1.
International Macro Financial Conditions
2.
Assessment of Risk on Hong Kong’s Financial
Stability
3.
Latest Developments in the Banking Sector
4.
Investment Income of the Exchange Fund in the
First Three Quarters of 2010
2
1.
International Macro Financial Conditions
2.
Assessment of Risk on Hong Kong’s Financial
Stability
3.
Latest Developments in the Banking Sector
4.
Investment Income of the Exchange Fund in the
First Three Quarters of 2010
3
GLOBAL ECONOMIC GROWTH FORECASTS
Real GDP Growth Forecasts
US
%
Euro area
Japan
4
%
4
Nov 2009
May 2010
3
3
Oct 2010
2
2
1
1
0
0
2010
2011
2010
2011
Source: Consensus Forecasts (Nov 2009 and May and Oct 2010)
2010
2011
4
GROWTH MOMENTUM IS WEAKENING
IN THE US
% 3m-on-3m
2.0
70
1.5
65
1.0
60
0.5
55
0.0
50
-0.5
45
-1.0
40
Personal consumption
expenditure (LHS)
-1.5
35
-2.0
30
ISM manufacturing index
(RHS)
-2.5
25
-3.0
20
2006
Source: Bloomberg
2007
2008
2009
2010
5
US LABOUR MARKET
%
11
10
9
Thousand persons
Monthly change in non-farm payroll
(Inverted, RHS)
Unemployment rate (LHS)
8
7
6
5
4
3
2
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: CEIC
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
6
US HIDDEN UNEMPLOYMENT:
LABOUR UNDERUTILISATION RATE
18
%
16
14
Labour underutilisation rate
12
10
8
6
1994
1996
1998
2000
2002
2004
2006
2008
2010
Labour underutilisation rate: Include total number of unemployed, plus persons who have not been looking for work
for the 4 weeks preceding the survey, but currently want a job and are available for work, plus part time workers
who want but unavailable to secure full time employment; as percentage of total labour force that includes the
aforementioned categories of persons.
Source: U.S. Bureau of Labor Statistics
7
US HOUSEHOLD DEBT
1.4
1.4
Household Debt-to-Income Ratio
1.3
1.2
1.3
1.2
2002 level = 1
1.1
1.1
1.0
1.0
0.9
0.9
0.8
50-year long run average = 0.8
0.8
0.7
0.7
0.6
0.6
0.5
0.5
0.4
0.4
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: CEIC
8
US PERSONAL SAVINGS RATE
%
14
12-month average of personal savings rate
Latest = 5.8%
(August)
12
Average = 2.7%
(2002-2007)
10
8
6
Average = 7.7%
(1960 - 2001)
4
2
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: CEIC, NBER
9
US INCOME GROWTH AND
UNEMPLOYMENT RATE
3.5
%
%
4.5
5
4
5.5
3
6.5
7.5
2
8.5
Unemployment rate (Inverted, LHS)
9.5
Growth in average hourly earnings (%YoY, RHS)
1
0
10.5
11.5
1985
-1
1990
Source: Bloomberg
1995
2000
2005
2010
10
US HOUSING MARKET
Jan 2000 = 100
Months
220
Homebuyer tax
credt expired
on 31st March
200
14
12
10
180
8
160
6
140
4
120
Case-Shiller 20 city home price index (LHS)
2
Months' supply of unsold homes (RHS)
100
0
2000
2001
2002
Source: Bloomberg
2003
2004
2005
2006
2007
2008
2009
2010
11
US CREDIT CONDITION
ppt
Commercial and Industrial Loans ppt
100
100
Small firms
80
80
Large and medium firms
60
60
ppt
50
Small firms
40
Large and medium
firms
30
40
40
tightening
20
20
0
0
-40
2000
-20
loosening
2002
2004
2006
40
30
20
tightening
20
10
10
0
0
-10
loosening
-20
-20
ppt
50
Jun
Sep
2009
Dec
Mar
Jun
2010
-10
-20
Sep
-40
2008
Source: Federal Reserve, Senior Loan Officer Survey
2010
12
EUROPEAN SOVEREIGN DEBT PROBLEMS:
CDS SPREADS
bps
1000
Prices of 5-year sovereign CDS
May 2010
900
800
700
600
bps
1000
900
800
Portugal
700
Ireland
600
Greece
500
500
400
400
300
300
200
200
100
100
0
2008
Source: Bloomberg
0
2009
2010
13
EUROPEAN SOVEREIGN DEBT PROBLEMS:
PUBLIC DEBT CONTINUES TO INCREASE
% of GDP
% of GDP
Public debt
160
140
120
160
2009
2010 (projection)
2011 (projection)
Greece
140
Italy
120
Ireland
100
100
Germany
Portugal
France
80
UK
Spain
80
60
60
40
40
20
20
0
0
Source: National sources, Eurostats, IMF, major press and staff estimations.
14
MAJOR CENTRAL BANKS CONTINUE TO
IMPLEMENT QUANTITATIVE EASING MEASURES
Change in the Size of Balance Sheets
Before
QE1
Latest2
Change
(%)
US Fed
(USD billion)
909
(6.3%)
2,302
(15.7%)
153.2
prepared to provide additional
accommodation if needed to support the
economic recovery and to return inflation,
over time, to levels consistent with its
