Hong Kong Economic and Monetary Developments and Prospects
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Transcript Hong Kong Economic and Monetary Developments and Prospects
DISCUSSION TOPICS
Updates on
–
Currency Stability
–
Banking
–
Financial Infrastructure
–
Hong Kong as an International Financial Centre
–
Exchange Fund
2
HONG KONG DOLLAR HAS WEAKENED
Hong Kong Dollar Exchange Rate
HKD / USD
7.90
Convertibility Zone
HKD / USD
7.90
7.85
7.85
7.80
7.80
7.75
7.75
7.70
Spot exchange rate
7.65
7.70
7.65
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2003
2004
2005
2006
2007
3
INTERBANK LIQUIDITY
Aggregate Balance
($ billion)
60
($ billion)
60
50
50
40
40
30
30
20
20
10
10
0
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2003
2004
2005
2006
2007
4
HONG KONG DOLLAR – MARKET EXPECTATIONS
Hong Kong Dollar Spot and 12-month Forward
HKD / USD
HKD / USD
7.85
7.85
Spot
7.80
7.80
7.75
7.75
7.70
7.70
12-month forward
7.65
7.65
7.60
7.60
Q1
Q2 Q3
2005
Q4
Q1
Q2 Q3
2006
Q4
Q1
Q2
Q3
2007
Q4
5
HONG KONG-DOLLAR AND US-DOLLAR
INTEREST RATES
(% pa)
6.00
5.00
(% pa)
6.00
3-month HIBOR
5.00
3-month LIBOR
4.00
4.00
3.00
3.00
2.00
2.00
1.00
1.00
0.00
0.00
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2003
2004
2005
2006
2007
6
WIDENED YIELD SPREAD OF EXCHANGE FUND
BILLS OVER HIBORs
%
%
1-month EFB yields vs HIBOR
7
7
6
6
5
5
4
4
3
3
2
1M HIBOR
2
1
1M EFB yield
1
0
0
-1
-1
-2
Jan-07
-2
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Up to midDec 07 7
RAPIDLY GROWING RTGS TURNOVER
RTGS vs stock market turnover
HK$ bn
1,800
1,600
HK$ bn
400
RTGS turnover (lhs)
350
Stock market turnover (rhs)
1,400
300
1,200
250
1,000
200
800
150
600
400
100
200
50
0
Jan-07
0
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
8
INTRADAY REPO TURNOVER
HK$bn
120
HK$bn
120
Exchange Fund papers held by licensed banks
100
100
Highest daily turnover during the month
Average daily turnover during the month
80
80
60
60
40
40
20
20
Lowest daily turnover during the month
0
2003
0
2004
2005
2006
2007
9
ADDRESSING THE INCREASED DEMAND FOR
EXCHANGE FUND PAPER
• Increase the supply of Exchange Fund
paper via tap issues
– Consistent with Currency Board principles as
the Monetary Base remains fully backed by
foreign reserves
– Primary objective is to meet the increased
demand of Exchange Fund paper for
managing intraday liquidity
10
YIELD SPREAD BETWEEN EXCHANGE FUND
BILLS AND HIBOR NARROWING
%
7
6
%
3 Jan 08: Release of
4 Jan 08: Press
Viewpoint article
announcement of
20 Dec 07: Release of
tap issue
Viewpoint article
7
11 Jan 08:
Tender for tap
issue
6
5
5
4
4
3
3
2
1M HIBOR
2
1
1M EFB yield
1
0
0
-1
-1
-2
Jul-07
-2
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Note: The Viewpoint article on 20 Dec 07 suggested that there might be a need for additional
Exchange Fund paper and the article on 3 Jan 08 indicated that the case for increasing the
supply of Exchange Fund paper has become clearer.
11
FACTORS AFFECTING CURRENCY STABILITY
• Sub-prime crisis
• Monetary and financial conditions on the
Mainland
• Inflation
12
THE US SUB-PRIME CRISIS CONTINUES
• Housing market continues to deteriorate
Depressed housing activity
Falling house prices
Units, mn
% yoy
8 25
Units, mn
2.5
Existing home sales (rhs)
7
2.0
6
Housing starts (lhs)
5
1.5
% yoy
25
20
20
15
15
10
10
5
5
0
0
4
1.0
3
New home sales (lhs)
2
0.5
1
Composite Case-Shiller index
-5
-5
S&P/Case-Shiller 20-city composite index
0 -10
0.0
2001
2002
2003
2004
2005
2006
2007
2001
2002
2003
2004
2005
2006
-10
2007
13
Increasing risks of a recession in the US
• There are increasing talks that the US economy
might dip into or is already in a recession.
