Transcript of a Conference Call on the IMF's Article IV Consultation with Hong Kong SAR

November 3, 2009

Washington, D.C.
Monday, November 2, 2009

MS. WONG: Good day, everybody. This is Daisy Wong of the International Monetary Fund's External Relations Department. Thank you very much for dialing into this conference call on Hong Kong's Article IV Consultation. I think you have all seen the preliminary conclusions of the 2009 Article IV mission with the Hong Kong Special Administrative Region. I will turn the call shortly over to Mr. Nigel Chalk. Mr. Chalk is the Mission Chief for China and Hong Kong, and the Assistant Director in the IMF's Asia & Pacific Department, and Mr. Vivek Arora, the IMF's Senior Resident Representative for China, is also available to take your questions. Mr. Chalk will make some introductory remarks and then we'll go to your questions. As you know, this call is on the record. Thank you very much. Over to you, Mr. Chalk.

MR. CHALK: Thank you, Daisy, and thank you for joining us this morning. Hopefully this will be informative. Let me just make a few opening remarks before we start. As Daisy said, you will have seen the preliminary conclusions of the mission. Let me just highlight a few of the main points in those conclusions.

This Article IV Consultation with the Hong Kong Special Administrative Region focused on two broad themes. The first was managing the coming recovery, and the second was longer-term structural questions that will be facing Hong Kong as China rebalances away from exports and investment and toward private consumption.

Let me talk a little bit about the recovery. Our sense is that recent data on the recovery is quite positive. We've seen quite good retail sales numbers yesterday and are seeing fairly positive growth data. As such, we have raised our growth forecast for 2009 and 2010 by around 1-1/2 percent which puts forecast growth for next year around 5 percent. As you probably know, by November the third quarter data will come out and then the situation should be clearer.

However, despite that increase in the growth forecast, we still believe that there's a substantial vulnerability facing Hong Kong from the external sector and the strength of the global recovery. As such we view the Hong Kong recovery as still fragile. For that reason, in the concluding statement you will see that we support the continuation of the fiscal stimulus into next year as an insurance policy against a further weakening of global demand.

In terms of the recovery, there were two areas we focused on in the discussions and in the conclusions of the mission. The first is on exit from the extraordinary measures that were put in place during the peak of the crisis last year, and we have some views on those that are generally supportive of the government's withdrawal from those measures. And the second issue is perhaps the more interesting issue, how the government should prepare for a potential credit-asset price cycle in the economy. Our sense is that right now we don't see asset prices, particularly for the property market, beginning to behave differently from where fundamentals suggest they should be (those fundamentals include things like interest rates, employment, household incomes). However, we do have a concern which is prospective, i.e. looking forward. A financial accelerator process could take hold whereby asset prices would start increasing. That could encourage greater investments across equity markets. That would raise the amount of credit extended, and as asset prices go up, that means that households would have greater collateral to borrow on the basis of those assets. That cycle is a normal part of economic interaction, but it does have certain financial stability and macroeconomic implications and as such we see a regulatory response could try to mitigate that cycle. We view that response as needing to be proactive and proportional to the potential risk. In that regard we fully support the efforts of the authorities--that were actually taking place after the finalized conclusions of the mission--which were to lower the loan-to-value ratio for certain high-end property and to change the availability of mortgage insurance in Hong Kong. We think those measures appropriately focus on safeguarding prudent lending practices in Hong Kong and they're very well-calibrated to the situation at hand. We also felt there could be a need for further measures in the future, and as you probably know, the Chief Executive will evaluate the potential for using land sales. After these general remarks I think I'll turn it over to questions. Both Mr. Arora and myself will respond to questions. Thank you.

QUESTIONER: I just wanted to double-check the revised forecast that you mentioned. You said that you were revising it by 1.5 percent. Was that for 2010 to 5 percent?

MR. CHALK: Yes, for both 2009 and 2010 we're increasing by 1.5 percent. So for 2009 we see a contraction of 2 percent. That's our current forecast. And for 2010 an expansion of 5 percent.

QUESTIONER: What was the forecast previously?

MR. CHALK: The previous forecasts in the World Economic Outlook were minus 3-1/2 and plus 3-1/2 percent for 2009 and 2010 respectively.

QUESTIONER: I just wanted to hear a bit more about the government's policy on land sales and where you think the government should start, in what timeframe it should start releasing land for development.

MR. CHALK: I think on the land sales it's a complex thing. I think that the issue here is that even while we're seeing quite a fast increase in prices in the high-end residential market or the luxury residential market, we haven't really seen that increase in the mass market. So, as such, I think the use of land sales is a feature we’d probably expect to be sometime in the future. I don't think there's a particular need for that now. And, in particular, my understanding is that the government will probably use other tools such as their urban renewal program and perhaps using some of the MTR land as a means to increase land supply onto the market. I think also that even an increase in land supply is likely to have fairly modest effects on prices given that it takes quite some time for that land to actually translate into new housing supply onto the market. So I think a lot of it would be in terms of signaling future supply onto the market rather than having an initial effect on current supply. Vivek, is there anything else to add?

MR. ARORA: As Nigel said, I think from the point of view of the property market itself it’s something for the future rather than now. And then I think, more structurally, the government announced plans to set aside land for things like private tertiary education and more structural objectives like that. So that's probably more the kind of focus we’ll see in the short run.

QUESTIONER: You mentioned about the economic recovery is fragile...

MR. CHALK: I'm having a little trouble hearing, but what I understand is why we view the recovery as fragile and also a question on the forecast. On the first question I think what we see is fairly strong domestic demand in Hong Kong. Private consumption particularly has started to pick up quite strongly. We've also seen quite good numbers in financial services which is important for the Hong Kong recovery. However, Hong Kong is a very open economy and, as such, is very exposed to changes in global demand. We saw that certainly last year and the first quarter of this year. Therefore, I think the fragility we see in the Hong Kong economy is not so much coming from domestic sources but, rather, from potential risks related to global demand, and the IMF, as part of its World Economic Outlook, has outlined those risks including the potential for a premature withdrawal of stimulus in some parts of the global economy. So I think that’s where we see the fragility and that translates into why we feel that there is a fragility to the economic recovery that is related to the risk from external demand feeding through to the Hong Kong economy. In terms of the forecast, our forecast for GDP growth for this year is a contraction of 2 percent, and for next year we forecast an expansion of 5 percent.

We've increased our forecast from that which is in the World Economic Outlook forecast by around 1-1/2 percent both for this year and next year and that translates into a forecast of a contraction of 2 percent this year and an expansion of 5 percent for the next year.

QUESTIONER: What’s the previous forecast for Hong Kong?

MR. CHALK: The previous forecasts were minus 3-1/2 for this year and plus 3-1/2 for next year, so each one is up 1-1/2 percentage points. They were from the September World Economic Outlook. You can go to the Fund's website and look at the World Economic Outlook for September and the forecasts are included there.

OPERATOR: We have no further questions in queue.

MR. CHALK: Thanks very much to everyone who joined the call and I think we're going to wrap it up there. As Daisy said, if you have further questions you can contact her at the IMF's External Relations Department. Thank you.

MS. WONG: Thank you everybody.


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