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FINANCIAL SYSTEM AND ECONOMY
With effect from February 25, 1982, the government exempted interest paid on foreign currency deposits in Hong Kong from interest withholding tax, which had previously been levied at 15 per cent. (At the same time, the rate of interest tax on Hong Kong dollar deposits was reduced to 10 per cent.) The remainder of the year witnessed a very substantial expansion of foreign currency deposits held with banks and deposit-taking companies, as deposits were switched to Hong Kong from other centres and as some existing Hong Kong dollar deposits were switched into foreign currencies. All in all, the foreign currency deposit base of the monetary sector has been strengthened and the position of Hong Kong as an international financial centre enhanced.
Through its bankers the government is active in the foreign exchange market to the extent that the portfolio management considerations of the Exchange Fund require, and the timing of transactions can be varied with a view to their impact on the exchange rate of the Hong Kong dollar. The government may on occasions intervene more positively, but such intervention generally seeks only to smooth out erratic movements in the rate rather than to challenge more fundamental underlying trends.
The exchange value of the Hong Kong dollar strengthened in the early part of the year and remained quite firm well into the third quarter, no doubt helped by the narrowing of the visible trade gap. The currency was then hit by the anxieties about Hong Kong's future. Over the year as a whole the trade-weighted exchange rate index, which is calculated against the currencies of Hong Kong's 15 principal trading partners on a trade-weighted basis, showed a depreciation of 6.8 per cent. Meanwhile, reflecting in addition the marked overall strength of the United States currency, the Hong Kong dollar depreciated by 12.7 per cent against the US dollar.
Domestic Money Market
In Hong Kong wholesale transactions in the local currency are concentrated in the inter-bank market, which comprises large deposits taken by one bank or deposit-taking company from another. In particular, institutions with a local deposit base lend to those without such a base.
Other short-term instruments are less in evidence than in some other centres. There is no marketable direct government debt. Some bills of exchange are held in portfolios, but they are rarely traded. To some extent the same is true of locally issued certificates of deposit, but both the volume of such certificates in issue, and the extent to which they are traded on the secondary market, have increased considerably in the past year or so. During 1982, in the context of a long-standing commitment by the government to seek a resolution to problems which might be inhibiting the development of the secondary market for local certificates of deposit, officials held discussions with the institutions concerned. These were aimed in particular at determining whether such paper, held by banks and deposit-taking companies, could justifiably be allowed to count as a liquid asset for the purposes of meeting their statutory liquidity ratios.
The only direct government debt now outstanding is due to the Asian Development Bank, and amounted to the equivalent of $285 million at March 31, 1982. There is a small amount of marketable government-guaranteed debt, issued by government-owned bodies: this comprises $400 million of 10-year bonds and $206.75 million of five-year notes issued by the Mass Transit Railway Corporation, and $230 million of notes issued by the Hong Kong Building and Loan Agency Limited. The Mass Transit Railway Corporation also has a commercial paper facility, which was developed in 1979. The paper takes the form of negotiable bills of exchange accepted by the corporation.