People’s Republic of China—Hong Kong Special Administrative Region: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the People’s Republic of China—Hong Kong Special Administrative Region

KEY ISSUESOutlook and risks. The macroeconomic outlook is favorable. Growth has firmed, inflation has eased, and unemployment has remained low—trends that are expected to continue. The main risks relate to the impact of the Fed's tapering, the outlook for the Mainland, and a possible correction in property prices.Financial. The Financial Sector Assessment Program (FSAP) conducted in2013?14 concluded that the financial system is well regulated and supervised and the banking system is resilient to shocks. The main areas for improvement are the financial sector resolution regime and insurance sector regulation and supervision. The large and growing exposure to the Mainland warrants continued close monitoring.Property. After a prolonged rise, property prices have stabilized. Counter-cyclical prudential and fiscal measures deployed during the upswing provide buffers that can be used to faciliate an orderly adjustment in the market while safeguarding financial stability. A long-run solution to housing hinges on ensuring adequate supply.Fiscal policy. Hong Kong SAR has a track record of fiscal discipline. Casting fiscal policy in a long-term framework will help strike a balance between spending to address aging and inequality, preserving low taxes, and maintaining fiscal prudence.External assessment. Hong Kong SAR's external position is consistent withmedium-term fundamentals and desirable policies. The Linked Exchange Rate Systemremains the best arrangement for Hong Kong SAR.