HK’s M2/GDP Ratio is the HIGHEST in the World

In recent years, the coherence of economic parameters between Hong Kong and Mainland China has become more and more obvious. Various economic sectors of Hong Kong are mainly serving the Mainland China economy, including the stock market, tourism industry, retail and wholesale, education markets and logistics and freight industries. The economy of Hong Kong has become highly regionalized, and farther away from internationalization. The advantages of Hong Kong in the Greater Bay Area are gradually lost. At the same time, the contagious effects between Hong Kong’s and the Mainland economies are more serious, and the financial and asset bubbles of the two are interlinked. The risks are getting higher and higher.

For example, since the international financial turmoil in 2008, the US’s three rounds of QE and China’s 4 trillion RMB flooded the markets, which has caused China’s total debt to rise sharply. In just 10 years time, China has become one of the world’s most debt-ridden countries. According to the Institute of International Finance (IIF), China’s total debt (including households, enterprises and national debts) in the first quarter of 2019 accounted for 303% of GDP, exceeding the international alarming threshold. The amount of China’s total debt exceeds 40 trillion US dollars, accounting for 15% of global debt [1], which is certainly an international concern.

However, we often overlook Hong Kong. Hong Kong, being China’s most important capital flowing window and with the advantages of a free circulation of international currencies and currency exchange rate stability, many Chinese companies issue bonds, especially foreign exchange bonds, in Hong Kong. The bank/corporate debt situation of Hong Kong is therefore inevitably directly affected by China’s corporate debts. Last week, my article [2] has analyzed that “the loans from the banks of Hong Kong to mainland China exceeded HK$4,000 billion, … Hong Kong’s total debt accounts to GDP ratio exceeds 300%! It is even higher than that of China. The situation of HK is worrying.” Corporate debt has exceeded 200% (Figure 1).

Figure 1 Hong Kong’s various types of debt as a percentage of GDP. Source: IMF (2019) [3]

Another economic indicator that has received much attention in recent years is the M2/GDP ratio. Many analyses use this as an indicator of the capability of a country’s productivity growth. If the ratio is low, it implies a high efficiency of each supply of money or loan as far as GDP growth is concerned. In contrast, if the ratio is much higher than one, it indicates that the increase in money supply or debt is less effective in increasing the output value.

As early as 2013, Reuters quoted an article published by the Governor of Bank of China [4] pointing out that China must reform to reduce M2/GDP levels. At that time, China’s M2/GDP ratio (in 2012) was only 188%, but it has already been the highest in the world’s major economies. Then, China’s M2 continued to grow at a rate of almost 13% per year, but it could only make about 10% of GDP growth.

Unfortunately, after seven years of hard work, China’s M2/GDP ratio has not been reduced. Instead, it has surged to more than 200% continuously and has been becoming one of the highest M2/GDP countries in the world. According to the World Bank database, China’s Broad-money/GDP has risen sharply since 1997, rising from around 160% to 199% in 2018 (up to 209% in 2016). On the contrary, the US’s M2/GDP ratio manages to remain lower than 1. The Broad-money/GDP ratio of the US in 2018 was about 89.5% (Figure 2).

However, one may overlook Hong Kong’s role in China’s debt and economic output. When China’s Broad-money/GDP rose to about 200%, Hong Kong has become the world’s highest Broad-money/GDP ratio economy, with a value of 384.757% in 2018. ! If China needs to increase its debt by $2 to promote $1 growth of the GDP, then Hong Kong needs to increase its debt by about $4 to promote $1 growth of the GDP. This may reflect the fact that the flow of hot money into Hong Kong is not for improving productivity, but for speculation in stocks and assets.

Figure 2 Broad-money/GDP ratio of China (light blue), Hong Kong (red line), UK (dark blue), US (green line), data from: World Bank (2019) [5]

Even though the efficiency of increasing debts to promote GDP growth is getting lower and lower, when the government has no other better alternatives to help increase the productivity, many governments cannot resist the temptation of using more debt growth to help stop a recession or to help boost the economy, disregarding any adverse consequences of piling up too much debts.

