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IMF raises forecast for Hong Kong's economic growth and
supports Linked Exchange Rate system

     An International Monetary Fund (IMF) Staff Mission to Hong Kong raised its forecast for Hong Kong's economic growth and maintained its long-standing support for the Linked Exchange Rate System (LERS).

     With the Government's prompt policy action in response to the global financial crisis, the IMF sees the Hong Kong economy as now back on a robust growth trajectory, with the key sources of demand firing on all cylinders.  The IMF Mission projects that Hong Kong's economy will expand by 6.75% in 2010 before moderating to 5-5.5% in 2011.  

     The assessment was made in the Preliminary Conclusions of the IMF Mission published today (November 18), following the 2010 Article IV consultation discussions.  

     Noting Hong Kong's strong economic recovery, an improving labour market and very loose monetary conditions, the IMF Mission expects a continuation, and perhaps acceleration, of the credit-asset price cycle.  The IMF Mission considers it essential to guarantee financial stability in the event the cycle shifts into reverse.  In this regard, the IMF Mission sees Hong Kong remaining in a strong position.  The financial system has been prudently managed and is well supervised and regulated.  As a result, Hong Kong's banks have significant capital and liquidity buffers, and generally maintain robust internal risk management systems which help insulate the financial system from the risk of downturn.

     The IMF Mission considers that the Government's graduated response to property price inflation is essential and should continue.  It also considers that the recent decision to supply more land and temporarily remove real estate from the investment asset class under the Capital Investment Entrant Scheme to be right and appropriate.  The IMF Mission calls for regulators to continue to ensure that underwriting standards are rigorously complied with.  This would be greatly facilitated by expanding the credit reference agency's current information base to include data on all individuals' mortgage loans.  

     The IMF Mission commends Hong Kong's fiscal policy for rightly providing support to the economy amid the global financial crisis.  In view of the positive growth prospects, the IMF Mission suggests the Government should discontinue temporary support measures in the 2011-12 Budget.  The expansion of infrastructure spending should, however, continue as planned given that they are an integral part of Hong Kong's strategy to increase its integration with the Mainland.  The overall fiscal position should move to adopt a countercyclical policy stance.  

     The Financial Secretary, Mr John C Tsang, welcomed the IMF Mission's positive economic outlook for Hong Kong.  "The continued broad-based recovery of the economy demonstrates that Hong Kong has weathered the global financial storm well.  Nonetheless, we will remain vigilant and continue to deal with the challenges created by the exceptionally accommodative monetary policies in the developed economies," he said.

     The IMF Mission maintains its support of the LERS, which has proven to be a robust anchor of Hong Kong's monetary and financial stability, even in very difficult circumstances.  The IMF Mission also continues to find the current level of the Hong Kong dollar to be broadly in line with economic fundamentals.  

     The Chief Executive of the Hong Kong Monetary Authority, Mr Norman Chan, said, "We are grateful to the IMF Mission for its continued support of the LERS.  We are also pleased with the Mission's reconfirmation of the robustness of Hong Kong's banking system.  Moreover, we are fully aware of the risks of an acceleration of the credit-fueled asset cycle.  We will monitor developments closely and introduce appropriate and timely prudential supervisory measures to ensure banking stability."

     The IMF Mission considers that Hong Kong's unique position as an international financial centre, with strong links to Mainland China, provides significant potential for growth and development.  Specifically, the IMF Mission suggests that Hong Kong should seek opportunities to further develop offshore renminbi business in Hong Kong.  These efforts should focus on increasing the use of the renminbi as a settlement currency for trade and current account transactions and expanding the range of investment vehicles into which offshore renminbi can be invested.    

     The IMF Mission visited Hong Kong from October 18 to 28 this year for the 2010 Article IV consultation with the Hong Kong Special Administrative Region.  It held discussions with government officials and private sector representatives.

     The Preliminary Conclusions of the IMF Mission are attached at annex.  The full report of the Article IV consultation will be discussed by the IMF Executive Board in late November.

Ends/Thursday, November 18, 2010
Issued at HKT 11:37


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