HK, Taiwan divergence result of economic policies

While the effect of the ongoing unrest on the Hong Kong economy is obvious, Taiwan was already doing better before the protests started.

By: Date: November 5, 2019 Topic: Global Economics & Governance

Hong Kong and Taiwan published their third-quarter growth figures very close in time, but the results were far apart.

The two share the same global risks insofar as both are open economies affected by the US-China trade war and are heavily dependent on the mainland, whose economy is slowing down. And yet, while both economies grew at the same speed (2.9%), it was in opposite directions: Taiwan positively and Hong Kong negatively.

It goes without saying that the Hong Kong economy has been bogged down by social unrest since mid-June, which explains the fast deterioration, but it is also true that both economies were already diverging before the social unrest started. The question, thus, is how was the Taiwanese economy able to perform better not only than Hong Kong, but also than other similar economies such as Singapore or South Korea (the four economies used to be considered the “Asian Tigers” in the 1980s and 1990s)?

The first important difference is the absence of monetary and exchange-rate policies for Hong Kong compared with Taiwan. This is not only because of Hong Kong’s currency peg with the US dollar but also because the Taiwan dollar is not fully convertible while the Hong Kong dollar is. In other words, Taiwan has a tighter control of the flows of hot money and liquidity in the financial system.

The second difference lies in fiscal policy, and not so much because Hong Kong does not have room to move but rather because it does not use it. In fact, the Taiwanese government, in the light of a worsening global environment, has introduced an Infrastructure Development Program as well as an energy reform plan to introduce renewables, thereby stimulating investment. Hong Kong instead has announced two tiny – especially the second – fiscal stimulus packages (all in all 0.7% of gross domestic product) that aim at reducing the pain that businesses are going through but not so much to invest in the future.

Third, Taiwan has seen its foreign direct investment increase substantially this year in areas such as fifth-generation telecom (5G), semiconductors, data centers and new energy. In addition to foreign firms, Taiwanese companies have speeded up their repatriation of profits thanks to supportive government policies. The comeback of domestic investment means a displacement of outward FDI.

Last but not least, Taiwan has conducted a conscious policy of diversification of its export structure away from excessive dependence on mainland China, which has helped cushion the impact of economic deceleration on the mainland. The key areas of expansion are the economies of the Association of Southeast Asian Nations and, more recently, the US. In the same vein, although the tourism industry has been hit by restrictions imposed by China, the growth in inbound tourism from Japan, South Korea and ASEAN has remained high.

In a nutshell, social unrest is clearly harming the Hong Kong economy but policies exist to cushion the impact, especially fiscal policy. In addition, more structural policies can be used to increase Hong Kong’s attractiveness for foreign investors. The Hong Kong government might want to take note.

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic


Why are some stock markets in Asia less affected by coronavirus?

While Asian markets are in a sea of red, mainland China, New Zealand, Hong Kong and Taiwan are all defying the gravity.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: March 31, 2020
Read article More on this topic More by this author


Downsides to Hong Kong’s untargeted cash handout

The stimulus is regressive in nature, as the bulk of expenditure is a one-off cash disbursement per adult

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 4, 2020
Read about event More on this topic

Past Event

Past Event

The Sound of Economics Live - The Brussels effect: How the European Union rules the world

This was a live recording of an episode of the Sound of Economics, Bruegel's podcast series. The discussion centered around the book of Anu Bradford, The Brussels Effect.

Speakers: Anu Bradford, Ashoka Mody, Giuseppe Porcaro and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 3, 2020
Read article More on this topic More by this author


Epidemic tests China’s supply chain dominance

Much has been written on the Wuhan coronavirus that causes the respiratory disease Covid-19, but very little is known yet about its impact on the global economy and, in particular, the global value chain. Still, one thing is clear: The shock is bigger than that caused by severe acute respiratory syndrome (SARS), for the simple reason that China is much more important for the global economy than it was then.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: February 17, 2020
Read article Download PDF More on this topic More by this author

External Publication

Factors determining Russia’s long-term growth rate

This paper’s main conclusion is that Russia’s economy cannot grow at the pace recorded in the early and mid-2000s because of the different external environment, the different stage of development and serious demographic headwinds.

By: Marek Dabrowski Topic: Global Economics & Governance Date: January 16, 2020
Read article More on this topic More by this author

Blog Post

Japanese economy: Déjà vu – but worse

It is difficult to imagine how Japan can undertake any major economic reform if it has taken five years to increase the consumption tax and has needed two strong fiscal packages.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: December 12, 2019
Read about event More on this topic

Past Event

Past Event

EU-Asia trade and investment connectivity

The Asia Europe Economic Forum (AEEF) was established in 2006 as a high level forum for in-depth research-based exchanges on global issues between Asian and European policy makers and experts. This year, the AEEF will be hosted by Bertelsmann Stiftung on 28-29 November, 2019 in Berlin, Germany, and it will focus on “EU-Asia trade and investment connectivity”.

Speakers: Aart de Geus, Guntram B. Wolff, He Fan, Alessia Amighini, John Beirne, Nicolaus Heinen, Jae-Young Lee, Cora Jungbluth, Alicia García-Herrero, Xin Yuan, Andreas Esche, Ken Wu, Sébastien Jean and Amb. Karsten Warnecke Topic: Global Economics & Governance Location: Bertelsmann Representative Office, Unter den Linden 1, 10117 Berlin Date: November 28, 2019
Read article More on this topic More by this author


Hong Kong’s Economy is in Danger of Further Contraction

Approaching the end of a volatile year, Hong Kong continues to face the triple whammy of slower growth in mainland China, the trade war uncertainty and social unrest.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: November 21, 2019
Read article Download PDF More on this topic

Working Paper

How does China fare on the Russian market? Implications for the European Union

China’s economic ties with Russia are deepening. Meanwhile, Europe remains Russia’s largest trading partner, lender and investor. An analysis of China’s ties with Russia, indicate that China seems to have become more of a competitor to the European Union on Russia’s market. Competition over investment and lending is more limited, but the situation could change rapidly with China and Russia giving clear signs of a stronger than ever strategic partnership.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: November 18, 2019
Read article More on this topic


Why sentiment in Greater Bay Area is deteriorating, especially in Hong Kong

Lack of concrete plans affects sentiment after brief surge on announcement of Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: November 13, 2019
Read article More on this topic

Blog Post

Implications of the Japan – United States Mini Trade Agreement

Details of the US-Japan mini-trade deal are lacking but the agreements’ direct impact on the US and Japanese economies is likely to be minuscule. The deal seems to have been made to compensate American farmers – a crucial electoral base of the President – for their losses from the trade war with China.

By: Sybrand Brekelmans and Uri Dadush Topic: Global Economics & Governance Date: October 11, 2019
Read article


Southbound flows rescuing Hong Kong equity market

China seems to be coming to the rescue as social unrest affects the city’s financial market, but it’s probably only for arbitrage reasons

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation, Global Economics & Governance Date: October 2, 2019
Load more posts