Figure 3 shows the relationship between Hong Kong’s M2 annual growth rate and quarterly GDP annual growth rate. The positive correlation between the two is very obvious. Most of the time, M2 growth (red line) is higher than GDP growth (blue line), but their up and down cycles are tracking each other closely, except during the 2008 international financial turmoil when there was a countercyclical phenomenon. That is when GDP has fallen sharply, but M2 was still growing substantially. In recent years, M2 growth is clearly ahead of GDP growth. It is obvious that the rise in GDP is dependent on the rise in debt.

Figure 3 Hong Kong’s M2 annual growth rate and quarterly GDP annual growth rate. Source: Hong Kong Census and Statistics Department (2019) [6]

Although the total amount of M2 and GDP in China in 2018 is 13 and 30 times that of Hong Kong, the annual changes of the two are very similar, especially the annual rate of change of the nominal economic output of the two economies (Figure 4). After the fall of the financial turmoil, the output value of the two economies rebounded simultaneously. China’s output value growth rate rose to 20%, and Hong Kong’s rebounded to 10%, which was the period of the highest economic output growth in the past decade. Since 2012, the growth rates of output value of the two economies have dropped by half to 10% and 5%. In 2016, we had the lowest growth year of nearly ten years. After the rebound in 2017, they have both fallen back since 2019. The patterns reflect the high correlation in inflation and economic growth between the two economies!

Figure 4 The nominal amount of GDP in China and Hong Kong, source: Hong Kong Census and Statistics and the United States FRED

In terms of M2, although the correlation between the two is not as high as in GDP, except during the 2008 period when there were the bailout measures of 4 trillion yuan in China after 2008, but Hong Kong has implemented a tightening fiscal policy. It is noted that China’s M2 annual growth rate is much higher than that of Hong Kong, which is about 5.2% higher in recent years. The cyclical pattern of M2 in Hong Kong is more obvious. The economic slowdown in 2008, 2012 and 2016 coincides with the slowdown in M2 growth. China’s M2 growth rate has been falling since 2009, falling from 29% all the way to 8.3% in the first quarter of 2019, but by international standards, it is still a very high growth rate in money supply. Furthermore, M2yoy/GDPyoy ratio is also greater than one, which makes the money supply efficiency doubtful.

Figure 5 M2 amount of money supply in China and Hong Kong, source: Hong Kong Census and Statistics and US FRED

Due to the high correlation between economic links and Hong Kong’s emergence as a small free economy, Hong Kong’s inflation has become imported inflation. Therefore, the high correlation between inflation in the two economies is also expected. Figures 6 and 7 show the inflation rates of the two economies over the past decade. Although Hong Kong’s inflation rate is more volatile than that of China, it is basically similar in terms of the cycle and magnitude, including a deflationary period around 2009, then a peak period of high inflation around 2011 (with inflation rates exceeding 6%). Then, it fell back to a low of 2% around 2017. The inflation rates in the second quarter of 2019 were both around 3%.

Figure 6 China’s inflation rate 2009–2019. Source: Trading Economics
Figure 7 Hong Kong’s inflation rate 2009–2019. Source: Trading Economics

Hong Kong’s inflation and economic output are highly correlated with China’s, but because of the linked exchange rate, Hong Kong’s interest rates and exchange rates must basically follow the United States, so there are often mismatches, resulting in abnormal real interest rates, causing a large number of hot money suddenly flow in or out, for speculation purposes. This is the real interest rate theory that I have been using to explain the long-term rise or fall in property prices in Hong Kong.

[A Chinese version is available at 姚松炎 (2019) 中港經濟的高度關聯 — M2/GDP比,方格子,9月14日。]


[1] Reuters (2019) China’s debt tops 300% of GDP, now 15% of global total: IIF, Reuters, Jul 18.

[2] Yiu, C.Y. (2019) How Much Loan is from Banks in HK to Mainland China?, Medium, Sep 11.


[4] Reuters (2013) China reforms needed to lower M2/GDP ratio — chief, Reuters, Mar 8.

[5] World Bank Database (2019) Broad-money/GDP Ratio.

[6] CSD (2019) Table 121 Money Supply and Table 30 Gross Domestic Products (GDP), Census and Statistics Department, HKSAR Government.,

[7] US FRED (2019) China M2 and China GDP, Data Series,,

ecyY — easy to understand why, easy to study why. Finding the truths scientifically is the theme.

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