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THE ECONOMY
The Exchange Fund was further expanded in 1978 when the government began to transfer the Hong Kong dollar balances of its General Revenue Account (apart from working balances) to the Exchange Fund against the issue of interest-bearing debt certificates. Thus the bulk of the government's financial assets are now held in the Exchange Fund, mainly in the form of bank deposits in certain foreign currencies and in Hong Kong dollars, and of various interest-bearing instruments in foreign currencies. Today, the principal activity of the fund is the day-to-day management of these assets, while its statutory role as defined in the Exchange Fund Ordinance is to influence the exchange value of the Hong Kong dollar. The Exchange Fund is managed by the Monetary Affairs Branch under the direction of the Financial Secretary, who is advised by a committee comprising prominent members of the banking community.
Another function related to the fund is the supply of notes and coins to the banking system. Currency notes in everyday circulation are $10, $20, $50, $100, $500 and $1,000 and may only be issued by the two note-issuing commercial 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. When the Hong Kong dollar was pegged to sterling prior to June 1972, certificates of indebtedness were issued and redeemed in sterling at a fixed exchange rate. But between June 23, 1972 and October 15, 1983, such payments were made in Hong Kong dollars. With effect from October 17, 1983, certificates of indebtedness have been issued and redeemed by the note-issuing banks against payment in US dollars at a fixed exchange rate of US$1 HK$7.80. The Exchange Fund bears the costs of maintaining the note issue (apart from the 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, 10 cents and five cents, and currency notes of one cent denomination, are issued by the government. The tenth of a series of $1,000 gold coins minted to commemorate the Lunar New Year was issued early in 1985. These gold coins are legal tender, but do not circulate. The total-currency in circulation at the end of 1985, with details of its composition, is shown at Appendix 5.
Foreign Exchange, Money and Other Financial Markets
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Hong Kong has a mature foreign exchange market where the local currency and major international currencies are actively traded. Several factors have contributed to the development of the foreign exchange market which has been an integral part of Hong Kong's emergence as a major international financial centre. First, there are no exchange controls in Hong Kong. Second, international banks may trade through their Hong Kong offices while other centres in Europe and North America are closed. Third, the continuous requirements of local industry and commerce in relation to their transactions with the rest of the world have ensured active trading in the local currency.
There is also a well developed interbank money market, where wholesale Hong Kong dollar deposits are traded among the banks and deposit-taking companies. Other short-term instruments are less in evidence than in some other centres, partly because the government is not itself active as a regulator of the monetary system's reserves through open market operations in such instruments. Nevertheless, markets in locally issued certificates of deposit and commercial paper have been growing in significance.
The stock market provides a source of capital to local enterprises and has attracted significant overseas investor interest. There are at present four stock exchanges in Hong Kong, namely, Far East Exchange, Hong Kong Stock Exchange, Kam Ngan Stock Exchange and Kowloon Stock Exchange. The Stock Exchanges Unification Ordinance