HONG KONG MONETARY AUTHORITY Briefing to the Legislative Council Panel on Financial Affairs 1 February 2016 DISCUSSION TOPICS Updates on – Financial and Economic Environment – Currency Stability – Banking Stability – Financial Infrastructure – Hong Kong as an International Financial Centre – Investment Environment and Performance of the Exchange Fund – Hong Kong Mortgage Corporation 2 FINANCIAL AND ECONOMIC ENVIRONMENT 3 GLOBAL ECONOMIC GROWTH FORECASTS Real GDP Growth (% year-on-year) 2014 2015 Estimates 2016 Forecasts US 2.4 2.4 2.4 Euro area 0.9 1.5 1.7 Japan -0.03 0.6 1.2 Asia (ex-Japan) 6.2 5.8 5.7 Mainland China 7.3 6.9 6.5 Hong Kong 2.5 2.4 2.0 Sources: January Consensus Forecasts and Official Statistics 4 REAL GDP GROWTH IN MAJOR COUNTRIES % qoq, annualised % qoq, annualised 12 12 8 8 US 4 4 0 0 -4 -4 Euro area -8 -8 Japan -12 -12 -16 -16 -20 -20 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg 5 HEADLINE INFLATION IN MAJOR COUNTRIES % yoy % yoy 6 6 5 5 4 US Japan 4 3 3 2 2 1 1 0 0 -1 -1 -2 Euro area -2 -3 -3 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: Bloomberg and CEIC 6 PURCHASING MANAGERS’ INDEX IN MAJOR ECONOMIES 65 Index Index 65 60 US ISM composite* 60 55 55 50 50 45 45 40 Euro area PMI composite 40 35 35 30 30 Japan PMI 25 25 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 *Weighted average of the ISM manufacturing and non-manufacturing indices Sources: Bloomberg and CEIC 7 NOMINAL EFFECTIVE EXCHANGE RATE INDEX OF MAJOR CURRENCIES Source: CEIC 8 US: CONSUMPTION GROWTH & BUSINESS INVESTMENT ACTIVITY % 3m-on-3m, annualised % 3m-on-3m, annualised 8 50 Real personal consumption expenditure (LHS) 6 40 30 4 20 2 10 0 0 -2 -10 -20 -4 -30 -6 Non-defense capital goods shipments (RHS) -40 -8 -50 2001 2003 2005 2007 2009 2011 2013 2015 Source: CEIC 9 US: LABOUR MARKET SITUATION %% 12 57 Employment-to-population ratio (Inverted, RHS) 58 10 59 8 60 61 6 62 Unemployment rate (LHS) 63 4 64 2 65 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: CEIC 10 US: LABOUR FORCE PARTICIPATION 68 % 67 Labour force participation rate 66 65 64 63 62 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: CEIC 11 US: HOUSE PRICES Index (Jan 2000=100) 220 Case-Shiller 20-city home price index 200 180 160 140 FHFA home price index 120 100 2000 2002 2004 2006 2008 2010 2012 2014 Sources: Standard & Poor’s and CEIC 12 US: HOME SALES Millions, annualized Millions, annualized 8 1.4 7 1.2 6 Existing home sales (LHS) 1.0 5 0.8 4 0.6 3 0.4 2 1 New home sales (RHS) 0.2 0 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: CEIC 13 US: FEDERAL GOVERNMENT DEBT US federal debt held by the public USD, trillions % of GDP 25 Official 100 Projections 90 20 80 As percentage of GDP (RHS) 70 15 60 50 10 40 30 5 20 In USD, trillions (LHS) 10 0 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Source: Congressional Budget Office 14 EURO AREA: SOVEREIGN BOND YIELDS 10-year sovereign bond yield 40 % 8 % 35 7 30 6 Spain Greece 25 5 20 4 Italy 15 3 France 10 2 5 Portugal 1 Germany Ireland 0 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 Note: 10-year Irish sovereign bond yield data is not available between 12 Oct 2011 and 14 Mar 2013 Source: Bloomberg 15 EURO AREA: UNEMPLOYMENT RATE % % 30 30 25 Youth unemployment rate 25 20 20 15 15 10 10 5 Total unemployment rate 5 0 0 2000 2002 2004 2006 2008 2010 2012 2014 Source: Bloomberg 16 EURO AREA: OVERALL INDEBTEDNESS Q4/2009 Latest (Q2/2015) FR IT ES Government PT GR IE FR IT ES Financial PT institutions GR IE FR IT Corporates and ES PT households GR IE 0 100 200 300 400 500 600 700 800 900 1000 % of GDP Note: FR – France, IT – Italy, ES – Spain, PT – Portugal, GR – Greece, IE – Ireland Source: European Central Bank 17 JAPAN: FINANCIAL MARKETS Index % 1,800 1.3 1,600 TOPIX 1.1 Japanese 10-year government bond yield 1,400 0.9 1,200 0.7 1,000 0.5 800 0.3 600 0.1 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Source: Bloomberg 18 JAPAN: PUBLIC DEBT % of GDP 300 Public debt 250 200 150 100 1999 2001 2003 2005 2007 2009 2011 2013 2015 Sources: Bank of Japan and CEIC 19 MAINLAND CHINA: REAL GDP GROWTH Source: CEIC 20 MAINLAND CHINA: