Briefing to the Legislative Council Panel on …

1 HONG KONG MONETARY AUTHORITYB riefing to the Legislative CouncilPanel on financial Affairs29 May 2017 2 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 CorporationDISCUSSION TOPICS 3 financial AND ECONOMIC ENVIRONMENT 4 GLOBAL ECONOMIC GROWTH FORECASTSS ources: May Consensus Forecasts and Official Statistics(% year-on-year)Real GDP Growth20162017 Forecasts2018 (ex-Japan) 5 REAL GDP GROWTH IN MAJOR COUNTRIESS ource: Bloomberg-20-16-12-8-4048122006200820102 01220142016-20-16-12-8-404812% qoq, annualised% qoq, annualisedJapanUSEuroarea 6 HEADLINE INFLATION IN MAJOR COUNTRIESS ources: Bloomberg and CEIC-3-2-10123456-3-2-101234562006200820 10201220142016% yoy% yoyJapanUSEuroarea 7 PURCHASING MANAGERS INDEX IN MAJOR ECONOMIESS ources: Bloomberg and CEIC*Weighted average of the ISM manufacturing and non-manufacturing indices253035404550556065253035404550556 065200620082010201220142016 IndexIndexJapanPMIUSISM composite*Euroarea PMI composite 8 NOMINAL EFFECTIVE EXCHANGE RATEINDEX OF MAJOR CURRENCIESS ource: CEIC607080901001101201306070809010011012 0130200620082010201220142016 Index (2010=100)Index (2010=100)JapaneseYenUSdollarEuro 9US.

2 CONSUMPTION GROWTH & BUSINESS INVESTMENT ACTIVITYS ource: CEIC-50-40-30-20-1001020304050-8-6-4-202 468200120032005200720092011201320152017% 3m-on-3m, annualised% 3m-on-3m, annualisedNon-defensecapital goods shipments (RHS)Realpersonal consumption expenditure (LHS) 10US: LABOUR MARKET SITUATIONS ource: CEIC575859606162636465246810122000200220 04200620082010201220142016%%Unemployment rate (LHS)Employment-to-populationratio (Inverted, RHS) 11US: LABOUR FORCE PARTICIPATIONS ource: CEIC626364656667682000200220042006200820 10201220142016%Labourforce participation rate 12US: HOUSE PRICESS ources: Standard & Poor s and CEIC100120140160180200220200020022004200 620082010201220142016 Index (Jan 2000=100)FHFA home price indexCase-Shiller20-city home price index 13US: HOME SALESS ource: , annualisedMillions, annualisedExisting home sales (LHS)New home sales (RHS) 14US: FEDERAL GOVERNMENT DEBTS ource: Congressional Budget OfficeUS federal debt held by the public0102030405060708090100051015202530 197019801990200020102020 USD, trillions% of GDPO fficial ProjectionsAs percentage of GDP (RHS)InUSD, trillions (LHS) 15 EURO AREA: SOVEREIGN BOND YIELDSNote: 10-year Irish sovereign bond yield data is not available between 12 Oct 2011 and 14 Mar 2013 Source: Bloomberg10-year sovereign bond yield05101520253035402010201120122013201 4201520162017 PortugalGreece%Ireland-10123456782010201 1201220132014201520162017 SpainItaly%FranceGermany 16 EURO AREA: UNEMPLOYMENT RATES ource: Bloomberg 17 EURO AREA: OVERALL INDEBTEDNESSNote.

