Hong Kong upbeat on positive IMF forecast

Despite projected 6.75% economic growth, HK remains vigilant and continue to deal with the challenges that monetary policies in the developed economies present.

The International Monetary Fund has raised its forecast for Hong Kong's economic growth, projecting its economy will expand by 6.75% this year before moderating to 5% to 5.5% next year.

Welcoming the IMF's positive outlook for Hong Kong, Financial Secretary John Tsang said the continued broad-based recovery of the economy shows Hong Kong has weathered the global financial storm well, according to a government report.

"We will remain vigilant and continue to deal with the challenges created by the exceptionally accommodative monetary policies in the developed economies," he said.

The IMF made the assessment in the Preliminary Conclusions of the IMF Mission published on Thursday, following the 2010 Article IV consultation discussions.

Credit-asset price cycle
Noting Hong Kong's strong economic recovery, an improving labour market and very loose monetary conditions, the IMF Mission expects a continuation, and perhaps acceleration, of the credit-asset price cycle. It considers it essential to guarantee financial stability in the event the cycle shifts into reverse.

The IMF Mission considers the Government's graduated response to property price inflation is essential and should continue. It also considers the recent decision to supply more land and temporarily remove real estate from the investment asset class under the Capital Investment Entrant Scheme to be right and appropriate.

The IMF Mission calls for regulators to continue to ensure underwriting standards are rigorously complied with. This would be greatly facilitated by expanding the credit reference agency's current information base to include data on all individuals' mortgage loans.

The IMF Mission commends Hong Kong's fiscal policy for rightly providing support to the economy amid the global financial crisis. In view of the positive growth prospects, it suggests the Government discontinue temporary support measures in the 2011-12 Budget.

Infrastructure spending
The expansion of infrastructure spending should, however, continue as planned given it is an integral part of Hong Kong's strategy to increase its integration with the Mainland. The overall fiscal position should move to adopt a countercyclical policy stance.

The IMF Mission said Hong Kong's unique position as an international financial centre, with strong links to the Mainland, provides significant potential for growth and development.

It said Hong Kong should seek opportunities to further develop offshore renminbi business in Hong Kong. These efforts should focus on increasing the use of the renminbi as a settlement currency for trade and current account transactions and expanding the range of investment vehicles into which offshore renminbi can be invested.

Rate system backed
The IMF Mission maintains its support of the Linked Exchange Rate System, which has proven to be a robust anchor of Hong Kong’s monetary and financial stability, even in very difficult circumstances. The IMF Mission also continues to find the current level of the Hong Kong dollar to be broadly in line with economic fundamentals.
Monetary Authority Chief Executive Norman Chan said he is grateful to the IMF Mission for its continued support of the Linked Exchange Rate System.

"We are also pleased with the Mission's reconfirmation of the robustness of Hong Kong's banking system. We are fully aware of the risks of an acceleration of the credit-fueled asset cycle. We will monitor developments closely and introduce appropriate and timely prudential supervisory measures to ensure banking stability."