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
2
REVIEW OF 2003
• Monetary and banking stability notwithstanding
heightened risks and volatility
• Investment return on Exchange Fund amounted to
HK$89.6 billion
• Approval for personal RMB business in Hong Kong
• Euro Clearing System commenced operation
• Hong Kong’s credit rating upgraded to A1
• Sharing of positive consumer credit data began
3
CURRENCY STABILITY (1)
HK$ / US$
b.p.
7.85
1,800
1,600
7.80
1,400
Spot exchange rate (left)
1,200
7.75
1,000
800
7.70
600
400
1-month HK / US interest rate differential (right)
7.65
200
0
7.60
-200
Jan
Jul
1998
Jan
Jul
1999
Jan
Jul
2000
Jan
Jul
2001
Jan
Jul
2002
Jan
Jul
Jan
2003
4
CURRENCY STABILITY (2)
HK$ / US$
7.90
HK$ / US$
7.90
7.85
7.85
7.80
7.80
7.75
7.75
Spot exchange rate
7.70
7.70
7.65
7.65
7.60
7.60
Jan-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Jan-04
5
CURRENCY - MARKET EXPECTATIONS (1)
pips
pips
8,000
8,000
7,000
7,000
6,000
6,000
5,000
5,000
4,000
4,000
12-month Hong Kong dollar forward points
3,000
3,000
2,000
2,000
1,000
1,000
0
0
-1,000
Jan
-1,000
Jul
1998
Jan
Jul
1999
Jan
Jul
2000
Jan
Jul
2001
Jan
Jul
2002
Jan
Jul
Jan
2003
6
CURRENCY - MARKET EXPECTATIONS (2)
pips
12-month Hong Kong dollar forward points
400
200
pips
400
200
0
0
-200
-200
-400
-400
-600
-600
-800
-800
-1,000
Jan-03
Apr-03
Jul-03
Oct-03
-1,000
Jan-04
7
CURRENCY - MARKET EXPECTATIONS (3)
HK$ / US$
7.90
7.85
12-month Hong Kong dollar
forward exchange rate
HK$ / US$
7.90
7.85
7.80
7.80
7.75
7.75
7.70
7.70
7.65
7.65
7.60
7.60
Jan-04
Jan-03
Apr-03
Jul-03
Oct-03
8
CURRENCY BOARD RULES
Capital
inflow
Capital
outflow
Aggregate Balance
(crucial component of
Monetary Base*)
Interbank interest
rates
* 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.
9
AGGREGATE BALANCE (1)
HK$ billion
60
HK$ billion
60
50
40
30
20
50
Aggregate
Balance brought
onto the balance
sheet of the
Exchange Fund on
the occasion of
the introduction of
RTGS
Monetary reform
through the
introduction of the
seven technical
measures, including
the Discount Window
10
0
Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03
40
30
20
10
0
10
AGGREGATE BALANCE (2)
HK$ billion
60
HK$ billion
60
50
50
40
40
30
30
20
20
10
10
0
Jan-03
0
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Jan-04
Note: Figures on the Aggregate Balance are after Discount Window activities.
11
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
12
POLICY OPTIONS (2)
Currency Board Account (HK$ billion)
Assets
Backing
assets
Liabilities
364.6
Monetary Base*
Certificates of
Indebtedness
Currency notes & coins
Exchange Fund paper
Aggregate Balance
335.0
151.1
7.4
123.9
52.2
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.
13
NEGATIVE INTEREST RATES ?
Balance Sheet of Banking System (HK$ billion)
Assets
Aggregate
Balance
Liabilities
28.3
HK dollar deposits
1,930.8
Demand deposits
226.9
Savings deposits
936.3
Time deposits
767.6
As of 31 December 2003
* Based on an ad hoc survey in 2001, Hong Kong dollar time deposits of HK$0.5
million and above accounted for about 80% of the total value of Hong Kong dollar
time deposits.
