Hong Kong's balance of payments account recorded a deficit of $12.5 billion (at 3.9% of GDP) in the third quarter, as compared to $21.7 billion (at 7.5% of GDP) in the second. Reserve assets correspondingly fell by the same amount.

At the end of September, the Government's external debt remained at zero, showing it is debt free.

The current account surplus widened considerably to $42.2 billion (at 13.2% of GDP) in the Q3, as inbound tourism and related service exports saw a sharp turnaround from the setback brought by SARS, aided by the launch of the individual visit scheme for Mainland visitors in July.

Inward direct investment and foreign purchase of local equity securities also rose notably, amid a better local investment environment. But at the same time, there was a surge in investment in overseas debt and equity securities by Hong Kong residents along with improvement in the global economic climate.

This resulted in a markedly larger net outflow of portfolio investment and hence an increased net outflow of financial non-reserve assets in Q3, which more than offset the sizeable current account surplus.

Hong Kong's direct investment abroad rose $39.2 billion and foreign direct investment in Hong Kong rose $59.5 billion during Q3, resulting in a net direct investment inflow of $20.3 billion, as against a net direct investment inflow of $34.8 billion in Q2.

On portfolio investment flow, assets rose $74 billion and liabilities fell $6.9 billion in Q3. Taken together, the resulting net outflow was $81 billion, compared to $25.9 billion in previous quarter.

The rise in portfolio investment assets was due to increased holdings of non-resident equity securities and debt securities by Hong Kong residents. The drop in portfolio investment liabilities was mainly attributable to decreased holdings of resident debt securities by non-residents, partially offset by increased holdings of resident equity securities by non-residents.

At the end of September, Hong Kong's gross external debt rose $1.2 billion from the end of June to $2.66 trillion, equivalent to 216% of GDP.