Structural Determinants of Hong Kong's Current Account Surplus
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 of creation:||Oct 2006|
|Date of revision:|
|Contact details of provider:|| Postal: 55th Floor, Two International Finance Centre, 8 Finance Street, Central|
Web page: http://www.info.gov.hk/hkma/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:hkg:wpaper:0614. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simon Chan)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.