14
CURRENCY - RISKS & VULNERABILITIES
External factors
• Global economic recovery
• Bottoming of interest rates
• External imbalances of the US
• Volatility in currency and equity markets
• Political pressure on RMB exchange rate
• Geopolitical issues
15
GLOBAL ECONOMIC OUTLOOK
GDP growth forecasts
2003
2004
2005
% yoy
8.9
% yoy
8.3
% yoy
7.6
US
3.1
4.6
3.6
Eurozone
0.5
1.8
2.1
Japan
2.3
2.1
1.6
Hong Kong
3.0*
5.1
4.5
Mainland China
Source: Consensus Forecasts (January-2004)
* Forecast by HKSAR Government in November 2003
16
US FED FUNDS TARGET RATE
%
%
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
0
Jan-04
17
US CURRENT ACCOUNT DEFICIT
Jan-1997=100
135
% of GDP
6.0
US nominal effective exchange rate (left)
US current account deficit (right)
5.5
130
5.0
125
4.5
120
4.0
115
3.5
110
3.0
2000
2001
2002
2003
18
EXCHANGE RATE VOLATILITY
US$ / Euro
Yen / US$
140
0.60
yen / US$ (left)
130
0.70
120
0.80
110
0.90
100
1.00
US$ / euro (right, inverted scale)
90
1.10
80
70
60
Jan-00
1.20
US$ depreciation
Jul-00
Jan-01
Jul-01
1.30
Jan-02
Jul-02
Jan-03
Jul-03
1.40
Jan-04
19
EQUITY PRICES IN MAJOR MARKETS
Jan-2000=100
125
Jan-2000=100
125
Hang Seng Index
Nikkei 225
S&P 500
Euro Stoxx
100
100
75
75
50
50
25
25
2000
2001
2002
2003
20
RENMINBI - MARKET EXPECTATIONS
pips
2,000
pips
12-month RMB non-deliverable forward points
1,000
2,000
1,000
0
0
-1,000
-1,000
-2,000
-2,000
-3,000
-3,000
-4,000
-4,000
-5,000
-5,000
-6,000
Jan-02 Apr-02
Jul-02
Oct-02
Jan-03 Apr-03
Jul-03
Oct-03
-6,000
Jan-04
21
12-MONTH HONG KONG DOLLAR AND
RENMINBI FORWARD EXCHANGE RATES
8.5
8.5
8.4
8.4
8.3
RMB/US$
8.3
8.2
8.2
8.1
8.1
8.0
8.0
7.9
7.9
HK$/US$
7.8
7.8
7.7
7.7
7.6
Jan-03
7.6
Apr-03
Jul-03
Oct-03
Jan-04
22
CURRENCY - RISKS & VULNERABILITIES
Domestic factors
Supportive factors
Concerns and uncertainties
• Robust economic
•
•
•
•
recovery
• Positive impact of
policies facilitating
economic integration
with the Mainland
Public finance
Unemployment
Deflation
Possible re-emergence
of SARS
• Hong Kong’s strong
external position
23
STRONG ECONOMIC RECOVERY
(%)
(Seasonally adjusted quarter-on-quarter change)
8
6
GDP
(%)
8
Private consumption
6
4
4
2
2
0
0
-2
-2
-4
-4
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
24
COMPETITIVENESS
(98Q1=100)
110
(98Q1=100)
110
105
105
100
100
95
95
90
90
85
85
80
Real effective exchange rate
80
75
Unit labour cost*
75
70
70
1998
1999
2000
2001
2002
2003
Note: * Constructed as the ratio of total wages of all employees to real GDP.
25
BALANCE OF PAYMENTS ACCOUNT
Current account surplus
HK$ billion
50
%
16
level (left)
percentage of GDP (right)
40
12
30
8
20
4
10
0
0
Q1
Q2
Q3
2000
Q4
Q1
Q2
Q3
2001
Q4
Q1
Q2
Q3
2002
Q4
Q1
Q2
Q3
2003
26
FISCAL DRAWDOWNS
HK$ billion
60
Net quarterly changes in fiscal placement
with the Exchange Fund
HK$ billion
60
40
40
20
20
0
0
-20
-20
-40
-40
-60
-60
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2000
2001
2002
2003
27
LABOUR MARKET
(4-quarter change, %)
15
(%)
9
10
6
5
3
0
0
Real GDP (left)
-5
-3
Employment *(left)
Unemployment rate *(right)
-10
-6
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Note: * One-quarter lag.
