IMF says Hong Kong’s financial system resilient to future shocks, cautions property valuations and deep China links as potential risks

·4-min read

The International Monetary Fund (IMF) said Hong Kong’s financial system remains resilient to future financial shocks and crises even after a challenging two years that saw the city’s economy experience its worst contraction on record.

In its latest financial system stability assessment, the international organisation’s executive directors found the main vulnerabilities for the city’s economy related to sky-high real-estate valuation and exposures to shifts in global markets and domestic risk sentiment. They also cited the extensive linkages of the city’s economy to mainland China as a potential vulnerability.

Potential pockets of vulnerability within the financial system included households, non-financial companies and investment fund sectors, the IMF said in a report published on Wednesday.

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“Sound macroeconomic and prudential policies over the years have provided Hong Kong SAR with important buffers to cope with the current slowdown and future shocks,” the IMF said. “The banking sector remains well capitalised, profitable, and non-performing loan ratios remain low. ”

Hong Kong’s economy was battered by months of anti-government protests in 2019, followed by the coronavirus pandemic in 2020, which hit global trade and travel. The city’s economy suffered its worst contraction on record in 2020, but grew by 7.9 per cent in the first quarter, its fastest pace in more than a decade.

Government officials and regulators in Hong Kong welcomed the IMF’s appraisal.

“The positive appraisal of our financial system is a clear recognition of the government’s long-standing efforts to safeguard financial stability, which is underpinned by sound policies as well as robust institutional frameworks and market infrastructures,” said Financial Secretary Paul Chan Mo-po.

The Secretary for Financial Services and the Treasury Christopher Hui Ching-yu said the IMF’s assessment confirms the resilience and stability of Hong Kong’s financial system.

“We will continue to work closely with regulators to maintain our robust and forward-looking financial regulatory regime and upgrade the financial infrastructure, in order to fortify our status as an international financial centre,” Hui said.

The IMF’s report was a follow-up to its last assessment of the city’s financial stability in 2014.

To address areas of vulnerability in the city’s financial system, the IMF recommended in part that regulators further monitor the debt repayment capacity of households, strengthen their data collection and add nonbank mortgage lending to their regulatory framework.

Hong Kong’s household debt-to-gross domestic product (GDP) ratio rose to a record 90.2 per cent at the end of 2020, compared with 80.4 per cent a year earlier, according to data from the Hong Kong Monetary Authority, the city’s de facto central bank. A decade ago, the ratio stood at about 50 per cent.

Of this debt, mortgages made up 68 per cent of the total. Total outstanding mortgages stood at HK$1.62 trillion (US$208.25 billion) at the end of April this year, with most families spending about half of their incomes to repay these loans.

The IMF, which counts 190 countries as members, also recommended that regulators enhance oversight and liquidity risk monitoring of banking groups with both local subsidiaries and foreign branches.

The IMF called for clarity on when Chief Executive Carrie Lam can give direction to the Hong Kong Monetary Authority, saying it could threaten the de facto central bank’s independence. Photo: Xiaomei Chen
The IMF called for clarity on when Chief Executive Carrie Lam can give direction to the Hong Kong Monetary Authority, saying it could threaten the de facto central bank’s independence. Photo: Xiaomei Chen

The IMF also noted that climate change presents a short-term and long-term risk to financial stability and highlighted plans to require companies to make mandatory disclosures about their climate risk as a positive step by local regulators.

At the same time, the IMF stressed the need for the HKMA to maintain its independence, saying the city should clarify under what circumstances Chief Executive Carrie Lam Yuet-ngor can give directions to the regulator.

“Hong Kong SAR’s competitiveness, as a major international financial centre, has depended on its sound rules and regulations, which have been adapted to international standards and best practices,” the IMF said. “The Hong Kong SAR authorities should continue to preserve the rule of law and strengthen the high-quality regulatory framework, so that solid foundation for competitiveness in its financial sector is preserved.”

HKMA chief executive Eddie Yue Wai-man said the IMF reiterated its support for the peg linked exchange rate system to be the “bedrock of our monetary and stability” and highlighted the IMF’s encouragement for the city to develop as a fintech hub in Asia.

Yue on Tuesday announced a comprehensive fintech plan for the next four years in Hong Kong, including a feasibility study for a digital currency called e-Hong Kong dollar.

“It is encouraging to note the IMF’s assessment that our banking supervision and regulation remain strong, our macro-prudential measures remain appropriate, and its endorsement of our continued efforts to strengthen the regulatory and supervisory framework, and promote the competitiveness of Hong Kong’s financial sector,” Yue said.

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