US GDP growth
% qoqa
6
Percentage point
6
4
4
2
2
0
0
-2
-2
-4
-4
06 Q3
06 Q4
07 Q1
Personal consumption (lhs)
Residential investment (lhs)
Change in stocks (lhs)
Real GDP (rhs)
07 Q2
07 Q3
07 Q4
Government expenditure (lhs)
Business investment (lhs)
Net exports (lhs)
Note: Q4 07 growth figure is market forecast (source: Bloomberg)
14
CENTRAL BANKS IN ACTION
• Co-ordinated central bank actions to inject liquidity
• Major central banks cut policy rates
Interest rate spreads
Policy rates
%
1.2
%
7.0
%
7.0
1.0
6.0
6.0
0.8
0.8
5.0
5.0
0.6
0.6
4.0
4.0
0.4
0.4
3.0
3.0
0.2
0.2
%
1.2
1.0
3-M USD Libor - policy rate
3-M EURIBOR - policy rate
0.0
0.0
-0.2
-0.2
-0.4
01/07/07
-0.4
30/08/07
29/10/07
28/12/07
2.0
1.0
Federal funds target rate
Federal reserve discount rate
ECB major refinancing rate
2.0
1.0
0.0
0.0
Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08
15
FINANCIAL MARKET STILL IN TURBULENCE
• Weak US data, persistent credit crisis and fears that a US
recession will likely drag down the global economy led to a
renewed bout of risk aversion and global equity market sell-off
US commercial paper outstanding
USD bn
USD bn
2500
2500
Global equity markets
August 07 = 100
150
S&P 500
140
2000
2000
Total CP outstanding
ABCP outstanding
1500
1500
1000
1000
500
500
0
Dec-06
0
Mar-07
Jun-07
Sep-07
Dec-07
August 07 = 100
150
HSI
140
FTSE 100
130
DAX
130
120
TOPIX
120
110
110
100
100
90
90
80
80
70
01/08/07
30/09/07
29/11/07
70
21/1/08
16
IMPACT OF THE SUB-PRIME PROBLEM ON
HONG KONG
• Local financial markets have been more
volatile but no systematic problem has
emerged
• Individual banks in Hong Kong may suffer
from their investment in asset-backed
securities, but unlikely to affect their
financial soundness
17
MONETARY AND FINANCIAL CONDITIONS ON
THE MAINLAND
• Widening of balance-of-payments surplus
• Faster appreciation of the renminbi
• Continued capital inflows, and rapid accumulation
of foreign-exchange reserves
• Continued increases in reserve requirement of the
banking sector
• Large issuance of PBoC paper to sterilise excess
liquidity created by the acquisition of foreign
reserves
18
MONETARY AND FINANCIAL CONDITIONS ON
THE MAINLAND
• Rising inflation
• Raising interest rates and using price controls to
curb inflation
• Implementing policies to encourage orderly capital
outflows
• Large demand for investment instruments by the
non-state sector
• Development of capital markets against the
background of supply-and-demand imbalance
19
HOUSING RENTS AND FOOD PRICES PUSH
UP HONG KONG’S INFLATION
Key Drivers of Inflation
(% yoy)
6
(% yoy)
6
Rentals
Food
Others
4
4
Underlying CCPI excluding special relief measures
2
2
0
0
-2
-2
-4
-4
-6
-6
2001
2002
2003
2004
2005
2006
2007
20
PRODUCTIVITY GROWTH HELPS CHECK
HONG KONG’S INFLATION
Productivity Growth Remains Strong
(% yoy)
(% yoy)
Nominal unit labour cost
Nominal payroll per person
Labour productivity
10
10
5
5
0
0
-5
-5
-10
-10
2002
2003
2004
2005
2006
2007
21
CURRENCY NOTES
• HK$10 Polymer Note
– Put into circulation in July 2007
– Extensive public education programme launched
– Public response favourable so far
– Additional 50 million notes to cater for Chinese
New Year demand
– The HKMA will evaluate public acceptance and
technical performance of the note in two years
22
BANKING SECTOR PERFORMANCE
Local AIs Remain Well Capitalised
Break in
series
%
20
18
16
14
Sep-07
12
10
8
6
4
2
2000
2001
2002
2003
Capital adequacy ratio
