Briefing to the Legislative CouncilBriefing to the Legislative Council

Panel on Financial AffairsPanel on Financial Affairs

4 February 20024 February 2002

HONG KONG MONETARY AUTHORITYHONG KONG MONETARY AUTHORITY

DISCUSSION TOPICSDISCUSSION TOPICS

• Currency

• Banking

• Financial Infrastructure

• Exchange Fund

2

CURRENCY STABILITY - FACTSCURRENCY STABILITY - FACTS

7.60

7.65

7.70

7.75

7.80

7.85

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan

HK$ / US$

-200

0

200

400

600

800

1000

1200

1400

1600

1800

b.p.

1999 2000 1998 2001

HK - US interest rate differential (1 month) (RHS)

Exchange rate (LHS)

3

• Yen weakness and implications for regional currencies and RMB exchange rate

• Debt crisis in Argentina

• Hong Kong markets used as proxy hedge against Asian risks

• Public finances in Hong Kong

• Support for, and confidence, in the Link

CURRENCY STABILITY - RISKSCURRENCY STABILITY - RISKS

4

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan

pips

12-month Hong Kong dollar forward points

1997 1998 1999 2000 2001

CURRENCY CURRENCY - MARKET EXPECTATIONS- MARKET EXPECTATIONS

5

CURRENCYCURRENCY - MARKET EXPECTATIONS - MARKET EXPECTATIONS

-300

-200

-100

0

100

200

300

400

500

Jan-2001

Feb-2001

Mar-2001

Apr-2001

May-2001

Jun-2001

Jul-2001

Aug-2001

Sep-2001

Oct-2001

Nov-2001

Dec-2001

Jan-2002

pips

-200

-100

0

100

200

300

400

500pips12-month Hong Kong dollar forward points

Sino-US tensions / yen

Argentina / rumoursabout the Link

Argentina / yen

6

CURRENCY CURRENCY - RISKS OF YEN WEAKNESS- RISKS OF YEN WEAKNESS

80

85

90

95

100

105

110

115

120

125

130

135

Sep Oct Nov Dec Jan

1 Sep 2001=100

80

85

90

95

100

105

110

115

120

125

130

135

Thai baht Philippine peso

Indonesian rupiah Korean won

Japanese yen

20017

CURRENCY - MARKET EXPECTATIONS ON RMBCURRENCY - MARKET EXPECTATIONS ON RMB

-500

0

500

1000

1500

2000

2500

3000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

pips

-500

0

500

1000

1500

2000

2500

3000pips

RMB 12-month forward

HK dollar 12-month forward

2001 8

CURRENCY - RISKS OF ARGENTINEAN DEBT CRISISCURRENCY - RISKS OF ARGENTINEAN DEBT CRISIS

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

pips

12-month Argentinean peso forward (LHS)

12-month HK dollar forward (RHS)

2001

pips

0

10000

25000

20000

15000

0

5000

-500

500

9

BANKING SECTOR PERFORMANCEBANKING SECTOR PERFORMANCE

Capital adequacy ratio1 : 18.30% (Sep 01) 18.00% (Jun 01)

Liquidity ratio2 : 51.38% (Sep 01) 52.47% (Jun 01)

Net interest margin2 : 2.12% (Q3 annualised) 2.17% (Q2 annualised)

Classified loans2 : 6.44% (Sep 01) 6.81% (Jun 01)

Mortgage delinquency ratio3 : 1.22% (Dec 01) 1.28% (Sep 01)

Credit card - charge-off ratio3 : 5.97% (Oct/Nov annualised) 4.75% (Q3 annualised)

Growth of total HK dollar deposits4 : 0.10% (Q4) 0.30% (Q3)

Growth of total domestic lending4 : -1.30% (Q4) -1.70% (Q3)

