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IMF reaffirms support for Linked Exchange Rate system and HK policies safeguarding economic, financial stability

     In its Staff Report on Hong Kong released today (January 18) to elaborate on the assessment in the Preliminary Conclusions released on December 12, 2012, the International Monetary Fund (IMF) reiterated that the Linked Exchange Rate system remains the best arrangement for Hong Kong and commended the Government's pre-emptive efforts to safeguard financial stability.

     The IMF Staff Mission to Hong Kong considered that the arguments for maintaining the Linked Exchange Rate system are compelling, given that it has generated substantial benefits in terms of monetary and financial stability, built up a stock of credibility over the decades, and kept the real exchange rate of the Hong Kong dollar broadly in line with fundamentals. The requirements for sustaining the current system, including a flexible economy, a track record of fiscal discipline and robust financial sector regulation and supervision, are all in place. The Linked Exchange Rate system is superior to other exchange rate regime options in the case of Hong Kong.  

     The Mission noted that the economy has been negatively affected by the weak external environment but the domestic demand has been resilient, buoyed by a healthy labour market and supportive fiscal policy. With the improved global economy, the Mission forecast that Hong Kong's economy will recover to around 3 per cent in 2013 while consumer price inflation would average 3.5 per cent.   

     With the active use of discretionary policies by the Government, the Mission found that Hong Kong's fiscal policy has been effective in reducing output volatility. While a fiscal policy should be deployed to provide stimuli in the event of an external shock, there is a need to prevent an erosion of fiscal discipline and it would be critical that a fiscal stimulus is withdrawn as the economy recovers.      

     The Mission cautioned that housing prices have doubled from their trough of 2008, raising concerns about affordability, demand-supply imbalances and the potential for a sharp price correction. In this regard, the Mission praised the fact that appropriate macro-prudential measures have been taken to safeguard the stability of the banking system. Other measures, such as fiscal measures, have also been used to address broader concerns about demand-supply imbalances and affordability. The Mission considered that these measures should continue to be adjusted in line with evolving risks.     

     Hong Kong's banking system, in the Mission's view, remains well-capitalised and is therefore in a good position to meet the Basel III standards. Pre-emptive measures have been taken to contain risks arising from real estate lending and growing banking exposure to the Mainland. Looking ahead, the Mission considered that the ongoing opening of the Mainland's capital account and expanded international use of Renminbi should provide further opportunities for Hong Kong to strengthen its position as an international financial centre.       

     The Financial Secretary, Mr John C Tsang, welcomed the Mission's endorsement of Hong Kong's economic and financial policies. "As a small, open economy and an international financial centre, Hong Kong is susceptible to external shocks and our policies are adopted with that in mind. We are firmly committed to the Linked Exchange Rate system, which has helped maintain Hong Kong's monetary and financial stability during cyclical changes. Against the immense uncertainties in the global environment, we will remain vigilant and deploy necessary measures to address potential risks to economic and financial stability."

     The Chief Executive of the Hong Kong Monetary Authority, Mr Norman Chan, said, "I welcome the Mission's continued support for the Linked Exchange Rate system. I am also glad to note the Mission's endorsement of our counter-cyclical prudential measures on mortgage lending, which have strengthened the resilience of the banking system to cope with possible shocks in the future."

     The Mission visited Hong Kong from November 7 to 16, 2012 to conduct the 2012 IMF Article IV consultation discussions.  

     The IMF's Public Information Notice is attached at Annex. The Staff Report can be obtained from the website of the Financial Services and the Treasury Bureau ( or the IMF website (

Ends/Friday, January 18, 2013
Issued at HKT 14:37


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