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Following is a question by the Hon Frederick Fung Kin-kee and a written reply by the Acting Secretary for Financial Services and the Treasury, Ms Julia Leung, in the Legislative Council today (October 16):
Question:
It has been reported that, contrary to market expectations, the United States Federal Open Market Committee decided at its meeting held in September this year to maintain the current monthly scale of purchasing US$85 billion United States Treasury bonds, and did not announce any market exit plan. Most of the committee members considered that the federal funds target rate should not be raised until 2015, and the pace should not be too quick. It is therefore forecast that the interest rate will remain below 2% until the end of 2016. In this connection, will the Government inform this Council:
(a) whether it has assessed the latest impact of the decision made at the aforesaid meeting on Hong Kong's economy, including the overall economic conditions, capital flows, asset prices and inflation, etc.; if it has, of the outcome; whether the authorities will consider raising this year's forecast of the year-on-year rate of increase in the Composite Consumer Price Index (i.e. the underlying inflation rate) of Hong Kong;
(b) whether it has assessed if abundant liquidity and the persistently low-interest-rate environment will bring about equity and property asset bubbles, which may lead to market fluctuations; whether the authorities have drawn up contingency plans and measures to curb the inflow of hot money, with a view to stabilising asset prices and combating speculations; and
(c) of the measures the authorities have put in place in response to the short to medium term low-interest-rate environment to reduce the risks faced by the banking sector?
Reply:
President,
The quantitative easing by advanced economies over the past few years has flooded the global markets with excessive liquidity, with the ebb and flow of hot money increasing the risks of capital flow reversal in Asia. The US Federal Reserve (the Fed) at its meeting in mid-September decided to await more evidence on sustained local economic growth before adjusting its pace of asset purchases. Volatility in global financial markets has re-emerged as a result of the Fed's unexpected delay in tapering. While the Fed has not yet reduced its purchases, market expectations about the possibility of a pullback have already put a number of emerging markets under pressure since the middle of this year.
Currently, the US economy's performance is mixed. Given that the US' debt ceiling and budget issues have yet to be resolved, and the fiscal adjustments may continue to weigh on its economic growth, there is still considerable uncertainty about future market developments. Investors are strongly advised to stay alert to and guard against related risks. We, in collaboration with the regulators, will continue to closely monitor the changes in the economic environment, including those in monetary policy and the financial markets, and their potential impacts on Hong Kong.
My reply to the three-part question is as follows:
(a) Our economic fundamentals are relatively sound, underpinned by the stable financial system. Following the Fed's announcement to maintain its current monetary policy, the Hong Kong dollar exchange rate remains stable, showing no significant signs of impact from the Fed's decision on capital flows. However, it is hard to predict the future direction of capital flows, and uncertainties in the macro-environment may result in sudden swings of market sentiments. The risks of capital flow reversal, therefore, should not be taken lightly, as it could induce a rise in Hong Kong's interest rates earlier than that in the US, posing downside risks to local asset prices.
On the price front, as international commodity prices are relatively stable and imported inflationary pressure remains tame, we expect that the effect of the Fed's decision to maintain its pace of asset purchases on Hong Kong's inflation should be minimal in the short run. As the inflation forecasts announced in mid-August (headline and underlying consumer price inflation forecasts for 2013 at 4.3% and 4% respectively) had already taken into account the uncertainties in the US monetary policy, there is no need for adjustment at this juncture.
(b) Changes in the US monetary policy will affect the global economy and stock market outlook and cause a shift in capital flows amongst different markets and asset classes. The actual impact would hinge on the pace, speed and scale of the Fed's tapering of economic stimulus, as well as interest rate movements. At the moment, the Hong Kong stock market continues to function orderly.
The residential property market has been quiet in general in the past few months with a sharp fall in trading activities after the announcement of the latest demand-side management measures by the Government in late February. Raising flat supply through increasing land supply is the Government's top policy priority in ensuring a healthy and stable development of the property market. In the light of the irrational exuberant property market in recent years driven by tight residential supply, extremely low interest rates and excessive liquidity, the Government has introduced several rounds of demand-side management measures to prevent the community from facing even greater pain should there be any adjustments caused by a change in interest rates or other external factors. The Hong Kong Monetary Authority (HKMA) is also concerned about the risks of excessive credit growth and property price bubble amid continued low interest rates and abundant interbank liquidity. To safeguard the stability of the banking system, HKMA has introduced six rounds of counter-cyclical prudential measures to strengthen banks' mortgage underwriting standards. These measures help enhance the resilience of the banking system against possible correction in property prices.
The above demand-side management measures have yielded results which meet our policy objectives. Overall flat prices increased by 0.4% per month on average during March to August 2013, a notable deceleration from the monthly average increase of 2.7% in the first two months of 2013. It can be seen that the measures have been effective in addressing the irrational property market exuberance and have changed the unrealistic expectation that property prices could only go up. Nevertheless, given the uncertainty of the Fed's monetary policy, international fund flows and market expectations may still fluctuate and impact on asset prices, including flat prices, in Hong Kong. We will keep a close eye on the property market and make appropriate adjustments in a timely manner as and when necessary.
(c) HKMA has been closely monitoring the developments in local and global financial markets, and analysing relevant data to assess the possible implications on and risks to Hong Kong's banking system. There has been a substantial inflow of funds into our banking system since the global financial crisis, and HKMA has launched a series of regulatory measures to ensure the stability of our banking system, including:
* managing the credit risk, liquidity risk and funding strategy of banks by requesting those with rapid loan growth to maintain sufficient and stable funding for such growth having regard to the business models and funding strategies of individual banks;
* requesting retail banks to increase the level of their regulatory reserves as a stronger buffer against possible deterioration in asset quality. As a result, the relevant retail banks' regulatory reserves (including their collective impairment allowances) have reached 1.4% of their total lending since the end of 2011, compared with 0.85% at the end of 2010;
* conducting regular stress tests to assess the resilience and robustness of Hong Kong's banking system as a whole as well as those of individual banks; and
* reminding banks to pay close attention to interest rate risks and the impact of interest rate movements on asset prices, their bond portfolios and their customers' repayment capacities.
We will remain vigilant against threats to the stability of our banking system and take appropriate measures as necessary.
Ends/Wednesday, October 16, 2013
Issued at HKT 16:18
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