HONG KONG MONETARY AUTHORITY Briefing to the Legislative Council Panel on Financial Affairs 20 May...

2

1. Macroeconomy / Monetary 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 quarter of 2010

3

GLOBAL ECONOMIES GLOBAL ECONOMIES RECOVERING AT DIFFERENT SPEEDSRECOVERING AT DIFFERENT SPEEDS

Sources: CEIC, Consensus Forecasts (May 2010)

GDP

90

100

110

120

130

2008 2009 2010 2011

1Q 2008=100

90

100

110

120

130

1Q 2008=100

ConsensusForecasts

2012

US

Asia(exclude Japan)

Euro area

4

0 50 100 150 200 250

Japan

Greece

Italy

US

Portugal

Ireland

UK

Spain

0 50 100 150 200 250

20072010 projections

General government debt (% of GDP)

50%

30%

70%

80%

30%

40%

75%

5%

Debt held bynon-residents

(% of debt)

SOVEREIGN DEBT PROBLEMS:SOVEREIGN DEBT PROBLEMS:GOVERNMENT DEBT IN EUROPE, US AND JAPANGOVERNMENT DEBT IN EUROPE, US AND JAPAN

Sources: IMF World Economic Outlook (April 2010), eurostat 、 European Commission AMECO database, CEIC, Government data published by the countries, Internet news

5

EUROPEAN SOVEREIGN DEBT PROBLEMS: EUROPEAN SOVEREIGN DEBT PROBLEMS: CDS SPREADSCDS SPREADS

Source: Bloomberg

0

100

200

300

400

500

600

700

800

900

1000

2008 2009 2010

bps

0

100

200

300

400

500

600

700

800

900

1000

bps

Portugal Ireland

Italy Greece

Spain

Prices of 5-year sovereign CDS

6

SOVEREIGN DEBT PROBLEMS: GREEK SOVEREIGN DEBT PROBLEMS: GREEK GOVERNMENT BOND YIELD AND GOVERNMENT DEBTGOVERNMENT BOND YIELD AND GOVERNMENT DEBT

Sources: EcoWin, European Commission AMECO database, and Reuters

0

2

4

6

8

10

12

14

16

18

20

* ECU before 1999

ppt

0

50

100

150

200

250

300

350

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Euro bn*

Greece outstanding government debt (rhs)

Greece 10-year government bond yields over German bunds (lhs)

19/6/00: Greece metthe requirements forjoining the euro zone

1/1/01: Greeceadopted euro

BBB

A+

downgradedby 3 notches

to BB+

Standard & Poor's credit ratings

7

SOVEREIGN DEBT PROBLEMS: SOVEREIGN DEBT PROBLEMS: CDS SPREAD OF GREECECDS SPREAD OF GREECE

Source: Bloomberg

0100200300400500600700800900

1000

2008 2009 2010

bps

01002003004005006007008009001000

bps

Bankruptcy ofLehman Brothers

57 bps

End-2009283 bps

Prices of 5-year sovereign CDS

8

EU/IMF MEASURES TO AVERT EU/IMF MEASURES TO AVERT A SOVEREIGN DEBT CRISIS IN EUROPEA SOVEREIGN DEBT CRISIS IN EUROPE

• Loans and guarantees up to €750 billion are provided to the EU members by the EU and the IMF (earlier EU and IMF has agreed to provide Greece with a financing package of €110 billion)

• European Central Bank to buy government and private bonds in the secondary market and provide up to 6-month liquidity to the European banking sector

• Re-open the US dollar liquidity swap facilities between the Federal Reserve and other major central banks

• Other heavily indebted countries have also announced measures to reduce fiscal deficits and government debts

9

MOVEMENTS OF THE EURO EXCHANGE RATEMOVEMENTS OF THE EURO EXCHANGE RATE

Sources: Bloomberg and CEIC

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

99 00 01 02 03 04 05 06 07 08 09 10

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

USD/EUR USD/EUR

Eurodepreci at i on

Late-Oct 20000.83 USD/EUR

Late-Apr 20081.60 USD/EUR

19 May 20101.22 USD/EUR

1 Dec 20091.51 USD/EUR

End-20041.36 USD/EUR

10

HONG KONG ECONOMIC SITUATION:HONG KONG ECONOMIC SITUATION:REAL GDP GROWTHREAL GDP GROWTH

-6

-4

-2

0

2

4

6

8

10

12

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

% point

-6

-4

-2

0

2

4

6

8

10

12% qoq

Net exports (lhs)

