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HONG KONG MONETARY AUTHORITY

HONG KONG MONETARY AUTHORITY. Briefing to the Legislative Council Panel on Financial Affairs. 2 February 2004. PROGRESS IN KEY FUNCTIONS & RESPONSIBILITIES. Review of 2003 Currency Banking Financial infrastructure Hong Kong as an international financial centre Exchange Fund.

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HONG KONG MONETARY AUTHORITY

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  1. HONG KONG MONETARY AUTHORITY Briefing to the Legislative Council Panel on Financial Affairs 2 February 2004

  2. PROGRESS INKEY FUNCTIONS & RESPONSIBILITIES • Review of 2003 • Currency • Banking • Financial infrastructure • Hong Kong as an international financial centre • Exchange Fund

  3. REVIEW OF 2003 • Monetary and banking stability notwithstanding heightened risks and volatility • Investment return on Exchange Fund amounted to HK$89.6 billion • Approval for personal RMB business in Hong Kong • Euro Clearing System commenced operation • Hong Kong’s credit rating upgraded to A1 • Sharing of positive consumer credit data began

  4. 1999 2000 2001 2002 2003 1998 CURRENCY STABILITY (1) Spot exchange rate (left) 1-month HK / US interest rate differential (right)

  5. CURRENCY STABILITY (2) Spot exchange rate

  6. 1999 2000 2001 2003 2002 1998 CURRENCY - MARKET EXPECTATIONS (1) 12-month Hong Kong dollar forward points

  7. CURRENCY - MARKET EXPECTATIONS (2) 12-month Hong Kong dollar forward points

  8. CURRENCY - MARKET EXPECTATIONS (3) 12-month Hong Kong dollar forward exchange rate

  9. Aggregate Balance (crucial component of Monetary Base*) Interbank interest rates Capital inflow CURRENCY BOARD RULES Capital outflow * The other components of the Monetary Base are banknotes and coins in circulation and Exchange Fund paper outstanding, the latter being convertible into the Aggregate Balance through the Discount Window.

  10. AGGREGATE BALANCE (1) Monetary reform through the introduction of the seven technical measures, including the Discount Window Aggregate Balance brought onto the balance sheet of the Exchange Fund on the occasion of the introduction of RTGS

  11. AGGREGATE BALANCE (2) Note: Figures on the Aggregate Balance are after Discount Window activities.

  12. POLICY OPTIONS (1) • Continue to take US dollars passively and allow Aggregate Balance to increase, and wait for interest rate differential to reverse the inflow • Enlarge interest rate differential by imposing a charge on large clearing balances of banks: negative interest rates • Absorb large Aggregate Balance through issue of Exchange Fund paper: a transfer between different components of Monetary Base • Introduce Convertibility Undertaking also on the strong side

  13. Backing 364.6 assets Monetary Base* 335.0 Certificates of Indebtedness 151.1 Currency notes & coins 7.4 Exchange Fund paper 123.9 Aggregate Balance 52.2 POLICY OPTIONS (2) Currency Board Account (HK$ billion) Assets Liabilities As of 21 January 2004 * Not equal to the sum of breakdown here because of exclusion of items such as interest payable on Exchange Fund Notes.

  14. Aggregate 28.3 Balance HK dollar deposits 1,930.8 Demand deposits 226.9 Savings deposits 936.3 Time deposits 767.6 NEGATIVE INTEREST RATES ? Balance Sheet of Banking System (HK$ billion) Assets Liabilities As of 31 December 2003 * Based on an ad hoc survey in 2001, Hong Kong dollar time deposits of HK$0.5 million and above accounted for about 80% of the total value of Hong Kong dollar time deposits.

  15. CURRENCY - RISKS & VULNERABILITIES External factors • Global economic recovery • Bottoming of interest rates • External imbalances of the US • Volatility in currency and equity markets • Political pressure on RMB exchange rate • Geopolitical issues

  16. GDP growth forecasts 2003 2004 2005 % yoy % yoy % yoy Mainland China 8.9 8.3 7.6 US 3.1 4.6 3.6 Eurozone 0.5 1.8 2.1 Japan 2.3 2.1 1.6 Hong Kong 3.0* 5.1 4.5 GLOBAL ECONOMIC OUTLOOK Source: Consensus Forecasts (January-2004) * Forecast by HKSAR Government in November 2003

  17. US FED FUNDS TARGET RATE

  18. US CURRENT ACCOUNT DEFICIT

  19. EXCHANGE RATE VOLATILITY yen / US$ (left) US$ / euro (right, inverted scale) US$ depreciation

  20. EQUITY PRICES IN MAJOR MARKETS

  21. RENMINBI - MARKET EXPECTATIONS 12-month RMB non-deliverable forward points

  22. 12-MONTH HONG KONG DOLLAR AND RENMINBI FORWARD EXCHANGE RATES RMB/US$ HK$/US$

  23. Supportive factors Robust economic recovery Positive impact of policies facilitating economic integration with the Mainland Hong Kong’s strong external position Concerns and uncertainties Public finance Unemployment Deflation Possible re-emergence of SARS CURRENCY - RISKS & VULNERABILITIES Domestic factors

  24. STRONG ECONOMIC RECOVERY (Seasonally adjusted quarter-on-quarter change)

  25. COMPETITIVENESS Note: * Constructed as the ratio of total wages of all employees to real GDP.

  26. 2001 2000 2002 2003 BALANCE OF PAYMENTS ACCOUNT Current account surplus

  27. 2001 2000 2003 2002 FISCAL DRAWDOWNS Net quarterly changes in fiscal placement with the Exchange Fund

  28. LABOUR MARKET Note: * One-quarter lag.

  29. CONSUMER PRICE DEFLATION

  30. CONSUMER PRICE DEFLATION

  31. CONSUMER PRICE DEFLATION

  32. CONSUMER PRICE DEFLATION

  33. BANKING STABILITY - REVIEW OF 2003 • Economic downturn • Worsening problem of negative home equity • Sluggish loan growth • Increased diversification of banks’ business • Increased popularity of electronic banking

  34. BANKING SECTOR PERFORMANCE % Capital adequacy ratio of all locally incorporated authorized institutions Period-end figures. There is a break in series at end-December 2001 owing to a change in the reporting population.

