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FINANCIAL SYSTEM AND ECONOMY
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 in the Exchange Fund, and are placed by the fund in bank deposits in Hong Kong dollars and certain foreign currencies, and in various interest-bearing instruments in foreign currencies. The fund transacts its business through 87 banking, safe custody and security accounts in 13 countries, reflecting the extensive programme of diversification, in terms of both currencies and management, of our financial assets in recent years.
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 by these banks against holdings of Exchange Fund certificates 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.
Coins of $5, $2, $1, 50 cents, 20 cents and 10 cents denominations, and currency notes of one cent denomination, are issued by the government. In May, a new round $5 coin was introduced, and the old $5 coin thereafter gradually withdrawn from circulation before it was demonetised in October. The new coin, which has a distinctive security edge, is usable in vending machines that were unable to handle the previous ten-sided coin: its introduction forms another step in the modernisation of the coinage of Hong Kong, following the report of the Coinage Review Committee in 1974. The sixth of a series of $1,000 gold coins minted to commemorate the Chinese Lunar New Year was issued early in the year. These gold coins are legal tender, but do not circulate. The total currency in circulation at the end of 1981, and details of its composition, are shown in Appendix 11.
Hong Kong abandoned the silver standard of its currency in 1935, when the exchange value of the Hong Kong dollar was fixed at about 1s. 3d. sterling (or $16 to £1). With the