Mr Yam comments on Hong Kong: from crisis to recovery
Speech by the Chief Executive of the Hong Kong Monetary Authority, Mr Joseph Yam, at the HKMA
Luncheon on the occasion of the opening of the HKMA Representative Office in London on
28 September 1999.
* * *
It is a great pleasure to be speaking here in London again, and to do so at this large and expert
gathering. Some of you may have been present at my last speaking engagement here, in June last year
at the 11th Dragon Boat Dinner, which now seems like a very, very long time ago. In that speech I
described Hong Kong, against the background of the financial turmoil in Asia, variedly as a pillar of
stability, the eye of the storm and the typhoon shelter of Asia. My message then was that Hong Kong,
with prudent policies and robust financial structures, had been the last and the least to be affected by
the storm.
Since that time, as you all know well, the tail of the storm has swept through Hong Kong and it has not
been so gentle after all. The painful downward adjustment in the internal cost/price structure under a
fixed exchange rate system eventually and inevitably came. This was reflected in plummeting asset
prices, declining GDP and rising unemployment. Although the fundamentals of the Hong Kong
economy remained sound, these events provided an attractive environment for the launch of
speculative attacks. And so during the summer of last year we received a severe buffeting from attacks
against our currency and financial markets, threatening a financial meltdown. We fought off these
attacks in August 1998 with a dramatic and controversial operation in the stock and futures markets.
We accumulated Hong Kong stocks to the value - at that time - of around US$ 15 billion. Since then,
the value of that portfolio has increased to US$ 26 bn, a reflection of the greatly improved financial
environment and, even for many of our critics, a vindication of our operation. I should stress that
making huge profits was not our primary purpose in this operation. But we are not complaining. The
70% return so far represents a bonus to our reserves: too bad there are no bonuses for those
responsible for acquiring the portfolio. It has been a very productive investment for the people of
Hong Kong. And we now have even more resources to safeguard the stability of our currency.
But this large holding of Hong Kong stocks is arguably excessive, having regard to the traditional lack
of involvement of Government in business, and to the potential conflict of interest in its dual role as
regulator and shareholder. Towards the end of this presentation I shall briefly return to the question of
how we intend to set about disposing of this portfolio. Before I do that, I should first like to update you
on the state of our economy as the painful adjustment process draws to a close and as clear signs of
economic recovery emerge. I should also like to address some of the concerns - unnecessary ones, in
my view - that still seem to be clouding the view of Hong Kong from outside.
The recovery
Those of you who heard me in June last year may well be a little sceptical about any advice from me
on the outlook for the Hong Kong economy. Although I was under no illusion about the less
prosperous times that lay ahead, like many at the time I was perhaps a little too sanguine in my
assessment about the impact that the Asian crisis would have on Hong Kong. However, the temptation
now for many is to go to the other extreme: to be very cautious in making predictions about the future
and to acknowledge signs of recovery only very reluctantly. This is understandable when we are still
only just moving out of our sharpest recession on record. Yet even the pessimists would now, I think,
acknowledge that the storm signals are down, the clouds are thinning out, and there are shafts of
sunlight in the distance. I speak only metaphorically, of course. As those of you who have been in
Hong Kong recently will know, this has been a very stormy summer from a meteorological point of
view: we have just had the worst typhoon in sixteen years and the wettest typhoon since records began
more than a hundred years ago.
Economically, the most recent figures suggest that our wet and windy summer has brought with it a
distinct turn for the better.
Chart 1
Gross Domestic Product
(%)
8
6
4
2
0
-2
Year-on-year change
-4
Quarter-on-quarter change, seasonally adjusted
-6
-8
Q1/ Q2 Q3 Q4 Q1/ Q2 Q3 Q4 Q1/ Q2 Q3 Q4 Q1/ Q2
96 97 98 99
1
• GDP - a rebound in the second quarter (in excess of 3%, quarter on quarter) after six
consecutive quarterly declines (Chart 1)
Chart 2
External Trade
(% yoy)
(HK$bn)
20 28
Overall trade balance
15 Imports of goods 21
Exports of goods
10 14
5 7
0 0
-5 -7
-10 -14
-15 -21
-20 -28
-25 -35
1996 1997 1998 1999
2
• External trade - exports picked up in recent months, with the overall trade balance remaining
in a healthy position (Chart 2)
Chart 3
Retail Sales (Seasonally Adjusted)
(% qoq)
8
4
0
-4
-8
-12
Q1/ 97 Q2 Q3 Q4 Q1/ 98 Q2 Q3 Q4 Q1/ 99 Q2
3
• Retail Sales - clear rebound in the second quarter (7% increase, quarter on quarter) (Chart 3)
Chart 4
Tourist Arrivals
('000)
1,200
1,000
800
600
96 97 98 99
4
• Tourism - uptrend re-established (up by 11% in the first seven months of 1999) (Chart 4)
Chart 5
Labour Market
(%, 3mma)
(%, yoy)
7 7
Unemployment rate (LHS)
6 6
Employment growth (RHS)
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
96 97 98 99
5
• Unemployment - off the peak, now at about 6% (Chart 5)
Chart 6
Composite CPI
(Index)
125 (Seasonally Adjusted, 10/94 - 9/95 = 100)
120
115
110
Overall
Core
105
Core excluding rent
100
96 97 98 99
6
• Prices - downward adjustment in CPI continuing, but the fall in core prices excluding rentals
has levelled off in recent months (Chart 6)
Chart 7
Hang Seng Index
(31/7/64=100)
17,000
15,000
13,000
11,000
9,000
7,000
96 97 98 99
7
• Stock market - recovered almost all of its lost ground (Chart 7)
Chart 8
Residential Property Price Index
(1995=100)
180
160
140
120
100
80
96 97 98 99
8
Property prices - off the bottom (September 1998) and stable (Chart 8)
•
Chart 9
Interest Rates
(%)
50
1-month HIBOR
40
Differential between 1-month
HIBOR and LIBOR
30
20
10
0
-10
97 98 99
9
• Interest rates - stability returned, and premium over the US Dollar interest rates has fallen to
pre-crisis level (Chart 9)
Chart 10
Loans Delinquency Ratio of Local Banks
(Ratio)
7
6
5
4
3
2
1
4Q97 1Q98 2Q98 3Q98 4Q98 1Q99 2Q99
10
• Non-performing loans - low (around 6%), still increasing but signs of levelling off in the
second quarter (Chart 10)
Chart 11
Mortgage Loans Delinquency Ratio
(Ratio)
1.4
1.2
1.0
0.8
0.6
0.4
0.2
Jun-98 Aug-98 Oct-98 Dec-98 Feb-99 Apr-99 Jun-99
11
Overdue mortgage payments - default ratio definitely levelling off since April (Chart 11).
•
Chart 12
Nominal GDP Indices in US$ Terms
1997 Q1-Q2 = 100
120 120
110 110
100 100
90 90
80 80
Hong Kong
70 70
Indonesia
Korea
60 60
Malaysia
50 50
Singapore
Taiwan
40 40
Thailand
30 30
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
1997 1998 1999