IMF commends Hong Kong's macroeconomic policy framework
*******************************************************

    In its Staff Report on Hong Kong released today (January 9), the International Monetary Fund (IMF) is highly supportive of the Government's policy framework in fostering economic growth and maintaining the competitiveness of Hong Kong as an international financial centre.

     The IMF projects the real GDP of Hong Kong to have grown by 6.8% in 2006, broadly in line with the latest Government forecast. Inflation is expected to have been around 2% in 2006. Skilful macroeconomic management, flexible markets and strengthening of financial market infrastructure along with a strong external environment were key factors in the turnaround of the economy over the past three years, according to the IMF.

     Expecting a modest out-performance of the target surplus of 0.5% of GDP in the financial year 2006-07, the IMF believes that there is little current risk to fiscal sustainability. Over the medium-term, however, the budget is likely to face rising age-related spending pressures, and continued revenue volatility will have to be managed.      

     The IMF welcomes the Government's efforts to make use of the space provided by the current favourable economic environment to focus on reforms to the healthcare system and to initiate public consultations on ways to broaden the tax base. The IMF notes the strong public opinion on the introduction of a goods and services tax, and that the Government will continue to consult the public on other options to broaden the tax base. The IMF also suggests that other measures to reduce revenue volatility could be considered, such as stabilising investment income through arrangements with the Exchange Fund.

     The IMF commends the Government for appropriately focusing on safeguarding Hong Kong's traditional strengths íV flexible markets and strong institutions íV which have underlined our competitiveness. It supports our plan to begin a public consultation on the introduction of a general competition law. It also recommends that the Government should maintain a balance between market flexibility and adequate worker protection when considering labour market regulation.

     On market infrastructure and supervision, the IMF notes our good progress in cross-border cooperation and preparations for Basel II, the introduction of the deposit protection scheme, proactive assessment of potential sources of stress in equity markets, strengthening of corporate governance, and plans to broaden anti-money-laundering and combating the financing of terrorism financing enforcement.  

     Welcoming the positive assessment of the Hong Kong economy, the Financial Secretary, Mr Henry Tang, said, "We are glad to note the IMF's encouraging remarks on the macroeconomic policies of the Government. We will strive to further strengthen the stability and competitiveness of Hong Kong to prepare us for any future challenges."

     As in the past, the IMF reiterates its support for the authorities' commitment to the linked exchange rate system. The three refinements introduced in May 2005 have made the system more resilient to shocks and potentially greater renminbi flexibility.

     The IMF believes that financial integration with the Mainland will be a major driver of Hong Kong's economic prospects. The IMF notes that the Government is making commendable efforts to coordinate with the Mainland authorities on ways of using Hong Kong's advanced financial infrastructure to improve the Mainland's financial intermediation, thereby benefiting both economies. The recent proposal to have Mainland financial institutions issuing renminbi denominated bonds in Hong Kong is a good example of such coordination.

     The Chief Executive of the Hong Kong Monetary Authority, Mr Joseph Yam, said, "I am glad that the IMF shares the view that the Hong Kong financial platform could be of greater use to the Mainland, and in that connection, we have been coordinating with the Mainland authorities on expanding the Qualified Domestic Institutional Investor (QDII) scheme and the renminbi business in Hong Kong. It should be noted that our country is unique in having two financial systems and that their relationship should be a complementary, cooperative and interactive one for achieving bigger, better and more efficient markets in the Mainland and Hong Kong."

     The IMF mission visited Hong Kong between October 16 to 24, 2006 to conduct the Article IV Consultation.  

     The IMF's Public Information Notice is attached at the annex. The Staff Report can be obtained from the website of the Financial Services and the Treasury Bureau (www.fstb.gov.hk) or the IMF website (www.imf.org).

Ends/Tuesday, January 9, 2007
Issued at HKT 12:16

NNNN