3 FR France, IT Italy, ES Spain, PT Portugal, GR Greece, IE IrelandSource: European Central Bank 18 JAPAN: financial MARKETSS ource: Bloomberg 19 JAPAN: PUBLIC DEBTS ources: Bank of Japanand CEIC100150200250300199920012003200520072 009201120132015% of GDPP ublicdebt 20 MAINLAND CHINA: REAL GDP GROWTHS ource: CEIC 21 MAINLAND CHINA: RETAIL SALESNote: January and February figures are the average growth rate for the first two months of the year Sources: W IND and HKMA staff estimates 22 MAINLAND CHINA: FIXED ASSET INVESTMENTS ources: CEICand HKMA staff estimates 23 MAINLAND CHINA: IMPORT AND EXPORT GROWTHS ources: CEIC and HKMA staff estimates 24 MAINLAND CHINA: PURCHASING MANAGERS INDEXS ource: CEIC 25 MAINLAND CHINA: INFLATIONS ource: CEIC 26 MAINLAND CHINA: MONEY AND LOAN GROWTHS ource: CEIC 27 MAINLAND CHINA: AGGREGATE FINANCING FLOWS ource: CEIC 28 MAINLAND CHINA: PROPERTY PRICE ANDTRANSACTION VOLUMES ources: CEIC, W INDand HKMA staff estimates 29 MAINLAND CHINA: HOUSING PRICE CHANGES IN MAJOR CITIESS ources: CEIC, W IND and HKMA staff estimates 30 HONG KONG: REAL GDP GROWTHS ource: C&SD-12-8-40481216-12-8-40481216 Contribution by net exportsContribution by fixed investment and changes in inventoryContribution by government consumptionContribution by private consumption% yoy% yoy|2010 |2011|2012|2013|2014|2015|2016|2017 (Q1)RealGDP growth 31 HONG KONG: ECONOMIC ACTIVITYS ource.

4 C&SD-30-20-10010203040-30-20-10010203040 % yoy|2010|2011|2012|2013|2014|2015|2016|2 017% yoy(Mar)Retail sales volumeExport volume 32 HONG KONG: BUSINESS OUTLOOKS ources: C&SD and MarkitEconomics40506070-2002040contracti onexpansionNet balanceIndex|2010|2011|2012|2013|2014|20 15|2016|2017 Quarterly Business Tendency Survey (LHS)PMI (RHS)(Q2) 33 HONG KONG: UNEMPLOYMENT RATES ource: C&SD012345678910012345678910200120032005 200720092011201320152017% of labour force% of labour force(Mar) 34 Sources: C&SD and HKMA staff estimatesHONG KONG: INFLATION-10123456789-10123456789 Contribution by food (excluding meals bought away from home)Contribution by housing rentalsContribution by others% yoy% yoy|2010|2011|2012|2013|2014|2015|2016| 2017 Underlyinginflation(Mar) 35 HONG KONG: EQUITY MARKETS ource: Bloomberg0501001502002503000501001502002 5030020092010201120122013201420152016201 7 Hong Kong'sHang Seng IndexMSCI AC Pacific(excl.)

5 HK & Japan)Index(Oct 27, 2008 = 100)Index(May) 36 HONG KONG: RESIDENTIAL PROPERTY PRICES Source: Rating and Valuation Department020406080100120140160180200020 4060801001201401601802001996200020042008 20122016 Index(Oct 1997 = 100)Mar: : of small and medium-sized flatsPrices of large flatsIndex 37 HONG KONG: TRANSACTION VOLUME IN THE PRIMARY AND SECONDARY MARKETSS ource: The Land Registry02468101214161802468101214161820 0920102011201220132014201520162017 Primary marketSecondary marketTransactions (in thousands)Transactions (in thousands)(Apr) 38 HONG KONG: NEW RESIDENTIAL MORTGAGE LOANSS ource: HKMA051015202530354045500510152025303540 455020022004200620082010201220142016 New residential mortgage loans approvedNew residential mortgage loans madeHK$ bnHK$ bn2017(Mar) 39 HONG KONG: COMPOSITE INTEREST RATES ource: HKMA012342006200720082009201020112012201 32014201520162017% (Apr) 40 HONG KONG: LOAN GROWTH AND ASSET QUALITY Source: loans (lhs)Classified loans (rhs)Growth rate (%)% of total loans(Q1) 41 HONG KONG: HOUSEHOLD DEBTS ource: 0102030405060700102030405060702005200620 0720082009201020112012201320142015201620 17 Residential mortgageCredit card advancesLoans for other private purposes% of GDP% of GDP(Q1)Total household debt 42 CURRENCY STABILITY 43 HONG KONG DOLLAR SPOT EXCHANGE RATE The Hong Kong dollar spot exchange rate traded in a softer tone in the past two months amid increased carry trades on the back of widening interest rate differentials between the US dollar and Hong Kong dollar.

