hong kong monetary authority

HONG KONG MONETARY AUTHORITYHONG KONG MONETARY AUTHORITY

Briefing to the Legislative CouncilBriefing to the Legislative Council

Panel on Financial AffairsPanel on Financial Affairs

7 November 20057 November 2005

2

DISCUSSION TOPICSDISCUSSION TOPICS

• Updates on

– Currency Stability

– Banking

– Financial Infrastructure

– Hong Kong as an International Financial Centre

– Exchange Fund

3

7.60

7.65

7.70

7.75

7.80

7.85

7.90HK$ / US$

7.60

7.65

7.70

7.75

7.80

7.85

7.90HK$ / US$

2003 2004 2005 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

CURRENCY STABILITY (I)CURRENCY STABILITY (I)

Spot exchange rate

Convertibility Zone

4

0

10

20

30

40

50

60(HK$ billion)

0

10

20

30

40

50

60

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

(HK$ billion)

2002 2003 2004 2005

Aggregate Balance

MOVEMENTS IN THE AGGREGATE BALANCE


5

HONG KONG DOLLAR AND US DOLLAR INTEREST RATES


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00(% pa)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00


(% pa)

Overnight HIBOR

Overnight LIBOR

2002 2003 2004 2005

6

HONG KONG DOLLAR AND US DOLLAR INTEREST RATES (Cont’d)


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50(% pa)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50


(% pa)

3-month HIBOR

3-month LIBOR

2002 2003 2004 2005

7

CURRENCY - MARKET EXPECTATIONS

12-month Hong Kong dollar forward points

1998 1999 2000 2001 2002 2003 2004 2005


-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul

pips

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000pips

8

-1,800

-1,600

-1,400

-1,200

-1,000

-800

-600

-400

-200

0

200

400

Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05

pips

-1,800

-1,600

-1,400

-1,200

-1,000

-800

-600

-400

-200

0

200

400

pips

CURRENCY - MARKET EXPECTATIONS (Cont’d)

12-month Hong Kong dollar forward points


9

90

95

100

105

110

20-Jul 03-Aug 17-Aug 31-Aug 14-Sep 28-Sep

90

95

100

105

110Hong Kong dollar Renminbi Malaysian ringgit

Japanese yen Indonesian rupiah Korean won

Singapore dollar Taiwan dollar Thai baht

(20 Jul 2005 =100) (20 Jul 2005 =100)ASIAN CURRENCIES

Note: An increase in the index represents appreciation.


10

MONETARY CONDITIONSMONETARY CONDITIONS

• Currency Board arrangements working effectively to normalise monetary conditions, particularly after the introduction of the three refinements.

• Fed funds target rate on an increasing trend.

• Domestic monetary conditions affected by factors pulling in different directions.


11

External factors

• High oil prices

• US monetary tightening

• Unbalanced growth in the global economy

• External imbalances

• Mainland macroeconomic conditions

• Trade disputes

• Possible influenza pandemic

CURRENCY STABILITY (II)CURRENCY STABILITY (II)

12

OIL PRICES AND GLOBAL GROWTH


0

1

2

3

4

5

6

7

8

2000 2001 2002 2003 2004 2005

% yoy

0

10

20

30

40

50

60

70USD/barrel

World GDP growth rate (LHS)

World oil demand growth rate (LHS)

Average oil price (RHS)

13

OIL INTENSITY IN 2004

* The high oil intensity in Singapore reflects the country’s oil refinery activities.

0.0

0.5

1.0

1.5

2.0

SG* CN TH IN ID MY PH KR TW US HK EU JP

barrels/US$1000 worth of GDP

World average


14

NORMALISATION OF INTEREST RATES


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05

%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0%

Base Rate

HK Prime rate

Effective mortgage rate

Fed funds target rate

15

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2.50

%

NET INTEREST MARGIN OF BANKS


16

MORTGAGE RATE AND BEST LENDING RATE


0

2

4

6

8

10

12% p.a.

