IMF backs linked exchange rate

IMF forecasts Hong Kong’s economy to grow 6.75% this year and moderate to 5-5.5% next year.

The International Monetary Fund released its Staff Report on Hong Kong on Friday, in which it welcomed the Government’s efforts in maintaining financial stability and reiterated its support for the Linked Exchange Rate system.

The report confirmed the assessment in the Preliminary Conclusions of the Fund Mission released on November 18.

The mission sees the Hong Kong economy recovering briskly with all demand components resuming a strong growth trajectory. It projects Hong Kong’s economy will grow by 6.75% this year and moderate to 5-5.5% next year. Consumer price inflation is projected to reach 5% by the end of 2011.

With Hong Kong’s economic recovery more entrenched and the likely persistence of highly accommodative monetary conditions in many industrial countries, the mission envisages continued upward pressures on property prices and an accelerated credit-asset price cycle.

Hong Kong remains in a strong position to guarantee financial stability in the event the cycle shifts into reverse. The financial system has been prudently managed and is well supervised and regulated. In addition, banks generally have robust internal risk-management systems and recent regulatory measures to tighten the underwriting standards for mortgage lending will help insulate the financial system from the effects of a housing downturn.

Noting various policy measures in response to higher housing prices, the Fund Mission considers the Government is much better prepared now than in any past cycle to deal with housing-price pressures and safeguard financial stability. It also considers rising housing prices are not out of line with fundamentals.

The mission fully supports the Government’s announcement of the package of anti-property speculation measures on November 19 and considers them a proactive and well-calibrated response to the current upswing in Hong Kong's property-price cycle. It assesses these initiatives will have an important impact in shifting the trajectory of the property market to a more sustainable path, according to a Ministry of Finance report.

In light of the strong economic recovery, the mission suggests the Government discontinue the temporary support measures in the 2011-12 Budget. But the planned increase in infrastructure investment should continue as it will increase transport links with the Mainland and strengthen Hong Kong’s longer-term competitiveness.

Given the buoyant outlook for revenues, the mission expects Hong Kong's fiscal position will remain firmly in surplus in the coming years even with this higher level of capital spending.

Assessment welcomed
Financial Secretary John Tsang welcomed the positive assessment.

“While Hong Kong has sound economic fundamentals, its openness makes it susceptible to the international environment, in particular the current abnormal macro-financial environment. We have therefore recently implemented a number of extraordinary measures concerning the property market to maintain our economic and financial stability. We will introduce further measures if circumstances so warrant in future,” Mr Tsang said.

The mission reiterated its long-standing support for the Linked Exchange Rate system, which has proven to be an anchor of monetary and financial stability in Hong Kong, even in very difficult circumstances. It assesses the current level of the Hong Kong dollar is broadly in line with medium-term fundamentals.

Monetary Authority Chief Executive Norman Chan welcomed the fund’s continued support of the linked rate, which has been the anchor for monetary and financial stability in Hong Kong since 1983.

“We also welcome the IMF’s support of the prudential measures on mortgage lending introduced by the Monetary Authority, which are crucial to the maintenance of banking stability in Hong Kong,” he said.

The mission believes Hong Kong’s unique position as an international financial centre with strong links to the Mainland provides significant potential for growth and development. This will be greatly aided by ongoing improvements being made to transport links with the Mainland.

Continued efforts are needed to steadily build on Hong Kong’s position as an offshore renminbi centre. The mission recognises the important steps that have been made over the past year and recommends the Government continue to seek opportunities to increase the use of the renminbi as a settlement currency for trade and current-account transactions, and to expand the range of renminbi investment products.