  35. BANKING SECTOR PERFORMANCE Asset quality of Retail Banks Classified loans as % of total loans Net of specific provisions Period-end figures.

  36. BANKING SECTOR PERFORMANCE Personal bankruptcy petitions(quarterly figures)

  37. BANKING SECTOR PERFORMANCE Charge-off ratio (%) Delinquency ratio (%) Credit card asset quality There is a break in series at Q4 2001 owing to an increase in the number of surveyed institutions.

  38. BANKING SECTOR PERFORMANCE Residential mortgage lending asset quality (%) Period-end figures. There is a break in series at December 2000 owing to an increase in the number of surveyed institutions. Combined ratio is the sum of delinquency ratio and the rescheduled loan ratio.

  39. BANKING SECTOR PERFORMANCE Residential mortgage lending in negative equity Period-end figures. * Preliminary figures. # Separate data on secured and unsecured loan value as at end-Sep 2001 are not available.

  40. BANKING SECTOR PERFORMANCE Volume growth for Retail Banks’ customer deposits and loans (year-on-year % growth) Month-end figures.

  41. BANKING SECTOR PERFORMANCE Net interest margin of Retail Banks

  42. WORK PROGRESS • Deposit protection scheme • under the scrutiny of a Bills Committee • Positive data sharing • banks have launched more products with interest rates based on individual customers’ creditworthiness • Commercial credit reference agency • finalising operational details for implementation in second half of 2004

  43. WORK PROGRESS • New Capital Accord • preparing for implementation by end-2006 • Fraudulent bank websites • stepping up surveillance and issue of circular and press statements to alert banks and the public • ATM frauds • monitoring banks’ progress in upgrading the security safeguards of ATMs

  44. FINANCIAL INFRASTRUCTURE FOR DOMESTIC FINANCIAL ACTIVITIES • Clearing and Settlement Systems Bill • Bills Committee is being formed • New banknotes • new HK$20, HK$50 and HK$1000 banknotes to go into circulation in second half of 2004

  45. FINANCIAL INFRASTRUCTURE FOR INTERNATIONAL FINANCIAL ACTIVITIES Turnover of US Dollar / Euro RTGS Clearing Systems in Hong Kong (daily average) Value (in million) US$ RTGS • Avg. daily value in 2003 : US$5.0 bn • No. of Direct Participants : 67 • No. of Indirect Participants : 160 Period EUR RTGS • Avg. daily value in 2003 : EUR0.8 bn • No. of Direct Participants : 23 • No. of Indirect Participants : 22

  46. FINANCIAL INFRASTRUCTURE FORCROSS BORDER FINANCIAL ACTIVITIES Turnover of Cross-border Payment Linkages between Hong Kong and the Mainland (daily average) November 2003USD RTGS link with Shenzhen December 2002HKD RTGS link with Shenzhen June 2002Two-way HKD joint cheque clearing with Guangdong and Shenzhen October 2000One-way HKD joint cheque clearing with Guangdong January 1998 One-way HKD joint cheque clearing with Shenzhen

  47. HONG KONG AS AN INTERNATIONAL FINANCIAL CENTRE • RMB business in Hong Kong • RMB debit and credit cards issued by Mainland banks used in Hong Kong since 18 January 2004 • preparation of other types of RMB business on schedule and expected to be launched in phases • Asian Bond Fund • local currency denominated ABF being studied • Hong Kong’s credit rating • continuing discussions with rating agencies

  48. EXCHANGE FUND - MARKETS IN 2003 • Volatile markets: weak H1 but strong H2 • Fluctuating bond yields • Strong equity markets • Exchange gains from the euro

  49. EXCHANGE FUND PERFORMANCE 2003 2002 2001 (HK$ billion) Gain / (Loss) on Hong Kong equities* 21.2 (11.8) (27.1) Gain / (Loss) on other equities* 26.8 (22.7) (3.3) Exchange gain / (loss) 22.9 27.2 (13.0) Total return from bonds, etc18.754.350.8 Investment income 89.6 47.0 7.4 * including dividends

  50. I 2003 I 2002 (HK$ billion) Full year Q1 Q2 Q3 Q4 Full year Investment income 89.6 6.7 41.1 8.4 33.4 47.0 Other income 0.2 0.0 0.1 0.0 0.1 0.2 Interest and expenses(6.4) (1.4)(1.5)(1.3) (2.2) (7.0) Net investment income 83.4 5.3 39.7 7.1 31.3 40.2 Treasury’s share(25.7)(2.1)(13.0)(2.0) (8.6) (15.6) Increase in EF Accumulated Surplus 57.7 3.2 26.7 5.1 22.7 24.6 EXCHANGE FUND CHANGE IN ACCUMULATED SURPLUS

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