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Record of Discussion of the Meeting of the Exchange Fund Advisory Committee
(Approved for Issue by the Report on Currency Board Operations (6 August – 21 August 2008)
The Sub-Committee noted that the Hong Kong dollar exchange rate against the US dollar had remained broadly stable and the currency market orderly during the reporting period despite considerable volatility in the financial markets globally and in Hong Kong. Interbank interest rates had decreased and the negative spreads of the yields of Exchange Fund paper against US dollar interest rates had widened, particularly for the ten and 15-year tenors. The Monetary Base had decreased slightly from HK$326.39 billion to HK$324.94 billion. 2. The Sub-Committee also noted a continuing increase in the loan-to-deposit ratio in the banking sector, which might have contributed to the gradual increase in interbank rates since May. Members felt that the position was complex and warranted further monitoring. 3. The Sub-Committee noted that, in accordance with Currency Board Principles, changes in the Monetary Base had been fully matched by corresponding changes in foreign reserves. 4. Given the short period between the last Report and the date of the meeting, Members agreed that an extended Report, covering events up to mid September should be prepared ahead of the next EFAC meeting. A report on Currency Board operations for the period from 6 August to 19 September 2008 is at Annex A.
Monitoring of Risks and Vulnerabilities 5. The Sub-Committee noted that international financial markets had remained jittery with the decline in oil prices bringing only temporary relief to equity markets and being offset by concerns about Fannie Mae and Freddie Mac. The US dollar had rebounded strongly and US treasuries had rallied. Growth had weakened in the major non-US economies with the Japanese economy contracting by 2.4% and the euro area by 0.8% in the second quarter. 6. Major central banks had kept interest rates unchanged since they faced risks both to growth and of inflation. Declining oil prices were likely to constrain the acceleration of inflation, although uncertainty remained high.
7. In Mainland China the economy had shown signs of
deceleration as external demand slowed and high energy and
commodity prices had pushed up the costs of intermediate
inputs. The renminbi had depreciated against the US dollar
since mid-July. Economic growth in Hong Kong had turned
negative in the second quarter, slowing to 4.2% year on year and
-1.4% quarter on quarter, while inflation had continued to
rise. The negative outlook in Japan and Europe was likely to
constrain export growth but strong corporate and household
balance sheets were expected to support consumer and business
spending in Hong Kong. What Drives Hong Kong Dollar Swap Spreads: Credit or Liquidity8. The Sub-Committee noted a paper analysing the determinants of Hong Kong-dollar swap spreads, which are widely interpreted by the market as a an effective proxy for banking-sector liquidity. The study concluded that liquidity had been more important in determining swap spreads than credit concerns in the period from 27 September 2007 (the onset of the sub-prime crisis) to 30 April 2008.
Long-term and Short-term Determinants of Property Prices in Hong Kong
9. The Sub-Committee noted a study of the determinants of
property prices in Hong Kong. The study suggested that the
long-run equilibrium real property price is determined by real
per capita income, real interest rates, land supply and the
residential investment deflator. In the short run, property
prices are also affected by equity prices.
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Hong Kong Monetary Authority
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