RETAIL SALES Note: January and February figures are the average growth rate for the first two months of the year Sources: WIND and HKMA staff estimates 21 MAINLAND CHINA: FIXED ASSET INVESTMENT Sources: CEIC and HKMA staff estimates 22 MAINLAND CHINA: IMPORT AND EXPORT GROWTH Sources: CEIC and HKMA staff estimates 23 MAINLAND CHINA: PURCHASING MANAGERS’ INDEX Source: CEIC 24 MAINLAND CHINA: INFLATION Source: CEIC 25 MAINLAND CHINA: MONEY AND LOAN GROWTH Source: CEIC 26 MAINLAND CHINA: AGGREGATE FINANCING FLOW Source: CEIC 27 MAINLAND CHINA: PROPERTY PRICE AND TRANSACTION VOLUME Sources: CEIC, WIND and HKMA staff estimates 28 MAINLAND CHINA: HOUSING PRICE CHANGES IN MAJOR CITIES Sources: CEIC, WIND and HKMA staff estimates 29 HONG KONG: REAL GDP GROWTH % yoy % yoy 16 16 Real GDP growth 12 12 Contribution by 8 8 net exports 4 4 Contribution by fixed investment 0 0 and changes in inventory -4 -4 Contribution by government consumption -8 -8 Contribution by -12 -12 private consumption | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 (Q3) Source: C&SD 30 HONG KONG: ECONOMIC ACTIVITY % yoy % yoy 40 40 30 Export volume 30 Retail sales volume 20 20 10 10 0 0 -10 -10 -20 -20 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 (Nov) Source: C&SD 31 HONG KONG: BUSINESS OUTLOOK Net balance Index 40 70 Quarterly Business Tendency Survey (LHS) expansion 20 60 0 50 PMI (RHS) contraction -20 40 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 Sources: C&SD and Markit Economics 32 HONG KONG: UNEMPLOYMENT RATE % of labour force % of labour force 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 2001 2003 2005 2007 2009 2011 2013 2015 Source: C&SD 33 HONG KONG: INFLATION % yoy Underlying inflation % yoy 9 Contribution by food (excluding meals bought away from home) 9 8 Contribution by housing rentals 8 Contribution by others 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 (Nov) Sources: C&SD and HKMA staff estimates 34 HONG KONG: EQUITY MARKET Index(Oct 27, 2008 = 100) Index MSCI AC Pacific 300 (excl. HK & Japan) 300 250 250 200 200 150 150 100 Hong Kong's 100 Hang Seng Index 50 50 0 0 2009 2010 2011 2012 2013 2014 2015 2016 (Jan) Source: Bloomberg 35 HONG KONG: RESIDENTIAL PROPERTY PRICES Index(Oct 1997 = 100) 200 200 Nov: 171.1 180 180 160 160 140 140 120 120 Prices of large flats Nov: 145.8 100 100 80 80 60 60 40 40 Prices of small and medium-sized flats 20 20 0 0 1996 2000 2004 2008 2012 2015 Source: Rating and Valuation Department 36 HONG KONG: TRANSACTION VOLUME IN THE PRIMARY AND SECONDARY MARKETS Transactions (in thousands) Transactions (in thousands) 18 Primary market 18 16 Secondary market 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 2009 2010 2011 2012 2013 2014 2015 (Dec) Source: The Land Registry 37 HONG KONG: NEW RESIDENTIAL MORTGAGE LOANS HK$ bn HK$ bn 50 New residential mortgage loans approved 50 45 New residential mortgage loans made 45 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 2002 2004 2006 2008 2010 2012 2014 2015 (Nov) Source: HKMA 38 HONG KONG: COMPOSITE INTEREST RATE % p.a. 4 3 2 1 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: HKMA 39 HONG KONG: LOAN GROWTH AND ASSET QUALITY Annualised growth rate (%) % of total loans 30 28.6 2.5 Total loans and advances (lhs) 25 Classified loans* (rhs) 2.0 20.2 20 16.0 1.5 15 12.7 9.6 1.0 10 0.5 5 Jan- Nov: 3.3 0 0.0 2010 2011 2012 2013 2014 2015 Note: * Q3 figure is used for 2015’s classified loan ratio Source: HKMA 40 HONG KONG: HOUSEHOLD DEBT % of GDP Total Household debt % of GDP 70 Residential mortgage 66.3 70 Credit card advances Loans for other private purposes 60 54.3 60 50 50 40 40 30 30 20 20 10 10 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (Q3) Source: HKMA 41 CURRENCY STABILITY 42 HONG KONG DOLLAR SPOT EXCHANGE RATE 43 • The Hong Kong dollar (HKD) spot exchange rate remained steady and continued to stay in levels near 7.7500 during November to December 2015. There has been no triggering of the strong-side Convertibility Undertaking since 1 November 2015. • Since early January this year, the HKD eased notably against the US dollar, trading near 7.8000 at mid-month.