FINANCIAL AND MONETARY AFFAIRS
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On December 3, 1998, the Board of Directors of the HKMC gave its approval in principle for the HKMC to partner with mortgage insurers to launch a mortgage insurance scheme that will let home buyers secure mortgage loans up to 85 per cent loan-to-valuation ratio. Under the scheme, the HKMC provides a guarantee at a fee to the lending bank for an amount up to 15 per cent of the value of the property. The HKMC fully hedges the exposure of the guarantee by taking out an insurance of equal amount with a mortgage insurer. The Mortgage Insurance Programme has been well received by the market since its launch on March 31. At the end of the year, 2 150 applications with an aggregate loan value of $4.4 billion have been received from 30 banks. Secondary market transactions account for over 88 per cent of the application received. This indicates that the programme has served to improve liquidity of the secondary property market.
With the launch of the Mortgage-backed Securities (MBS) in October, the HKMC entered the second phase of its business plan. This back-to-back structure allows banks to effectively 're-package' their mortgage assets into a more liquid asset and maintain the majority of the cash flow if they hold the MBS in their own investment portfolio. This 'win-win' structure is appealing to banks and investors. The high quality of Hong Kong residential mortgages, coupled with the HKMC guarantee for the timely pass-through of all principal and interest due on the bonds, serves to make the HKMC MBS a safe and attractive investment for investors. The HKMC was able to issue an impressive HK$1.63 billion of MBS in the fourth quarter of 1999 with two of its key business partners, namely Dao Heng Bank and American Express Bank.
Monetary Policy
Hong Kong's monetary policy objective is currency stability. Given the highly externally oriented nature of the Hong Kong economy, this objective is further defined as a stable external value for the currency in terms of a fixed exchange rate against the US dollar at the rate of $7.80 to US$1. This clear monetary policy objective is achieved through the linked exchange rate system. This system was introduced in October 1983 after a nine-year period in which the Hong Kong dollar floated and the exchange rate was volatile.
The linked exchange rate system is a currency board system, which theoretically requires the monetary base to be backed by a foreign currency at a fixed exchange rate. In Hong Kong, the monetary base includes the amount of bank notes and coins issued, the balance of clearing accounts of the licensed banks held with the HKMA for the account of the Exchange Fund for the purpose of effecting the clearing and settlement of transactions between the banks themselves and also between the currency board and the banks (the Aggregate Balance), and the outstanding amount of Exchange Fund Bills and Notes.
Since the inception of the linked exchange rate system in October 1983, the issuance and redemption of bank notes, through the note-issuing banks, are required to be made against US dollars at the fixed exchange rate of $7.80 to US$1. Specifically, Certificates of Indebtedness, which authorise note-issuing banks to issue banknotes, are issued and redeemed against US dollars at that fixed rate and for the account of the Exchange Fund. In other words, the Certificates of Indebtedness, which are cover for banknotes, are fully backed by US dollars and are convertible into US dollars at the fixed rate of $7.80 to US$1. Similarly, the issue and withdrawal of coins in circulation are conducted against US dollars at a fixed exchange rate of 7.80.
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