FINANCIAL STRUCTURE
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for less than 15 per cent, with the balance in United States dollars and other major currencies.
Since April 1, 1976, the fund has also 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 certifi- cates denominated in Hong Kong dollars. The debt certificates issued to the General Account bear interest at appropriate market rates, but no interest is paid on certifi- cates held by the Coinage Security Fund because all coin issue maintenance costs are charged to the Exchange Fund. 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 established for the purpose of regulating the exchange value of the currency of Hong Kong. Consequently, the general revenue balance in the government's statement of assets and liabilities only reflects the difference between the government's cash receipts and payments. Since September, 1978, there has been a gradual transfer of the Hong Kong dollar balances of the General Account, apart from working balances, to the Exchange Fund. When this transfer has been completed the bulk of the government's financial assets will be held by the fund, which will effec- tively become banker to the Treasury.
The exchange value of the Hong Kong dollar was established in 1935 at 1s 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 however was not a statutory one and it was established and maintained by the operations of the Exchange Fund in conjunc- tion-with the note-issuing banks. It weakened after the devaluation of the pound in November, 1967, and 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.
During 1978 the overall value of the Hong Kong dollar in terms of the currencies of Hong Kong's major trading partners, as measured by a trade-weighted index, declined by some 12.6 per cent. At the end of 1978, its value was about 11.7 per cent lower than in the period immediately before the dollar floated in November, 1974. The decline reflected the wider trade deficit, itself the product of substantially more rapid growth in the domestic sector of the economy than in the export sector, and higher United States dollar interest rates.
At the end of 1978 the middle market rate for the United States dollar was about HK$4.80=US$1. Since the beginning of 1973, transactions between Hong Kong and overseas countries have been free of all exchange control restrictions.
Banking
Banks are licensed in Hong Kong under the Banking Ordinance which provides for their supervision and inspection by a Commissioner of Banking and imposes certain