FINANCIAL AND MONETARY AFFAIRS
During the year under review, the exchange rate of the Hong Kong dollar against the US dollar remained stable under the linked exchange rate system. Local interest rates remained at low levels, consistent with the interest rates in the United States of America. Hong Kong dollar deposits and loans recorded solid growth.
The market exchange rate of the Hong Kong dollar against the US dollar moved within a narrow range of HK$7.722 and HK$7.761 to US$1. In May, it strengthened briefly to around HK$7.722. An inflow of overseas funds into the buoyant stock market and the firming up of interbank interest rates associated with new share issues contributed to the strengthening. In late June, it weakened once to an intra-day low of about HK$7.78, partly due to a rumour on the repatriation of funds to China to defend the exchange rate of the Renminbi. It then quickly rebounded to around HK$7.75 towards the end of June. During the fourth quarter, there was a strong inflow of overseas funds into the local stock market. As a result, the exchange rate of the Hong Kong dollar strengthened slightly, closing the year at HK$7.726 to US$1.
The marco-adjustment stabilisation programme of China, introduced in July, seemed to have little impact on the Hong Kong monetary sector. There was no clear sign of significant net outflow of funds to China, as evidenced by the stable Hong Kong dollar market exchange rate.
Under the linked exchange rate system, the overall exchange value of the Hong Kong dollar, as measured by the effective exchange rate index, is influenced predominantly by the movements of the US dollar against other major currencies. During most of the year, the US dollar appreciated against the major European currencies, as a result of the narrowing of the interest rate differential between the US dollar and the European currencies and the volatility in the exchange rates of some of the currencies under the Exchange Rate Mechanism. On the other hand, the US dollar weakened against the Japanese Yen in the face of the persistent trade surplus in favour of Japan. This trend was, however, reversed in the fourth quarter in view of the improved performance of the US economy. Largely reflecting these movements, the effective exchange rate index of the Hong Kong dollar edged up from 114.2 at the end of December 1992 to 115.3 in early February and then eased to 111.5 towards the end of April. It fluctuated around the range of 112-113 during the third quarter before edging up during the fourth quarter to close the year at 114.3. (For details, see Appendix 13.)
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Partly affected by the strong funding demand around the Lunar New Year, the three-month Hong Kong interbank offered rate (HIBOR) generally stayed above the corresponding Euro-dollar deposit rate in January and firmed up further in mid-February under the influence of large share flotation exercises. Subsequent to a liquidity injection into the banking system by the Hong Kong Monetary Authority, the differential between the three-month HIBOR and the corresponding Euro-dollar rate narrowed towards the end of February. The two rates moved closely together between March and June but HIBOR was slightly higher than the corresponding Euro-dollar rate in July, again due to some share flotation exercises. Since July, the three-month HIBOR has eased slightly, drifting marginally below the corresponding Euro-dollar rates in October and the first half of November, but firming towards the end of the year due to share flotation exercises as well as year-end tightness in interbank liquidity. For 1993 as a whole, the average interest rate differential (in terms of three-month rates) was 0.15 of a percentage point, about the same as the corresponding 0.13 percentage point recorded in 1992.
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