34
FINANCIAL STRUCTURE
and are issued and redeemed as the value of notes in circulation rises and falls. The fund receives and makes payment in Hong Kong dollars through accounts it holds with the note-issuing banks. The fund bears the cost of maintaining the note issue except for a small proportion, equivalent to the proportion of authorised issues to the total note issue, which is met by the note-issuing banks. The bulk of the fund's resources are held in foreign currencies and are employed in a variety of deposits and investments denominated in several currencies. Until 1971, virtually all of those funds and those held by the general account as well, were in sterling. But since then, sterling holdings have been progressively diversified and, by the end of 1977, sterling accounted for less than 15 per cent with the balance in other major currencies. It is these resources that are used by the government to influence, when thought appropriate, the foreign exchange value of the Hong Kong dollar.
Since April 1, 1976, the fund also has held the bulk of the foreign exchange assets previously held in the general account and all the assets of the Coinage Security Fund. These were transferred to the Exchange Fund against the issue of debt certificates denominated in Hong Kong dollars bearing interest at appropriate market rates. This means that all losses and gains resulting from changes in the Hong Kong dollar value of official foreign assets now accrue to the Exchange Fund, which was designed for the purpose of regulating the exchange value of Hong Kong currency. Consequently, the general revenue balance in the government's statement of assets and liabilities normally only reflects the difference between the government's cash receipts and pay- ments. It also is proposed to transfer the Hong Kong dollar balances in the general account, apart from small working balances, to the Exchange Fund. After this transfer, all the government's financial assets will be held by the fund, which will effectively become banker to the Treasury.
The exchange value of the Hong Kong dollar was established in 1935 at about Is 3d sterling ($16 to £1). On the setting up of the International Monetary Fund after World War II, the Hong Kong dollar was given its own gold parity at a rate reflecting this relationship. The relationship with sterling was, however, not a statutory one, and was established and maintained by the operations of the Exchange Fund in conjunction with the note-issuing banks. It weakened after the devaluation of the pound in November, 1967, and it ended after the pound was allowed to float downwards in June, 1972. Early in the following month, the Hong Kong Government decided to fix the exchange value of the Hong Kong dollar in terms of United States dollars instead of sterling. But in November, 1974, this link was broken as well, and the Hong Kong dollar was allowed to float independently. Since then its value has fluctuated according to market conditions. Appendix 5 sets out changes in the exchange value of the Hong Kong dollar from 1946 to November, 1974.
In the first quarter of 1977, the Hong Kong dollar continued to strengthen and appreciated against most currencies, despite some official intervention. Since then, however, with economic prospects not so favourable as in the previous year, the dollar weakened. At the end of 1977, the overall value of the Hong Kong dollar against the currencies of the territory's major trading partners, as measured by a trade-weighted index, was some seven per cent lower than at the end of 1976 and one per cent higher than in the period immediately before the currency floated.
Since the beginning of 1973, transactions between Hong Kong and overseas coun- tries have been free of all exchange control restrictions.