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HONG KONG MONETARY AUTHORITY

Detailed analysis of currency stability, market expectations, risks, and banking sector performance presented to the Legislative Council Panel on Financial Affairs by the Hong Kong Monetary Authority. Focus on exchange rates, market expectations, risks factors, and banking efficiency. Insights on financial infrastructure for domestic, international, and Mainland/Hong Kong-related financial activities.

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HONG KONG MONETARY AUTHORITY

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  1. HONG KONG MONETARY AUTHORITY Briefing to the Legislative Council Panel on Financial Affairs 4 February 2002

  2. DISCUSSION TOPICS • Currency • Banking • Financial Infrastructure • Exchange Fund 2

  3. CURRENCY STABILITY - FACTS Exchange rate (LHS) HK - US interest rate differential (1 month) (RHS) 2001 2000 1998 1999 3

  4. CURRENCY STABILITY - RISKS • 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 4

  5. CURRENCY - MARKET EXPECTATIONS 12-month Hong Kong dollar forward points 2000 1999 2001 1997 1998 5

  6. CURRENCY - MARKET EXPECTATIONS 12-month Hong Kong dollar forward points Sino-US tensions / yen Argentina / yen Argentina / rumours about the Link 6

  7. CURRENCY - RISKS OF YEN WEAKNESS 1 Sep 2001=100 135 135 130 130 125 125 120 120 115 115 110 110 105 105 100 100 95 95 Thai baht Philippine peso 90 90 Indonesian rupiah Korean won 85 85 Japanese yen 80 80 Sep Oct Nov Dec Jan 2001 7

  8. CURRENCY - MARKET EXPECTATIONS ON RMB pips pips 3000 3000 2500 2500 RMB 12-month forward HK dollar 12-month forward 2000 2000 1500 1500 1000 1000 500 500 0 0 -500 -500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2001 8

  9. CURRENCY - RISKS OF ARGENTINEAN DEBT CRISIS pips pips 25000 12-month Argentinean peso forward (LHS) 20000 12-month HK dollar forward (RHS) 15000 10000 5000 0 500 0 -500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2001 9

  10. BANKING 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 AIs 2 Locally-incorporated banks 3 Surveyed AIs (29 for RMLs, 23 for credit cards) 4 All AIs 10

  11. BANKING - EFFICIENCY AND COMPETITION • Commercial Credit Reference Agency • Positive consumer credit data • Review of market entry criteria • Banking consumer protection 11

  12. BANKING - SAFETY AND SOUNDNESS • Deposit Insurance Scheme • Bank consolidation • New Capital Accord • Mortgage loans in negative equity 12

  13. FINANCIAL 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

  14. FINANCIAL INFRASTRUCTURE FORDOMESTIC 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

  15. FINANCIAL INFRASTRUCTURE FOR INTERNATIONAL 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

  16. in US $ Mn No. of transactions Value 6,000 3,500 3,000 5,000 • US$ RTGS • Over US$5 bn daily 2,500 4,000 2,000 3,000 1,500 2,000 1,000 1,000 500 0 0 Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Month 00 00 00 00 00 01 01 01 01 01 01 01 01 01 01 01 01 • Of whichPvP (US$ / HK$) • Over US$2 bn daily FINANCIAL INFRASTRUCTURE FOR INTERNATIONAL 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 US dollar RTGS turnover (daily average) 16

  17. FINANCIAL INFRASTRUCTURE FOR 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

  18. MAINLAND / HONG KONG FINANCIAL ACTIVITIES – 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

  19. EXCHANGE 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, etc50.463.113.4 Investment income 7.0 45.1 103.8 * including dividends 19

  20. EXCHANGE FUND INVESTMENT BENCHMARK Bonds 80% Equities 20% (Hong Kong : 5%) Currencies 80% US dollar bloc 15% European bloc 5% Yen 20

  21. EXCHANGE FUNDPERFORMANCE AGAINST BENCHMARK * Preliminary, unaudited figures for 2001 21

  22. INVESTMENT PERFORMANCE OF EXCHANGE FUND AND COMPARABLE BALANCED FUNDS Return 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8%  Exchange Fund  10.8%  4.8%  0.7% 2001 1999 2000 Balanced Funds with 20% - 30% Equity Component Source: Watson Wyatt and Standard & Poor’s 22

  23. EXCHANGE FUND HISTORICAL RETURN # Hong Kong CPI-A at end-November 2001 23

  24. EXCHANGE FUND ABRIDGED BALANCE SHEET (HK$ billion) 2001 2000 Change ASSETS Deposits 98.6 73.1 25.5 Debt securities 733.3 729.8 3.5 Hong Kong equities 85.9 152.9 (67.0) Other equities 35.3 40.6 (5.3) Other assets 27.527.00.5 Total assets 980.6 1,023.4 (42.8) LIABILITIES AND ACCUMULATED SURPLUS Certificates of Indebtedness 107.5 99.2 8.3 Coins 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 8.9 Placements by other HKSAR government funds 380.6 417.2 (36.6) Other liabilities 65.284.0(18.8) Total liabilities 677.9 716.3 (38.4) Accumulated surplus 302.7307.1(4.4) Total liabilities and accumulated surplus 980.6 1,023.4 (42.8) 24

  25. 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)6.11.0* (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. EXCHANGE FUNDCHANGE IN ACCUMULATED SURPLUS 25

  26. EXCHANGE FUND HONG KONG EQUITY PORTFOLIO (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) 85.9 Disposal 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). 26

  27. HONG KONG MONETARY AUTHORITY Briefing to the Legislative Council Panel on Financial Affairs 4 February 2002 27

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