Transcript Hong Kong Economic and Monetary Developments and Prospects

DISCUSSION TOPICS
Updates on
–
Financial Market Crisis and Global Recession
–
Currency Stability
–
Banking Industry
–
Financial Infrastructure
–
Hong Kong as an International Financial Centre
–
The Investment Environment and Performance
of the Exchange Fund
2
FINANCIAL MARKET CRISIS
AND GLOBAL RECESSION
3
FINANCIAL MARKETS REMAIN STRAINED
• While a financial meltdown has been averted, financial markets
remained strained and volatile.
S&P 500 and VIX
US Treasury yield and CDX index
%
bps
10-year UST yield (%, lhs)
5
CDX Investment Grade (bps, rhs)
1600
300
S&P 500 (lhs)
90
VIX Index (rhs)
80
1400
70
250
4
200
1200
60
3
50
150
2
1000
40
100
800
50
600
30
20
1
10
0
Jan-08
Mar-08 May-08
Source: Bloomberg
Jul-08
Sep-08
Nov-08
0
Jan-09
400
Jan-08 Mar-08 May-08 Jul-08
0
Sep-08 Nov-08 Jan-09
Source: Bloomberg
4
ADVANCED ECONOMIES IN RECESSION
• The financial market crisis evolved into a global economic
downturn. Many advanced economies entered sharp recessions.
GDP: US, Euro area, Japan
% qoq annualised
8
US
6
PMI: US, Euro area, Japan
% qoq annualised
8
Euro area
Japan
65
60
6
55
4
4
2
2
50
45
Euro area PMI composite
40
0
0
-2
35
US non manufacturing ISM
30
Japan PMI
-2
25
-4
-4
2006
2007
Source: Bloomberg
2008
20
2006
2007
2008
Source: Bloomberg
5
DEFLATION PRESSURES LOOMING
• Risks of deflation in many advanced economies cannot
be dismissed in the scenario of a deep recession
• The scope for further interest rate cuts is small
• Impact:
─ Deflationary trend would lead to rising real interest
rates
 Reduce consumption and investment
 Increase the debt burden of borrowers
 Reinforce distress selling, triggering a debt-deflation
spiral
6
EMERGING MARKETS SLOW SHARPLY
• The emerging markets downturn was marked in the face of slowing
exports, a reversal of capital flows, and a loss of confidence.
Industrial production: selected EMs
Exports: selected EMs
% yoy
60
% yoy
China
Brazil
50
40
China
40
Brazil
Russia
35
India
30
India
25
Russia
30
20
15
20
10
10
5
0
0
-10
2006
2007
2008
2009
-5
2006
2007
2008
2009
-10
-20
-15
Source: Bloomberg
Source: Bloomberg
7
OUTLOOK REMAINS GLOOMY
FOR THE GLOBAL ECONOMY
IMF economic forecasts
2007
(Actual)
2008
(Projections)
2009
(Projections)
2.6
1.4
-0.3
8
6.6
5.1
4.7
2.9
1.5
G3
- US
- Euro area
- Japan
2
2.6
2.1
1.4
1.2
0.5
-0.7
-0.5
-0.2
Asia
- China
- NIEs
- ASEAN-5
11.9
5.6
6.3
9.7
3.9
5.4
8.5
2.1
4.2
GDP Growth
Advanced economies
Emerging market and
developing countries
Other advanced
economies
8
AGGRESSIVE MONETARY EASING
TO EASE FINANCIAL CONDITIONS
• Many economies eased monetary policy aggressively to counter
growth risks, although the effect of lower interest rates on demand
may have been weakened by the disruption in credit markets.
Policy rates: US, euro area, Japan
%
5
US
Euro area
Japan
4
3
2
1
0
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Source: Bloomberg
9
FISCAL POLICIES TO SUPPORT GROWTH
• Policymakers have more recently used fiscal stimulus measures to
support growth.
Recently introduced fiscal stimulus packages
% of GDP
Australia
A$10.4 bn
0.9
China1
Rmb4 trn
13.9
France
€26 bn
1.3
Germany1
€50 bn
2.0
Japan
Ұ5 trn
1.0
UK
£20 bn
1.4
$775 bn
5.4
US1, 2
1. Fiscal spending over two years.
