The IMF maintains its long-standing support of the Linked Exchange Rate System, which has proved to be an anchor of monetary and financial stability in Hong Kong over the past 25 years.

The International Monetary Fund (IMF) in its Staff Report on Hong Kong released December 9 commends the Hong Kong Special Administrative Region Government’s (HKSARG) measures to contain the contagious risks from the global financial turmoil and reiterates its support for the Linked Exchange Rate System (LERS).

The IMF projects Hong Kong’s economic growth to fall noticeably in the coming months amid the still unfolding turbulence in the international financial markets.  Consumer price inflation is expected to fall below 3% in 2009.  In the long run, an economic growth rate of around 5% per annum is feasible given the consistent improvements in productivity and overall dynamism and adaptability of the economy.

The IMF recognizes that Hong Kong’s financial system has performed well and without significant market dislocations.  It attributes the resilience to the HKSARG’s efforts over the past several years to establish a more robust system of financial supervision and regulation and to implement a sophisticated financial infrastructure.  The IMF commends the regulatory authorities for their increased supervisory activities in recent months, substantial attention to contingency planning and continued willingness to explore areas for further improvement.

The IMF considered that the 2008-09 Budget and the supplementary package of measures introduced in July should help guard against a more dramatic economic downturn.  The IMF calls for continued fiscal stimulus in the 2009-2010 Budget with the government targeting fiscal balance or a modest deficit.  It also advocates taking a more medium-term perspective, favoring fiscal stimulus through an acceleration of infrastructure investments and possibly a permanent reduction in direct tax rates.  The IMF supports reforming the healthcare system and considers that the government has recognized rightly the problem and laid out options that ought to be considered.

Hong Kong Financial Secretary John C. Tsang welcomed the IMF’s commendations of the government’s policies and measures.  “I am confident that Hong Kong’s strong fundamentals, sound regulatory framework and prudent risk management by financial institutions will stand us in good stead in tackling the global financial turmoil.  Meanwhile, we will continue to implement necessary measures to help those in need during this difficult period,” said Mr. Tsang.

The IMF maintained its long-standing support of the LERS, which has proved to be an anchor of monetary and financial stability in Hong Kong over the past 25 years.  The Hong Kong dollar continues to be valued broadly in line with economic fundamentals.  The IMF also supports the range of actions taken by the Hong Kong Monetary Authority (HKMA) to increase the attractiveness and flexibility of its liquidity support facilities under extraordinary circumstances.

The IMF considered that the banking system remains sound.  Hong Kong’s banks have managed risk prudently and are well positioned to handle a worsening in credit quality.  The announcement of a time-bound, blanket deposit guarantee and a contingent bank capital facility are fully warranted in the current extraordinary global circumstances.

Chief Executive of the HKMA Joseph Yam said, “I am glad that the IMF supports the range of actions we have taken to sustain confidence in the banking system.  We will keep a close eye on global market developments and are prepared to take any further necessary measures to safeguard the stability of the system.”

The IMF considered that recent progress toward the adoption of a new competition law that is in line with international best practice would enhance Hong Kong’s competitiveness.  It also supports the government’s intention to make the minimum wage legislation uniform across employment groupings.  The minimum wage should be set at a level to safeguard the interests of lower income workers without materially affecting their employment prospects and the flexibility of Hong Kong’s labor markets.

The IMF considered that a broader expansion of communications and infrastructure in the Pearl River Delta would offer significant potential for further growth and development in the region.  The IMF also recommends that the government continue to find opportunities to move forward the financial integration process with mainland China and to play a catalytic role in the modernization of the Mainland’s financial system and its integration with global capital markets.

The IMF mission visited Hong Kong from October 20-30 to conduct the Article IV consultation discussions.  The Staff Report can be found on the Web sites of the Financial Services and the Treasury Bureau [www.fstb.gov.hk] or the IMF Web site [www.imf.org].