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IMF supports Government's policies to enhance competitiveness and the linked exchange rate

    An International Monetary Fund (IMF) staff mission to Hong Kong welcomes the Government's policies to enhance competitiveness and maintains its long-standing support for the authorities' commitment to the Linked Exchange Rate system (LERS).

     The mission expects the Hong Kong economy to grow by 5.5%-6% this year.  Skilful macroeconomic management, the underlying flexibility of Hong Kong's markets, and the continued integration with the Mainland have contributed significantly to this overall robust economic situation.  Growth is expected to moderate to below 5% in 2008 and average around 5% over the medium term.  

     The assessment was made by the IMF mission in their concluding statement published today (November 20), following the completion of the 2007 Article IV Consultation, which involves an annual review of Hong Kong's exchange rate, fiscal and structural policies.  

     The mission expects that the outturn for this fiscal year will be stronger than the original estimates.  The fiscal stance appears appropriate, and the new initiatives in the Policy Address, including a refocusing on infrastructure spending, are important to enhance competitiveness and support medium-term growth.  Nonetheless, Hong Kong continues to face the challenges of high revenue volatility and rising ageing-related spending pressures over the medium term.  Broadening the tax base remains important to further limit revenue volatility, and the mission looks forward to the upcoming consultation on healthcare reforms to address the rise in healthcare costs in the future as the population ages.

     The mission welcomes the initiatives taken by the Hong Kong and Mainland authorities to deepen financial integration, and considers that they will clearly benefit both economies.  Progress on the implementation of the financial services action agenda, which was developed by the economic summit on "China's 11th five year plan and the development of Hong Kong", is well underway.  To maintain Hong Kong's competitiveness as an international financial centre, the mission also notes the authorities' efforts to attract more listings of equities from overseas jurisdictions and facilitate the expansion of the market into new financial product areas.

     The mission recognises that the competitiveness of Hong Kong as a financial centre also depends on continued enhancement of its strong reputation for supervision and governance.  In this regard, further regulatory enhancements have taken place, such as the smooth implementation of Basel II and the strengthening of cross-border regulatory co-operation.  The increased co-ordination among financial regulators should also help to detect cross-market risks, which require continued close monitoring given the rapid rise in valuation and turnover of equities and related instruments and margin financing activities.

     The Financial Secretary, Mr John C Tsang, said, "We welcome the mission's positive assessment of the Hong Kong economy and the Government's policy framework in enhancing the competitiveness of Hong Kong.   We will continue our efforts to further strengthen our status as an international financial centre."

      The mission maintains its support for the Government's commitment to the LERS, and it also finds the real value of the Hong Kong dollar to be in line with economic fundamentals.  It notes that a confluence of events in the past month or so including cuts in US dollar interest rates, bunching of over-subscribed initial public offerings and strong demand for Mainland-related equity have resulted in the market operations by the Hong Kong Monetary Authority (HKMA) under the LERS.  The injection of liquidity has effectively normalised the relationship between the Hong Kong dollar exchange rate and interest rates in the interbank market, and underscores the general resilience of the LERS with the Three Refinements introduced in May 2005.

     The chief executive of the HKMA, Mr Joseph Yam, said, "We welcome the mission's continued support of the Linked Exchange Rate system and its positive assessment of the effective functioning of the system despite increased fund flows and market volatility, which underscores the general resilience of the system with the Three Refinements introduced in 2005."

     The mission stressed that market flexibility remains key to the success of the LERS and Hong Kong's competitiveness.  It reiterates its support for the planned general Competition Law, which will help to strengthen market flexibility.  The mission also suggests that the Government should carefully balance labour-market flexibility and wage protection.  Since wage flexibility is a key means by which Hong Kong adjusts to external shocks, the mission suggests that the Government  considers alternative measures such as expanding in-work benefits apart from mandatory minimum wage.

     The IMF mission visited Hong Kong from October 29 to November 7 this year for the 2007 Article IV Consultation discussions with the Hong Kong Special Administrative Region.  It held discussions with Government officials and private sector representatives.

     The mission's concluding statement from the consultation is attached as annex.

Ends/Tuesday, November 20, 2007
Issued at HKT 15:54


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