The IMF Article IV Consultation has once again expressed clear support for Hong Kong's Linked Exchange Rate system.
In the middle of last month a meeting of the Executive Board of the International Monetary Fund (IMF) took place to discuss the appraisal of Hong Kong by the staff of the IMF under the 2003 Article IV Consultation. Readers may have noticed the Concluding Statement of the 2003 Article IV Consultation staff report published back in February and the Summing Up of the Executive Board discussion published at the end of last month after the meeting I referred to.
The IMF Article IV Consultation is an important annual exercise for Hong Kong, very much like an annual medical check-up. The exercise this year has been particularly important because Hong Kong is under considerable stress. The Summing Up of the Executive Board discussion shows a deep appreciation by the IMF of the policy challenges in the period ahead for Hong Kong - including the short-term difficulties posed by the outbreak of SARS and the medium-term challenges associated with growing integration with the Mainland of China. It also shows strong support for the manner in which Hong Kong is tackling these challenges.
The part that I am particularly pleased to read is the clear support for Hong Kong's commitment to the Linked Exchange Rate system. There is also the emphasis in this connection that "the long-term sustainability of the system will depend crucially on prudent fiscal policies, maintenance of a sound financial system, and enhanced flexibility of goods and factor markets". This echoes what I have said in the past. As Monetary Authority I have the responsibility, among other things, to deliver the monetary policy objective of exchange rate stability; and so I have a duty to sound warnings when risks against the achievement of this clear and important objective have been identified. I am glad to have this confirmation from the IMF.
Readers may have also noticed a reference to a Financial System Stability Assessment (FSSA). This is a very thorough, ad hoc exercise conducted also by the IMF in the fourth quarter of last year and January this year, focussing on the soundness of the financial sector of Hong Kong rather than on macroeconomic policies, which are covered by annual Article IV Consultations. I am also glad that, in the FSSA, the IMF is of the opinion that "Hong Kong SAR's financial system is resilient, fundamentally sound, and supported by a strong financial stability framework". Such assessments do not come easily from the IMF, particularly in view of the turbulent period of the past ten years in the global financial system, which has led to much more stringent international standards on such financial stability issues as market structure and regulation. Hong Kong specifically has also been through very rough times in the past decade, including the debilitating financial crisis of 1997-98, the bursting of the property bubble, which has involved a fall in property prices exceeding 60% from the peak, and persistent general deflation. And still, in the opinion of the IMF, "the banking system is well capitalised and profitable".
Yes, we have put in a lot of effort in the past to strengthen the monetary and financial systems of Hong Kong. But we must not be complacent. There are areas in which improvements are still called for, particularly in our financial system, notwithstanding its overall robustness. Indeed, some of these have been under active consideration on our own initiative for some time now. In respect of the banking system, for which the HKMA has responsibility, preparations are well advanced for the introduction of a deposit protection scheme and the better use of commercial and consumer credit information. There has also been much progress on reform in the securities sector.
The robustness of Hong Kong's monetary and financial systems is most important as we tackle the many difficult problems that Hong Kong faces. We in the HKMA shall do our best to provide a stable monetary and banking environment to facilitate the resolution of these problems. But the community must also realise that success or otherwise in the resolution of these problems will in turn have an impact on monetary and financial stability, and that we simply cannot allow this bulwark that is so essential to the wellbeing of Hong Kong to be corroded in any way. We will continue to be frank and, without causing panic, transparent in our assessment of the risks as we see them.
Joseph Yam
5 June 2003
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