6 The Hong Kong dollar eased gradually from about per US dollar at end-February to around at end-April. 44 AGGREGATE BALANCE The Aggregate Balance remained stable at levels close to HK$260 billion in the past two months. 45 DOMESTIC INTEREST RATES The Hong Kong dollar interbank interest rates (HIBORs) remained lower than their US dollar counterparts (LIBORs). Owing to the US interest rate hike in March, the spread between overnight HIBOR and LIBOR widened from -55 basis points at end-February to about -85 basis points at end-April. During the same period, the three-month spread also widened from -12 basis points to nearly -30 basis points. 4612-MONTH HONG KONG DOLLAR FORWARD POINTS Reflecting widened interest rate differentials between the Hong Kong dollar and US dollar, the 12-month Hong Kong dollar forward points moved into deeper discounts, from -170 pips at end-February to around -340 pips in mid-April.

7 It remained steady at such level towards the end of April. 47 BANKING STABILITY 48 Locally incorporated authorized institutions (AIs) continued to be well capitalisedBANKING SECTOR PERFORMANCE The banking sector continued to be well capitalised. The consolidated capital adequacy ratio of locally incorporated AIs declined slightly to at end-March 2017 from a quarter earlier, but still well above the international minimum requirement of 8%. 49 Liquidity position remained soundBANKING SECTOR PERFORMANCE In Q1 2017, the quarterly average Liquidity Coverage Ratio of category 1 institutions was , well above the 80% statutory minimum requirement applicable for 2017. For category 2 institutions, their quarterly average Liquidity Maintenance Ratio was , also well above the 25% statutory minimum requirement.

8 50 Asset quality remained healthy BANKING SECTOR PERFORMANCE The asset quality of retail banks continued to hold up well. Their classified loan ratio edged down to at end-March 2017 from a quarter earlier. Similarly, the classified loan ratio of the whole banking sector fell to from 51 Net interest margin improvedBANKING SECTOR PERFORMANCE The net interest margin of retail banks Hong Kong offices rose to in the first quarter of 2017 from in the same period last year. 5252 CREDIT GROWTH AND ASSET QUALITY Credit Growth Hong Kong banking sector s total loans increased by in the first quarter of 2017, or on an annualized basis, higher than the increase in 2016. The growth in the first quarter was broad-bas ed.

9 Bot h loans for use in Hong Kong (+ on quarter-on-quarter basis or + on an annualized basis) and loans for use outside Hong Kong (+ on quarter-on-quarter basis or + on an annualized basis) recorded significant growth, mainly due to increase in demand for new loans by Hong Kong corporates and overseas entities. Trade finance also grew at a faster pace in March, reflecting the significant improvement of import and export trades in recent months. Asset Quality The asset quality of the banking sector remained healthy. At end-Marc h 2017, retail banks' classified loan ratio stood at , still well below the long-run historical average of since 2000. 53 LOAN-TO-DEPOSITRATIOSWERE BROADLY STABLE Hong Kong-dollar loan-to-deposit ratio stood at 76% at end-March 2017, slightly down from 77% a quarter earlier.

10 All currencies loan-to-deposit ratio edged up to 69% from 68%. 54 RISK MANAGEMENT OF PROPERTY MORTGAGE LOANSR esidential property price index andtransaction volumeSources: R&VD and Land RegistryAverage loan-to-value ratio and debt servicing ratiofor new residential mortgage loans approved* Before the first round of HKMA s countercyclical measures was introduced# When the tighter requirement on debt servicing ratio was introduced by the HKMAMar 201751% aar 201734% 3133353739414345303540455055606570200920 102011201220132014201520162017 Sep 2009*64%Aug 2010#41%Averageloan-to-value ratio (%)Averagedebt servicing ratio (%)02,0004,0006,0008,00010,00012,00014,0 0016,00002040608010012014016018020020092 0102011201220132014201520162017 Transaction volume (rhs)Property pr ice index (lhs)Property Price Index(Oct 1997 = 100)