2. To be finalised.
Source: Bloomberg, national authorities’ websites
10
CURRENCY STABILITY
11
HONG KONG DOLLAR STAYED CLOSE TO 7.75
HKD / USD
7.90
HKD / USD
7.90
Convertibility Zone
7.85
7.85
7.80
7.80
7.75
7.75
Spot exchange rate
7.70
7.70
7.65
7.65
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2003
2004
2005
2006
2007
2008
2009
12
AGGREGATE BALANCE SURGED TO NEW HIGHS
HKD billion
180
HKD billion
180
160
160
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2004
2005
2006
2007
2008
2009
13
NARROWED INTEREST RATE SPREAD
HKD/USD
7.85
% p.a.
2.0
spot exchange rate (lhs)
7.80
1.0
7.75
0.0
7.70
-1.0
7.65
-2.0
one-month HIBOR-LIBOR (rhs)
7.60
-3.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2004
2005
2006
2007
2008
2009
14
REDUCED NET LENDING TO BANKS ABROAD
HKD billion
1,100
1,000
900
HKD billion
600
HKD net lending to banks abroad (rhs)
Amount due to banks (lhs)
500
Amount due from banks (lhs)
800
400
700
600
300
500
400
200
300
200
100
100
0
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2005
2006
2007
2008
15
HONG KONG HAS SIZEABLE EXTERNAL ASSETS
Net Total IIP
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
(USD bn)
(% of GDP)
1,022
522
-53
-150
-155
-18
-27
223
467
-58
31
252
-5
-35
-16
-10
-19
138
122
-23
Note: End-2007 figures. Korea and India refer to September and March
2008 figures respectively.
16
INCREASE IN HK DOLLAR DEPOSITS
10
% change over
3 months ago
10
8
8
6
6
4
4
2
2
0
0
-2
-4
-2
HKD deposits
-4
HKD loans
-6
-6
-8
-8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2005
2006
2007
2008
Note: Quarter-end figures. 2008 Q4 refers to end-November number.
17
FORWARD DISCOUNT NARROWED
HKD / USD
HKD / USD
7.85
7.85
Spot
7.80
7.80
7.75
7.75
12-month forward
7.70
7.70
7.65
7.65
Q1
Q2
Q3
2007
Q4
Q1
Q2
Q3
2008
Q4
Q1
2009
18
LOCAL INTEREST RATES EASED
% pa
6
% pa
6
Overnight HIBOR
5
% pa
6
% pa
6
3-month HIBOR
5
5
4
4
4
4
3
3
3
3
2
2
2
2
1
1
1
1
0
Jan-08
0
0
Jan-08
0
Overnight LIBOR
Apr-08
Jul-08
Oct-08
Jan-09
5
3-month LIBOR
Apr-08
Jul-08
Oct-08
Jan-09
19
THE BASE RATE WAS LOWERED
% pa
8
7
% pa
8
Overnight HIBOR
Base Rate
7
US Federal Funds Target Rate
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2004
2005
2006
2007
2008
2009
20
INCREASED ISSUANCE OF EF PAPER
% pa
Announcement of additional
issuance of $8bn worth of EF
paper on 24 November 2008
6
3-month HIBOR
% pa
5
6
5
3-month Exchange Fund yields
Announcement
of additional
issuance of
$18bn worth of
EF paper on 6
January 2009
4
Announcement of additional
issuance of $4bn worth of EF
paper on 20 October 2008
3
4
3
2
2
1
1
0
0
-1
Jan-08
-1
Apr-08
Jul-08
Oct-08
Jan-09
21
FUNCTIONING OF INTERBANK MONEY MARKET
• Liquidity concerns eased significantly
• Utilisation of five measures greatly reduced
• Confidence in banking system strengthened
22
CURRENCY SWAP WITH PBoC
• HKD/RMB currency swap agreement signed
with PBoC on 20 January 2009
• Size : up to RMB 200 bn / HKD 227 bn
• In effect for 3 years; extendable upon expiry
of agreement
23
CURRENCY SWAP WITH PBoC
• Allow the provision of RMB funding
– To facilitate trade settlement
– To meet potential funding difficulties of Mainland
branches/subsidiaries of Hong Kong banks
• Signify monetary co-operation between Hong
Kong and the Mainland China
