Fund outflows from Hong Hong and emerging markets could continue as the United States Federal Reserve winds down quantitative easing (QE) and begins to shift from ultra low interest rates, Norman Chan, chief executive of the Hong Kong Monetary Authority (HKMA) said.
However, there has been no significant impact on Hong Kong’s banking system from the Fed’s QE tapering, Chan said in the HKMA annual report released Wednesday.
Lenders’ asset quality and liquidity remain sound and domestic financial institutions are well capitalized.
The Hong Kong dollar interbank interest rates are relatively low but the average cost of funds for retail banks has risen since May last year when the Fed announced a gradual tapering of its asset-buying program. Credit growth in the banking sector slowed in the fourth quarter, the HKMA said.
Hong Kong’s de facto central bank expects gross domestic product to expand 3 percent to 4 percent in 2014. Meanwhile, market consensus puts headline inflation at 3.8 percent, down from 4.3 percent in 2013. The outlook for the labor market is stable, with the unemployment rate seen at about 3.4 percent.
Chan said the biggest risk comes from uncertainty over the pace and scale of the QE tapering and interest rate normalization.
Also, slower than expected growth in mainland China could have a negative effect on Hong Kong given the increasingly close cross-border economic ties, he said.
The HKMA will continue to closely monitor market developments for any signs of monetary stability, in addition to requiring banks to step up risk controls on interest rates, liquidity and credit. It will continue its prudent management policy on the Exchange Fund.
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