FINANCIAL AND MONETARY AFFAIRS
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weakening of the US dollar against the Japanese Yen, the Euro as well as the Sterling Pound, the EERI declined from 106 at the end of 2001 to a low of 102 in mid-July 2002. Thereafter, the index rebounded somewhat as the Yen depreciated on renewed concerns about the pace of banking sector reform in Japan. Towards the end of the year, a weakened economic outlook in the U.S. exerted downward pressures on the US dollar, leading to a decline in the EERI, which closed at 102.
Growth of Hong Kong dollar narrow and broad money diverged notably in 2002. The Hong Kong dollar narrow money increased by 12.9 per cent during the year, while broad money contracted by 0.6 per cent. The strong growth of the narrow money reflected in part a low opportunity cost of holding non-interest bearing monetary assets as well as an increase in cash demand associated with a rising number of tourists from the Mainland. The small decrease in broad money was attributable to a fall in time deposits, which was in part due to portfolio shifts for higher returns on the back of record-low deposit rates relative to yields on alternative assets, such as debt securities.
Loans for use in Hong Kong shrank for the second consecutive year by 2.4 per cent in 2002, reflecting the weak economic conditions. Analysed by economic use, the fall was broad-based. In face of the sluggish property market activities, loans for building, construction, property development and investment contracted moderately, while residential mortgage loans registered a small decline in 2002, following a rise in 2001. Outstanding credit card advances, which have registered strong increases in recent years, declined in 2002, probably reflecting tightening of credit card issuance and lending policies alongside continuing deterioration in loan quality and weak consumer spending. Loans for trade financing increased during the year, as external trade improved. As Hong Kong dollar deposits dropped less than Hong Kong dollar loans, the Hong Kong dollar loan-to-deposit ratio fell marginally to 88.5 per cent at the end of 2002, from 88.8 per cent a year earlier.
Exchange Fund
The Exchange Fund was established by the Currency Ordinance of 1935 (later renamed as the Exchange Fund Ordinance). Since its creation, the Fund has held the backing to bank note issues of Hong Kong. In 1976, the Fund's role was expanded. The backing for coins issued and the bulk of the foreign currency assets held in the Government's General Revenue Account, were transferred to the Exchange Fund. Meanwhile, the Government began to transfer the fiscal reserves of its General Revenue Account (apart from the working balances) to the Fund to centralise the investment management of its financial assets. Through this transfer, the bulk of the Government's financial assets are placed with the Fund. The Coinage Security Fund was merged with the Exchange Fund on December 31, 1978.
Prior to April 1, 1998, fiscal reserves were placed with the Exchange Fund as deposits on which market interest rates were paid by the Fund to the General Revenue. As the official reserves have grown significantly over the years, it was decided that the fiscal reserves placed with the Exchange Fund should seek to achieve a higher long-term real rate of return. With effect from April 1, 1998, the return on the fiscal reserves placed with the Exchange Fund is linked to its overall return.
Upon the establishment of the Hong Kong Special Administrative Region on July 1, 1997, the assets of the Land Fund Trust were vested in the Hong Kong SAR Government. The Chief Executive of the Hong Kong SAR appointed the Financial