FINANCIAL AND MONETARY AFFAIRS
Exchange Fund Bills). The first weekly tranche of Exchange Fund Bills worth $200-$300 million was expected to be launched early in 1990.
The Exchange Fund
The Hong Kong Government's Exchange Fund was established by the Currency Ordinance of 1935 (later renamed the Exchange Fund Ordinance). Since its inception, the fund has held the backing to the note issue. In 1976, its role was expanded, with the assets of the Coinage Security Fund (which held the backing for coins issued by the government) as well as the bulk of foreign currency assets held in the government's General Revenue Account, being transferred to the fund. In both cases, the transfer was made against the issue by the 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 redeemed.
The 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 fund, against the issue of interest-bearing debt certificates. Thus, the bulk of the government's financial assets are now held in the 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 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 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 gilt-edge securities, 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 Limited (formerly The Hongkong and Shanghai Banking Corporation) and the Standard Chartered Bank, against holdings of certificates of indebtedness issued by the fund.
These non-interest-bearing liabilities of the 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 fund bears the costs of maintaining the note issue (apart from the proportion of the costs relating 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 and 10 cents denominations, and currency notes of one-cent denomination, are issued by the government. The total currency in circulation at the end of 1989, with details of its composition, is shown at Appendix 13.
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