THE ECONOMY
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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 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 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. Apart from a very small fiduciary issue, which is backed by securities issued or guaranteed by the British or Hong Kong Government, currency notes in everyday circulation (currently of $10, $20, $50, $100, $500 and $1,000 denominations) may only be issued by the Hongkong and Shanghai Banking Corporation and the Standard Chartered Bank against holdings of certificates of indebtedness issued by the Exchange Fund.
These non-interest-bearing liabilities of the Exchange Fund are issued or redeemed as the amount of notes in circulation rises or falls. Since October 17, 1983, when the Hong Kong dollar was linked to the US dollar, certificates of indebtedness have been issued to and redeemed from the two note-issuing banks against payments in US dollars at a fixed exchange rate of HK$7.80 = US$1. The Exchange Fund bears the costs of maintaining the note issue (apart from the proportion of the costs which relate 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. However, the five-cent coins will be withdrawn from circulation from January 1, 1989. The total currency in circulation at the end of 1988, with details of its composition, is shown at Appendix 9.
Public Sector and Public Finances
In accounting terms, the public sector is conventionally taken to include the Hong Kong Government itself, together with the Housing Authority and the Urban and Regional Councils. Government grants to institutions in the private or quasi-public sectors are included but expenditure by organisations in which the government has only equity, such as the Mass Transit Railway Corporation and the Kowloon-Canton Railway Corporation, is not included.
The government controls its finances through a series of fund accounts. The General Revenue Account is the main account for day-to-day departmental expenditure and revenue collection. Five other funds exist mainly to finance capital expenditure and to make loans. They are the Capital Works Reserve Fund, the Development Loan Funds, the Lotteries Fund, the Mass Transit Fund the the Student Loan Fund. Following the enactment of the Housing (Amendment) Ordinance 1988 which reorganised the Hong Kong Housing Authority and its financial relationship with the government, the Home Ownership Fund, which had been in operation since 1977, was de-established. Under the new arrangements, the assets and liabilities of the Home Ownership Fund as at March 31, 1988 were handed over to the authority on April 1, 1988 to form part of the permanent government capital of the authority.