Hong Kong's growth synchronization with China and the US: A trend and cycle analysis

Highlight•Investigate Hong Kong's growth trend and cycle synchronization with China and the US.•Trends are identified using the permanent income hypothesis with state space model.•Hierarchical, structural vector autoregression models are used for analysis.•Hong Kong's growth cycles driven by US transitory shocks even in the recent decade.•Mainland China has a large impact on Hong Kong's trend growth in the recent decade.

This paper investigates the synchronization of Hong Kong's economic growth with mainland China and the US. We identify trends of economic growth based on the permanent income hypothesis. Specifically, we first confirm whether real consumption in Hong Kong and mainland China satisfies the permanent income hypothesis, at least in a weak form. We then identify the permanent and transitory components of income of each economy using a simple state-space model. We use structural vector autoregression models to analyze how permanent and transitory shocks originating from mainland China and the US affect the Hong Kong economy, and how such influences evolve over time. Our main findings suggest that transitory shocks from the US remain a major driving force behind Hong Kong's business cycle fluctuations. On the other hand, permanent shocks from mainland China have a larger impact on Hong Kong's trend growth.