(Approved for Issue by the Exchange Fund Advisory Committee on
29 November 2001)
Currency Board Operations for the Period 27
September - 19 October 2001
The Sub-Committee noted that, despite the unstable world
situation, the Hong Kong dollar exchange and money markets had
remained generally stable throughout the reporting period. Hong
Kong dollar interbank interest rates had eased following the 50 bp
cut in the US Fed Funds Target Rate on 2 October, and reflecting
market expectations of further US rate cuts. They had stayed below
their US dollar counterparts for most of the period, although
towards the middle of October, they had risen slightly above US
rates, following market reports and concerns that a change to Hong
Kong's monetary system was being contemplated, and worries about
the impact of the crisis in Argentina. Members noted that market
sentiment on these issues had also been reflected in the Hong Kong
dollar 12-month forward points, which had moved sharply higher in
mid-October, registering a premium against the US dollar.
2. The Sub-Committee noted that, in accordance with Currency
Board principles, changes in the monetary base continued to be
fully matched by changes in foreign reserves.
3. The report on Currency Board operations for the period under
review is at Annex A.
Monitoring of Risks and Vulnerabilities
4. The Sub-Committee noted the regular information paper on
external and internal risks facing Hong Kong. Members noted that
there was no evidence that the economic downturn in the US was
moderating, moreover, the slowdown in economic activity in the euro
zone was now clearer. The repricing of risks and the inevitable
boost in insurance and security-related expenditure by both the
public and private sectors were likely to have long-term
macroeconomic effects. Members also noted the deteriorating
situation in Japan. Against the backdrop of worsening economic
conditions worldwide, Argentina's public debt problem had developed
into a major financial crisis, the impact of which had created some
slight volatility in the Hong Kong dollar 12-month forward market
around the middle of October.
5. With regard to Hong Kong's economy, the Sub-Committee noted
that the October consensus forecast for 2001 GDP growth had been
revised downwards to slightly below zero, and that unemployment was
increasing. They observed that this deterioration was a reflection
of the world downturn, which was having a particularly severe
impact on Asia, and was not the result of risks or vulnerabilities
specific to Hong Kong.
Sources of Unemployment
6. The Sub-Committee noted an information paper on the main
determinants of unemployment in Hong Kong with reference to the two
components of the unemployment rate: the natural rate and the
cyclical component. The analysis suggested that the natural
unemployment rate had edged up from around 2-3% in the early 1990s
to around 3-4% in more recent years, reflecting structural changes
in the economy. This rate was still nevertheless low by
international standards, and it suggested that Hong Kong's labour
market had been highly flexible in adapting to changing conditions.
The paper also observed that most of the variations in the
unemployment rate in recent years were attributable to cyclical
conditions.
Measures of Core Inflation in Hong Kong
7. The Sub-Committee noted an information paper examining
different approaches to measuring core inflation in Hong Kong. The
paper observed that in many economies alternative indicators to the
"headline" statistic based on the overall Consumer Price Index were
found to provide superior measures of underlying inflation. By
contrast, the evidence suggested that in Hong Kong the headline
inflation rate and various core inflation measures showed
strikingly similar trends, and did not differ significantly in
terms of volatility. Thus, the CCPI constituted a very good measure
of inflation in Hong Kong.
Inflation Targeting in
Asia
8. The Sub-Committee noted an information paper reporting on
inflation targeting policies in various Asian economies.
Hong Kong's External Claims and Liabilities
vis-a-vis Mainland China
9. The Sub-Committee noted an information paper on the
considerable increase in 2000 in Hong Kong's banks' net external
liabilities vis-a-vis the Mainland. The main contributory factors
to this increase included fund-raising activities of H-share
enterprises, surplus foreign currency liquidity in the Mainland's
banking system, changes in the Mainland's foreign exchange policy,
and foreign banks' cautious lending attitude towards the Mainland.
Although still small as a proportion of total Hong Kong funding,
the significant rise in Hong Kong dollar net liabilities vis-a-vis
the Mainland accounted for nearly two thirds of the overall
increase in Hong Kong dollar funding in Hong Kong's banking system.
The increase may also have contributed to a softening of Hong Kong
dollar interest rates.
For further enquiries, please contact:
Jasmin Fung, Manager (Press), at 2878 8246
Hong Kong Monetary Authority
29 November 2001
