The US credit crisis has shown signs of improving, but it is likely that the US is heading toward a recession, Hong Kong's central bank governor said yesterday.

Joseph Yam, chief executive of the Hong Kong Monetary Authority (HKMA), said in a paper to the Legislative Council that there are signs of improvement and stability in the US credit market, but the situation has not yet returned to normal.

Other than rate cuts and liquidity injections, the US Federal Reserve (Fed) introduced the Term Auction Facility (TAF) in December, and the Term Securities Lending Facilities in March.

Yam said the Fed has taken steps to safeguard the economy, through both monetary and regulatory policies.

However, Yam remains cautious about the US market.

He noted that the securities market is still stagnant, interbank market remains tight and the credit crunch is spreading out to the general economy.

He warned: "There are increasing signs that the US is entering a recession".

The US real gross domestic product (GDP) growth slowed substantially to 0.6 percent, quarter-on-quarter, in the fourth quarter of 2007. Yam also noted that the housing market is still weakening.

Yam stressed that the Hong Kong banking system does not have huge subprime-related problems and that banks must continue to adopt prudent lending standards.

The HKMA has asked banks to review and enhance, where appropriate, their risk management, as he said: "One of the lessons of the US subprime crisis is that market liquidity could dry up quickly".

Yam also noted that additional pressure on the Hong Kong dollar emerged in March with the rapid depreciation of the dollar and the continued appreciation of the yuan. He also expressed concerns about domestic inflation pressure.

However, he said that the spot exchange rate depreciated in late March and in April, partly reflecting carry trades, and the HKMA did not carry out any market operations during the first quarter.

The climbing yuan attracted more deposits recently.

By the end of February, however, yuan deposits accounted for a mere 0.8 percent of the total deposits in Hong Kong. The authority expects the demand for yuan outside of the mainland to increase.

(HK Edition 04/23/2008 page2)