FINANCIAL AND MONETARY AFFAIRS
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. On December 31, 1978, the Coinage Security Fund was merged with the Exchange Fund.
=
In 1976, the government began to transfer the fiscal reserves of its General Revenue Account (apart from the working balances) to the fund. This arrangement was introduced to avoid fiscal reserves having to bear the exchange risk arising from investments in foreign currency assets and to centralise the management of the government's financial assets. The fiscal reserves are not permanently appropriated for the use of the Exchange Fund. They are repaid to the General Revenue Account when they are required to meet the obligations of the general revenue. The bulk of the government's financial assets are, therefore, with the fund, which holds its assets mainly in the form of bank deposits in certain foreign currencies and in Hong Kong dollars, and marketable interest-bearing instruments in foreign currencies.
The principal activity of the Exchange Fund on a day-to-day basis is 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 and it intervenes, when necessary, in the local money market or foreign currency markets to maintain stability. The functions of the fund were extended on the enactment of the Exchange Fund (Amendment) Ordinance 1992 by introducing a secondary and subsidiary role of maintaining the stability and integrity of the monetary and financial systems.
In the past, the management of the fund was passive, characterised by a conservative approach with a preference for a high degree of liquidity and for short-term investments. Both the overall size of the fund, and the greater emphasis on the long-term stability and strength of Hong Kong's financial system, now enable the management of the Exchange Fund to have a longer-term outlook. The HKMA has upgraded and modernised its management of the Exchange Fund. Strategies more appropriate to a long-term fund, such as a benchmark approach and a greater use of the long-term capital markets, have been adopted. The range of currencies and instruments used has been increased, including, for the first time, investments in traded equities for a part of the Exchange Fund. The resources allocated to the management of the fund have also been increased fivefold. The HKMA has placed great emphasis on establishing links with other market participants. The aim is for openness and co-operation with the markets, with a view to developing good working relationships to enable the markets to play their part in assisting in the modernisation of the management of the fund.
Another function related to the Exchange Fund is the supply of notes and coins to the banking system. Bank notes (currently of $10, $20, $50, $100, $500 and $1,000 denominations) are issued by the Hongkong and Shanghai Banking Corporation Limited and Standard Chartered Bank. Apart from a very small fiduciary issue, which is backed by gilt-edged securities, the note-issuing banks may only issue currency notes against holdings of certificates of indebtedness issued by the fund. Legislative amendments were passed in July to make the Bank of China the third note-issuing bank. The Bank of China intends to commence issuing banknotes in May 1994.
83
84
וי