mandate (22/9)
Bank of England
(GBP billion)
93
(6.4%)
245
(16.7%)
162.8
will continue to offer to purchase highquality private sector assets on behalf of the
Treasury, financed by the issue of Treasury
bills (7/10)
Bank of Japan
(JPY1,000 billion)
110
(21.8%)
121
(25.4%)
10.0
will examine establishing a program to
purchase government securities and other
financial assets, the size of the program will
be about 5 trillion yen (5/10)
Latest monetary policy statement
1. As of around end-August 2008. 2. As of around end-September 2010. 3. Figures in brackets are ratio to GDP.
Source: Websites of various central banks.
15
1.
International Macro Financial Conditions
2.
Assessment of Risk on Hong Kong’s Financial
Stability
3.
Latest Developments in the Banking Sector
4.
Investment Income of the Exchange Fund in the
First Three Quarters of 2010
16
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: INFLATION
Inflation forecasts for Hong Kong and Mainland
%
5
4
May-10
Sep-10
4
Mainland
HK
%
5
3
3
2
2
1
1
0
0
2010
2011
Source：Consensus Forecast (May and Sep 2010)
2010
2011
17
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: INFLATION
Underlying inflation and contributions of its components
% yoy
10
Rentals
Non-tradables excluding rentals
Tradables excluding basic food
Basic food
Underlying CCPI inflation
8
% yoy
10
8
6
6
4
4
2
2
0
0
-2
-2
2007
2008
2009
2010
Underlying inflation: Netting out the effects of all Government's one-off relief measures from headline inflation.
18
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: INFLATION
CCPI rental component and residential property price index
Index
(Jan 1997=100)
130
110
Index
(Jan 1997=100)
130
CCPI rental component
110
90
90
70
70
50
50
Residential property price index
30
30
97 98 99 00 01 02 03 04 05 06 07 08 09 10
19
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: EQUITY MARKET
Hong Kong and Asia Pacific equity market performance
Rebased to Oct 27, 2008 = 100
MSCI AC Pacific
250
(excl. HK & Japan)
200
Hong Kong's
Hang Seng Index
250
200
150
150
Nov 2009
100
100
50
50
0
Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep
2008 2009
2010
0
20
EQUITY FUND RAISING ACTIVITIES
AND CAPITAL INFLOWS
Total amount of
fund raised in the
equity market
HK$ billion
600
Inflows to the
Hong Kong dollar
500
400
300
200
100
0
2006
2007
2008
2009
2010*
Notes
(1) Total amount of fund raised in the equity market include those from IPOs, rights issues, placing, public offers,
consideration issues, exercise of warrants and share option schemes.
(2) The 2008-2009 figures are slightly different from data of Hong Kong Exchanges and Clearing Limited, since fund
raising activities not involving Hong Kong dollars have been excluded.
(3) * represents preliminary figures up to September 2010, with the amount of fund raised in the AIA IPO included.
21
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: PROPERTY MARKET
Residential property prices and transaction volume
Oct 1997 = 100
140
at or above100 sq. m. (lhs)
120
Thousands
40
below 100 sq. m. (lhs)
100
80
Oct 1997 = 100
120
Nov 2009
35
110
30
100
25
90
109.9
88.7
73.7
80
20
60
15
40
10
20
Total transaction volume (rhs)
0
1996 1998 2000 2002 2004 2006 2008 2010
70
60.2
60
Oct Apr Oct Apr Sep
2008 2009
2010
5
0
22
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: PROPERTY MARKET
Changes over a year (HK$ bn)
300
250
Changes in property-related loans
200
150
100
50
0
-50
-100
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
23
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: PROPERTY MARKET
• To strengthen banks’ risk management on residential mortgage
lending, the HKMA issued guidelines on 13 August to implement
the following prudential measures:
– Loan-to-value Ratio: lowering the maximum loan-to-value
ratio to 60% for non-owner-occupied properties and for
properties valued at $12 million and above
– Debt Servicing Ratio (DSR): standardising borrowers’ DSR to
50% and requiring banks to conduct stress tests in order to
