FINANCIAL AND MONETARY AFFAIRS
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exchange value of the Hong Kong dollar. Its functions were extended on the enactment of the Exchange Fund (Amendment) Ordinance 1992 by introducing a secondary role of maintaining the stability and integrity of the monetary and financial systems, with a view to maintaining Hong Kong as an international financial
centre.
The HKMA manages the Exchange Fund. Apart from ensuring that the Fund meets its statutory roles, the HKMA's principal activity is the day-to-day management of the Fund's assets. These are invested mainly in OECD bonds and equities. To meet the Government's operational needs, part of the Exchange Fund is also held in Hong Kong dollar denominated assets.
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 which ensures that the monetary base related to the currency board operations is fully backed by highly liquid, primarily short-term, US dollar denominated debt securities. The second is an Investment Portfolio which preserves the Fund's value for future generations of Hong Kong. The long term asset allocation strategy of the Exchange Fund is guided by the investment benchmark, which defines the bonds and equities mix as well as the overall currency composition of the Fund. The management of the Fund and the investment style adopted are set out and explained in the HKMA's annual report.
On December 31, 2003, the Exchange Fund's total assets stood at $1,011.6 billion, of which foreign currency assets amounted to $929.6 billion (or US$119.7 billion). The accumulated surplus of the Exchange Fund amounted to $384.9 billion. The Fund's financial position from 1998 to 2003 inclusive is shown in the Appendices. With a view to demonstrating the Government's continued commitment to greater openness and transparency, foreign currency asset figures have been published monthly since January 1997. In addition, an abridged balance sheet of the Exchange Fund and a set of Currency Board accounts are published monthly.
Another function related to the Exchange Fund is currency issuance. Bank notes in denominations of $20, $50, $100, $500 and $1,000 are issued by the three note-issuing banks: the Standard Chartered Bank, the Hongkong and Shanghai Banking Corporation Limited and the Bank of China (Hong Kong) Limited. 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 from the notes.
Through the HKMA, the Government issues the new $10 currency note and coins of $10, $5, $2, $1, 50 cents, 20 cents and 10 cents denominations. Sufficient quantities of the $10 note and all denominations of coins have been maintained for injection into the market when required. The total of notes and coins in circulation at year-end was $140.3 billion. The new $100 and $500 banknotes issued by the three note-issuing banks began to circulate in December (the new $20, $50 and $1,000 banknotes will be available by the second half of 2004). This is the first comprehensive redesign of banknotes for almost 10 years. The security features used in the new banknotes and the colour schemes of each denomination are standardised. On top of the security features used in the existing banknotes, the new banknotes contain a number of new features to enhance the security of the Hong Kong currency.