• Beneficial to financial stability of Hong Kong
and promoting Hong Kong’s role in regional
financial stability
24
RISKS TO CURRENCY STABILITY
• Domestic demand and export performance of
Hong Kong weakened due to the global
economic slowdown, labour market
conditions deteriorated
• The gloomy economic outlook and tightened
credit conditions weighed on domestic asset
prices, undermining consumer and business
confidence
• Risks associated with the Mainland economy
25
SIGNIFICANT ECONOMIC DOWNTURN
• Real GDP contracted in Q2 and Q3 of 2008, dragged down by
weaker domestic demand and exports
• Recessions in the industrialised economies will weigh on
domestic economic growth through the trade channel
% point
6
% qoq
6
% yoy (3-month moving average)
30
Re-exports from Mainland
through Hong Kong
25
4
4
US imports
20
15
2
2
10
5
0
0
0
-5
-2
-2
Hong Kong's exports
-10
-15
-4
2006
Domestic demand (lhs)
2007
Net exports (lhs)
2008
-4
-20
2001
2002
2003
2004
2005
2006
2007
2008
Real GDP (rhs)
26
Inflation
LOWER INFLATION AND
HIGHER UNEMPLOYMENT
• Underlying CCPI inflation moderated to 4.6% year on year in
December 2008, due to smaller increases in food costs and
housing rents
• Unemployment rate rose to 4.1% in December 2008, and is likely to
edge up further due to sluggish labour demand
% yoy
% yoy
%
% yoy
8
Others
8
10
6
Rentals
6
8
8
4
6
6
2
2
4
4
0
0
2
2
-2
-2
0
0
-4
-4
-2
-6
-6
-4
10
Unemployment rate (lhs)
Food
4
Underlying CCPI excl. special relief measures
2001
2002
2003
2004
2005
2006
2007
2008
Employment growth (rhs)
-2
-4
96 97 98 99 00 01 02 03 04 05 06 07 08
27
DECLINES IN DOMESTIC ASSET PRICES
• Domestic equity prices plummeted by almost 50% in 2008,
following the decline in the global stock markets
• House prices and transaction volume trended downward amid
weak economic outlook and uncertain job prospects
Jan 2000=100
1999=100
220
200
200
180
45
160
40
180
160
Hang Seng Index
140
120
100
80
60
MSCI All Country Index
140
Number ('000)
50
Residential property price (lhs)
35
120
30
100
25
80
20
60
Transaction
volume (rhs)
15
40
40
20
20
5
0
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
10
96 97 98 99 00 01 02 03 04 05 06 07 08 09
28
Inflation PROSPECTS
NEAR-TERM ECONOMIC
• The Purchasing Managers’ index (PMI) has fallen into the
contraction zone for six months, pointing to continued weakness
in business activities
• Declines in market housing rents and stabilisation in basic food
prices will alleviate inflationary pressures
Diffusion index
% yoy
80
15
Real GDP growth (rhs)
% yoy
25
20
70
10
60
5
Private housing rents
15
10
5
50
0
0
Basic food
prices
-5
40
-5
-15
PMI (lhs)
30
-10
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-10
-20
2001
2002
2003
2004
2005
2006
2007
2008
29
RISKS TO ECONOMIC OUTLOOK
• Sharper-than-expected recessions in the US and
Europe would worsen the trade performance of
Hong Kong
• Tight credit conditions amid economic contraction
may restrain business spending, creating a vicious
circle that prolongs the downturn of the domestic
economy
• More visible slowdown on the Mainland would
weigh on the growth prospects in Hong Kong
• Nevertheless, Hong Kong has entered this crisis in
a position of strength and should be able to weather
it relatively well
30
RISKS ASSOCIATED WITH
THE MAINLAND ECONOMY