28
CONSUMER PRICE DEFLATION
(99/00=100)
(%)
100
2
98
0
96
-2
94
-4
92
Composite CPI (left)
-6
Change over 12 months (right)
90
-8
2001
2002
2003
29
CONSUMER PRICE DEFLATION
(99/00=100)
(99/00=100)
100
100
98
98
96
96
94
94
Composite CPI (seasonally adjusted)
92
92
Composite CPI (adjusted for the effects of
government relief measures)
90
90
2001
2002
2003
30
CONSUMER PRICE DEFLATION
(Jan 01=100)
(Jan 01 =100)
105
105
100
100
95
95
90
90
85
85
80
Rental index (R&VD)
80
75
Composite CPI: rental component *
75
70
70
2001
2002
2003
Note: * Adjusted for seasonal factors and the effects of rates concessions.
31
CONSUMER PRICE DEFLATION
(Jan 01=100)
(Jan 01=100)
101
101
99
99
97
97
95
95
93
91
93
Composite CPI (CCPI)
CCPI excluding rental component
91
CCPI (using market rents)
89
89
2001
2002
2003
Note: Adjusted for seasonal factors and the effects of government relief measures.
32
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
33
BANKING SECTOR PERFORMANCE
%
22
Capital adequacy ratio of all locally
incorporated authorized institutions
20
18
16
14
12
10
8
6
4
Q1
/97
Q2
/97
Q3
/97
Q4
/97
Q1
/98
Q2
/98
Q3
/98
Q4
/98
Q1
/99
Q2
/99
Q3
/99
Q4
/99
Q1
/00
Q2
/00
Q3
/00
Q4
/00
Q1
/01
Q2
/01
Q3
/01
Q4
/01
Q1
/02
Q2
/02
Q3
/02
Q4
/02
Q1
/03
Q2
/03
Q3
/03
2
Period-end figures.
There is a break in series at end-December 2001 owing to a change in the reporting population.
34
/97
/9
Q3 7
/97
Q4
/9
Q1 7
/9
Q2 8
/98
Q3
/9
Q4 8
/98
Q1
/9
Q2 9
/99
Q3
/9
Q4 9
/99
Q1
/0
Q2 0
/0
Q3 0
/00
Q4
/0
Q1 0
/01
Q2
/0
Q3 1
/01
Q4
/0
Q1 1
/02
Q2
/0
Q3 2
/0
Q4 2
/02
Q1
/0
Q2 3
/03
Q3
/03
Q2
Q1
BANKING SECTOR PERFORMANCE
%
Asset quality of Retail Banks
12
10
8
Classified loans
as % of total loans
6
4
2
Net of
specific
provisions
0
Period-end figures.
35
/97
/99
/03
Q4
/03
Q3
/03
Q2
/03
Q1
/02
Q4
/02
Q3
/02
Q2
/02
Q1
/01
Q4
/01
Q3
/01
Q2
/01
Q1
/00
Q4
/00
Q3
/00
Q2
/00
Q1
/99
Q4
/99
8,000
Q3
Number
Q2
/99
Q1
/98
Q4
/98
Q3
/98
Q2
/98
Q1
/97
Q4
/97
Q3
/97
Q2
Q1
BANKING SECTOR PERFORMANCE
Personal bankruptcy petitions
(quarterly figures)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
36
BANKING SECTOR PERFORMANCE
Charge-off ratio
(%)
Delinquency ratio
(%)
Credit card asset quality
16.0
2.0
14.0
1.8
1.6
12.0
1.4
10.0
1.2
8.0
1.0
6.0
0.8
0.6
4.0
0.4
Charge-off ratio (quarterly annualised LHS)
Q2
/03
Q4
/02
Q2
/02
Q4
/01
Q2
/01
Q4
/00
Q2
/00
Q4
/99
Q2
/99
Q4
/98
0.0
Q2
/98
0.0
Q4
/97
0.2
Q2
/97
2.0
Delinquency ratio (period-end, RHS)
There is a break in series at Q4 2001 owing to an increase in the number of surveyed institutions.
37
BANKING SECTOR PERFORMANCE
(%)
Residential mortgage lending asset quality
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
Delinquency ratio
3
c-0
De
p-0
3
3
Se
3
n-0
Ju
2
r-0
Ma
c-0
De
p-0
2
2
Se
2
n-0
Ju
r-0
1
Rescheduled loan ratio
Ma
c-0
De
p-0
1
1
Se
1
n-0
Ju
0
r-0
Ma
c-0
De
p-0
0
0
Se
0
n-0
Ju
9
r-0
Ma
c-9
De
p-9
9
9
Se
9
n-9
Ju
r-9
8
c-9
Ma
8
De
p-9
Se
Ju
n-9
8
0.00
Combined ratio
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.