0

2

4

6

8

10

12

92 93 94 95 96 97 98 99 00 01 02 03 04 05

% p.a.

Mortgage rate

Best lending rate

17

-8

-7

-6

-5

-4

-3

-2

-1

0% p.a.

-8

-7

-6

-5

-4

-3

-2

-1

0

92 93 94 95 96 97 98 99 00 01 02 03 04 05

% p.a.


INTEREST RATE SPREAD

Savings deposit rate minus mortgage rate

18


Note: decrease in exchange rate indices represent depreciation.

US current account balance, interest rate spreads and USD exchange rates

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

80

85

90

95

100

105

110

115

120

EUR/USD (index) (RHS)

JPY/USD (index) (RHS)

USD-EUR policy rate spread (LHS)

USD-JPY policy rate spread (LHS)

% 2003 Q1 =100

US current a/c balance (% of GDP) (LHS)

19


Renminbi – Market Expectations

7.50

7.60

7.70

7.80

7.90

8.00

8.10

8.20

8.30

8.40

Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05

RMB/USD

7.50

7.60

7.70

7.80

7.90

8.00

8.10

8.20

8.30

8.40

RMB/USD

RMB spot exchange rate

12 month RMB NDF rate

20

CURRENCY STABILITY (III)CURRENCY STABILITY (III)

Domestic factors

• Growth and inflation

• External position

• Property prices

• Unemployment

• Public finance

21

-4

-2

0

2

4

6

8

(%)

-4

-2

0

2

4

6

8

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

(%)

GDP Private consumption

ECONOMIC RECOVERY

(Seasonally adjusted quarter-on-quarter change)


22

CONSUMER PRICE MOVEMENTS

88

90

92

94

96

98

100(99/00=100)

88

90

92

94

96

98

100(99/00=100)

CCPI (seasonally adjusted)

CCPI (adjusted for the effects of seasonal factorsand special relief measures)

CCPI excluding rental component

2001 2002 2003 2004 2005


23

CCPI RENTAL COMPONENT


60

70

80

90

100

110(Jan 01=100)

60

70

80

90

100

110

2001 2002 2003 2004 2005

(Jan 01=100)

Residential Property Rental Index

CCPI Rental Component (adjusted for the effects ofseasonal factors and special relief measures)

24

BALANCE OF PAYMENTS ACCOUNT

Current account surplus


0

10

20

30

40

50

60

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

0

4

8

12

16

20

level (LHS)

percentage of GDP (RHS)

(%)(HK$ billion)

2000 2001 2002 2003 2004 2005

25

PROPERTY MARKET

60

80

100

120

140

160

180(Jan 01=100)

60

80

100

120

140

160

180

2001 2002 2003 2004 2005

(Jan 01=100)

Residential Property Price Index

Office Price Index

Retail Shop Price Index


26

GRAPHICAL ANALYSIS


0

20

40

60

80

100Real property prices

Transactionvolume

Confirmor transactions

Buy-rent gap

Income gearing

Real newmortgages

1997 Q2-3 2005 Jun-Aug 2003 Q2

- - - - For the high-end of the market (2005 Jun-Aug)

27

LABOUR MARKETLABOUR MARKET


-10

-5

0

5

10

15

-6

-3

0

3

6

9

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

(%)

Real GDP (LHS)

Employment (LHS)

Unemployment rate (RHS)

(year-on-year change, %)

28

Net quarterly changes in fiscal placement with the Exchange Fund

FISCAL DRAWDOWNSFISCAL DRAWDOWNS

2000 2002 2001 2003 2004 2005


-60

-40

-20

0

20

40

60

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

-60

-40

-20

0

20

40

60(HK$ billion) (HK$ billion)

