HKMA Quarterly Bulletin and Half-Yearly Monetary and Financial Stability Report (September 2023 Issue)

The Hong Kong Monetary Authority (HKMA) has published its latest semi-annual Monetary and Financial Stability Report. The report provides an update on macroeconomic issues such as price stability and economic outlook and summarizes some key risks in the near future as they may materialize in the financial market. Some of the key points are briefly noted below; for more detailed, comprehensive information, please refer to the enclosed report.
(1) Macroeconomic development:
– Interest rates have remained high globally due to high inflation, leading to economic downturns.
– Market participants expect a “high for longer” period as far as interest rates are concerned, leading to negative economic recovery expectations.
– The global economy faces even further downside risks due to tight labor markets in major advanced economies.
– The economic recovery of mainland China has slowed due to shrinking exports, concerns about the real estate market, and decreasing consumer confidence.
– The Hong Kong economy has rebounded sharply in the first half of 2023, with real GDP expanding and private consumption improving. Investment spending has also picked up, although there was a mild decline in the second quarter.
(2) Asset markets:
– The Hang Seng Index (HSI) in Hong Kong declined by 7.1% from the end of February 2023 to the end of August 2023.
– Despite global equity markets‘ buoyancy, concerns about the pace of the Mainland’s economic recovery negatively impacted the Hong Kong equity market.
– Nevertheless, equity market investment funds registered net inflows into Hong Kong from February to July 2023, indicating robust investor interest.
– Bond yields in the US and Hong Kong remained high due to the anticipation of further interest rate hikes in the US.
– In early 2023, the Hong Kong Government issued the world’s first government-issued tokenized green bond.
– Also, the Hong Kong government has taken first steps to develop an infrastructure financing securitization platform and promote the green and sustainable debt market in Hong Kong.
(3) Banking sector:
– The profitability of retail banks significantly improved in the first half of 2023.
– Aggregate pre-tax operating profit of retail banks increased by 120.5% in the first half of 2023 compared to the same period in 2022.
– The return on assets (ROA) for retail banks rose notably to 1.15% in the first half of 2023.
– Despite the rapid rise in global interest rates over the past year, the impact of interest rate risk on banks in Hong Kong remained relatively small and contained.
– Naturally, the overall funding costs of retail banks increased gradually in the first half of 2023 due to continued US and subsequent Hong Kong interest rate hikes.
– Liquidity metrics, including the Liquidity Coverage Ratio and Liquidity Maintenance Ratio, were well above their statutory minimum requirements.
– Despite economic concerns, the loan quality of institutions remained stable.
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The HKMA has also issued a new Quarterly Bulletin which features an article about Hong Kong’s progress exploring a possible introduction of a Central Bank Digital Currency in the city state.