Fixed investment and inventory (lhs)

Government consumption (lhs)

Private consumption (lhs)

Real GDP (rhs)

2008 2009 2010

Change in Real GDP

11

HONG KONG ECONOMIC SITUATION:HONG KONG ECONOMIC SITUATION:LABOUR MARKETLABOUR MARKET

5.4%

8.5%

4.0

4.5

5.0

5.5

Sep-09 Nov-09 Jan-10 Mar-10 May-10

4.0

4.5

5.0

5.5

Moderation ofunemployment

rate

% %

4.9

4.4

Unemployment Rate

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010

0

2

4

6

8

10% of labour force % of labour force

12





13

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: INFLATIONFINANCIAL STABILITY: INFLATION

Inflation Trend of Mainland and Hong Kong

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2009 2010 2011

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Headline CCPI inflation rate -Hong Kong

% YoY % YoY

CPI inflation rate - China

Consensus forecasts

14

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: INFLATIONFINANCIAL STABILITY: INFLATION

-15

-12

-9

-6

-3

0

3

6

9

12

15

90 92 94 96 98 00 02 04 06 08 10

% yoy

-15

-12

-9

-6

-3

0

3

6

9

12

15% yoyCPI excluding rent

Retained import unit value index

Retained import prices and consumer prices

15

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: EQUITY MARKETFINANCIAL STABILITY: EQUITY MARKET

Hong Kong and Asia Pacific equity market performance

0

50

100

150

200

250

Nov Jan Mar May Jul Sep Nov Jan Mar May

0

50

100

150

200

250

2008 2009 2010

Lehman Brothersfiled Chapter 11

Debt Standstillof Dubai World

Greek debtcrisis unfolding

Rebased to Oct 27, 2008 = 100

Hong Kong'sHang Seng Index

MSCI AC Pacific(excl. HK & Japan)

16

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: EQUITY MARKETFINANCIAL STABILITY: EQUITY MARKET

Share of stock-market-related loans to total domestic loans

0

2

4

6

8

10

12

1997Q1

1998Q1

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

%

0

2

4

6

8

10

12

%

Non-margin lending

Margin lending

17

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: FINANCIAL STABILITY: PROPERTY MARKETPROPERTY MARKET

Residential property prices and transaction volume

0

20

40

60

80

100

120

140

1996 1998 2000 2002 2004 2006 2008 2010

0

5

10

15

20

25

30

35

40Luxury market (at or above 100 sq. m.) (lhs)

Mass market (below 100 sq. m.) (lhs)

Total transaction volume (rhs)

Sale & Purchase Agreement ('000)Q3 1997 = 100

109.0

82.8

60

65

70

75

80

85

90

95

100

105

110

Jan Apr Jul Oct Jan

60

65

70

75

80

85

90

95

100

105

110Q3 1997 = 100Q3 1997 = 100

2009 2010

18


Outstanding mortgage loans

* There is a break in data series at December 2000 due to an increase in the number of surveyed institutions.

-4

0

4

8

12

1996 1998 2000 2002 2004 2006 2008 2010

-4

0

4

8

12Change from 3 months ago (%) %

*

-4

-2

0

2

4

6

Jan Jul Jan Jul Jan

-4

-2

0

2

4

6

2.7

2.1

4.1

Change from 3 months ago (%) %

2008 2009 2010

19

Mortgage rate over 10%


Mortgage repayment-to-income ratio

Note: For the luxury market, the ratio is calculated based on the 95th percentile income of households residing in private housing. For the mass market, it is based on the median income of households residing in private housing.

Mortgage rate below 2.5%

0

20

40

60

80

100

120

140

160

1996 1998 2000 2002 2004 2006 2008 2010

0

20

40

60

80

100

120

140

160Luxury market (at or above 100 sq. m.)

Mass market (below 100 sq. m.)

% of household income %

20


• Repayment amount will rise by about 30%, assuming no change in repayment period

If mortgage interest rate rises by 300 bps,

Impact of mortgage rate increase on mortgage repayment-to-income ratio

30

40

50

60

70

80

90

100

Jan Apr Jul Oct Jan

30

40

50

60

70

80

90

100Luxury market (100 sq. m. or above)Mass market (below 100 sq. m.)

