Tsang said that he had to maintain the government's reserves -- which currently stand at around 500 billion Hong Kong dollars (64 billion US) -- due to the uncertainties of the global economy.

"We have not seen the bottom. The worst is still to come," he said, in a talk to the city's business community.

"Some may think I am using scare tactics. I am not."

With financial giants such as the Royal Bank of Scotland, AIG, and HSBC, reporting record losses in their annual results, Tsang said he would have to wait until the middle of this year to have a better grasp of how Hong Kong's economy is going to play out.

"At this time this year, I believe we need to be more pragmatic and more prudent than ever. That's why I do not want to give too much of your hard-earned money too readily and too fast," he said.

In his budget delivered last month, Tsang said Hong Kong's gross domestic product had shrunk 2.5 percent in the fourth quarter year-on-year, as the key finance and export industries were hit by the global slowdown.

Many analysts had called on Tsang to raid the hefty war chest to stimulate the flagging economy, but he resisted making any huge spending promises.

Hong Kong slipped into recession in the third quarter of 2008, a sharp contrast to the China-inspired boom over the past four years in the former British colony.

earlier related report
China's growth to slow to 6.5 pct in Q1: govt think tank
China's economy is likely to slow further to 6.5 percent in the first quarter, intensifying deflationary pressures, a government think tank said in a report published on Monday.

First-quarter economic growth will be slower than the 6.8 percent seen in the fourth quarter of last year, the State Information Centre said in a report published in the official China Securities Journal.

The government think tank also forecast the consumer price index (CPI), the main gauge of inflation, would fall 1.0 percent in the first quarter, compared with a rise of 1.0 percent in January.

China has set a full-year inflation target of four percent for 2009.

The last time the monthly CPI reading fell into negative territory was six years ago, when it slipped 0.4 percent in December 2002, according to previous government data.

Producer prices, which measure trends at the wholesale level, may drop 5.0 percent in the first quarter, the think tank said. The producer price index fell 3.3 percent in January.

Sustained price drops are alarming because they often cause consumers to delay major purchases in anticipation of still cheaper goods in the future, putting even more downward pressure on economic growth and prices.

In a separate report, the newspaper quoted Yi Gang, vice governor of the central bank, as saying consumer prices may see year-on-year declines in some months this year.

But he added that China is not seeing a classic deflationary spiral as the economy is still expanding and "the central bank has sufficient monetary tools to address deflation" and curb further price drops.

The government think tank also said exports, a pillar of the world's third largest economy, were likely to fall nine percent in the first quarter to 278.4 billion dollars while imports will drop 25 percent to 198.4 billion dollars.

It said that would lead to a 93.2 percent rise in China's trade surplus in the first quarter to 80 billion dollars.

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