38
BANKING SECTOR PERFORMANCE
Residential mortgage lending in negative equity
HK$ billion
No. in thousand
170
110
150
105
130
100
95
110
90
90
85
70
80
50
75
30
70
10
65
-10
Sep-01#
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03*
60
Amount of unsecured negative equity residential mortgage loans (LHS)
Amount of secured negative equity residential mortgage loans (LHS)
Number of negative equity residential mortgage loans (RHS)
Period-end figures.
* Preliminary figures.
# Separate data on secured and unsecured loan value as at end-Sep 2001 are not
available.
39
7
r-9
n-9
Se 7
p-9
De 7
c-9
Ma 7
r-9
8
Ju
n-9
Se 8
p-9
De 8
c-9
Ma 8
r-9
9
Ju
n-9
Se 9
p-9
De 9
c-9
Ma 9
r-0
0
Ju
n-0
Se 0
p-0
De 0
c-0
Ma 0
r-0
1
Ju
n-0
Se 1
p-0
De 1
c-0
Ma 1
r-0
2
Ju
n-0
Se 2
p-0
De 2
c-0
Ma 2
r-0
3
Ju
n-0
Se 3
p-0
De 3
c-0
3
Ju
-10
Ma
BANKING SECTOR PERFORMANCE
%
35
Volume growth for Retail Banks’ customer deposits and loans
(year-on-year % growth)
30
25
20
15
10
5
0
-5
Customer deposits
Month-end figures.
Customer loans
40
/97
Q2
/9
Q3 7
/9
Q4 7
/9
Q1 7
/9
Q2 8
/98
Q3
/9
Q4 8
/9
Q1 8
/9
Q2 9
/9
Q3 9
/99
Q4
/9
Q1 9
/0
Q2 0
/0
Q3 0
/0
Q4 0
/0
Q1 0
/0
Q2 1
/01
Q3
/0
Q4 1
/01
Q1
/02
Q2
/0
Q3 2
/0
Q4 2
/0
Q1 2
/0
Q2 3
/0
Q3 3
/03
Q1
BANKING SECTOR PERFORMANCE
%
Net interest margin of Retail Banks
2.4
2.3
2.2
2.1
2.0
1.9
1.8
41
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
42
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
43
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$1000
banknotes to go into circulation in second
half of 2004
44
FINANCIAL INFRASTRUCTURE FOR
INTERNATIONAL FINANCIAL ACTIVITIES
Turnover of US Dollar / Euro RTGS Clearing
Systems in Hong Kong (daily average)
Value
(in million)
6000
5000
4000
3000
2000
1000
0
2000
2001
2002
Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03
US$ RTGS
•
•
•
Avg. daily value in 2003 : US$5.0 bn
No. of Direct Participants : 67
No. of Indirect Participants : 160
Period
EUR RTGS
•
•
•
Avg. daily value in 2003 : EUR0.8 bn
No. of Direct Participants : 23
No. of Indirect Participants : 22
45
FINANCIAL INFRASTRUCTURE FOR
CROSS BORDER FINANCIAL ACTIVITIES
Turnover of Cross-border Payment Linkages
between Hong Kong and the Mainland (daily average)
No. of transactions
Value (in HK$ mn)
November 2003
USD RTGS link
with Shenzhen
250
December 2002
HKD RTGS link
with Shenzhen
200
150
100
1,500
January 1998
One-way HKD joint
cheque clearing with
Shenzhen
October 2000
One-way HKD joint
cheque clearing with
Guangdong
June 2002
Two-way HKD joint
cheque clearing with
Guangdong and
Shenzhen
1,000
500
50
Period
0
0
1H98
2H98
1H99
2H99
1H00
2H00
1H01
2H01
1H02
2H02
1H03
2H03
46
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
47
EXCHANGE FUND - MARKETS IN 2003
• Volatile markets: weak H1 but strong H2
• Fluctuating bond yields
• Strong equity markets
• Exchange gains from the euro
48
EXCHANGE FUND PERFORMANCE
2003
2002
2001
