IMF supports linked exchange rate

November 16, 2011

An International Monetary Fund Staff Mission to Hong Kong has given a strong endorsement of the linked exchange rate system and the Government’s policy framework to support growth and safeguard financial stability.
 
Financial Secretary John Tsang today welcomed the IMF Mission’s view that the linked exchange rate system continued to be the most appropriate exchange rate arrangement for Hong Kong.
 
“We are also pleased the IMF Mission has given a positive assessment on Hong Kong, having regard to our sound economic fundamentals and effective economic policy framework. We will keep a close watch over global developments and take appropriate measures against any possible adverse events,” he said.
 
The assessment was made in the Preliminary Conclusions of the IMF Mission published today, following the 2011 Article IV consultation discussions.
 
Strong endorsement
The IMF Mission considered Hong Kong’s dynamic and compelling rebound following the global financial crisis was underpinned by its concerted policy efforts, flexible economic system and strong up-drafts from Mainland China. With external demand weakening, the IMF Mission projected Hong Kong’s economic growth would ease to 5.75% this year and moderate to 4% next year.
 
The IMF Mission commended the Government’s measures in the property market, which were effective in lowering transaction volumes, restraining credit for housing and preserving the health of the banking system. It also considered the regulatory authorities were forward-looking and proactive in protecting the financial system from an eventual turn in the credit cycle.
 
The mission said the linked exchange rate system remained the best option for Hong Kong as it was a simple, credible and effective regime, and as such merits continued support.
 
It said proposals to abandon the currency board and re-peg the Hong Kong dollar to a basket of currencies or pursue some form of crawling peg were ill-conceived, as such changes would give Hong Kong no more monetary autonomy but would sacrifice the benefits of monetary and financial stability that were hard-won over the past 28 years.
 
It said the current level of the Hong Kong dollar was broadly in line with economic fundamentals.
 
Vigilance assured
Monetary Authority Chief Executive Norman Chan also welcomed the IMF’s endorsement of the counter-cyclical supervisory measures taken by the authority to enhance the risk management and robustness of Hong Kong’s banking system, including the four rounds of tightening of banks’ mortgage underwriting standards and a requirement for banks to maintain higher levels of regulatory reserve.
 
“We shall remain vigilant and prudent while the external environment has become increasingly uncertain. We stand ready to deploy appropriate measures as necessary to protect monetary and banking stability in Hong Kong,” Mr Chan said.
 
Noting the encouraging development of offshore renminbi business in Hong Kong, the mission said the policy steps allowing Mainland non-financial institutions to issue dim sum bonds, create a renminbi qualified foreign institutional investors scheme, and open the door to renminbi foreign direct investments are facilitating the further expansion, deepening, and maturation of the offshore renminbi market in Hong Kong.
 
It also notes the increase in renminbi foreign direct investment flows will facilitate an expansion of renminbi credit, resulting in more balanced renminbi assets and liabilities in the banking system.
 
The IMF Mission visited Hong Kong from October 17 to 27 for the 2011 Article IV Consultation with Hong Kong. It held discussions with government officials and private-sector representatives.
 
The full report of the Article IV consultation will be discussed by the IMF Executive Board later this month.