HONG KONG MONETARY AUTHORITY Annual Report 1996
HONG KONG MONETARY AUTHORITY
INFLATION MODERATED
Consumer price inflation, as measured by CPI(A), rose by 6% in 1996, the lowest since 1987. This was attributable to a number of reasons. First, prices of tradable goods were largely contained by a stronger Hong Kong dollar and lower inflation in Hong Kong's major trading partners, particularly China. Import prices fell by 1% in 1996. Second, moderate consumer spending also alleviated inflationary pressure on tradable goods. Third, the easing of inflationary pressure from wages and rents kept prices of services in check.
Nevertheless, non-tradable items continued to have a higher inflation than the overall rate (Chart 4). The difference in the inflation rates of the tradable (mostly goods) and non- tradable (mostly services) was due to firstly, slower productivity growth in services as opposed to the manufacturing sector, and secondly, the sharp increase in demand for Hong Kong's services due to the economic boom in China.
ASSET PRICES UP
In sharp contrast to the more moderate rise in consumer prices, asset prices rose more quickly in 1996. For 1996 as a whole, equity prices rose substantially by 34%, supported by higher earnings forecasts for local corporations as well as the buoyant equity market in the US. The Hang Seng Index reached its record high of 13,531 in late November 1996 before closing the year at 13,451. The strong increase was supported by the fact that the P/E ratio of 17 times in December 1996 was still far below record highs of 44 in May 1973, 22 in September 1987 and 23 in December 1993. The Hang Seng Index P/E ratio remains lower than those of other regional markets, despite Hong Kong having broadly similar economic fundamentals.
MONETARY SITUATION
A STABLE HONG KONG DOLLAR
Exchange rate stability under the linked exchange rate system is the primary monetary policy objective of the HKMA. HKMA's capability in delivering this objective has been underpinned by a robust monetary management framework and strong foreign currency reserves.
The exchange rate of the Hong Kong dollar remained stable against the US dollar during 1996, moving within a narrow range of 7.731-7.741 for most of the year. Following the appreciation of the US dollar against other major currencies in the international currency markets, the overall exchange value of the Hong Kong dollar, as measured by the trade weighted effective exchange rate index (EERI), rose from 122.7 at the beginning of 1996 to 125.3 at the end of the year.