2004
2005
2006
2007
International standard
Period-end figures
23
BANKING SECTOR PERFORMANCE
Liquidity Levels Remain High
HK$ million
4,000
80%
3,500
78%
76%
3,000
74%
2,500
72%
2,000
70%
1,500
68%
66%
1,000
64%
500
62%
0
60%
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
HK$ loans
HK$ deposits (including swaps)
HK$ total assets
HK$ loan/deposit ratio (RHS)
24
BANKING SECTOR PERFORMANCE
Higher Domestic Loan Demand
Quarterly increases (in HK$ bn)
Trade
financing
Share
financing
Property
lending
Others
Total
domestic
loans
Mar-07
0
127
10
9
146
Jun-07
18
47
25
21
111
Sep-07
3
43
28
26
100
Total up to
Sep-07
21
217
63
56
357
25
BANKING SECTOR PERFORMANCE
Net Interest Margin Increasing
%
2.5
2.4
2.3
2.2
2.1
2.0
1.9
1.8
1.7
1.6
1.5
2000
2001
2002
2003
2004
2005
2006
Q3 2007
Period-average figures
* Annualised figure
26
BANKING SECTOR PERFORMANCE
Asset Quality Remains Sound
Classified loan ratio
(Peak: Sep 1999)
100
80
Residential mortgage
loan (RML)
delinquency ratio
(Peak: Apr 2001)
60
40
20
0
Number of
negative equity RMLs
(Peak: Jun 2003)
Peak
Ratio of overdue and
rescheduled loans
(Peak: Sep 1999)
Credit card
charge off ratio
(Peak: Q3 2002)*
Sep-06
Latest
* Annualised figure
27
BANKING SECTOR PERFORMANCE
Residential Mortgage Lending in
Negative Equity Declined Further
No. in thousand
120
HK$ billion
180.0
160.0
100
140.0
80
120.0
100.0
60
80.0
40
60.0
40.0
20
20.0
0
M
ar
Ju 02
nSe 02
pD 02
ec
M 02
ar
-0
Ju 3
nSe 03
pD 03
ec
M 03
ar
-0
Ju 4
nSe 04
pD 04
ec
M 04
ar
Ju 05
nSe 05
pD 05
ec
M 05
ar
-0
Ju 6
nSe 06
pD 06
ec
M 06
ar
-0
Ju 7
nSe 07
pD 07
ec
-0
7
0.0
Value of negative equity residential mortgage loans (LHS)
Number of negative equity residential mortgage loans (RHS)
Period-end figures
28
BANKING SECTOR PERFORMANCE
Implications of the sub-prime crisis
Aggregate sub-prime or sub-prime-related exposures of
local banks are not material relative to their total assets
No systemic impact on the banking sector
However, profitability of individual banks with sub-prime or
sub-prime-related exposures is likely to be affected
29
REVIEW OF HKMA’S WORK ON BANKING STABILITY
• Aims to make recommendations on focus and priorities of the
HKMA’s banking supervisory functions and policies to be
developed in the next five years
• Takes into account
–
globalisation of finance and banking business
–
increasing integration of the financial systems of Hong Kong and
Mainland China
–
growing complexity of banking products
–
increasing reliance of banks on information technology
–
increasing need to combat financial crime
–
changing nature of supervision
–
expectations of the community
• To be completed in second quarter of 2008
30
COMMERCIAL CREDIT REFERENCE AGENCY
• The Commercial Credit Reference Agency (CCRA)
will be expanded to cover sole proprietorships and
partnerships on 1 March 2008.
31
ANTI-MONEY LAUNDERING & COUNTER
TERRORIST FINANCING
• The Financial Action Task Force on Money Laundering
visited Hong Kong as part of a mutual evaluation of antimoney-laundering and counter-terrorist-financing
measures. The report will be finalised in mid-2008.
• The HKMA amended its Supplement to the Guideline on
Prevention of Money Laundering in November 2007 to
take into account recent developments.
• The Industry Working Group on Prevention of Money
Laundering and Terrorist Financing has prepared
several guidance papers on politically exposed persons,
offshore companies, and address proof.
