Hong Kong’s financial system remains stable with no significant capital outflows detected although the aggregate balance of the city’s banking sector dropped to a recent low level, Hong Kong Monetary Authority Chief Executive Eddie Yue Wai-man said.

The HKMA has several proposals to fall back on if the banking sector’s aggregate balance falls, Yue told reporters after meeting lawmakers in the Legislative Council on Monday, although he did not elaborate. The aggregate balance has slipped to its recent low level of HK$54.2 billion ($6.94 billion).

“A diminishing aggregate balance means capital is going out. One consequence of declining aggregate balance is that it leads to rising interest rates in Hong Kong that will attract capital coming back. The other result is that HKMA can issue less Exchange Fund bills and notes that can push up the aggregate balance level,” Yue said.

A diminishing aggregate balance means capital is going out. One consequence of declining aggregate balance is that it leads to rising interest rates in Hong Kong that will attract capital coming back. The other result is that HKMA can issue less Exchange Fund bills and notes that can push up the aggregate balance level

Eddie Yue Wai-man, 

Hong Kong Monetary Authority chief executive 

The monetary base, as a gauge of capital inflows or outflows of the city’s financial system, reached HK$1.68 trillion at the end of January, an increase of 1.6 percent from the end of December last year. The rise was mainly due to an increase in the outstanding amount of certificates of indebtedness — which reflected the seasonal demand for banknotes around the Lunar New Year. The monetary base comprises certificates of deposits, government-issued currency in circulation, aggregate balance and outstanding Exchange Fund bills and notes.

“Due to the epidemic, the stock markets of the United States and Hong Kong are volatile, nevertheless, market operations remain in order. Hong Kong’s financial system remains stable with no huge capital outflows, yet we will monitor market changes,” Yue stressed.

According to HKMA statistics, total deposits with authorized institutions remained virtually unchanged in January. Of this total, Hong Kong dollar deposits grew by 1.1 percent, while overall foreign-currency deposits declined 1.2 percent and renminbi deposits decreased 3.1 percent in the same period.

“The asset quality of the city’s banking sector remains good as the HKMA introduced a host of countercyclical measures, so that even if there are falls in home prices, this is not expected to have a severe impact on banks as it did the past,” Yue noted.

Nevertheless, total loans and advances remained flat in February, while only increasing 0.7 percent in the previous month; the spread of the novel coronavirus has affected economic activity, the HKMA explained. As Hong Kong-dollar deposits increased while Hong Kong-dollar loans stayed virtually unchanged, the Hong Kong-dollar loan-to-deposit ratio decreased to 89.4 percent at end-January from 90.3 percent in the previous month, indicating banks are engaging less lending to businesses.

Turning to the HK$4.19 trillion Exchange Fund, the financial arsenal used to defend the stability of the Hong Kong dollar, the HKMA will exercise prudence in asset allocation this year, favoring more strong defensive financial assets.

“It is difficult to predict the performance of the Exchange Fund this year since the market is so volatile. HKMA mainly invests in large bulk of high-quality sovereign bonds denominated in US dollar with stringent requirements in credit rating in order to preserve the highest liquidity of the investment portfolio,” Yue noted.

The Exchange Fund last year registered the second-highest investment income, totaling HK$247.2 billion with an investment return rate of 6.2 percent, higher than the average return rate of 4.8 percent between 1994 and 2019 and the average inflation rate of 2.1 percent for the same period.