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Mr President, perhaps some Members may wish to remind us of what happened in Orange County in California. Let me reassure Members that there are two safeguards in the Bill against the Exchange Fund engaging in high risk financial activities. First, the financial arrangements can only be entered into for the prudent management of the Fund, i.e. for hedging purposes. Secondly, there will be prior consultation with the Exchange Fund Advisory Committee before the Financial Secretary can enter into such arrangements.

The fourth aspect of the Bill deals with the mechanism for a transfer of "excess assets" of the Exchange Fund to the general revenue and other funds of Hong Kong, as stipulated in section 8 of the principal Ordinance. The present section 8 was an addition in 1964. The purpose was to enable the Financial Secretary, subject to consultation with the Exchange Fund Advisory Committee and with the approval of the Secretary of State, to devote such assets of the Fund which have become surplus to the requirements of the Fund to the general revenue or to any other funds of Hong Kong as the Secretary of State may approve. The reason for the introduction of this measure was to avoid the excessive accumulation of assets in the Fund.

At the time, it was considered that a 105 per cent cover for the Certificates of Indebtedness outstanding, in other words the amount of bank notes issued, would be adequate for the requirements of the Fund. Section 8 was later amended in 1968 to require a 105 per cent cover not only for the face value of Certificates of Indebtedness outstanding but also borrowings for the account of the Exchange Fund.

It is therefore clear that the spirit of section 8 has always been that a transfer from the Exchange Fund can be made only when there are assets surplus to the requirements of the Fund. This is a sound and prudent principle which should continue to apply. However, the quantitative measure in section 8 as to what is adequate for the requirements of the Fund has become itself rather inadequate with the passage of time. First, Hong Kong's monetary system has undergone considerable changes since 1964. Exchange controls were totally abolished in 1973. A freely -convertible currency, no exchange controls and free flow of capital have become important features of our monetary system. These features have been enshrined in the Joint Declaration and the Basic Law.

Secondly, exchange rate stability under the framework of the linked exchange rate system has become our primary monetary policy objective since October 1983. Section 3(1A) of the Exchange Fund Ordinance was also introduced in 1992 to include as the secondary purpose of the Fund the maintenance of the integrity and stability of the monetary and financial systems. Thirdly, there has been phenomenal growth in financial activities worldwide, involving huge flow of funds in an increasingly deregulated environment. The maintenance of currency stability now involves more than just full backing for bank notes and other borrowings.

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