avoid borrowers running into financial difficulties when
mortgage rates increase in the future
• The HKMA will conduct thematic on-site examinations to monitor
banks’ compliance with above measures
24
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: PROPERTY MARKET
LATEST DEVELOPMENTS (1)
('000)
18
Transaction volume of residential property
Primary market
Secondary market
16
14
('000)
18
16
14
Nov 2009
12
12
10
10
8
8
6
6
4
4
2
2
0
0
Jan
2009
Apr
Jul
Oct
Jan
2010
Apr
Jul
Sep
25
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: PROPERTY MARKET
LATEST DEVELOPMENTS (2)
Number of applications for mortgage insurance
Number of cases
8,000
HK$ billion
16
MIP applications (total loan amount) (rhs)
7,000
14
MIP applications (number of cases) (lhs)
6,000
12
5,000
10
4,000
8
3,000
6
2,000
4
1,000
2
0
0
Jan
2009
Apr
Jul
Oct
Jan
2010
Apr
Jul
Oct
(up to 28th)
26
ASSESSMENT OF RISK ON HONG KONG’S
FINANCIAL STABILITY: PROPERTY MARKET
LATEST DEVELOPMENTS (3)
Residential mortgage survey results
Jul
Aug
Sep
40.8
+15.3%
16,837
+9.7%
40.3
-1.3%
17,114
+1.6%
31.6
-21.6%
13,893
-18.8%
2.43
273
62.0
2.36
275
61.4
2.28
273
58.6
New applications
Number
M-o-M % change
25,877
+9.7%
23,663
+1.6%
17,459
-18.8%
New loans drawn down
Value (HK$ billion)
M-o-M % change
Number
M-o-M % change
25.9
-15.9%
11,331
-16.2%
33.1
+27.8%
13,540
+19.5%
33.9
+2.4%
14,525
+7.3%
New loans approved
Value (HK$ billion)
M-o-M % change
Number
M-o-M % change
Average size (HK$ million)
Average contractual life (months)
Loan-to-value ratio (%)
27
CONCLUSIONS
• Growth in the advanced economies such as Europe and the US is losing
momentum and these economies are therefore likely to introduce further
expansionary monetary policies.
• Given the exceptionally low interest rates, abundant liquidity and positive
domestic economic conditions, the risk of asset (especially property)
price bubble forming in Hong Kong is rising.
• In August, the Government introduced a series of measures targeting the
property market and the HKMA required banks to further enhance their
credit risk management.
• The effectiveness of these measures remains to be seen. The HKMA
will closely monitor market developments and may introduce further
measures to maintain banking stability if necessary.
• Prospective home-buyers should avoid over-stretching themselves.
Otherwise, they might face financial difficulties when interest rates
increase eventually.
28
1.
International Macro Financial Conditions
2.
Assessment of Risk on Hong Kong’s Financial
Stability
3.
Latest Developments in the Banking Sector
4.
Investment Income of the Exchange Fund in the
First Three Quarters of 2010
29
NOTABLE DEVELOPMENTS IN
RENMINBI BUSINESS
11 Feb
HKMA issued an important elucidation on
supervisory principles and operational arrangements
22 Jun
Mainland authorities announced a major expansion
of the RMB trade settlement scheme with the rest of
the world
19 Jul
Clearing Agreement on RMB business amended
17 Aug
Mainland authorities launched a pilot scheme for
eligible institutions outside the Mainland to invest in
the Mainland’s interbank bond market
30
RENMINBI BUSINESS IN HONG KONG
RMB deposits in Hong Kong
increased steadily
RMB trade settlement gained
momentum since March 2010
RMB billion
RMB billion
RMB billion
RMB billion
45
45
180
180
40
40
160
35
140
140
30
120
120
25
25
100
100
20
20
80
80
15
15
60
60
10
10
40
40
5
5
20
20
0
0
0
0
RMB bonds
35
Amount of RMB trade settlement
transactions
30
Jul-09
Jan-10
Jul-10
160
RMB deposits
Jan-09
Jul-09
Jan-10
Jul-10
31
HONG KONG’S INCREASING ROLE
IN RMB FINANCING
• RMB bond issuance to reach record amount
– Total issuance in 2010 to be at least RMB 17.8 billion
– Issuers broadening to Hong Kong and global corporations
and multinationals (including Asian Development Bank and
International Finance Corporation)
• A wide range of RMB products launched since the
amendment of Clearing Agreement, including
– Certificates of deposit
– Structured deposits
– Insurance products
– Syndicated loans
– Investment funds
32
DEPOSIT PROTECTION

