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The Rupp Report: Stable Situation For Hong Kong

Jürg Rupp, Executive Editor

Many countries around the world are suffering because of the current financial crisis. Hong Kong is not excluded in this context. However, according to a so-called independent report just published in Hong Kong, the local banking system is stable and in robust condition, and has escaped the worst of the current global financial squeeze.

Mainland Banking
The report found that Hong Kong had bounced back well from the Asian financial crisis, and that its banking system “has so far been relatively unscathed” from the new crisis facing the global banking system, triggered by the US sub-prime market crisis. A more fundamental issue for the city’s banking regulator, said the report, will be how best to manage its growing integration with the banking system on the Chinese mainland.

Opportunities And Risks
The ability to expand into the mainland will create new business opportunities for Hong Kong banks, which are facing increasing competition in their domestic market. On the other hand, this move will also bring increased risks. Both the Hong Kong Monetary Authority (HKMA) and the banks will need to understand the nature of these risks and ensure that there are adequate means in place to control them. According to the experts, the cooperation with the China Banking Regulatory Commission will be a fundamental factor.

Professionalism And Effectiveness
The report also found that the HKMA is widely respected within the banking sector for its professionalism and effectiveness. It is viewed by outside commentators, including international credit ratings agencies, as being a player in the premier league. The review was initiated last year by the HKMA and covered a wide range of areas, including recent trends and issues in banking, the authority’s functions and powers under the Banking Ordinance, its supervisory and policy framework, authorization of financial institutions, and safety-net arrangements. HKMA CEO Joseph Yam commented, “[T]he report’s recommendations would be studied, to see how they can be applied to further strengthen our work in maintaining banking stability.

The latest Moody’s Global Banking Survey also affirmed the strength of Hong Kong’s banking industry. Issued in June, Moody’s industry outlook for Asia’s banks over the next 18 months is negative, although not drastically so. A number of mitigating factors will serve to cushion the impact on the banks of the current credit crunch, the sub-prime crisis, slowing global economies and rising inflation.

Monetary Statistics For August 2008

Recent statistics by the HKMA report total deposits with authorized institutions decreased by 0.8 percent in August 2008. Hong Kong dollar deposits declined by 0.2 percent during the month, as the contraction in demand and savings deposits exceeded the increase in time deposits. Foreign currency deposits also dropped by 1.3 percent in August. Accounting for around 2.9 percent of foreign-currency deposits, renminbi deposits in Hong Kong contracted further during the month, by 7.7 percent to 71.1 billion renmimbi at the end of August.

Total loans and advances rose by 0.6 percent in August. Loans for use in Hong Kong expanded by 0.7 percent, and loans for use outside Hong Kong grew by 0.2 percent. Because loans continued to climb while deposits declined, the Hong Kong dollar loan-to-deposit ratio increased to 83.8 percent at the end of August.

Seasonally adjusted, the Hong Kong dollar for one month increased by 0.5 percent in August and rose by 10.5 percent year-on-year. The unadjusted Hong Kong dollar for three months declined by 0.1 percent during the month but expanded by 0.2 percent from a year earlier.

Solid Financials
In a speech to the Hong Kong Association of Banks, Hong Kong Financial Secretary John Tsang praised the banking sector for its strong financial and liquidity positions. These have cushioned the economy against the global financial turmoil. He pledged that the government would work with financial regulatory bodies to ensure stability in the financial market and the economy. Tsang is convinced that “our strong fundamentals, sound regulatory framework and prudent risk management by financial institutions provide staunch support to Hong Kong in riding out the storm.” We’ll see in the (very) near future.

October 7, 2008