29

BANKING SECTOR PERFORMANCEBANKING SECTOR PERFORMANCE

Local AIs are well capitalised

Period-end figures

2

4

6

8

10

12

14

16

18

20

22

1997 1998 1999 2000 2001 2002 2003 2004 2005

%

Capital adequacy ratio International standard

30

Domestic lending declined(retail banks)


Quarterly percentage change

Domestic lending : -0.5%Trade financing : -2.3%Manufacturing : -2.1%Wholesale/retail : -3.9%Property lending : +0.4%

-0.5%

-2.3%-2.1%

0.4%

-3.9%

-7.0

-4.0

-1.0

2.0

5.0

8.0

11.0

14.0

17.0

Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

%

Domestic lending Trade finance Manufacturing

Property lending Wholesale/retail

31


Delinquency or rescheduled loan ratio

(%)Charge-off ratio

(%)

Consumer banking: declining trend in charge-off and delinquencies

Credit card delinquency ratio (Jun 05) : 0.40%

Credit card charge-off ratio (Jun 05) : 3.27%

Mortgage delinquency ratio (Sep 05 ) : 0.18%

Rescheduled mortgage loan ratio (Sep 05) : 0.36%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

0.0

2.0

4.0

6.0

8.0

10.0

Credit card charge-off ratio (quarterly annualised, RHS) Credit card delinquency ratio (period-end, LHS)

Mortgage delinquency ratio (period-end, LHS) Rescheduled mortgage loan ratio (period-end, LHS)

32


Period-end outstanding figures

Number of residential mortgage lending in negative equity

10

30

50

70

90

110

130

150

170HK$ billion

0

20

40

60

80

100

120No. in thousand

Value of negative equity residential mortgage loans (LHS)

Number of negative equity residential mortgage loans (RHS)

33


Pick up in net interest margin (retail banks)

1.5

1.6

1.7

1.8

1.9

2.0

Q3/03 Q4/03 Q1/04 Q2/04 Q3/04 Q4/04 Q1/05 Q2/05 Q3/05

%

34


Increasing proportion of time deposits (retail banks)

0

20

40

60

80

100

1997 1998 1999 2000 2001 2002 2003 2004 M-05 J-05 S-05

%

Time Savings Demand

35

• Implementation of Basel II in Hong Kong

– Banking (Amendment) Ordinance 2005 enacted on 6 July, providing the legislative framework for the implementation of Basel II in Hong Kong

– Development of revised capital standards making good progress; so far four packages of proposals have been released for consultation

– Consultation on other outstanding proposals, including the approach to Internal Ratings-based validation, the supervisory review process and disclosure requirements, targeted to finish around end of the year

BANKING SECTOR - WORK PROGRESS (I)BANKING SECTOR - WORK PROGRESS (I)

36

BANKING SECTOR - WORK PROGRESS (II)BANKING SECTOR - WORK PROGRESS (II)

• Implementation of Basel II in Hong Kong (cont’d)

– Capital Rules and Disclosure Rules are being drafted. They will be released for consultation by stages, given the length and complexity of the revised framework

– Aim to table the core part of the Rules in LegCo by the end of June 2006, a demanding timetable which will require a substantial commitment of resources by the HKMA, the Government and the banking industry

– Continue to monitor AIs’ preparation and contact with overseas regulators to streamline cross-border application of Basel II to banking groups operating internationally

37

• Prevention of money laundering– Assessing compliance with anti-money laundering

(AML) standards through on-site examinations and introduction of self-assessment framework

– Increasing effectiveness of on-site examinations by improving examination procedures and strengthening AML expertise

– Monitoring the latest international AML developments and incorporating changes in supervisory framework where appropriate

– The Banco Delta Asia incident has highlighted the increasing attention of the international financial community to this subject

BANKING SECTOR - WORK PROGRESS (III)BANKING SECTOR - WORK PROGRESS (III)

38

• Implementation progress:

– All 20 AIs offering high-risk internet banking transactions have adopted two-factor authentication

– around 250,000 retail customers registered for two-factor authentication in June 2005

