Moody's upgrades Hong Kong's rating

On November 9, the Hong Kong Special Administrative Region Government welcomed Moody's decision to upgrade Hong Kong’s long-term foreign-currency and local-currency rating outlook to “Positive” from “Stable,” with ratings at “Aa2.”

The upgrade was attributed to the Government’s financial strength, very low levels of government debt and large fiscal reserves. In addition, Moody’s determined that the hypothetical risk emanating from China has lessened, which contributes to a positive rating outlook for Hong Kong.

Moody’s also upgraded China's rating outlook to “Positive” from “Stable,” with ratings remaining at “A1.” Moody’s added that, due to increasing integration between Hong Kong and mainland China, Hong Kong’s rating is marginally lower than its intrinsic credit strength.

Welcoming the news, Hong Kong Financial Secretary John C. Tsang said the upgrade reflected Moody’s recognition of Hong Kong’s capability to sail through the global financial crisis smoothly.

“I am pleased to note Moody’s recognition of Hong Kong’s credit strengths and that the hypothetical risk emanating from the Mainland has lessened. We will continue to impress upon Moody’s that the Mainland also presents huge upward potential to Hong Kong through our strong trade and financial links,” said Mr. Tsang.

The agency last upgraded Hong Kong’s long-term foreign-currency and local-currency sovereign ratings to “Aa2” from “Aa3” in July 2007.

Government records US$8.3 billion deficit

The Hong Kong Special Administrative Region Government recently announced its financial results for the six months ended September 30, 2009.

Expenditure for the period April to September 2009 amounted to US$17.58 billion and revenue of US$9.28 billion, resulting in a deficit of US$8.3 billion.

A government spokesman said that the deficit for the period was mainly because some major types of revenue including salaries tax and profits tax were mostly received toward the end of a financial year.

The fiscal reserves stood at US$55.07 billion as of September 30, 2009 .

Exchange Fund increases by US$4.96 billion

Total assets of the Hong Kong Exchange Fund amounted to US$251.06 billion on September 30. This is US$4.96 billion higher than at the end of August 2009, according to the Hong Kong Monetary Authority.  

Foreign currency assets increased by US$4.3 billion and Hong Kong dollar assets increased by US$653.84 million.

The rise in foreign currency assets was due mainly to valuation gains on foreign currency investments, purchases of foreign currencies with Hong Kong dollars and an increase in Certificates of Indebtedness.  

The rise in Hong Kong dollar assets was due mainly to valuation gains on Hong Kong equities, increases in bank borrowings and placements by Hong Kong government/statutory bodies.  These increases were partly offset by fiscal drawdowns.

The Currency Board Account shows that the Monetary Base at the end of September 2009 was US$103.02 billion, an increase of US$1.47 billion, or 1.45%, from the end of August 2009.  The rise in the Monetary Base was due mainly to an inflow of funds into the Hong Kong dollar and an increase in Certificates of Indebtedness.

The Backing Assets increased by US$1.64 billion, or 1.53%, to US$108.97 billion.  The increase was attributable mainly to the rise in the Monetary Base together with revaluation gains and interest from investments.  Reflecting this, the backing ratio rose from 105.69% at the end of August 2009 to 105.77% at the end of September 2009.

Remuneration discussions continue

The Hong Kong Monetary Authority (HKMA) is consulting the Hong Kong Association of Banks and the Deposit-taking Companies Association on its draft “Guideline on a Sound Remuneration System.”

The Guideline aims to ensure that authorized institutions (AIs) have in place sound remuneration systems that are consistent with and promote effective risk management.  Remuneration systems that create incentives for inappropriate or excessive risk-taking have the potential to threaten the safety and soundness of individual institutions and thereby ultimately the stability of the banking system as a whole. The Guideline is expected to be issued as a module of the HKMA’s Supervisory Policy Manual by the end of this year.  

The Guideline, when issued, will apply to all AIs, given its relevance to AIs’ risk management and internal control systems generally and the need to ensure a level playing field within the local banking sector.  The HKMA will expect AIs to take prompt action to implement the Guideline once issued, with a view to achieving full compliance within the year 2010.        

The consultation will close on November 30, 2009.  

Foreign currency reserve assets increase

Hong Kong’s official foreign currency reserve assets amounted to US$240.1 billion at the end of October 2009, according to the Hong Kong Monetary Authority, compared to US$226.9 billion at end-September.

Including unsettled forward contracts, the foreign currency reserve assets of Hong Kong at the end of October also stood at US$240.1 billion, compared to US$229.2 billion at end-September.

Hong Kong is the world’s seventh largest holder of foreign currency reserves based on the latest published figures, after Mainland China, Japan, Russia, Taiwan, India and Korea.

The total foreign currency reserve assets of US$240.1 billion represent over nine times the currency in circulation or about 51% of Hong Kong dollar M3.