November 2010

Two potent forces continue to influence Hong Kong SAR's prospects: the unprecedented monetary policy easing in the United States and the solid domestic recovery, in part driven by spillovers from the Mainland. While the substantial expansion of the monetary base (which began in 2008) has stopped, the banking system remains exceptionally liquid and credit growth is now beginning to pick up. Despite the government's efforts, with tighter lending standards, higher real estate transaction taxes, and an increased supply of land-property prices continue to rise. The most pressing challenge over the near term will be to ensure that the ongoing acceleration of property price inflation does not translate into financial risks or unduly amplify the macroeconomic cycle. The government should continue to proactively deploy countervailing prudential regulations—to ensure the quality of bank credit remains high—and put in place a sufficiently counter-cyclical budget in the coming fiscal year. Over a longer horizon, policies will need to ensure that Hong Kong SAR can fully capitalize on its unique status as an offshore renminbi center and adapt to the ongoing changes in the global financial regulatory environment.

Since the start of economic reform in the early 1980s, China has experienced plenty of growth and inequality; per capita income has grown nearly 8 percent annually, while the Gini coefficient rose from 0.28 to 0.39. Using a rich longitudinal survey spanning the years 1987-2002, this paper finds that households located in higher inequality villages experienced significantly lower income growth through the 1990s. However, local inequality's predictive power and effects are significantly diminished by the end of the sample. Evidence points to unobserved village institutions at the time of economic reforms that were associated with household access to higher income activities as the source of the link between inequality and growth. The empirical analysis addresses a number of pertinent econometric issues including measurement error and attrition, but underscores others that are likely to be intractable for all investigations of the inequality-growth relationship.