The Mainland economy lost momentum in recent months, with the annualised growth
rate softening from 10.4% in H1 to 7.9% in H2 2008.

Inflationary risks receded, with headline inflation declining to 1.2% at the end of 2008,
from 7.9% in H1.

The stock market has remained volatile. The property market continued to weaken
with prices in big cities falling since February 2008. The prices in December 2008
recorded the first year-on-year decline since July 2005.

Mainland authorities adopted policies to support the economy

–
Monetary easing with five interest rate cuts, four RRR cuts and scaled-down
open market operations since September 2008
–
Fiscal stimulus package of RMB 4 trillion announced on 9 November 2008
A weakening Mainland economy will unavoidably affect Hong Kong’s economic
prospects. Nonetheless, growth in the Mainland is expected to remain relatively
respectable, particularly in view of the proactive policy measures being adopted to
stimulate growth.
31
BANKING INDUSTRY
32
IMPACT OF GLOBAL FINANCIAL CRISIS ON
FINANCIAL PERFORMANCE
 Local banks’ 2008 profitability will be
significantly affected
 2009 will remain difficult
 Banks generally remain well capitalised, while
the HKMA will monitor their capital position
closely
 The HKMA has put in place contingency capital
facilities for local banks in case of need
33
BANKING SECTOR PERFORMANCE
Net interest margin of retail banks narrowed
2.1
%
Net interest margin of retail
banks (quarterly annualised)
2.0
1.9
1.8
1.75%
1.7
Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08
34
BANKING SECTOR PERFORMANCE
Loan quality was good but
signs of deterioration emerged
Overview of loan quality
Classified loan ratio
(Peak: Sep 1999)
100
80
60
RML delinquency
ratio (Peak: Apr 2001)
Ratio of overdue and
rescheduled loans
(Peak: Sep 1999)
40
20
0
Number of
negative equity RMLs
(Peak: Jun 2003)
Peak
Credit card
charge off ratio
(Peak: Q3 2002)
Latest
35
BANKING SECTOR PERFORMANCE
Local AIs remain well capitalised
16.0
%
Capital adequacy ratio of locally incorporated AIs
14.0
13.8%
12.0
10.0
8.0
6.0
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
36
BANKING SECTOR PERFORMANCE
Liquidity level remains high
55
%
Quarterly average liquidity ratio of retail banks
50
45
40
45.0%
35
30
25
20
Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
37
BANKING SECTOR PERFORMANCE
Hong-Kong-dollar loan-to-deposit ratio declined
HK$ billion
3,000
80%
70%
2,500
60%
50%
2,000
40%
30%
1,500
20%
10%
1,000
0%
Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
HK$ loans (LHS)
HK$ deposits (LHS)
HK$ loan-to-deposit ratio (RHS)
38
BANKING SECTOR PERFORMANCE
Total loans of retail banks declined
HK$ billion
2,500
2,400
2,300
2,200
2,100
2,000
1,900
1,800
1,700
1,600
1,500
Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Loans for use in HK
Trade finance
Loans for use outside HK
39
LENDING TO SMEs

The HKMA has continued to encourage AIs to be
supportive of their SME customers, and
reminded them of the need to follow the “Hong
Kong Approach to Corporate Difficulties”
(circular issued in November 2008)

Many AIs have reiterated their support for SMEs
with some establishing “SME lending funds” to
support the sector. The banking industry also
responded positively to the Government’s newly
introduced Special Loan Guarantee Scheme
40
LEHMAN-RELATED ISSUES COMPLAINT-HANDLING AND INVESTIGATIONS

Up to 22 January, 19,994 complaints have been received, of
which 19,601 cases have gone through preliminary
assessment

The HKMA opened investigations on 4,876 complaints

In 280 cases involving 15 banks adequate justifications were
found for referral to the SFC to determine whether there has
been a failure at the bank level

The HKMA will continue its investigations into individual
cases to establish whether there has been a failure by the
relevant individuals concerned

The HKMA is engaging additional contract staff to assist in
the investigation of complaints

The HKMA will work closely with the SFC in any further
investigations to expedite the process
41
REPORT ON COMPLAINTS ABOUT SALE OF
LEHMAN-RELATED INVESTMENT PRODUCTS

On 31 December 2008 the HKMA submitted a
report to the Financial Secretary on its
observations on lessons learned and issues
identified during the process of investigating
the complaints about the sale of Lehman-related
investment products

The HKMA will play an active role in assisting
the Government to review the present
regulatory framework for protection of retail
investors
42
REPORT ON COMPLAINTS ABOUT SALE OF
LEHMAN–RELATED INVESTMENT PRODUCTS

Letter issued to AIs on 9 January 2009 urging them to
study the report carefully, particularly
recommendations aimed at strengthening the existing
regulatory regime and investor protection framework

AIs engaged in the selling of securities and investment
products are required to implement some of the
recommendations seeking to strengthen the selling
process either immediately or within the first quarter

