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The Hong Kong dollar exchange rate stayed close to the linked rate of
7.80 during the first three quarters of 2003, but strengthened markedly
to 7.70 in early October before easing to 7.7631 at the end of 2003. In
response to banks' bids, the HKMA has sold a cumulative $31.9 billion
of Hong Kong dollars since late September 2003. The notable strengthening
of the Hong Kong dollar reflects improved prospects of the economy, the
US dollar weakness, and the international pressure for the renminbi to
appreciate.
Hong Kong dollar interest rates were on a downtrend
during the year, with a brief increase in April-May on worries about the
negative impact of the SARS outbreak. Domestic interest rates have dropped
below the US dollar counterparts since August 2003. In terms of one-month
money, Hong Kong dollar interbank interest rate (HIBOR) closed the year
at 0.07 per cent, 99 basis points below the corresponding euro-dollar
rate, owing in part to a larger Aggregate Balance. The best lending rate
quoted by major banks in Hong Kong was unchanged at 5.0 per cent during
the year, while the savings deposit rate quoted by major banks dropped
marginally from 0.03 per cent to 0.01 per cent.
The yields on Exchange Fund paper largely followed
those on US Treasuries, with 7-year and 10-year Notes closing the year
at 3.73 and 4.37 per cent respectively. The yield curves of Exchange Fund
papers steepened during the year, mainly reflecting decreases in short
term interest rates. The yield differentials between the Exchange Fund
Notes and US Treasuries decreased during the year, to -50 basis points
and 12 basis points respectively for 7-year and 10-year paper.
The overall exchange value of the Hong Kong dollar,
as measured by the trade-weighted Effective Exchange Rate Index (EERI),
was predominantly affected by the exchange rate of the US dollar vis-
à -vis other major currencies. Largely reflecting a weakening of
the US dollar against other major international currencies, the EERI decreased
from 102 at the end of 2002 to 99 at the end of 2003.
Growth of Hong Kong dollar narrow money (HK$M1) and
broad money (HK$M3) accelerated notably from mid-2003. Narrow money (seasonally
adjusted) increased by 35.8 per cent during the year, while broad money
rose by 5.9 per cent. The brisk growth of narrow money was attributable
in part to a low opportunity cost of holding non-interest bearing monetary
assets as well as a significant rebound in stock market activity in the
second half of 2003. The pick-up in growth of broad money reflected a
revival in economic activity although it was still restrained by record-low
deposit rates. For example, the estimated return on broad money, which
is a weighted average of the yields of its components, was close to zero,
and much lower than yields on longer-term US Treasuries.
Loans for use in Hong Kong shrank for the third consecutive
year by 1.4 per cent in 2003, as credit demand continued to be affected
by sluggish private investment, the weak property market and slack in
the labour market. Analysed by economic use, residential mortgage loans,
and loans for building, construction, property development and investment
fell further in 2003. In other sectors, outstanding credit card advances
continued to decrease in 2003, although the rate of decline moderated
in the second half. Notwithstanding a pick-up in consumer spending, the
drop in credit card advances reflected mainly a tightening of credit card
issuance and lending policies by banks, write-offs and restructuring of
credit card receivables during the year. Trade financing remained robust,
alongside strong external trade performance. Lending to stockbrokers and
financial concerns increased in the second half of the year, attributable
to active stock market activity. The contraction in Hong Kong dollar loans,
coupled with an expansion in Hong Kong dollar deposits led to a fall in
the Hong Kong dollar loan-to-deposit ratio to 81.5 per cent at the end
of 2003, from 88.5 per cent a year earlier. |
