The Asian financial crisis, economic recession, and structural change in Hong Kong

Abstract

This article studies the interplay of two factors that has an important bearing on the nature of deflationary pressure and its persistence in Hong Kong since 1997. These two main factors are: (1) a sharp and protracted downturn of the business cycle, and (2) structural change of the economy in response to the opening of China and its gradual integration with Hong Kong. We develop a theoretical framework for interpreting the post-1997 deflation that can also be applied to the understanding of the decade fo inflation that preceded the onset of the Asian Financial Crisis and the subsequent global economic slowdown. We cite evidence that demonstrates the deflation in Hong Kong can be explained, primarily, by cyclical factors. The persistence in deflation should not be interpreted as a result of structural transformation of the Hong Kong economy resulting from closer integration with Mainland China. The price convergence process resulting from the economic integration with the Mainland will continue for a considerable period of time. It will, however, exert only a minor dampening effect on the average price level in Hong Kong given its slow moving process. © 20002 Elsevier Science Inc. All rights reserved.