To formulate a plan to implement separation of deposit
and investment services by end of March for
discussion with the HKMA
43
REVIEW OF THE HKMA’S WORK
ON BANKING STABILITY
 The HKMA is considering the consultant’s
recommendations and the comments
received from the public consultation
 The HKMA aims to produce policy
responses to the Consultant’s
recommendations in the first half of 2009
44
SUPERVISORY POLICY INITIATIVES
•
Aim to implement recommendations of the Financial
Stability Forum, G20, Basel Committee on Banking
Supervision and other international bodies to address
lessons learned from the global financial crisis
•
Major policy initiatives in 2009 and beyond include:

enhancement of capital adequacy and disclosure
framework as well as supervisory oversight of capital
adequacy

revision of supervisory framework for liquidity risk

development of supervisory guidance to enhance AIs’ risk
management standards (e.g. management of firm-wide
risks, securitisation and off-balance sheet exposures,
counterparty credit risk, stress-testing, valuation etc.)
45
REVISED CODE OF BANKING PRACTICE
 Completed a comprehensive review of the
Code of Banking Practice in 2008
 The objectives of the review were to improve
the existing provisions of the Code and to
keep it up to date with recent developments
in the banking sector
 Revised Code became effective on 2 January
2009
46
MARKET INFRASTRUCTURE
Oversight of the clearing and settlement systems

All local designated systems remain in compliance
with the safety and efficiency requirements of the
Clearing and Settlement Systems Ordinance

Continued support to the Process Review
Committee in preparing the fourth Annual Report
to the Financial Secretary
47
DEPOSIT PROTECTION SCHEME
 The HKMA is assisting the Deposit
Protection Board in its review of the
coverage of the DPS. The Board is
expected to formulate
recommendations in Q1 2009
48
FINANCIAL INFRASTRUCTURE
49
FINANCIAL MARKET INFRASTRUCTURE

To develop Hong Kong into a regional payment and
settlement hub, enhancing its role and status as an
international financial centre

Strategy for developing market infrastructure
–
Maintain smooth and efficient operation of payment systems
–
Improve the functions and capabilities of payment and
securities settlement systems
• CMU enhancement in support of temporary measures to
provide liquidity assistance to banks
• Expedited e-IPO refund process
• Migration to SWIFTNet
50
FINANCIAL MARKET INFRASTRUCTURE
– Promote links with overseas systems and use of
Hong Kong’s financial infrastructure
• Payment-versus-payment link between Hong
Kong’s US dollar RTGS system and the
Indonesian Rupiah RTGS system
• RTGS links with Mainland China’s foreign
currency settlement systems
• Promotion of Hong Kong’s payment services and
role as a payment and settlement hub
• Increased turnover of RTGS systems
51
HONG KONG DOLLAR RTGS TURNOVER
Hong Kong dollar RTGS system
Turnover in HK$ bn
No. of transactions
900
24,000
800
Average daily turnover in value
22,000
20,000
700
Average daily turnover in volume
18,000
600
16,000
14,000
500
12,000
400
10,000
300
8,000
6,000
200
4,000
100
2,000
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
52
DEVELOPMENT OF ISLAMIC FINANCE
Promote market infrastructure
HKMA’s Four-part Strategy

Assist the Government in its tax review to provide a level playing field for
Islamic finance transactions.
Encourage product development


Launch of the second Islamic banking window in Hong Kong in November
2008
First Islamic syndicated loan facility arranged in Hong Kong in December 2008
Build international profile

Participation in an inaugural Hong Kong Islamic finance forum on 25
November 2008
Promote market awareness

