The HKMA had another busy and, I believe, successful and productive year in 2006: the Hong Kong dollar exchange rate remained stable despite record fund flows, the banking sector remained strong, the Exchange Fund earned a respectable investment return, and some real progress was made in mapping out a strategy for Hong Kong’s world-class financial infrastructure to contribute to the further development of China’s economy.

Hong Kong’s economy grew by 6.8% in 2006, lower than the 7.5% in 2005 but still above trend and very respectable. Monetary conditions eased, reflecting high levels of liquidity in the banking sector, but were broadly neutral. Unemployment declined to its lowest level in six years, while inflation picked up slightly but not yet to levels that would cause concern. Growth in the economy was mainly driven by domestic demand, particularly consumer spending and investment in business equipment. At the same time, exports of goods and services were robust with increases in trade with the Mainland and solid demand from our other major trading partners.

Asset markets performed well: the residential property market was stable after a strong rise in 2005, with little sign of overheating; and the stock market staged a strong rally in the second half of the year, with the Hang Seng Index increasing by 34% to reach a record high of 20,001 on 28 December. This rise was supported by Hong Kong’s strong economic performance, the pause in monetary tightening in the US, and large inflows of funds related to initial public offerings, mostly of Mainland stocks.