IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Hong Kong's Trade Patterns and Trade Elasticities

  • 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)

Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0618.

    in new window

    Length: 26 pages
    Date of creation: Nov 2006
    Date of revision:
    Handle: RePEc:hkg:wpaper:0618
    Contact details of provider: Postal: 55th Floor, Two International Finance Centre, 8 Finance Street, Central
    Phone: (852)28788261
    Fax: (852)28781892
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:hkg:wpaper:0618. 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.