A feature article in HKMA Dec 2008 Quarterly Bulletin to explain HKMA’s
current supervisory approach to Islamic finance in Hong Kong
53
HONG KONG AS AN
INTERNATIONAL
FNANCIAL CENTRE
54
RENMINBI BUSINESS
• In December 2008, the Central Government
announced a further expansion of renminbi
business in Hong Kong, allowing eligible
Mainland and Hong Kong enterprises to use
renminbi to settle trade transactions.
• The HKMA will work closely with the PBoC to
facilitate timely completion of technical
preparations for an early launch of the
arrangement.
55
INCREASING REGIONAL CO-OPERATION
• Monitoring of regional monetary and financial stability:
pivotal role in strengthened surveillance efforts of AsiaPacific central banks amid the global financial crisis
• Banking stability: chairing EMEAP Working Group on Banking
Supervision and organising a High-Level Meeting jointly with
the Financial Stability Institute of Bank for International
Settlements to exchange views on the role of banking sector
and banking supervision in financial stability
• Financial co-operation initiatives: Plenary and regional
meetings of Financial Stability Forum (FSF) were held in
December in Hong Kong to discuss efforts to contain the
global financial crisis and to build a stronger financial system,
FSF membership expansion, and the work underway in
fulfilling the G20 Action Plan
56
THE INVESTMENT ENVIRONMENT
AND
PERFORMANCE OF
THE EXCHANGE FUND
57
MARKETS IN 2008
• Exchange rates:
–
US dollar strengthened sharply in the second half of 2008
against the euro but weakened against the yen
• Equity markets:
–
Major markets experienced one of the worst slumps in history
–
Major indices dropped around 30-50%
• Interest rates:
–
Aggressive easing by major central banks
–
Capital seeking a safe haven flooded into sovereign bond
markets
–
Government bond yields reached historical lows in the fourth
quarter of 2008
58
INVESTMENT INCOME
I
2008
I
2007
2006
2005
2004
Full
year
Full
year
Full
year
Full
year *
Q4
Q3
Q2
Q1
Full
year
Gain/(Loss) on Hong Kong
equities^@
(77.9)
(21.0)
(24.8)
(2.1)
(30.0)
55.8
35.9
7.0
12.0
Gain/(Loss) on other
equities^
(73.2)
(30.0)
(17.8)
(3.0)
(22.4)
6.7
18.7
20.5
11.2
Exchange gain/(loss)
(12.4)
1.4
(25.4)
(0.6)
12.2
18.7
17.3
(19.5)
8.5
88.6
58.0
19.7
(14.7)
25.6
61.0
31.9
29.8
25.0
(74.9)
8.4
(48.3)
(20.4)
(14.6)
142.2
103.8
37.8
56.7
3.0
29.4
(23.5)
(18.3)
15.4
86.4
67.9
30.8
44.7
(HK$ billion)
Return from bonds#
Investment income/(loss)
(including HK equities)@
Investment income/(loss)
(excluding HK equities)
* Unaudited figures
^ Including dividends
# Including interest
@
Excluding valuation changes in Strategic Portfolio
59
CHANGES IN INVESTMENT INCOME,
PAYMENT TO TREASURY AND ACCUMULATED SURPLUS
I
2008
I
2007
Full year *
Q4
Q3
Q2
Q1
Full year
(74.9)
8.4
(48.3)
(20.4)
(14.6)
142.2
0.3
0.1
0.1
0.0
0.1
0.2
Interest and other expenses
(6.4)
(1.2)
(1.8)
(1.8)
(1.6)
(10.2)
Net investment income/(loss)
(81.0)
7.3
(50.0)
(22.2)
(16.1)
132.2
Payment to Treasury #
(46.4)
(11.5)
(11.3)
(11.8)
(11.8)
(27.6)
(8.9)
(1.2)
(1.2)
(1.0)
(5.5)
4.7
(136.3)
(5.4)
(62.5)
(35.0)
(33.4)
109.3
(HK$ billion)
Investment income/(loss)
Other income
Valuation change of Strategic Portfolio^
Increase/(Decrease) in EF
accumulated surplus
* Unaudited figures
#
The fixed rate of fee payment to Treasury for 2008 is 9.4% and 7% (w.e.f. 1 April 2007) for 2007.
^ Including dividends
60
HISTORICAL INVESTMENT INCOME
(HK$ billion)
Year
Full Year
Q4
Q3
Q2
Q1
2001
7.4
13.6
10.4
(2.0)
(14.6)
2002
47.0
26.3
(2.1)
26.5
(3.7)
2003
89.7