A large-scale multi-media publicity campaign commenced in
August to inform the public that the full deposit guarantee will
expire by the end of this year

The enhancements to the DPS will take effect from January
2011 with the protection limit increasing to HK$500,000

Banks will have to make sufficient representation on the
protection status of their products and the related changes to
subsidiary legislation were submitted to LegCo in October
33
Handling of Customer Personal Data by Banks

HKMA reminds banks from time to time that they should ensure that
their handling of customers’ personal data is in compliance with the
Personal Data (Privacy) Ordinance and relevant codes and
regulations

Issued circulars in August and September 2010 to require banks to
review their current practices in handling customers’ personal data in
light of the Privacy Commissioner’s interim report on the Octopus
case and a recent decision of the Administrative Appeals Board

HKMA issued a further circular in October drawing AIs’ attention to
the “Guidance on the Collection and Use of Personal Data in Direct
Marketing” issued by the Privacy Commissioner on 18 October

The HKMA published the interim findings in the auditors’ report in
relation to the Octopus incident on 18 October and is monitoring
Octopus’ implementation of the recommendations made in the report
34
Global Financial Regulation Reforms
“Basel III”
• To enhance the resilience of the global banking system, the Basel
Committee on Banking Supervision reached board agreement on
12 September 2010 regarding “Basel III”
• “Basel III” tightens the definition of regulatory capital; increases
the minimum requirement of Tier 1 Capital; establishes
conservation / countercyclical capital buffers; introduces a nonrisk based leverage ratio; a new liquidity coverage ratio and a net
stable funding ratio
• The new requirements will be phased-in between 1 January 2013
and 1 January 2019
• Local banking sector is expected to be able to comply with the
new requirements
35
1.
International Macro Financial Conditions
2.
Assessment of Risk on Hong Kong’s Financial
Stability
3.
Latest Developments in the Banking Sector
4.
Investment Income of the Exchange Fund in the
First Three Quarters of 2010
36
INVESTMENT INCOME
2010
2009
2008
2007
Jan - Sep *
Full Year
Full Year
Full Year
Hong Kong equities^@
7.3
48.9
(77.9)
55.8
Foreign equities^
7.9
48.8
(73.1)
6.7
(3.6)
9.8
(12.4)
18.7
0.8
0.8
-
Bonds#
60.7
(0.6)
88.4
61.0
Investment income/(loss)@&
73.1
107.7
(75.0)
142.2
(HK$ billion)
Foreign exchange
Other investments&
-
* Unaudited figures
^ Including dividends
# Including interest
@
Excluding valuation changes in Strategic Portfolio
& Including valuation changes of investment held by EF’s investment holding subsidiaries
37
CHANGES IN INVESTMENT INCOME, PAYMENT TO
FISCAL RESERVES AND ACCUMULATED SURPLUS
I
2009
Q2
Q1
Full year
74.1
(12.1)
11.1
107.7
0.2
0.1
0.1
Interest and other expenses
(3.6)
(1.2)
(1.5)
(0.9)
(3.8)
Net investment income/(loss)
69.7
73.0
(13.5)
10.2
104.1
(25.2)
(8.3)
(8.4)
(8.5)
(33.5)
(2.8)
(1.1)
(0.9)
(0.8)
(1.2)
0.3
1.6
(0.4)
(0.9)
3.6
42.0
65.2
(23.2)
0.0
73.0
(HK$ billion)
Investment income/(loss)
Other income
Payment to Fiscal Reserves
#
Payment to HKSAR government
funds and statutory bodies #
Valuation change of Strategic Portfolio less
investment held by EF’s investment holding
subsidiaries^
Increase/(Decrease) in EF
Accumulated Surplus
I
2010
Jan - Sep*
Q3
73.1
* Unaudited figures
# The fixed rate of fee payment is 6.3% for 2010 and 6.8% for 2009
^ Including dividends
-
0.2
38