FINANCIAL AND MONETARY AFFAIRS
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Foreign banks in Hong Kong tend to be the premier banks in their countries of incorporation and this is illustrated by the fact that 83 of the top 100 banks in the world in 1991 have operations in the territory. In addition, many merchant banks or investment banks of world standing operate in Hong Kong. A substantial proportion of the transactions in the banking sector are international in nature: more than 60 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 investment overseas is also believed to be considerable.
The Financial Scene
Affected by problems in other parts of the Bank of Credit and Commerce group, the operation of the Bank of Credit and Commerce Hong Kong Limited was suspended by the Commissioner of Banking on July 8 in order to preserve the bank's assets and to ensure fairness to all depositors. The Registrar General was subsequently appointed Provisional Liquidator of BCCHK. To alleviate immediate hardship to depositors, government provided the Provisional Liquidator with an indemnity to enable him to make an initial distribution of 25 per cent of the net credit balances to creditors, including depositors, subject to an upper limit of $500,000 in respect of the distribution to any depositor or creditor.
In July and August, following the BCCHK incident, several banks were the subject of unfounded rumours but the situation normalised very quickly because all the affected banks were fully capable of meeting their obligations. Performing the role as lender of the last resort, the Exchange Fund provided liquidity support to some of the affected banks. For the banking system as a whole, the customer deposit base, in terms of both total deposits and Hong Kong dollar deposits, continued to show a substantial increase.
With the approval of the High Court, the Provisional Liquidator entered into a Provisional Agreement with The Hong Kong Chinese Bank (HKCB) on November 22 for the transfer of the assets and recorded liabilities of BCCHK and BCCI Finance International Limited to a new bank to be formed and owned as to not less than 51 per cent by HKCB. The agreement would be subject to a number of technical and other issues being resolved, including, among other things, the design of an appropriate scheme of arrangement which has to be approved by the High Court and depositors, the issue of a banking licence to the new entity and the enactment of legislation to transfer the assets and liabilities to the new bank.
The primary monetary policy objective under the linked exchange rate system is to maintain a stable exchange rate between the Hong Kong dollar and the US dollar around the linked rate of 7.80. The pursuit of ancillary objectives, such as curbing inflation, is possible only within the confines of this overriding objective. Against rising inflationary pressures and expectations in the early part of 1991, local interest rates were increased in May as part of an anti-inflation package. Following a tightening of interbank liquidity and a one percentage point hike in deposit rates set by the Hong Kong Association of Banks (HKAB), the three-month Hong Kong dollar interbank interest rate firmed to around 8 per