FINANCIAL AND MONETARY AFFAIRS
exchanges. It is taking a lead in the second phase of a review of securities legislation in an attempt to remove loopholes and consolidate similar provisions in relevant ordinances. The statutory listing rules have been revised to cater for the changing needs of the market. New applicants for registration as intermediaries in the securities and futures markets are now subject to more vigorous 'fit and proper' tests.
Hong Kong as an International Financial Centre
The favourable geographical position of Hong Kong, which provides a bridge in the time gap between North America and Europe, together with the economic links with China and other economies in the South-east Asian region as well as excellent communications with the rest of the world, has helped Hong Kong to develop into an important international financial centre.
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The foreign banks in Hong Kong tend to be the premier banks in their countries of incorporation and this is illustrated by the fact that 76 of the top 100 banks in the world in 1989 had operations in the territory. In addition, many of the most important merchant banks or investment banks operate in Hong Kong. A substantial proportion of the transactions in the banking sector are international in nature; over 50 per cent of the sector's aggregate assets and liabilities are external, spreading over more than 100 countries. The financial markets, particularly in foreign exchange and gold, form an integral part of the corresponding global markets. Moreover, Hong Kong serves as an important centre for the intermediation of international flows of savings and investment, particularly through the syndication of loans and international fund management. International investors play a significant and increasing role in Hong Kong, and Hong Kong's investment overseas is also believed to be considerable.
The Financial Scene
In 1989, the local financial scene was characterised by the following features. Firstly, the exchange rate of the Hong Kong dollar against the US dollar stayed close to the linked rate of HK$7.80 to US$1 throughout the year. Secondly, the uptrend in local interest rates, which began in 1988 and continued into the first quarter of 1989, was reversed in April, in line with movements in US dollar interest rates. Thirdly, the growth rate of Hong Kong dollar money supply showed some deceleration during the year, as did that of domestic loans and advances, against the background of a slow-down in overall economic growth.
During 1989, the market exchange rate of the Hong Kong dollar against the US dollar moved within a narrow range of HK$7.774 and HK$7.815 to US$1. At the end of the year, it closed at HK$7.807 This remarkable stability in the exchange rate, maintained even in late May and early June when the unrest in China caused tremendous volatility in the Hong Kong stock and Hang Seng Index futures markets, was clear evidence of the confidence people have in the linked exchange rate system, and the government's resolve and ability to maintain the linked rate at HK$7.80. This exchange rate stability has been underpinned by the accounting arrangements implemented in July 1988, which enable the government more effectively to influence the level of interbank liquidity.
Because of the link, the overall exchange value of the Hong Kong dollar shared a common trend with that of the US dollar. The effective exchange rate index of the Hong Kong dollar rose from 100.6 at the end of 1988 to a high of 106.2 in mid-June 1989, when the US dollar strengthened in the light of improved US trade figures and the sub- stantial premium of US dollar interest rates over German and Japanese rates. However, as the US dollar subsequently weakened against other major currencies, the effective exchange
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