Financial and Monetary Affairs 101
After being largely stable at low levels in the first half of 2011, Hong Kong dollar interbank interest rates increased slightly in the second half, tracking the upward movements in their US dollar counterparts. The upticks in Hong Kong Interbank Offered Rates (HIBORS12) also reflected increased demand for year-end Hong Kong dollar liquidity and occasional funding needs arising from IPOs in the equity market. Despite the modest rises, the short-term interbank rates stayed well below the Base Rate of the Discount Window.
From January to July the forward discounts were generally stable, consistent with the roughly stable HIBOR-LIBOR13 spreads. However, tighter Hong Kong dollar liquidity towards the end of 2011 was evident in the forward market. Following some widening in August, the Hong Kong dollar forward discounts broadly narrowed during the period between September and December and the three- month forward point even momentarily turned from discounts to small premiums in December. Some market participants might have tapped into collateralised term funding by swapping US dollars for Hong Kong dollars, leading to the contraction in forward discounts, especially during the last two months of the year.
To strengthen its oversight of global financial issues, the HKMA established the Financial Stability Surveillance Division under the Monetary Management Department in December 2011. The new division brings together staff of the Banking Policy Department and the Monetary Operations Division previously engaged in macro- prudential surveillance work. Their analyses will form the basis for deliberations by the HKMA Macro Surveillance Committee, which was set up in the second quarter of the year to facilitate regular monitoring of risks and vulnerabilities to Hong Kong's monetary and financial system. In 2011, the committee examined a number of major risks, including the rapid pace of credit growth among Als and the development of the sovereign debt crisis in Europe.
Exchange Fund
According to the Exchange Fund Ordinance, the Exchange Fund's primary statutory role is to affect the exchange value of the Hong Kong dollar. It can also be used to maintain the stability and integrity of the monetary and financial systems, with a view to maintaining Hong Kong as an international financial centre.
The HKMA is responsible to the Financial Secretary for the use and the investment management of the Exchange Fund. 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 distinct portfolios. The Backing Portfolio holds highly liquid US dollar-denominated debt securities to fully back the monetary base. The Investment Portfolio aims to preserve the fund's long-term purchasing power. The asset allocation strategy of the Exchange Fund is guided by the investment benchmark approved by the Financial Secretary on the
12 HIBORS are the rate of interest offered on Hong Kong dollar loans by banks in the interbank
market for a specified period ranging from overnight to one year.
13 London Interbank Offered Rate.