• For visually-impaired customers:

– banks are in discussions with representatives of visually-impaired customers

– exploring solutions, e.g. security token with voice output, one-time password delivered through dedicated phone-banking hotline

BANKING SECTOR - TWO-FACTOR AUTHENTICATIONBANKING SECTOR - TWO-FACTOR AUTHENTICATION

39

• Assisting the Hong Kong Deposit Protection Board to prepare for the launch of the Deposit Protection Scheme (DPS)

• Progress on key preparatory tasks

- A framework for assessing and collecting contributions has been established

- Drafting the rules governing the operation of the DPS

- Developing the procedures and the associated information systems for assessing and paying compensation to depositors

• The DPS is expected to start collecting contributions and providing deposit protection in the second half of 2006.

BANKING SECTOR - Deposit Protection SchemeBANKING SECTOR - Deposit Protection Scheme

40

• Review by the Financial Infrastructure Sub-Committee of EFAC of financial infrastructure development

– development strategy: safe and efficient financial infrastructure based on a multi-currency, multi-dimensional platform

– main review areas include Mainland-related financial infrastructure, payment systems and debt settlement systems

– review completed in mid-2005

– recommendations include project development (for enhancing system capabilities) and business development (for expanding existing infrastructure network and usage)

– implementation of these recommendations started in the second half of 2005

MARKET INFRASTRUCTURE (I)MARKET INFRASTRUCTURE (I)

41

• Oversight of the clearing and settlement systems

– off-site reviews and on-site examinations of system operators and settlement institutions of designated systems

– provide secretarial support to the Process Review Committee (PRC), an independent body to ensure that MA has applied the same oversight standards to MA and non-MA-related designated systems

– encourage credit and debit card industries to conduct self assessment of their security controls and strengthen their security system where necessary in the light of the CardSystems Incident in June

MARKET INFRASTRUCTURE (2)MARKET INFRASTRUCTURE (2)

42

Renminbi business in Hong Kong

• Outstanding renminbi deposits reached RMB 22.6 billion yuan at the end of September 2005

• In October 2005, State Council agreed in principle that the People’s Bank of China should provide clearing arrangements for expanded renminbi business

• Continuing discussions with Mainland authorities on using renminbi to settle cross-border trade and issuance of renminbi bonds in Hong Kong

HONG KONG AS AN INTERNATIONAL HONG KONG AS AN INTERNATIONAL FINANCIAL CENTRE (I)FINANCIAL CENTRE (I)

43

Expanded scope of renminbi business in Hong Kong:

(i) Designated merchants can open renminbi deposit accounts and exchange the deposits into Hong Kong dollars; definition of “designated merchants” has been widened to include merchants engaging in transportation, communication, medical and education services;

(ii) Hong Kong residents can open renminbi cheque accounts and issue renminbi cheques for consumer spending in Guangdong Province subject to a daily limit of RMB80,000 yuan;

(iii) Daily limits for conversion of renminbi cash by individuals is increased from RMB6,000 yuan to RMB20,000 yuan, and that for renminbi remittance is increased from RMB50,000 yuan to RMB80,000 yuan;

(iv) Cap of RMB100,000 yuan on credit limit of renminbi credit cards issued by Hong Kong banks removed.

HONG KONG AS AN INTERNATIONAL HONG KONG AS AN INTERNATIONAL FINANCIAL CENTRE (II)FINANCIAL CENTRE (II)

44

Asian Bond Fund 2 (ABF2)

• 11 EMEAP central banks and monetary authorities, including the HKMA, have invested a total of US$2 billion in ABF2.

• ABF2 consists of the ABF Pan Asia Bond Index Fund (PAIF) and 8 Single-market Funds. So far, the PAIF and 3 Single-market Funds in Hong Kong, Malaysia and Singapore have been listed. The other funds will be launched in the next few months.