1 Locally-incorporated AIs2 Locally-incorporated banks3 Surveyed AIs (29 for RMLs, 23 for credit cards)4 All AIs

10

BANKING - EFFICIENCY AND COMPETITIONBANKING - EFFICIENCY AND COMPETITION

• Commercial Credit Reference Agency

• Positive consumer credit data

• Review of market entry criteria

• Banking consumer protection

11

BANKING - SAFETY AND SOUNDNESSBANKING - SAFETY AND SOUNDNESS

• Deposit Insurance Scheme

• Bank consolidation

• New Capital Accord

• Mortgage loans in negative equity

12

FINANCIAL INFRASTRUCTUREFINANCIAL INFRASTRUCTURE

Objective: reinforce Hong Kong’s role as an International Financial Centre

Our competitive advantage: a financial infrastructure in which financial intermediation and other financial transactions can be conducted safely and efficiently

• Domestic financial activities

• International financial activities

• Mainland / Hong Kong financial activities

13

FINANCIAL INFRASTRUCTURE FORFINANCIAL INFRASTRUCTURE FORDOMESTIC FINANCIAL ACTIVITIESDOMESTIC FINANCIAL ACTIVITIES

• Debt market development – expansion of market size and promotion of retail investor base

• Retail payment systems – self regulatory approach; preparation of industry codes of practices; monitoring e-money development

• Integration of payment, clearing and settlement systems for money, debt securities, equities and their derivatives to enhance liquidity and promote real time DvP

14

FINANCIAL INFRASTRUCTURE FOR INTERNATIFINANCIAL INFRASTRUCTURE FOR INTERNATIONAL FINANCIAL ACTIVITIESONAL FINANCIAL ACTIVITIES

• Promotion of US dollar RTGS in the region

• Proposal to develop a RTGS system for euro and yen

• International linkages of payment systems

• Promotion of international linkages of debt clearing systems

15

FINANCIAL INFRASTRUCTURE FOR INTERNATIFINANCIAL INFRASTRUCTURE FOR INTERNATIONAL FINANCIAL ACTIVITIESONAL FINANCIAL ACTIVITIES

• Rising turnover

• Hong Kong and regional membership

• First ever PvP transaction was done in Hong Kong on 25 September 2000 between HK dollar and US dollar

0

1,000

2,000

3,000

4,000

5,000

6,000

Aug-

00

Sep-

00

Oct-

00

Nov-

00

Dec-

00

Jan-

01

Feb-

01

Mar-

01

Apr-

01

May-

01

Jun-

01

Jul-

01

Aug-

01

Sep-

01

Oct-

01

Nov-

01

Dec-

01

0

500

1,000

1,500

2,000

2,500

3,000

3,500

in US $ MnValue No. of transactions

Month

US$ RTGS Over US$5 bn daily

Of which PvP (US$ / HK$) Over US$2 bn daily

US dollar RTGS turnover (daily average)

16

FINANCIAL INFRASTRUCTURE FORFINANCIAL INFRASTRUCTURE FOR MAINLAND / HONG KONG FINANCIAL ACTIVITIES MAINLAND / HONG KONG FINANCIAL ACTIVITIES

• Warrants special attention because of exchange controls and non-convertible currency in the Mainland, and rapid liberalisation

• Objective 1: greater use of Hong Kong for the Mainland’s international financial activities

• Objective 2: address asymmetric mobility of capital by developing appropriate channels to facilitate cross-border flow of funds

17

MAINLAND / HONG KONG FINANCIAL ACTIVITIMAINLAND / HONG KONG FINANCIAL ACTIVITIES – INITIATIVESES – INITIATIVES

• Location of international treasury operation of Mainland banks in Hong Kong

• Joint cheque clearing between Guangdong and Hong Kong

• Linkages in debt clearing systems

• Linkages in payment systems

18

EXCHANGE FUND PERFORMANCEEXCHANGE FUND PERFORMANCE

2001 2000 1999

(HK$ billion)

Gain / (Loss) on HK equities* (27.1) (7.3) 96.5

Gain / (Loss) on other equities* (3.2) 0.5 3.8

Exchange gain / (loss) (13.1) (11.2) (9.9)

Total return from bonds, etc 50.4 63.1 13.4

Investment income 7.0 45.1 103.8

* including dividends

19

EXCHANGE FUND INVESTMENT BENCHMARKEXCHANGE FUND INVESTMENT BENCHMARK

Bonds 80%

Equities 20% (Hong Kong : 5%)

