Prediction of Deflation in Hong Kong Comes True

Three years ago (May 29, 2017), I warned the Chief Executive of the HKMA about the advent of deflation in the Financial Affairs Committee of the Legislative Council, Hong Kong: “Dr YIU Chung-yim remarked that the international community had expressed concern about the risks arising from the development of trade protectionism. He enquired about measures HKMA would take to counteract such risks, and sought its views on the recent decline in the inflation rates of Hong Kong and the Mainland. …” Unfortunately, although he has also noticed that some advanced economies are worried about the risk of deflation, he downplayed the belief that Hong Kong will not be deflation in the short term: “The Chief Executive of the Monetary Authority mentioned that… with the improvement in global economic conditions and stabilization in commodity prices recently, he envisaged that Hong Kong’s inflation would be moderate in the near term with the global economic situation” (Legislative Council, 2017, p. 6)

Since the outbreak of the pandemic this year, I have written four consecutive articles on “Post-epidemic Economy” to predict on the future, the first of which is titled “Recession and Deflation” once again warned of recession and deflation (Yiu, 2020a). The forecast of a recession was fulfilled as early as the end of last year, and deflation has come true today!

The government of Hong Kong announced that the Consumer Price Index (CPI) fell by 2.3% year-on-year in July this year, the first time it has fallen in more than a decade. In order to avoid causing public panic, the government added that if the government’s one-off relief measures are excluded, the basic inflation rate in July will be +0.2%. However, the government does not exclude the impact of the government’s distribution of $10,000 to each adult citizen. Otherwise, The deflation figures may even be more severe. In any case, the government finally stated in the document that the authorities will pay attention to the risk of deflation.

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Figure 1 Inflation Rate of Hong Kong. Source: Trading Economics

In fact, most people’s economic forecasts in the past six months point to inflation. The reason is that many countries’ governments are flooding the markets with an ample supply of liquidity, depreciating the purchasing power of the currency. There are also serious floodings and natural disasters in the region causing the loss of food harvests, the high price of pork is a case in point. However, the sudden suspension of a lot of economic activities and the reduction in debts due to bankruptcies and foreclosures in the wake of the pandemic shrink the supply.

It can lead to a debt-deflationary spiral as theorized by the Fisher-Minsky Bernanke’s “Debt-Deflation Theory”:
“Fisher (1933) put forward the famous Debt-Deflation Theory to explain the reasons for the Wall Street collapse in 1929 and the subsequent Great Depression. According to his view, the recession caused by the decline in demand is mostly caused by excessive debt. Once the market has large-scale bad debts, liquidation and foreclosures are bound to emerge (Debt liquidation leads to distress selling), prices would be further pushing down. Price plummeting, in turn, affects consumer confidence, and forms a vicious cycle of deflation; Minsky (1982) and Bernake (1983) further extend Fisher’s theory to explain that when asset prices plummet and widespread bankruptcy occurs, both will further lead to a shrinking consumption and investment demand. “(Yiu, 2020b)


Legislative Council (2017) Panel on Financial Affairs Minutes of meeting held on Monday, 29 May 2017. LC Paper No. CB(1)1402/16–17.

Yiu, C.Y. (2020a) The Post-COVID Global Economy 1 — Recession and Deflation, Medium, Apr. 11.

Yiu, C.Y. 姚松炎 (2020b) 供應需求齊震盪,五大行業遭重創,Hong Kong Economic Monthly Journal 信報財經月刊,518期,84–86. (Chinese)

Bernanke, B. (1983) Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression, American Economic Review, Vol. 73(3), June 1983, p. 257–76.

Fisher, I. (1933) The Debt-Deflation Theory of Great Depressions, Econometrica 1 (4): 337–57

Minsky, H. (1982) Debt-Deflation Processes in Today’s Institutional Environment, Banca Nazionale del Lavoro Quarterly Review, December.

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