Speech at Panel on Financial Affairs

Briefing on the work of the Hong Kong Monetary Authority

Management of the Exchange Fund

Mr CHAN Chun-ying expressed concern that Hong Kong was faced with multiple uncertainties in 2022 including the evolving pandemic situation, rising inflation and geopolitical tensions. They enquired about the defensive measures taken or planned by HKMA in managing the Exchange Fund (“EF”) amidst the volatile market conditions.

HKMA said that amidst uncertainties in the external environment, HKMA had been managing EF flexibly in response to fluctuations in global market conditions, and adjusting EF’s asset allocation in a timely manner while taking appropriate defensive measures. Firstly, in terms of bonds, HKMA had been adjusting the holdings of floating-rate bonds to offset the impact of rising interest rates. Secondly, HKMA had been appropriately adjusting its foreign exchange exposures arising from non-US dollar assets to reduce potential losses from a further strengthening of the US dollar. Thirdly, HKMA had also been increasing the size of the Long-Term Growth Portfolio to diversify investments.

Financial stability, interest rate movements and the property market

Mr CHAN Chun-ying enquired about HKMA’s assessment on the trend of the Aggregate Balance in the Hong Kong banking system which was an important indicator of Hong Kong dollar (“HK dollar”) liquidity and interest rate movements of HK dollar. He expressed concern about the impact of the interest rate hikes by the US Federal Reserve on the HK dollar interbank rates and the stability of the banking system, and enquired about HKMA’s response measures. There was also a concern that if Hong Kong followed the pace of increasing interest rates in the US, the economy might be dampened.

On the trend of the Aggregate Balance, HKMA said that it would be influenced by a number of factors, including the pace and magnitude of interest rate hikes in the US and the demand and supply situation of HK dollar. As regards the interest rate hikes in the US, HKMA pointed out that under the Linked Exchange Rate System (“LERS”), considerable differentials in the US dollar and HK dollar interbank rates would incentivise market participants to conduct carry trades and lead to fund flowing out from the HK dollar market. The reduced liquidity would in turn lead to an increase in HK dollar interest rates in line with the interest rate automatic adjustment mechanism under LERS. Given the ample liquidity in the Hong Kong banking system, it was expected that the HK dollar interbank rates might lag behind the US dollar interest rates in the current rate hike cycle. However, the time lag might be shorter in this rate hike cycle given the current faster pace of US rate hikes. Banks would decide on the timing of and magnitude for adjusting their interest rates having regard to their own commercial considerations. HKMA would keep members of the public informed of latest developments to facilitate their risk management arrangements.

Regarding possible policy options for boosting the economy, HKMA said that it would mainly come from fiscal policy measures. Under LERS, the stability of HK dollar exchange rate was maintained through an automatic interest rate adjustment mechanism, and Hong Kong could not set its own interest rates to stimulate the economy. But for a relatively small and open economy like Hong Kong, the stability of the exchange rate under LERS was extremely important particularly in times of market volatility.

Briefing on the work of the Financial Services Development Council

Mr CHAN Chun-ying enquired whether FSDC had plans to collaborate with the Hong Kong Institute of Bankers and the Hong Kong Academy of Finance on human capital development, and why FSDC had been providing a low budget on human capital development for its own staff.

FSDC advised that it had collaborated with the Hong Kong Institute of Bankers and the Hong Kong Academy of Finance on human capital development initiatives in past years, and the three bodies had different focuses in providing human capital development programmes. While FSDC focused on attracting local and overseas talents in joining the financial services industry, the other two institutions placed more efforts in providing on-the-job development programmes for existing practitioners of the industry. As regards FSDC’s budget for development of its own staff, FSDC explained that it had been prudent in working out the budget in this area given that there had been little increase in FSDC’s overall budget over the years despite expansion in its responsibilities.