2009 2010

% of household income %

21

ASSESSMENT OF RISK ON HONG KONG’S ASSESSMENT OF RISK ON HONG KONG’S FINANCIAL STABILITY: FINANCIAL STABILITY: CAPITAL FLOWSCAPITAL FLOWS

7.70

7.75

7.80

7.85

7.90

7.95

HKD/USD7.70

7.75

7.80

7.85

7.90

7.95

2008 2009 2010

HKD/USD

Convertibility Zone

Spot exchange rateappreciation of HKD

22

0

100

200

300

400

500

600

700

800

900

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

HK$ billion

Aggregate Balance Outstanding EFBN

Inflowsbetween2008Q4

and2009Q4

wereHK$640billion

Note: The Outstanding EFBN and the Aggregate Balance are quarter-end figures.

no netinflows

in2010Q1

Inflow of funds into HKD


No net inflows in 2010Q1

23

0

100

200

300

400

500

600

2006 2007 2008 2009 2010 Q1

HK$ billion

Note (1): Equities funds raised include IPO, right issues, placings, open offers, consideration issues, warrants exercised andshare option scheme.Note (2): 2008-2009 figures differ from those provided by the HKEx as the activities which did not involve HKD flows havebeen excluded.

Inflow of fundsinto HKD

Funds raised

Equity fund-raising activities and inflows


24

• The low-interest-rate environment and monetary easing in the US and the euro area will persist for some time.

• Funds that flowed into the Hong Kong dollar during late-2008 and 2009 have not left Hong Kong. More funds might flow into the Hong Kong dollar if fund-raising activities in the equity market become more active again in the second half of the year.

• Given the exceptionally low interest rate, abundant liquidity and positive economic conditions, the risk of an asset bubble (especially in the property market) forming in Hong Kong has not lessened.

CONCLUSIONCONCLUSION (1) (1)

25

• The HKMA has taken supervisory measures requiring banks to manage their credit risk properly. The loan-to-value ratio for residential mortgages on properties valued at $20 million or more has been lowered to 60% (At the same time, the Government has taken steps to reduce the risk of a bubble forming in the property market through managing the supply of land and introducing other measures).

• Home-buyers should be alert to the risk of over-stretching themselves in applying for mortgages. Otherwise, they might face difficulties in repaying the loans when interest rates rise to a normal level.

• Investors should exercise caution as external factors affecting capital flows and interest rate movements in Hong Kong are clouded with uncertainties.

CONCLUSIONCONCLUSION (2) (2)

26





27

BANKING SECTOR PERFORMANCEBANKING SECTOR PERFORMANCE

Locally incorporated AIs continued to be well capitalised

16.9%

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

%

28


Liquidity ratio of retail banks remained well above statutory minimum of 25%

44.2%

20

25

30

35

40

45

50

55

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

%

29


Asset quality indicators remained at comfortable levels compared with historical standards

020406080

100

Classified loan ratioCurrrent: 1.35% (Dec 2009)Peak: 10.61% (Sep 1999)

Ratio of overdue andrescheduled loans

Current: 0.88% (Dec 2009)Peak: 8.58% (Sep 1999)

Credit card charge off ratioCurrent: 2.39% (Q1 2010)Peak: 14.55% (Q3 2002)

Number of negative equityRMLs

Current: 303 (Mar 2010)Peak: 105,697 (Jun 2003)

RML delinquency ratioCurrent: 0.03% (Mar 2010)

Peak: 1.43% (Apr 2001)

Peak Latest

30


Net interest margin and return on assets of retail banks

1.34%1.37%

1.0%1.1%

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

%

0.2

0.4

0.6

0.8

1.0

1.2

1.4

NIM (LHS) ROA (RHS)

%

31

SUPERVISORY POLICY INITIATIVESSUPERVISORY POLICY INITIATIVES

• Regulatory Capital Framework:

– Basel Committee reform proposals

– Amendment of Banking (Capital) Rules

• Liquidity regime:

– Implementation of revised standards

• Supervisory guidance:

– Guideline on remuneration issued in Mar 2010

– Consultation on guidance on fair valuation practices for financial instruments

32

DEPOSIT PROTECTIONDEPOSIT PROTECTION

The amendment bill for enhancing the Deposit Protection Scheme (DPS) was introduced into LegCo in April

The enhanced DPS (including the new protection limit of $500,000) expected to be effective immediately after the expiry of the full deposit guarantee

