IMF: Hong Kong now in recovery

An International Monetary Fund (IMF) Staff Mission to Hong Kong has welcomed the proactive and concerted policy efforts by the government to tackle the global financial crisis.

Noting the various positive indicators in recent months, the agency sees an economic recovery now under way in Hong Kong. It projects the Hong Kong economy will contract 2% in 2009, with growth steadily strengthening to 5% in 2010. Unemployment is expected to decline in the coming months, and consumer price inflation is projected to be close to zero by the end of 2010.

The assessment was made in the Preliminary Conclusions of the IMF Mission published on November 3, after the 2009 Article IV consultation discussions.

The Mission notes that Hong Kong's banking system has proved to be resilient to the dramatic events in the global financial system over the past year, and that it remains healthy, liquid and well capitalized. It also supports the proposed increase in the deposit protection limit, which would be in line with the coverage in other jurisdictions. The agency shares concern about the risk of a credit-asset price cycle that could lead to a sharp run-up in prices for certain real and financial assets when credit demand resumes sharp growth. It considers that while the continued strict enforcement of the existing regulatory structure will be essential in maintaining financial stability, there is a role for the introduction of countervailing prudential measures.

The Mission supports the expansionary fiscal measures announced earlier this year, supplementing the stimulus introduced in 2008. Given the downside risks to the global economy, the agency recommends maintaining a supportive fiscal stance in the 2010-11 Budget. Consideration could also be given to further modernizing Hong Kong's systems for budgetary management. The Mission notes that many changes are already under way to improve health-care service delivery. It suggests the government consider introducing a broader range of user fees or price-based measures to ensure the efficient use of medical services, and believes that supplementary sources of financing should be phased in at an early stage to ensure that over time, private financing sources contribute to a larger share of health-care expenditures.

Hong Kong Financial Secretary John C. Tsang welcomed the Mission’s support of policy efforts to combat the global financial crisis.

“We welcome the Mission's fair and balanced assessment of Hong Kong's overall economic situation. We will continue to pursue the strategy of stabilizing the financial system, supporting enterprises and preserving employment until the recovery is firmly in place,” said Mr. Tsang.

The Mission maintains its support for the Linked Exchange-Rate system, which has shown itself to be a simple and transparent exchange-rate arrangement and anchor of Hong Kong's monetary and financial stability. The agency continues to find the value of the Hong Kong dollar to be broadly in line with economic fundamentals. It expects the present accommodative monetary conditions will remain in place for an extended period, but that at some future point, the recent extraordinary expansion in the Aggregate Balance will be unwound. It considers clear communication with the public and financial markets during this period to be essential in preventing unnecessary turbulence in foreign currency or money markets.

“We are glad that the Mission supports the introduction of countervailing prudential measures to ensure that the banking industry continues to manage risks prudently,” Hong Kong Monetary Authority Chief Executive Norman Chan said. “We will continue to be vigilant in maintaining banking and financial stability in Hong Kong.”

The Mission expects the rebalancing of the Mainland economy toward household consumption will be an important policy challenge for Hong Kong, but also an opportunity to seek out new lines of business. Recognizing Hong Kong's status as an important international financial center, the agency believes Hong Kong has significant potential to provide a range of financial services to the Mainland. Specifically, the Mission encourages the government to continue to seek out ways to develop Hong Kong as an offshore renminbi business center.

The IMF Mission visited Hong Kong on October 12-22 for the 2009 Article IV consultation discussions. It held discussions with government officials and private sector representatives.