Hong Kong Deregulates Interest Rates

by Mary Swire, Tax-News.com, Hong Kong

04 July 2001

The Hong Kong Monetary Authority (HKMA) has announced that the final phase of interest rate deregulation covering Hong Kong dollar savings and current accounts is now in force. From yesterday (3 July 2001) interest rates on all types of deposits, including savings account deposits, will be determined by competitive market forces. The prohibition against interest on current accounts was also lifted at the same time.

David Carse, Deputy Chief Executive of the HKMA, stated: 'Deregulation will allow banks to compete for deposits freely on the basis of price and product innovation. This will enhance the efficiency and the competitiveness of our banking sector.'

According to reports from the People's Daily news service, analysts are predicting that full deregulation of the interest rate rule (IRR) system will shift Hong Kong's banking industry into a 'completely new era and this will produce a profound impact on banks, depositors and investors.' They added: 'It does not suit Hong Kong's status as an international financial centre to maintain the interest rate cartel.'

The HKMA noted that different banks have been responding to deregulation in different ways with regard to their charging policy for account services, minimum balance requirements and tiering of interest rates. Customers therefore have a choice as to how they access banking services and at what cost. However, as a greater diversity of banking products and services is available in the market, consumers should be prepared to shop around to look for the services that suit them best.

Raymond Or, general manager of Hong Kong's largest bank, HSBC, said: 'The banking industry in Hong Kong is experiencing fundamental changes for a number of reasons, of which one is interest rate deregulation. The removal of the maximum rate caps on deposits will increase competition and threaten to tighten margins further.'

In a report released by KPMG Hong Kong including a 2000 Banking Survey and outlook for 2001, Babak Nikzad, a banking partner at KPMG said: 'Although we have seen significantly improved results in 2000, this has primarily been driven by lower provisions. Continued fierce competition in the mortgage market, forthcoming deregulation of interest rates and the likely introduction of a deposit insurance scheme will all present major challenges.'

'However,' he added, 'on a positive note, if the current levels of liquidity persist, it is expected that banks will not increase deposit rates even in the deregulated environment, and this will help to protect interest margins in the short term. Nevertheless, banks will need to concentrate increasingly on operational efficiency, cost control and effective customer relationships management to maintain the growth in profits ... all in all, 2001 will be a challenging year.'

Mr Carse confirmed that the HKMA would be monitoring the impact of deregulation closely.

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