The Impact of the China Factor on the pre-1997 Hong Kong Economy: a macroeconometric analysis

After the reunification of Hong Kong and China in 1997, Hong Kong is assured of a high degree of autonomy by the Basic Law. However, there remains some worry about the territory's economic viability and financial stability. Whether Chinese policies and China's remarkable growth momentum could continue to boost Hong Kong's prosperity has become an issue of concern. As the Chinese economic reform proceeds, the ‘China factor’ has been generating an increasing influence on the performance of the Hong Kong economy. Unfortunately, there have been very few rigorous quantitative analyses of this rapidly evolving development. To fill the gap, we have constructed a macroeconometric model of Hong Kong which takes into detailed account the linkages of the two economies including trade and capital flows. Estimation of the model incorporates error correction techniques to establish short-run dynamics and long-run equilibria. Our findings have identified crucial channels through which the ‘China factor’ has exerted impact on the Hong Kong economy. It is shown that the factor was not overwhelming up to the recent past, in terms of its stabilizing effects in the financial market and its stimulation on growth, although its influence may rise in the post-1997 era.