Exchange and money markets remained stable throughout 2006 despite record fund flows related to initial public offerings and speculation on the effect of renminbi appreciation on the Hong Kong dollar.

This is the findings of Monetary Authority Chief Executive Joseph Yam in the authority's 2006 annual report, published today. It reviews trends and events in monetary and banking affairs and reports on the authority's work during the last year. It also sets out plans for the coming year.

Strong economy

Hong Kong enjoyed another year of robust economic growth in 2006, helped mainly by strong domestic demand, increases in trade with the Mainland and solid demand for goods and services from other major trading partners.

Unemployment fell to its lowest level in six years, while inflation remained moderate. Asset markets were stable after a strong rise in 2005 and the stock market staged a strong rally in the second half of 2006. Banks' profitability improved due to higher net-interest income, and income from fees and commissions.

Audited Exchange Fund accounts earned a gross investment income of $103.8 billion in 2006, with its rate of return exceeding that of the investment benchmark approved by the Financial Secretary on the advice of the Exchange Fund Advisory Committee by 0.6%.

Blueprint for HK's financial development

Other developments in 2006 included:

* the development of a blueprint for the financial development of Hong Kong that was adopted as part of the report by the Focus Group on Financial Services formed by the Chief Executive's Economic Summit on China's 11th Five-Year Plan and the Development of Hong Kong;

* the completion of the administrative work and legal process necessary to implement the Basel II requirements in Hong Kong on January 1;

* the launching of the deposit protection scheme;

* further expansion of renminbi business in Hong Kong; and,

* international credit rating agencies upgrading Hong Kong's sovereign ratings to AA, the highest they have ever been.