Currencies 80% US dollar bloc

15% European bloc

5% Yen

20

EXCHANGE FUNDEXCHANGE FUNDPERFORMANCE AGAINST BENCHMARKPERFORMANCE AGAINST BENCHMARK

3.8%

0.4%

10.8%

4.8%

0.7%

5.5%

0%

2%

4%

6%

8%

10%

12%

1999 2000 2001*

Investment Return of ExchangeFund's Investment Benchmark

Investment Return of Exchange Fund

* Preliminary, unaudited figures for 2001

21

INVESTMENT PERFORMANCE OF EXCHANGE FUND INVESTMENT PERFORMANCE OF EXCHANGE FUND AND COMPARABLE BALANCED FUNDSAND COMPARABLE BALANCED FUNDS

Balanced Funds with 20% - 30% Equity Component

Source: Watson Wyatt and Standard & Poor’s

1st Quartile

2nd Quartile

3rd Quartile

4th Quartile

16%

14%

12%

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

10.8%

4.8%

0.7%

Exchange Fund

Return

1999 2000 2001

22

2.4%

10.8%

5.1%

6.1%

12.1%

10.8%

4.8%

0.7%

6.5%

2.4%

0%

2%

4%

6%

8%

10%

12%

14%

1994 1995 1996 1997 1998 1999 2000 2001 CompoundedAnnual

InvestmentReturn

(1994-2001)

Average Annual HK

CPI-A (1994-2001)#

EXCHANGE FUND HISTORICAL RETURNEXCHANGE FUND HISTORICAL RETURN

# Hong Kong CPI-A at end-November 2001

23

EXCHANGE FUND ABRIDGED BALANCE SHEETEXCHANGE FUND ABRIDGED BALANCE SHEET

(HK$ billion) 2001 2000 Change

ASSETSDeposits 98.6 73.1 25.5Debt securities 733.3 729.8 3.5Hong Kong equities 85.9 152.9 (67.0)Other equities 35.3 40.6 (5.3)Other assets 27.5 27.0 0.5

Total assets 980.6 1,023.4 (42.8)

LIABILITIES AND ACCUMULATED SURPLUSCertificates of Indebtedness 107.5 99.2 8.3Coins in circulation 5.7 5.9 (0.2)Balance of banking system 0.7 0.7 -Exchange Fund Bills and Notes 118.2 109.3 8.9Placements by other HKSAR government funds 380.6 417.2 (36.6)Other liabilities 65.2 84.0 (18.8)Total liabilities 677.9 716.3 (38.4)Accumulated surplus 302.7 307.1 (4.4)

Total liabilities and accumulated surplus 980.6 1,023.4 (42.8)

24

EXCHANGE FUNDEXCHANGE FUNDCHANGE IN ACCUMULATED SURPLUSCHANGE IN ACCUMULATED SURPLUS

I 2001 I 2000

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

Investment income/(loss) 7.0 (14.6) (2.0) 10.4 13.2 45.1

Other income 0.2 0.1 0.0 0.1 0.0 0.2

Interest and expenses (9.9) (2.8) (2.8) (2.3) (2.0) (11.0)

Net investment income/(loss) (2.7) (17.3) (4.8) 8.2 11.2 34.3

Treasury’s share (1.7) 6.1 1.0* (4.0)* (4.8)* (18.1)

Increase/(Decrease) in EF accumulated surplus (4.4) (11.2) (3.8) 4.2 6.4 16.2

* Treasury’s share in the first three quarters of financial year 2001-02 : HK$7.8 billion.

25

(HK$ billion)

Investment in August 1998 118.1

Income from Disposal and Dividends (end-Dec 2001) 139.9

Size of remaining portfolio (end-Dec 2001) 85.9Disposal 36.9

Long Term Investment* 49.0

* Including Hong Kong equities transferred from the Land Fund in 1998

(valued at HK$9 billion in 1998).

EXCHANGE FUND HONG KONG EQUITY PORTFOLIOEXCHANGE FUND HONG KONG EQUITY PORTFOLIO

26

Briefing to the Legislative CouncilBriefing to the Legislative Council

Panel on Financial AffairsPanel on Financial Affairs

4 February 20024 February 2002

HONG KONG MONETARY AUTHORITYHONG KONG MONETARY AUTHORITY

27