32
MARKET INFRASTRUCTURE
• To develop Hong Kong into a regional payment and
settlement hub, enhancing Hong Kong’s role and
status as an international financial centre
• New project development
–
Electronic trading platform for Exchange Fund Bills
and Notes
–
Migration to SWIFTNet
33
DEVELOPMENT STRATEGY
• Strategy for development of market infrastructure
– Adding new functions to payment systems
– promoting links and use of financial infrastructure
• Success in increasing turnover of RTGS systems
and links with overseas systems
• Will continue to further strengthen Hong Kong’s
multi-currency, multi-dimensional payment and
settlement platform
34
EFFICIENT OPERATION OF THE PAYMENT SYSTEM
HK$ Bn
1,750
28 Sep
(HK$1.67 trillion)
5 Nov
(HK$1.67 trillion)
1,500
6 Nov
(HK$ 1.56 trillion)
9 Oct
(HK$1.46 trillion)
1,250
1,000
750
500
250
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
35
MARKET INFRASTRUCTURE
Oversight of the clearing and settlement systems
All local designated systems remain in compliance
with the safety and efficiency requirements of the
Clearing and Settlement Systems Ordinance
Continued support rendered to the Process Review
Committee in preparing the third Annual Report to
the Financial Secretary.
36
HONG KONG AS AN INTERNATIONAL FINANCIAL CENTRE
Regional co-operation
• Developing bond market in Asia
• Promoting regional financial stability through
active participation in an enhanced monitoring
mechanism of Asia-Pacific central banks
• Providing input to regional financial co-operation
initiatives
• Strengthening crisis management
37
HONG KONG AS AN INTERNATIONAL FINANCIAL CENTRE
• To continue the implementation of the Action Agenda
of “China’s 11th Five-Year Plan and the Development of
Hong Kong”, focussing on:
(1) Renminbi business in HK
– promote continuous development of the renminbi bond
market
– work further on the proposal for settlement of imports
from the Mainland in renminbi
(2) Use of HK’s platform for the orderly outflow of
Mainland funds
– work closely with Mainland authorities on
implementation of pilot scheme for direct foreign
portfolio investments by Mainland individuals and
further development of QDII schemes.
38
Investment Objectives of
The Exchange Fund
Investment objectives of the Exchange Fund:
(1) to preserve capital;
(2) to ensure that the entire Monetary Base at all
times will be fully backed by highly liquid US
dollar denominated assets;
(3) to ensure sufficient liquidity for the purpose of
maintaining monetary and financial stability; and
(4) subject to (1) – (3), to achieve an investment
return that will preserve the long-term purchasing
power of the Fund.
39
Markets in 2007
• Exchange rates:
–
US dollar weakened against the euro and yen
• Equity markets:
–
Foreign equities market rose in the 1H but retreated in the 2H
as the US subprime mortgage crisis intensified
–
Local equities market gained significantly on the back of
ample liquidity but correction set in during Nov-Dec
• Interest rates:
–
Monetary easing by major central banks
–
Bond yields fell in general as risk appetite declined but money
market rates rose on concerns about credit availability
–
Credit spread widened significantly
40
Investment Income
I
2007
I
2006
2005
2004
2003
(HK$ billion)
Full
year*
Q4
Q3
Q2
Q1
Full
year
Full
year
Full
year
Full
year
Gain on Hong Kong
equities^
55.8
5.7
35.0
14.9
0.2
35.9
7.0
12.0
21.2
Gain/(Loss) on other
equities^
6.7
(4.4)
(1.0)
9.9
2.2
18.7
20.5
11.2
26.8
Exchange gain/(loss)
18.7
8.2
3.0
1.5
6.0
17.3
(19.5)
8.5
22.9
Return from bonds#
61.0
23.9
24.8
0.0
12.3
31.9
29.8
25.0
18.8
Investment income
142.2
33.4
61.8
26.3
20.7
103.8
37.8
56.7
89.7
* Unaudited figures
^ Including dividends
# Including interest
41
Change in Investment Income, Treasury’s Share
and Accumulated Surplus
I
2007
Full year
I
2006
Q4
Q3
Q2
Q1
Full year
142.2
33.4
61.8
26.3
20.7
103.8
0.2
0.1
0.0
0.1
0.0
0.2
Interest and other expenses
(10.2)
(2.2)
(2.8)
(2.9)
(2.3)
(10.5)
Net investment income
132.2
31.3
59.0
23.5
18.4
93.5
Payment to Treasury #
(27.6)
(7.4)
(6.9)
(6.9)
(6.4)
(28.9)
4.7
(1.1)
5.8
N/A
N/A
N/A
109.3
22.8
57.9
16.6
12.0
64.6
(HK$ billion)
Investment income
Other income
Valuation change of Strategic Portfolio^
Increase in EF accumulated surplus
#
(unaudited)
The fixed rate of fee payment to Treasury for 2007 (w.e.f. 1 April 2007) is 7%.