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, etc
18.7
54.3
50.8
Investment income
89.6
47.0
7.4
(HK$ billion)
* including dividends
49
EXCHANGE FUND CHANGE
IN ACCUMULATED SURPLUS
I
2003
I
2002
Full year
Q1
Q2
Q3
Q4
Full year
89.6
6.7
41.1
8.4
33.4
47.0
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
(25.7)
(2.1)
(13.0)
(2.0)
(8.6)
(15.6)
57.7
3.2
26.7
5.1
22.7
24.6
(HK$ billion)
Investment income
Other income
Treasury’s share
Increase in
EF Accumulated Surplus
50
EXCHANGE FUND HISTORICAL CHANGE
IN ACCUMULATED SURPLUS
(HK$ billion)
Investment income
Other income
2003*
2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
89.6
47.0
7.4
0.2
0.2
0.2
45.1 103.8
0.2
0.2
93.8
35.6
25.4
46.7
8.9
19.2
0.2
0.2
0.2
0.3
0.2
4.5
Interest and expenses
(6.4)
(7.0) (10.5) (11.0) (10.0) (16.0) (18.4) (12.9) (12.6) (8.2) (5.4)
Net investment income/(loss)
83.4
40.2 (2.9)
Treasury’s share
34.3
94.0
78.0
17.4
12.7
34.4
0.9
18.3
(25.7) (15.6) (1.6) (18.1) (45.4) (26.0)
0.0
0.0
0.0
0.0
0.0
17.4
12.7
34.4
0.9
18.3
Increase/(Decrease) in
EF Accumulated Surplus
57.7
24.6 (4.5)
16.2
48.6
52.0
* unaudited figures for 2003
51
EXCHANGE FUND
ABRIDGED BALANCE SHEET
2003
2002
Change
60.1
760.8
71.2
99.4
19.7
51.5
764.8
50.9
63.1
24.8
8.6
(4.0)
20.3
36.3
(5.1)
1,011.2
955.1
56.1
Certificates of Indebtedness
134.2
Government-issued currency notes & coins in circulation 6.3
Balance of the banking system
28.3
Exchange Fund Bills and Notes
123.5
Placements by other HKSAR government funds
252.3
Other liabilities
81.7
Total liabilities
626.3
Accumulated Surplus
384.9
118.5
5.9
0.5
122.9
301.7
78.4
627.9
327.2
15.7
0.4
27.8
0.6
(49.4)
3.3
(1.6)
57.7
Total liabilities and Accumulated Surplus
955.1
56.1
(HK$ billion)
ASSETS
Deposits
Debt securities
Hong Kong equities
Other equities
Other assets
Total assets
LIABILITIES AND ACCUMULATED SURPLUS
1,011.2
52
EXCHANGE FUND PERFORMANCE
AGAINST INVESTMENT BENCHMARK
12%
10.8%
Investment Return of Exchange Fund's
Investment Benchmark*
10%
9.5%
10.2%
Investment Return of Exchange Fund*
8%
6%
5.5%
5.1%
4.8%
3.8%
4%
3.9%
2%
0.4%
0.7%
0%
1999
2000
2001
* Investment return computed in accordance with
AIMR Global Investment Performance Standards
2002
2003
(unaudited)
53
INVESTMENT RETURN*
OF THE EXCHANGE FUND
14%
12.1%
12%
10.8%
10.8%
10.2%
10%
8%
6.7%
6.1%
6%
5.1%
5.1%
4.8%
4%
2.4%
2%
1.3%
0.7%
0%
1994
1995
1996
1997
1998
1999
# Hong Kong CPI-A at end-November 2003
* Investment return computed in accordance with
AIMR Global Investment Performance Standards
2000
2001
2002
2003
Compounded Compounded
Annual
Annual
Investment Hong Kong
Return
CPI-A
(1994-2003) (1994-2003#)
54
OUTLOOK FOR 2004
• Uncertain and difficult environment:
– where are interest rates heading?
– where is the exchange value of US dollar
heading?
– where are equity markets heading?
55
HONG KONG MONETARY AUTHORITY
Briefing to the Legislative Council
Panel on Financial Affairs
2 February 2004
56