How the IMF contributes to the economy of HK?

        The Asian financial crisis had a strict impact on Hong Kong SAR since October 1997. The Hong Kong dollar came under the pressure formed by guess on several occasions since October 1997, the asset price bubble— which had developed over the previous year— deflated, and market attitude weakened in response to deteriorating economic conditions in the region. This led to upward pressure on domestic interest rates, which further weakened asset prices. By mid– 1998, the local stock index and residential property prices had fallen by over 50 percent from their peak in 1997, reducing wealth by more than 100 percent of GDP.

        The Hong Kong SAR government responded with a series of measures to moderate the effects of the contraction in economic activity and to stabilize the property market. During this period, the International Monetary Fund (IMF) also contributes to the economy of Hong Kong in a few issues.

        IMF usually gives some comment to the monetary institutions in Hong Kong. In September 1998, when they comment the intervention by the HKSAR government, they point out that the intervention reflects the government wants to maintain the linked exchange rate. In November 1998, the research department of the IMF estimated that Hong Kong's economy would appear a negative 5% in 1998 and 0% in 1999. In December 1998, they predicted Hong Kong's unemployment rate in 1999 would rise to a historical peak - 6.4%

        Under Article IV of the IMF's Articles of Agreement, the IMF holds discussions having two sides with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is sent out to the country's authorities. As a Special Administrative Region of the People's Republic of China, Hong Kong SAR is not a member of the IMF. The Article IV consultation with People's Republic of China in respect of the Hong Kong Special Administrative Region has been held with the Hong Kong SAR authorities every year since October 1997.

        In late 1998, the Article IV consultation with People's Republic of China in respect of the Hong Kong Special Administrative Region has been held. The IMF Executive Board on January 29, 1999 considered a report on the Article IV consultation discussions. Also, on February 11,1999, the IMF issued a Public Information Notice (PIN) 'IMF Concludes Article IV Consultation held in 1998 with the People's Republic of China in respect of the Hong Kong Special Administrative Region' following the conclusion of the Article IV consultation for Hong Kong to make known the views of the IMF to the public. This action is planned to increase the transparency of the IMF's assessment of these policies. In the PIN, the main features of the Board's discussion are described. It includes the background and Executive Board Assessment of the deteriorating situation in Hong Kong SAR.

        Executive Directors observed that, in spite of its strong economic fundamentals, the Hong Kong SAR economy had been severely affected by the Asian financial crisis over the past year. Activity had been harsh hit by falling demand in regional economies, the depreciation of trading partners' currencies, and the adjustment of the bubble in domestic asset prices. Against this printed cloth hung at the back of a stage, there had been pressures on the linked exchange rate system, higher domestic interest rates, and a further weakening of domestic demand.

        Directors observed that the steep adjustment to the shocks had proceeded remarkably rapidly, demonstrating the flexibility of the economy. Asset prices had fallen sharply and labor costs and inflation were declining. Aided by the more recent appreciation of regional currencies, this had helped improve external competitiveness. Against this background, Directors expected that signs of a recovery could begin to emerge in the second half of the year, although they cautioned that the Hong Kong SAR Government (Hong Kong SARG) should remain alert, as the short-term outlook remained subject to uncertainty in view of the still remaining consequences of the Asian crisis and the unstable nature of global financial markets.

        While the ongoing adjustment had had considerable costs in terms of output and employment, Directors observed that this had been inevitable in view of the size of the external shocks Hong Kong SAR had faced, as well as the openness of its economy. Noting that the linked exchange rate system had contributed significantly to the remarkable growth and financial stability of the economy in the past fifteen years, Directors strongly supported the Hong Kong SARG's promise to maintaining the exchange rate link, and welcomed the Hong Kong SARG's determined efforts to defend the linked exchange rate system, including by allowing interest rates to rise, over the past year. Directors also welcomed the Hong Kong SARG's recent efforts to strengthen the operation and transparency of the linked exchange rate system.

        Directors emphasized that the operations of the Hong Kong SARG in the stock and futures markets to fight simultaneous pressures in the foreign exchange and stock markets had raised concerns regarding the role of the government in the securities market and potential conflicts of interest, as well as a number of technical problems, which should be addressed quickly. In this context, the recent setting up of an independent corporation to manage and in the end arrange of the Hong Kong SARG's holdings was a welcome step. Some Directors considered that the Hong Kong SARG's action had been necessary to defend the system in the recent exceptional financial positions, but put emphasis on that the Hong Kong SARG should keep herself from further intervention in equity markets to ensure the condition of being whole of a rules-based policy framework. More generally, Directors observed that this experience certified to be free from disease yet again to the need for increased transparency and data disclosure on the part of private investors, in addition to enhanced public sector transparency.