• The ABF Hong Kong Bond Index Fund and the PAIF were listed in Hong Kong in June and July respectively, with asset size having grown by 42% and 12% since launch.

• The passively managed bond index funds of ABF2 represent a new asset class in Asia, providing efficient and low-cost vehicles for investing in local currency-denominated bonds in the region.

HONG KONG AS AN INTERNATIONAL HONG KONG AS AN INTERNATIONAL FINANCIAL CENTRE (II)FINANCIAL CENTRE (II)

45

EXCHANGE FUND PERFORMANCEEXCHANGE FUND PERFORMANCE

* Including dividends

1 Audited figures; 2 Unaudited figures

(HK$ billion)

Q3

20052

Q2 Q1

20041

Full year

Gain / (Loss) on Hong Kong equities*

8.15.1 (3.5)

12.0

Gain / (Loss) on other equities* 10.13.4 (0.9)

11.2

Exchange gain / (loss) (2.4)(10.7) (3.0)

8.5

Total return from bonds, etc 3.215.8 5.3 25.0

Investment income 19.013.6 (2.1)

56.7

46

EXCHANGE FUNDEXCHANGE FUNDTREASURY’S SHARE OF INVESTMENT INCOMETREASURY’S SHARE OF INVESTMENT INCOME

2005 2004

(HK$ billion) Q3 Q2 Q1 Full Year*

56.7

0.2

(4.8)

52.1

(14.5)

0.9

38.5

Investment income / (loss) 19.0 13.6 (2.1)

Other income 0.0 0.1 0.0

Interest, other costs and

adjustments (2.2) (2.4) (1.3)

Net investment income / (loss) 16.8 11.3 (3.4)

Treasury’s share (4.9) (3.5) 0.7

Revaluation gain on premises

affecting accumulated surplus 0.0 0.0 0.0

Increase / (Decrease) in

EF accumulated surplus 11.9 7.8 (2.7)

* Audited figures

47

YEARLY TREASURY SHARE OF THE EXCHANGE FUNDYEARLY TREASURY SHARE OF THE EXCHANGE FUNDINVESTMENT INCOME VS. TREASURY INCOME INVESTMENT INCOME VS. TREASURY INCOME

FORECASTFORECAST

Note 1: Year-to-date up to the end of September 2005.

Note 2: Based on MA’s fiscal year from January to December in each calendar year.

Note 3: Based on HK Government’s fiscal year from April to March of the following year.

Note 4: The figures have been published since 2002. Figures before then are HKMA estimates.

Year Actual Treasury Share (note 2) Treasury Income Forecast (notes 3 & 4)

2005 7.7 (note1) 14.1

2004 14.5 12.3

2003 25.7 12.1

2002 15.6 13.8

2001 1.6 12.5

2000 18.1 31.6

1999 45.4 22.2

1998 26.0 26.7

48

VERY VOLATILE VERY VOLATILE FOREIGN EXCHANGE MARKETSFOREIGN EXCHANGE MARKETS

US dollar appreciation

96

100

104

108

112

116

Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

0.9

1.0

1.1

1.2

1.3

1.4

USD/JPY (LHS)

EURO/USD (RHS, inverted scale)

USD/JPY EUR/USD

49

UNCERTAIN OUTLOOK FOR EQUITY MARKETSUNCERTAIN OUTLOOK FOR EQUITY MARKETS

80

90

100

110

120

130

Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05

80

90

100

110

120

130

Hang Seng Index

S&P 500

Dec 03 = 100

50

INTEREST RATES IN THE USINTEREST RATES IN THE US

3.8

4.0

4.2

4.4

4.6

4.8

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

3.8

4.0

4.2

4.4

4.6

4.8

US 10yr Treasury Note Yield

% %

hong kong monetary authority

Documents

ratescurrency stability

us dollar

mortgage delinquency

exchange rate indices

rescheduled loan ratio

property lending

nking sector performanceperiod

domestic monetary conditions