Financial and Monetary Affairs | 101
The governance structure of the HKICPA was changed in 2004 to enhance the transparency and independence of the regulation of the profession. Under the new structure, the Chief Executive is empowered to appoint four lay members to the council of the HKICPA, and at least 18 lay members each to its disciplinary and investigation panels.
Monetary Policy
The objective of Hong Kong's monetary policy is to maintain currency stability. Given the fact that Hong Kong's economy is externally oriented, this means. maintaining the external value of its currency in terms of its exchange rate in the foreign exchange market against the US dollar at around $7.80 to US$1. This clear monetary policy objective is achieved through the linked exchange rate system, which was introduced in October 1983 after a nine-year period during which the Hong Kong dollar floated and the exchange rate was volatile.
The linked exchange rate system is characterised by currency board arrangements requiring the Hong Kong dollar monetary base to be at least 100 per cent backed by and changes in it to be 100 per cent matched by -corresponding changes in US dollar reserves held in the Exchange Fund at the fixed exchange rate of $7.80 to US$1. In Hong Kong, the monetary base includes the amount of currency notes and coins issued, the Aggregate Balance (the sum of the clearing balances of banks held with the HKMA for the purpose of effecting the clearing and settlement of transactions between banks themselves and also between the HKMA and banks), and the outstanding amount of Exchange Fund Bills and Notes.
Since the inception of the linked exchange rate system in October 1983, note- issuing banks are required to hold Certificates of Indebtedness (CIs) issued by the Exchange Fund to provide backing for bank note issuance. The issuance and redemption of Cls is made against US dollars at the convertibility rate of $7.80 to US$1 for the account of the Exchange Fund. Similarly, the issue and withdrawal of government-issued currency notes and coins in circulation is conducted against US dollars at the fixed exchange rate of $7.80.
When the linked exchange rate system was introduced in October 1983, there was no institutional arrangement whereby banks in Hong Kong maintained clearing accounts with the currency board. Thus, that part of the monetary base represented by the clearing balances of the banking system was initially not subject to the discipline imposed by a currency board system. Action was taken to correct this in 1988 through arrangements that required the Management Bank of the Clearing House of the HKAB to maintain a clearing account with the Government's then Monetary Affairs Branch for the account of the Exchange Fund. This was replaced by another arrangement, when the RTGS system was introduced for interbank transactions in Hong Kong towards the end of 1996. Since then, all licensed banks have had to maintain direct clearing accounts with the Exchange Fund.
By assuming responsibility for the interbank clearing system, the HKMA also became responsible for the provision of lending to any banks experiencing day-to-day shortages of liquidity. A Liquidity Adjustment Facility was set up in 1992 for this