Hong Kong's monetary policy is effectively tied to the US, its real economy has been experiencing increased integration with the Mainland through trade, Foreign Direct Investment (FDI), tourism, and increasingly financial flows. Co-movements of business cycles in Hong Kong and the Mainland have increased steadily since the 1990s. Although its co-movements with the US dipped in the late 1990s, there has been a significant increase in the synchronisation of business cycles among these three economies since 2000. This finding naturally raises a question as to what factors drive the co-movements of business cycles among the three economies. Our structural vector auto-regression analysis suggests that over the medium to long run, about 60% and 45% of variations in output and prices in Hong Kong respectively can be explained by US shocks, while the impact of Mainland shocks mostly concentrates on Hong Kong's price movements. It is estimated that Mainland shocks explain over one-third of Hong Kong's price developments. Using a methodology to distinguish between the effects of common US shocks and idiosyncratic domestic shocks, we find little correlation between the business cycles in Hong Kong and the Mainland in the absence of the common US influences, whereas the influence of the US shocks on these two economies leads to a high degree of synchronisation. In other words, the business cycle co-movements of Hong Kong and the Mainland are largely due to the common influence of economic conditions in the Unites States and possibly their US dollar pegged exchange rate system. The lack of similarity of domestic shocks between Hong Kong and the Mainland can be mostly attributed to their continuing structural differences and stage of economic development. Since the similarity of shocks is the most important factor for the choice of exchange rate regime, it follows that the Linked Exchange Rate system based on the US dollar would continue to be desirable in the foreseeable future. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0611&r=cna |
| By: | Frank Leung (Research Department, Hong Kong Monetary Authority) |
| Abstract: | Hong Kong as a city-state economy often records current account surplus. Empirical results show that the surplus is positively related to trade openness, terms of trade, volatility of output gap, the M2-to-GDP ratio and the non-service-sector-to-GDP ratio, and is negatively associated with the old-age dependency ratio. Among the explanatory variables, terms of trade and volatility of output gap play a predominate role in explaining movements in the current account balance. From a saving-investment point of view, the joint statistical significance of trade openness, terms of trade and volatility of output gap supports interpretation of Hong Kong's current account balance from the perspective of accumulation of net foreign assets. As a small and highly open economy, Hong Kong is specialised and subject to high income volatility in the face of terms of trade shocks and business cycle fluctuations, with relatively concentrated domestic investment opportunities. As a result, for income smoothing and risk diversification purposes, Hong Kong residents have accumulated substantial net foreign assets by running current account surpluses. From a trade-flow perspective, the shift in economic structure from manufacturing to service (as proxied by the decrease in the non-service-sector-to-GDP ratio) has deprived Hong Kong of a manufacturing base for exports, reducing the merchandise trade balance. Fortunately, this has been more than offset by the expansion of Hong Kong's role as a service centre for trade intermediation (as proxied by the increase in the trade openness ratio, which indicates increasing volume of trade flows being processed by Hong Kong) so that the overall current account has remained largely in surplus. Hong Kong's equilibrium current account surplus is estimated to be about 8.7% of GDP at present. Hong Kong's current account surplus is projected to average 4.4% of GDP over the next decade, smaller than the historical average surplus of 5.8% of GDP. This mainly reflects (1) more intense competition for intermediation of China trade from other Mainland cities (which reduces the pace of generation of external income through service exports), (2) an aging population (which reduces savings and hence the current account balance) and (3) a deterioration of terms of trade as a result of expected renminbi appreciation. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0614&r=cna |
