Financial and Monetary Affairs | 91
Anti-money Laundering and Counter Financing of Terrorism
Hong Kong keeps in view its anti-money laundering and counter financing of terrorism programme to maintain a safe business and investment environment. A high-level Central Co-ordinating Committee on Anti-Money Laundering and Counter Financing of Terrorism, chaired by the Financial Secretary, is in place to give steer on this policy area.
Monetary Policy
The monetary policy objective of Hong Kong is currency stability, defined as a stable external exchange value of the currency of Hong Kong, in terms of its exchange rate in the foreign exchange market against the US dollar, at around HK$7.80 to US$1. This clear policy aim is achieved through the linked exchange rate system introduced in 1983.
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 EFBNs.
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 are made against US dollars at the convertibility rate of HK$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 are conducted against US dollars at the fixed exchange rate of HK$7.80.
A Discount Window was introduced in
was introduced in 1998 under which banks have unrestricted access to day-end liquidity through repurchase agreements using EFBNs as collateral. The Base Rate is the reference on which the interest rates charged by the HKMA for different types of borrowings by licensed banks through the Discount Window are calculated. Before October 9, it was set at either 150 basis points above the prevailing US Federal Funds Target Rate or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates, whichever is higher.
Since October 9 the spread of 150 basis points above the prevailing US Federal Funds Target Rate has been reduced to 50 basis points. In addition, the other
leg relating to the moving averages of the relevant interbank interest rates has been removed from the formula until the end of March 2009.
Under the currency board system, Hong Kong dollar exchange rate stability is maintained through an interest rate adjustment mechanism. The monetary base increases when the foreign currency (in Hong Kong's case, US dollars) to which the
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