Norman Chan, chief executive of the Hong Kong Monetary Authority (HKMA), says the special administrative region faces divergent risks as it seeks to manage the impact on it of the wider global financial crisis.
Chan, speaking exclusively to Euromoney, admits there are clear downside risks on economic growth in Hong Kong in the event of further deterioration in global conditions.
However, he says there are also risks posed by a resurgence of capital inflows, adding upward pressure on inflation and asset prices, particularly property.
Chan says the global economy is facing unprecedented uncertainty, with economic growth and financial stability hanging in the balance. The course of events is, he points out, largely dependent on Europe’s ability to defuse the sovereign debt crisis and the recovery momentum of the US economy.
"Given the structural weaknesses and the lack of fiscal space in the advanced economies, we are likely to see a prolonged period of sub-par global growth, necessitating monetary authorities in advanced economies to maintain their ultra-loose monetary policies," he says.
Stability prioritized
Against this backdrop, according to Chan, the HKMA’s priority closer to home is simple: to maintain financial stability.
"If there is only one lesson we can learn from the global financial crisis, it is the paramount importance of maintaining financial stability," he says. "No one can or should take financial stability and economic prosperity for granted: they require very hard work over many years, if not decades."
He adds that key to maintaining financial stability is not strengthening the resilience of the banking sector after the eruption of a crisis, as has been the case in much of the world since 2008, but to take the necessary precautionary measures before the crisis happens.
In recent years, the Hong Kong banking sector has been faced by challenges associated with an exuberant property market and rapid expansion of credit. Since October 2009, Chan’s organization has undertaken no fewer than four rounds of what it describes as "countercyclical macro-prudential measures" to tighten banks’ underwriting standards for mortgage business. These moves are a bid to enhance the ability to withstand the possible shock of a substantial correction in the property market.
The HKMA also introduced mortgage data sharing in April last year that helps to upgrade the quality of the banks’ assessment of the creditworthiness of mortgage loan borrowers.
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| Norman Chan, chief executive of the Hong Kong Monetary Authority (HKMA) |
Separately, the HKMA has conducted several rounds of examinations to ensure that banks have not lowered their credit-underwriting standards because of strong loan demand from customers, particularly those from mainland China. Measures have been taken to ensure banks have stable funding sources and strong buffers to support their loan growth, and cope with the ever-present possibility of deterioration in asset quality. As a result of the joint efforts of the HKMA and the banking industry, credit growth slowed from nearly 30% in 2010 and the first half of 2011 to 11% (annualized) in the second half of 2011 and down to 9% (annualized) in the first half this year.
Chan stresses his commitment to focus not only on crisis management but also on the opportunities presented by the pace of growth in Asia.
This growth is being driven by several factors. The fast creation of wealth in the region has led to heightened demand for high-quality financial services. Financial liberalization in mainland China is leading to the wider use of the renminbi in cross-border trade and investments. And global investors are increasing their allocation to Asia in light of the structural challenges facing more advanced economies.
Asset management
In terms of asset management, Hong Kong is the largest hub for Asian hedge funds and the second largest hub for private equity in Asia, only slightly trailing mainland China. Hong Kong’s more mature private banking platform remains the preferred path of access to the growing wealth pool in mainland China and across Asia.
Benefiting from the liberalization of China’s capital account, Hong Kong has the largest number of asset managers from overseas that are seeking to invest in the Chinese financial market through the Qualified Foreign Institutional Investors framework. "We are also the first springboard for asset managers from mainland China seeking to grow their overseas footprint," says Chan.
As China continues to assert itself on the global stage, there will be greater international usage of renminbi as a currency for trade and investments. In 2011, nearly 8% of China’s trade was settled in renminbis, up from only 2% in 2010. "There is considerable room for growth in this area, as compared with the usage of domestic currencies by other major trading nations for trade settlement," says Chan.
Hong Kong has long been the gateway for trade and investment flows between mainland China and the rest of the world. Hong Kong intermediates some 30% of the mainland’s external trade and accounts for some 60% of cross-border direct investments in both directions. This explains why Hong Kong has quickly become a global hub for offshore renminbi business.
For all its rapid development, Chan believes Hong Kong still has untapped potential. "In recent years, we have seen more and more financial institutions coming to Asia," he says. "Many of them have set up regional headquarters or offices in Hong Kong, and use Hong Kong as a springboard to tap into opportunities in China and the region.
"What we are seeing today is just the beginning of what is to come."