1. PECC PEO/Structural Specialist Meeting Macroeconomic Management in Hong Kong since 1990
Osaka, September 2004

2. Preamble
Booming economy  prone to over-leveraging  vulnerable to external shock or abrupt turn in economic trend
Individuals : excessive borrowing
Corporates : excessive investment  high gearing ratio

3. Preamble
Excessive debt  if accompanied with weak banking sector  risk of “debt crisis”
Rising interest rate  debt servicing cost
Currency risk
Maturity mismatch

4. Preamble Solvency issue Bankruptcy
Systemic breakdown of financial intermediation
Spillover
e.g. Asian financial crisis

5. Preamble Solvency issue Bankruptcy
Systemic breakdown of financial intermediation
Spillover
e.g. Asian financial crisis

6. Preamble Painful adjustment Currency devaluation Asset price plunge
NPLs
Output contraction (rising unemployment)

7. Currency devaluation

8. Asset price plunges

9. Soaring non-performing loans

10. Output contraction

11. Rising unemployment

12. Hong Kong Experience Resilience to adversities
Flexibility to maintain competitiveness
Strong financial infrastructure

13. Hong Kong’s resilience
Setbacks in 1998 and 2001
Rebound promptly  led by strong external trade

14. Hong Kong’s resilience
Direct investment (DI) inflow remained substantial  averaging at HK$192 billion or 15% of GDP a year  Hong Kong as one of the major DI recipient in the region

15. Hong Kong’s resilience
Hong Kong  attractive hub to foreign enterprises

16. Hong Kong’s resilience
Household’s unsecured loans (credit card advances + other personal loans)  a small part of total bank loans for domestic use (around 7% in recent years)

17. Hong Kong’s resilience

18. Hong Kong’s resilience
Hong Kong’s gross external debt : mostly associated with normal operations of the banking sector and with inward direct investment
Private sector’s share not significant (7-9% over ); mostly of longer-term nature
Backed by substantial external assets  strong net positions across sectors

19. Hong Kong’s resilience
Current account consistently in surplus  high savings for the economy as a whole
Substantial outward investment  accumulation of external assets  Hong Kong as a net creditor

20. Hong Kong’s resilience
Prudent and conservative fiscal policy : always “strive to maintain a balanced budget”
Simple tax system & low tax rates: tax burdens (direct + indirect) around 9-10% of GDP in recent years
Small government

21. Hong Kong’s resilience
Fiscal deficit currently averaged at 3.3% of GDP
Fiscal reserves remained sizeable at the end of FY2003 : 23% of GDP
Debt-free until lately
Asset securitisation and bond offering : Toll Revenue Bond (HK$6 billion) in May 2004, HK$20 billion notes and bonds to institutional and retail investors in July 2004

22. Strong Banking Sector
Hong Kong’s banks  asset quality remained high even during the crisis
Non-performing loans ratio : peak at 7.6% in 99 Q4 
2.28% in 04 Q2
Classified loans ratio : peak at 10.61% in 99 Q3 
2.99% in 04 Q2
Capital adequacy ratio : stayed high even at adverse times (over 18%)  significantly larger than the minimum standard (8%) set by BIS

23. Strong Banking Sector
Bank remained profitable and liquid even in the wake of the crisis
Return on assets : dipped in 1998, yet rebounded to a high level since 2000
Bad debt charge : leaped in 1998 & 1999, yet eased back promptly and stabilised since 2000
Liquidity : bank credit increasingly supported by deposit base

24. Strong Banking Sector Increasingly a net creditor
Hong Kong’s banks  sound external position  substantial net external claims (110% of GDP in 2003)
Increasingly a net creditor

25. Lessons to learn - Flexibility
Prompt adjustments in consumer prices, wages, export prices, property prices and rentals
Competitiveness restored within a short period of time
Maintain stable exchange rate (linked rate system), rely on internal adjustment

26. Lessons to learn - Flexibility

27. Lessons to learn - Flexibility

28. Lessons to learn - Flexibility

29. Lessons to learn - Flexibility

30. Lessons to learn - Flexibility

31. Lessons to learn - sound supervision
HKMA loan classification system
Classified loans  substandard, doubtful, loss
also focus on borrower’s business prospects, cash flow and payment capability
more effective management of credit risk
Prudent lending approach of bank  playing an important role in enhancing corporate governance

32. Lessons to learn - sound supervision
Limit bank’s exposure to property market :
70% guideline on loan to value ratio (Nov 1991)
40% ceiling for property exposure of Authorised Institutions (early 1994 to Jul 1998)
60% guideline on LTV ratio for luxury property (Jan Oct 2001)

33. Lessons to learn - sound supervision
Establishment of a Commercial Credit Reference Agency for small and medium-sized enterprises (SMEs)
facilitate credit assessment
an important addition to Hong Kong’s banking infrastructure

34. Lessons to learn - strong financial infrastructure
Enhancement to currency board system (Sep 1998)  7 technical measures
Volatility of local interest rates markedly reduced since then

35. Lessons to learn - strong financial infrastructure
Real Time Gross Settlement System (RTGS)
Launched in Dec 1996
Provides HK with a modern, efficient and robust inter-bank payment system
Reduces settlement risk

36. Lessons to learn - strong financial infrastructure
US dollar Clearing System
Launched in 2000
Provide a range of opportunities for further development our stock and debt markets in the longer term
Eliminate settlement risks that arises when a transaction is spread across different time zones

37. Thank You