Financial Secretary Paul Chan on Sunday warned of challenges facing Hong Kong's economic recovery amid the imminent interest rate hikes by the US Federal Reserve and other central banks.

Writing on his official blog, the finance chief said the higher rates would affect the global economy and capital flows, and might spark volatility in financial markets.

He pointed out that the widening of interest rate gaps between Hong Kong and US dollars has attracted carry trade activities and prompted funds to flow gradually from the Hong Kong dollar to the greenback, and the Hong Kong Monetary Authority had repeatedly bought Hong Kong dollars in recent months in accordance to the Linked Exchange Rate System

Chan stressed the city has resilient public finances and an effective mechanism to monitor financial risks, adding that it has a foreign exchange reserve of more than US$440 billion. Local banks, he stressed, also conduct their business prudently.

He said all these give Hong Kong the fundamental strength to uphold the Linked Exchange Rate System.

Meanwhile, the finance minister said while the city's employment situation is improving, he isn’t optimistic about the latest export figures due out this week because of the weak global economy.

He warned that second quarter GDP figures would also be unsatisfactory despite a slight improvement.