^ Including dividends
42
Historical Change in Investment Income,
Treasury’s Share and Accumulated Surplus
(HK$ billion)
2007*
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Investment income
142.2
103.8
37.8
56.7
89.7
47.0
7.4
45.1
103.8
93.8
35.6
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
Interest and other expenses
(10.2)
(10.5)
(7.6)
(4.8)
(5.6)
(7.0)
(10.5)
(11.0)
(10.0)
(16.0)
(18.4)
Net investment income
132.2
93.5
30.4
52.1
84.3
40.2
(2.9)
34.3
94.0
78.0
17.4
Payment to Treasury
(27.6)
(28.9)
(10.1)
(14.5)
(25.7)
(15.6)
(1.6)
(18.1)
(45.4)
(26.0)
N/A
Valuation change of
Strategic Portfolio^
4.7
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Revaluation gain/(loss)
on premises
N/A
N/A
N/A
0.9
(0.9)
N/A
N/A
N/A
N/A
N/A
N/A
109.3
64.6
20.3
38.5
57.7
24.6
(4.5)
16.2
48.6
52.0
17.4
N/A
N/A
(0.6)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
109.3
64.6
19.7
38.5
57.7
24.6
(4.5)
16.2
48.6
52.0
17.4
Other income
Carry to accumulated
surplus
Adjustment to accumulated surplus
Effect of implementation
of HKAS 39
Increase/(Decrease) in
EF accumulated
surplus
* unaudited figures
^ including dividends
43
Exchange Fund
Abridged Balance Sheet
At
31 Dec 2007
(HK$ billion)
At
31 Dec 2006
Change
(unaudited)
ASSETS
Deposits
133.9
62.4
71.5
Debt securities
922.3
828.4
93.9
Hong Kong equities
184.6
122.4
62.2
Other equities
145.6
137.4
8.2
Other assets
30.6
25.8
4.8
Total assets
1,417.0
======
1,176.4
======
240.6
=====
163.4
156.9
6.5
7.5
6.9
0.6
Balance of the banking system
10.6
2.0
8.6
Exchange Fund Bills and Notes
141.8
129.2
12.6
Fiscal Reserves Account1
464.6
324.5
140.1
Other liabilities1
12.1
49.2
(37.1)
Total liabilities
800.0
668.7
131.3
Accumulated surplus
617.0
507.7
109.3
LIABILITIES AND FUND EQUITY
Certificates of Indebtedness
Government-issued currency notes & coins in circulation
Total liabilities and fund equity
1,417.0
1,176.4
240.6
======
======
=====
Note 1: Under the new fee arrangement, the payment of $27.6 billion has been included in Fiscal Reserves
Account balance of $464.6 billion. With the old arrangement, the return on Fiscal Reserves of $28.9
billion in 2006 was accrued under Other liabilities of $49.2 billion.
44
Exchange Fund
Performance Against Investment Benchmark
14%
12%
10.8%
Investment Return of
Exchange Fund's Investment
Benchmark
10.6%
10.2%
9.5%
Investment Return of
Exchange Fund
10%
11.8%
9.5%
8.9%
8%
6%
5.5%
5.7% 5.7%
5.1%
4.8%
3.9%
3.8%
3.1%
4%
2.9%
2%
0.7%
0.4%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
(unaudited)
45
Investment Return
of the Exchange Fund
14%
12.1%
11.8%
12%
10.8%
10.8%
10.2%
9.5%
10%
8%
7.0%
6.1%
6%
5.7%
5.1%
5.1%
4.8%
4%
3.1%
2.4%
1.4%
2%
0.7%
Compounded Annual
Hong Kong CPI-A
(1994-2007#)
Compounded Annual
Investment Return
(1994-2007)
2006
2005
2004
2003
2002
2001
2007 (unaudited)
# Hong Kong CPI-A at end-November 2007
2000
1999
1998
1997
1996
1995
1994
0%
46
Treasury Return Against Estimate
HK$bn
50
Treasury's estimated return
45.4
Treasury's share of Exchange Fund return
40
31.6
28.9
30
26.7
27.6
25.7
26.0
26.0
22.2
18.1
20
18.2
15.6
13.8
12.5
14.5
12.1
12.3
14.1
10.1
10
1.6
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
(unaudited)
47