33.5
8.4
41.1
6.7
2004
56.7
33.0
14.1
(7.2)
16.8
2005
37.8
7.3
19.0
13.6
(2.1)
2006
103.8
36.0
37.1
12.5
18.2
2007*
142.2
33.4
61.8
26.3
20.7
2008*#
(74.9)
8.4
(48.3)
(20.4)
(14.6)
* Excluding valuation changes in the Strategic Portfolio.
# Unaudited figures
61
HISTORICAL CHANGE IN INVESTMENT INCOME,
PAYMENT TO TREASURY AND ACCUMULATED SURPLUS
(HK$ billion)
2008*
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Investment
income/(loss)
(74.9)
142.2
103.8
37.8
56.7
89.7
47.0
7.4
45.1
103.8
93.8
0.3
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
(6.4)
(10.2)
(10.5)
(7.6)
(4.8)
(5.6)
(7.0)
(10.5)
(11.0)
(10.0)
(16.0)
Net investment
income/(loss)
(81.0)
132.2
93.5
30.4
52.1
84.3
40.2
(2.9)
34.3
94.0
78.0
Payment to Treasury
(46.4)
(27.6)
(28.9)
(10.1)
(14.5)
(25.7)
(15.6)
(1.6)
(18.1)
(45.4)
(26.0)
(8.9)
4.7
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.9
(0.9)
N/A
N/A
N/A
N/A
N/A
(136.3)
109.3
64.6
20.3
38.5
57.7
24.6
(4.5)
16.2
48.6
52.0
N/A
N/A
N/A
(0.6)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(136.3)
109.3
64.6
19.7
38.5
57.7
24.6
(4.5)
16.2
48.6
52.0
Other income
Interest and other
expenses
Valuation change of
Strategic Portfolio^
Revaluation gain/(loss)
on premises
Carry to accumulated
surplus
Adjustment to accumulated surplus
Effect of implementation
of HKAS 39
Increase/(Decrease)
in EF accumulated
surplus
* Unaudited figures
^ Including dividends
62
EXCHANGE FUND ABRIDGED BALANCE SHEET
At
31 Dec 2008 *
At
31 Dec 2007
Change
190.4
132.9
57.5
1,150.8
922.9
227.9
Hong Kong equities
92.9
184.6
(91.7)
Other equities
86.1
146.0
(59.9)
Other assets
37.5
28.0
9.5
Total assets
1,557.7
======
1,414.4
======
143.3
=====
176.1
163.4
12.7
8.3
7.5
0.8
Balance of the banking system
158.0
10.6
147.4
Exchange Fund Bills and Notes
162.5
141.8
20.7
Fiscal Reserves Account
531.4
464.6
66.8
40.7
9.5
31.2
1,077.0
797.4
279.6
480.7
617.0
(136.3)
1,557.7
======
1,414.4
======
143.3
=====
(HK$ billion)
ASSETS
Deposits
Debt securities
LIABILITIES AND FUND EQUITY
Certificates of Indebtedness
Government-issued currency notes & coins in circulation
Other liabilities
Total liabilities
Accumulated surplus
Total liabilities and fund equity
* Unaudited figures
63
INVESTMENT RETURN
OF THE EXCHANGE FUND
16%
11.8%
12.1%
12%
10.8%
10.8%
10.2%
9.5%
8%
6.1%
6.1%
5.7%
5.1%
5.1%
4.8%
3.1%
4%
2.4%
1.5%
Compounded Annual
Hong Kong CPI-A
(1994-2008#)
2007
2006
2005
2004
2003
2002
2008 (unaudited)
-4%
2001
2000
1999
1998
1997
1996
1995
1994
0%
Compounded Annual
Investment Return
(1994-2008)
0.7%
-5.6%
-8%
# Hong Kong CPI-A at end-November 2008
64
EXCHANGE FUND PERFORMANCE AGAINST
INVESTMENT BENCHMARK
12%
10.8%
Investment Return of
Exchange Fund's Investment
10.2%
Benchmark
9.5%
10.6%
9.5%
8.9%
Investment Return of
Exchange Fund
8%
11.8%
5.5%
5.7% 5.7%
5.1%
3.9%
4.8%
3.8%
3.1%
4%
2.9%
0.7%
0.4%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
(unaudited)
-4%
-3.7%
-5.6%
-8%
65
ROBUST RISK MANAGEMENT
• Conservative asset allocation to meet the
Exchange Fund’s primary investment
objectives
– Majority in bonds and cash, minority in
equities including the passive holding of HK
equities
• Prudent credit risk control measures that
minimise the Exchange Fund’s exposure to
‘toxic’ assets and ailing financial institutions
66
PAYMENT TO TREASURY AGAINST ESTIMATE
HK$bn
50
46.4
Payment to Treasury
45.4
42.4
Treasury's estimate
40
31.6
28.9
30
26.0
26.7
27.6
25.7
26.0
22.2
18.2
18.1
20
15.6
13.8
12.5
14.5
12.1
14.1
12.3
10.1
10
1.6
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
(unaudited)
67