FINANCIAL AND MONETARY AFFAIRS
management of the fund's assets. These are held mainly in the form of high quality bonds and equities. To meet the Government's operational needs, part of the Exchange Fund is also held in Hong Kong dollar denominated securities.
The HKMA regularly reviews its investment strategy and operations. In line with the statutory purposes of the Exchange Fund, the investment strategy in place is similar to that pursued by other central banks and monetary authorities overseas. An investment strategy appropriate for a long-term fund such as a benchmark approach and a greater use of the long-term capital markets - has been adopted, and the range of currencies and instruments used has also been increased.
To meet the objectives of preserving capital, providing liquidity to maintain financial and currency stability and generating an adequate long-term return, the Exchange Fund is managed as two distinct portfolios. The first is a Backing Portfolio to ensure that the monetary base related to the currency board operations is fully backed by highly liquid, short-term US dollar denominated interest-bearing securities. The second is an Investment Portfolio to preserve the fund's value for future generations in Hong Kong. The management of the fund and the investment style adopted are set out and explained in the HKMA's annual report each year.
On June 30, the Exchange Fund's total assets stood at $952.9 billion, of which foreign currency assets amounted to $705.6 billion (or US$90.9 billion). The accumulated surplus of the Exchange Fund amounted to $266.5 billion. The fund's financial position from 1995 to June 1999 inclusive, is shown at Appendix 19. With a view to showing the Government's continued commitment to greater openness and transparency, foreign currency asset figures have been published on a monthly basis since January 1997.
Another function related to the Exchange Fund is currency notes and coins. issuance. Banknotes in denominations of $20, $50, $100, $500 and $1,000 are issued by the three note-issuing banks in Hong Kong: the Hongkong and Shanghai Banking Corporation Limited, the Standard Chartered Bank and the Bank of China. The note-issuing banks may issue currency notes only by surrendering non-interest- bearing US dollar backing at a fixed exchange rate of 7.80. Thus the fund enjoys the seigniorage of the currency notes.
Through the HKMA, the Government issues coins of $10, $5, $2, $1, 50 cents, 20 cents and 10 cents denominations. Sufficient quantities of all denominations of coins have been maintained for injection into the market as and when required. To facilitate a smooth transition to the Year 2000, the collective banknote reserve of the three note-issuing banks was built-up to $150 billion or 160 per cent of the normal expected level of circulation in December. In the event, the total notes and coins in circulation was increased by $28 billion to the peak of $124 billion at the end of 1999.
Exchange Fund Investment Limited
Exchange Fund Investment Limited (EFIL) was established in October 1998 as a private limited company under the Companies Ordinance to manage the Hang Seng Index (HSI) constituent stocks acquired by the Government during the market operation in August 1998. EFIL also manages the portfolio of Hong Kong equities transferred from the Land Fund to the Exchange Fund in November 1998.
In April, EFIL announced the appointment of three financial advisers in connection with the disposal of the Exchange Fund's Hong Kong equity portfolio
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