48
FINANCIAL SYSTEM AND ECONOMY
The international gold market in Hong Kong was equally active during the year. Dealings in this market take place in United States dollars per troy ounce of 99.95 per cent fine gold, with delivery in London. The price of gold loco London at the end of 1980 was US$588 per ounce compared with US$526 per ounce at the end of 1979.
Exchange Fund
The Hong Kong Government Exchange Fund is effectively the banker to the government, and so carries out a number of quasi-central banking functions. The Exchange Fund was established by the Currency Ordinance of 1935 (later renamed the Exchange Fund Ordin- ance), with its stated purpose being to regulate the exchange value of the Hong Kong dollar. The fund is managed by the Monetary Affairs Branch of the Government Secretariat under the directions of the Financial Secretary.
From its inception the fund has held the backing to the note issue, with notes being issued by the two note-issuing banks The Hongkong and Shanghai Banking Corporation and The Chartered Bank against their holdings of certificates of indebtedness. These are non-interest-bearing liabilities of the Exchange Fund, and are issued or redeemed as the value of the notes in circulation rises or falls. The role of the fund was developed further in 1976 when all the assets of the Coinage Security Fund (which held the backing for coins issued by the government), as well as the bulk of the foreign currency assets held in the government's General Revenue Account, were transferred to the fund. In both cases, the transfers were made against the issue by the fund of debt certificates denominated in Hong Kong dollars. On December 31, 1978, the Coinage Security Fund was merged with the Exchange Fund and all the certificates held by the Coinage Security Fund were redeemed. Apart from some very small working balances the fund is, therefore, the sole repository of Hong Kong's official foreign currency reserves. As a result, 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, and all changes in the Hong Kong dollar value of official foreign currency assets are reflected in the Exchange Fund's accounts.
The role of the Exchange Fund was expanded again in 1978 when the government began to transfer the Hong Kong dollar balances of the General Revenue Account (apart from working balances) to the Exchange Fund against the issue of interest-bearing debt certificates. Now that the transfer has been completed, the bulk of the government's financial assets are held by the Exchange Fund. The resources of the fund are invested in Hong Kong dollars and in other currencies. These resources are used if the government intervenes in the foreign exchange markets to influence the value of the Hong Kong dollar. Steps were taken in 1979 to prevent short-term Hong Kong dollar balances held by the Exchange Fund with banks in Hong Kong from acting as a base for credit creation, and to remove those balances from the Hong Kong money supply.
SA
Currency and Exchange Value of the Dollar Currency notes are issued by two commercial banks The Hongkong and Shanghai Banking Corporation and The Chartered Bank. Notes in everyday circulation are $10, $50, $100, $500 and $1,000, and may only be issued against holdings of Exchange Fund cer- tificates of indebtedness, apart from a very small fiduciary issue, which is backed by securities issued or guaranteed by the British or Hong Kong governments. The Exchange Fund bears the costs of maintaining the note issue (apart from that proportion of the costs which relates to the fiduciary issue), and the net profits of the note issue accrue to the fund.