The HKMA participated in a tripartite working group with the central banks of Malaysia and Singapore to implement a concerted exit strategy for full deposit guarantee by the end of this year by all three jurisdictions as scheduled

33

INVESTOR PROTECTIONINVESTOR PROTECTION

Mystery shopping programme to be implemented in the second half of 2010

Assisting the Government on establishing the Investor Education Council and Financial Dispute Resolution Centre

Working with SFC on implementation of proposed new measures to enhance investor protection, such as:

– investor characterisation process

– pre-sale disclosure of commissions and other commercial interests

Introducing the Pre-Investment Cooling-Off Period

34

• On 11 February, HKMA issued an elucidation of the supervisory principles and operational arrangements regarding RMB business in Hong Kong to simplify the operational procedures and increase the flexibility in developing diversified RMB-denominated financial products in Hong Kong:

– Mainland authorities and banks are responsible for verifying whether transactions undertaken by the Mainland counterparts are in compliance with the relevant rules and requirements in the Mainland, while Participating AIs in Hong Kong will process the RMB transactions in accordance with the usual banking practices in Hong Kong

– With regard to the RMB funds that have flowed into Hong Kong, Participating AIs can develop RMB businesses based on the regulatory requirements and market conditions in Hong Kong

RENMINBI BUSINESS IN HONG KONG RENMINBI BUSINESS IN HONG KONG (1)(1)

35

0

500

1,000

1,500

2,000

2,500

3,000

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

0

2,000

4,000

6,000

8,000

10,000

12,000

Amount of RMB trade settlementtransactions (lhs)No. of trade settlement accountsopened (rhs)

RMB million No of accounts

RENMINBI BUSINESS IN HONG KONG RENMINBI BUSINESS IN HONG KONG (2)(2)

RMB trade settlement gained momentum in March 2010

* The Chinese New Year fell in February in 2010, so there were fewer working days than usual in that month.

*

RMB deposits and bonds issuance in Hong Kong increasing steadily

No. of trade settlement accounts reached 11,366

0

10

20

30

40

50

60

70

80

90

100

110

120

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

0

10

20

30

40

50

60

70

80

90

100

110

120

RMB deposit RMB bonds

Outstanding Amount(RMB billion)

Outstanding Amount(RMB billion)

36





37

INVESTMENT INCOMEINVESTMENT INCOME

2010 2009 2008 2007

(HK$ billion) Q1 * Full Year Full Year Full Year

Gain/(Loss) on Hong Kong equities^@ (3.1) 48.9 (77.9) 55.8

Gain/(Loss) on other equities^ 11.2 48.8 (73.1) 6.7

Exchange gain/(loss) (8.7) 9.8 (12.4) 18.7

Return from bonds# 11.4 (0.6) 88.4 61.0

Investment income/(loss)@ 10.8 106.9 (75.0) 142.2

* Unaudited figures

^ Including dividends# Including interest@ Excluding valuation changes in Strategic Portfolio

38

CHANGES IN INVESTMENT INCOME, PAYMENT TOCHANGES IN INVESTMENT INCOME, PAYMENT TOFISCAL RESERVES AND ACCUMULATED SURPLUSFISCAL RESERVES AND ACCUMULATED SURPLUS

2010 I 2009 I

(HK$ billion) Q1* Full year Q4 Q3 Q2 Q1

Investment income/(loss) 10.8 106.9 10.0 71.9 58.5 (33.5)

Other income 0.0 0.2 0.0 0.0 0.2 0.0

Interest and other expenses (0.9) (3.8) (1.0) (0.9) (1.2) (0.7)

Net investment income/(loss) 9.9 103.3 9.0 71.0 57.5 (34.2)

Payment to Fiscal Reserves # (8.5) (33.5) (7.9) (8.0) (8.5) (9.1)

Payment to HKSAR government funds and statutory bodies # (0.8) (1.2) (0.6) (0.3) (0.3) 0.0

Valuation change of Strategic Portfolio^ (0.6) 4.4 0.0 1.3 3.2 (0.1)

Increase/(Decrease) in EF Accumulated Surplus 0.0 73.0 0.5 64.0 51.9 (43.4)

* Unaudited figures

# The fixed rate of fee payment is 6.3% for 2010 and 6.8% for 2009

^ Including dividends

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HONG KONG MONETARY AUTHORITY Briefing to the Legislative Council Panel on Financial Affairs 20 May...

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