        Directors welcomed the Hong Kong SARG's strong emphasis on transparency in the regulatory framework governing the securities market; the proposed review of existing legislation and strengthened coordination among the various regulatory bodies; and the tightening of enforcement of existing rules on illegal trading. Directors also supported the Hong Kong SARG's proposals to strengthen the regulatory and supervisory framework for nonbank financial institutions, and to monitor the financial position of the corporate sector more closely.

        Directors commended the Hong Kong SARG's consistent record of fiscal wisdom, observing that the accumulation of substantial fiscal reserves had played an important role in maintaining confidence in financial markets, and had significantly increased the Hong Kong SARG's room for planned and controlled movement in the current economic downturn. Directors suggested that under the present economic conditions, and given the outlook for growth and unemployment in 1999, it would be undesirable to tighten fiscal policy during the next fiscal year. However, a deficit should be set within a medium-term framework, incorporating a return to budget balance, so that it was clearly seen as being temporary in nature. Moreover, any additional revenues from asset sales, which had a limited impact on aggregate demand, should be used to rebuild fiscal reserves.

        Directors observed that the financial position of Hong Kong SAR's banks and the quality of the regulatory and supervisory system, which were high by international standards, had been further strengthened by recent regulatory and supervisory improvements. While pressures on the banks would continue in 1999 as the full effects of the economic slowdown were felt, the situation was expected to remain manageable. In this context, the impact of the bankruptcy of the Guangdong International Trust and Investment Company (GITIC), and associated financial pressures on other mainland-related enterprises, would need to be carefully monitored. Noting the high degree of exposure of the banking system to property lending, Directors also called for close monitoring of both banks and the Hong Kong Mortgage Corporation to ensure that the overall financial system remained sound.

        Looking ahead, Directors noted that unemployment would remain a urgent issue in the period ahead, and write comments in the measures undertaken by the Hong Kong SARG to increase the speed of infrastructure and labor-intensive investment projects, and the expansion of retraining and job placement schemes. In this context, Directors observed that the Comprehensive Social Security Assistance Scheme provided a safety net for people suffering from economic difficulties, while seeking to avoid reducing labor market flexibility. They supported maintaining these principles in the continuing to exist review of the scheme.

        Directors expressed the view that Hong Kong SAR's data provision to the Fund is adequate for careful watch, and speak formally to the Hong Kong SARG for their efforts to spread a wide range of high quality economic and financial data on a timely basis. They looked forward to the publication of data on the external current and capital accounts in 1999, consistent with Hong Kong SAR's commitment under the SDDS, and urged publication of more timely and detailed data on fiscal developments.

        The IMF is charged with safeguarding the stability of the international monetary system. Thus, a central role for the IMF in resolving the Asian financial crisis was clear, and has been state positively again by the international community in various fora involving many participants. The IMF's priority was also clear: to help restore confidence to the economies affected by the crisis including Hong Kong

        With the aim of obtaining its immediate goal of restoring confidence in the region, the IMF responded quickly by becoming more concentrate its consultations with other members both within and outside the region that were affected by the crisis and needed to take policy steps to keep away the effects that can be spread by contact, although not necessarily requiring IMF financial support.

        The IMF's immediate effort to reestablish confidence in the affected economies includes Hong Kong involved: a temporary tightening of monetary policy to stem exchange rate depreciation; concerted action to correct the weaknesses in the financial system, which contributed significantly to the crisis.

        The IMF has been focusing on preventing such crises in the future by strengthening careful watch of members' exchange rate policies and financial markets. It has taken steps to assess more speaking honestly the potential risks attached to members' policies. It has also sought more timely and accurate data from members, more closely scrutinized members' financial sectors, and concentrated attention on countries where economic disturbances are likely to overflow to the international community.

        According to the IMF, given the increased importance of private capital flows in the globalized world economy, the Interim Committee has endorsed the concept of an amendment to the IMF's charter (or Articles of Agreement) that would make the promotion of capital account liberalization one of its purposes and give the IMF appropriate jurisdiction over capital movements. The IMF is considering carefully all aspects of this issue, recognizing that moves toward capital account liberalization must be properly set a speed and sequenced in light of individual economy positions.

International Monetary Fund (1999) 'Public Information Notice: IMF Concludes Article IV Consultation held in 1998 with the People's Republic of China in Respect of the Hong Kong Special Administrative Region', International Monetary Fund, http://www.imf.org/external/np/sec/pn/1999/PN9910.HTM.

International Monetary Fund (1999) 'The IMF's Response to the Asian Crisis - Factsheet', International Monetary Fund, http://www.imf.org/external/np/exr/facts/asia.htm.

International Monetary Fund (1999) 'What Is the IMF?', International Monetary Fund, http://www.imf.org/external/pubs/ft/exrp/what.htm.

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