| By: | Jim Wong (Research Department, Hong Kong Monetary Authority); Ka-fai Choi (Research Department, Hong Kong Monetary Authority); Tom Fong (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper develops a framework for stress testing the credit exposures of Hong Kong's retail banks to macroeconomic shocks. It involves the construction of macroeconomic credit risk models, each consisting of a multiple regression model explaining the default rate of banks, and a set of autoregressive models explaining the macroeconomic environment estimated by the method of seemingly unrelated regression. Specifically, two macroeconomic credit risk models are built. One model is specified for the overall loan portfolios of banks and, to illustrate how the same framework can be applied for stress testing loans to different economic sectors, the other model is specified for the banks' mortgage exposures only. The empirical results suggest a significant relationship between the default rates of bank loans and key macroeconomic factors including Hong Kong¡¦s real GDP, real interest rates, real property prices and Mainland China's real GDP. Macro stress testing is then performed to assess the vulnerability and risk exposures of banks' overall loan portfolios and mortgage exposures. By using the framework, a Monte Carlo method is applied to estimate the distribution of possible credit losses conditional on an artificially introduced shock. Different shocks are individually introduced into the framework for the stress tests. The magnitudes of the shocks are specified according to those occurred during the Asian financial crisis. The result shows that even for the Value-at-Risk (VaR) at the confidence level of 90%, banks would continue to make a profit in most stressed scenarios, suggesting that the current credit risk of the banking sector is moderate. However, under the extreme case for the VaR at the confidence level of 99%, banks' credit loss would range from a maximum of 3.22% to a maximum of 5.56% of the portfolios, and if a confidence level of 99.9% is taken, it could range from a maximum of 6.08% to a maximum of 8.95%. These estimated maximum losses are very similar to what the market experienced one year after the Asian financial crisis shock. However, the probability of such losses and beyond is very low. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0615&r=cna |
| By: | Tom Fong (Research Department, Hong Kong Monetary Authority); Alfred Wong (Research Department, Hong Kong Monetary Authority); Ivy Yong (External Department, Hong Kong Monetary Authority) |
| Abstract: | The presence of price disparity between A- and H- shares suggests that the two markets are segmented and thus allocation of capital is inefficient. In this paper, we attempt to identify the factors contributing to the price disparity, with a view to helping policymakers find solutions to the problem. Our results suggest that the disparity is caused by a combination of micro and macro factors. The fact that some of these factors are found to have played a crucial role in determining the disparity implies that reforms that can remove or reduce the segmentation can potentially bring considerable benefits by improving price discovery and market efficiency. |
| Keywords: | Price disparity, Chinese stock markets, Panel data analysis, Synchronisation, Dynamic correlation |
| JEL: | C23 F36 G10 G12 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0711&r=cna |
| By: | Jim Wong (Research Department, Hong Kong Monetary Authority); Tom Fong (Research Department, Hong Kong Monetary Authority); Eric Wong (Research Department, Hong Kong Monetary Authority); Ka-fai Choi (Research Department, Hong Kong Monetary Authority) |
| Abstract: | Given banks' special role in channelling funds from savers to investors, their cost efficiency has a significant effect on the supply of credit and, in turn, on the overall economic performance. In addition, inefficiency would affect banks' earnings, thus hampering their ability to withstand shocks. The issue of banks' cost efficiency is therefore of interest to policy makers. Using the stochastic frontier approach and a panel dataset of retail banks, this paper assesses the cost efficiency of the banking sector in Hong Kong. The average cost inefficiency during the period 1992-2005 is found to be about 15% to 29% of observed total costs, which is largely in line with the experience of US and European banks. Cost efficiency is found to be correlated with macroeconomic conditions, with a significant rise in cost inefficiency triggered by the Asian financial crisis and the outbreak of SARS during the period 1998-2003, partly due to the lack of perfect flexibility by banks to adjust their factor inputs (labour, funds and capital) in response to falling outputs. Additional resources spent on risk control, new business initiatives and strengthening customer relationships may also have contributed. Nevertheless, the cost efficiency has started to improve by 2004 Q1, along with the recovery of the economy. This suggests also that the adjustments and streamlining by the banks in recent years may have begun to bear fruit. Empirical results also indicate that cost efficiency is positively correlated with bank size, suggesting large banks are on average more efficient than smaller banks. Efficiency is also observed to be sensitive to banks' business mix, with banks which focus more on lending business exhibiting a higher level of efficiency compared to banks that focus relatively less on loans. In addition, banks suffering from larger loan loss provisions are found to be less efficient, probably due to higher operational costs relating to credit risk and loan loss management. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0612&r=cna |