Hong Kong Monetary Authority's lack of independence queried in IMF study

Fund assessment notes the chief executive's powers to control monetary authority, amid growing concerns over exposure to mainland borrowers

PUBLISHED : Friday, 18 July, 2014, 2:57am
UPDATED : Friday, 18 July, 2014, 3:37am

The IMF has called into question the independence of the Hong Kong Monetary Authority (HKMA) from the chief executive at a time of growing concern over the city's exposure to mainland borrowers.

In a financial sector assessment aimed at gauging the Hong Kong banking system's compliance with Basel III rules, the International Monetary Fund said late on Wednesday that Section 10 of the Banking Ordinance grants the chief executive the power to direct Hong Kong's de facto central bank or overrule its decisions without specifying the conditions in which such action may be taken.

"The independence of the HKMA is not as fully protected by law as it could be and it is recommended that further steps are taken to ensure this," the 359-page IMF assessment said.

While it noted that the rule had never been used, the IMF recommended removing the clause or clarifying it.

In a comment included in the report, the HKMA said the power reflected the chief executive's responsibility to formulate monetary and financial policy in Hong Kong.

"The power … would only be used as a tool of last resort to implement specific remedial measures in the most critical and extreme circumstances," the monetary authority said in the IMF report.

In a separate IMF report issued late on Wednesday, the multilateral agency disclosed the results of a solvency and liquidity stress test which, among other factors, pointed to a high level of risk stemming from exposure to mainland borrowers.

A sharp slowdown in growth on the mainland "would have severe consequences for the Hong Kong financial sector," the report said. "The quality of Hong Kong banks' assets would deteriorate as lower growth adversely affect borrowers' - both Hong Kong and mainland - capacity to repay."

The stress test echoed a warning the IMF issued in May on growing exposure to the mainland.

Late last month, ratings agency Moody's restated its negative outlook on the city's banking system owing to the risk of rapidly expanding exposure to mainland borrowers, which grew by 29 per cent in 2013 and accounted for 20 per cent of total banking assets, or HK$2.3 trillion, by the end of last year.

However, analysts said continued strong mainland growth would lessen the risk.

"The risks are higher than lending to Hong Kong companies but these risks are controllable," said Liao Qun, senior vice-president of strategy and planning for China banking at Citic Bank International. "The most important thing is that economic growth in China remains fast."

On Wednesday, the mainland posted 7.5 per cent growth in gross domestic product for the second quarter of the year after recording slightly slower growth in the first quarter.

Growth under 6 per cent would likely lead to major defaults at mainland firms, to which the Hong Kong banking sector would be exposed, Liao said, but he noted that the current pace of the economy was sufficient in mitigating much of the risk.