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THE ECONOMY
issued by the government) as well as the bulk of foreign currency assets held in the government's General Revenue Account transferred to the fund. In both cases, the transfer was made against the issue by the Exchange Fund of interest-bearing debt certificates denominated in Hong Kong dollars. On December 31, 1978, the Coinage Security Fund was merged with the Exchange Fund and all the debt certificates held by the Coinage Security Fund were redeemed.
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 the working balances) to the Exchange Fund against the issue of interest-bearing debt cer- tificates. 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 interest-bearing instruments in foreign currencies. The principal activity for the Exchange Fund is the day-to-day management of these assets. 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 of the Government Secretariat under the direction of the Financial Secretary, who is advised by a committee comprising prominent members of the banking and financial community.
Another function related to the Exchange Fund is the supply of notes and coins to the banking system. Currency notes in everyday circulation, of $10, $20, $50, $100, $500 and $1,000 denominations, may only be issued by the two note-issuing commercial banks against holdings of certificates of indebtedness issued by the Exchange Fund (apart from a very small fiduciary issue, which is backed by securities issued or guaranteed by the British or Hong Kong government). 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. Between June 23, 1972 and November 24, 1974, when the Hong Kong dollar was pegged to the US dollar, and between November 25, 1974 and October 15, 1983, when the Hong Kong dollar was floating, such payments were made in Hong Kong dollars. Since October 17, 1983, certificates of indebtedness have been issued and redeemed by the two note-issuing banks against payments 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 cent, 20 cent, 10 cent and five-cent denominations, and currency notes of one-cent denomination, are issued by the government.
1
The eleventh of a series of $1,000 gold coins minted to commemorate the Lunar New Year was issued early in 1986. There was another limited issue of $1,000 gold coins in November 1986, to commemorate the second visit to Hong Kong of the Queen and Prince Philip. These gold coins are legal tender, but do not circulate. The total currency in circulation at the end of 1986, with details of its composition, is shown at Appendix 5.
There are few monetary instruments available to the government for monetary policy purposes. From November 1974 until October 1983, the Hong Kong dollar was a floating currency. During this period, the Exchange Fund's role in directly influencing the exchange rate through intervention in the foreign exchange market was limited to ironing out short-term fluctuations.
On October 17, 1983, after a period of much instability in the exchange rate, a revised exchange rate system was introduced. Under the new arrangement, certificates of indebted- ness issued by the Exchange Fund, which the two note-issuing banks are required to hold as cover for the issue of Hong Kong dollar notes, are issued and redeemed against payments