XN000022-1995-05-17 — Page 8

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Throughout 1994, the exchange rate of the HK dollar against US dollar remained very stable.

Explaining the success of the linked rate system, Mr Yam said the currency board mechanism and strong economic fundamentals such as the very high level of foreign reserves, and fiscal discipline had combined to provide a firm anchor for the exchange rate not available in those economies which practised "pegged" exchange rate systems.

"These aspects are sometimes overlooked, in particular by some of those who were encouraged by the Mexican crisis to speculate against the Hong Kong dollar in January 1995", he added, referring to HKMA's success in defending the Hong Kong dollar during the January episode.

On the management of the Exchange Fund, the annual report reveals in detail the investment strategy adopted by the HKMA, with a clear description of the three operational portfolios of the Fund. These three operational portfolios are the portfolio of assets to act as a hedge against the interest-bearing liabilities of the Fund, the portfolio of liquid reserves and the investment portfolio to preserve the value of the Fund for future generations of the people of Hong Kong.

The operating environment of the banking sector in Hong Kong became more difficult in 1994 amid US interest rates hikes and partial deregulation of retail deposit interest rates. According to the report, the return on assets of the locally incorporated banks fell to 1.83% in 1994 from 1.94% in 1993, although this is still high by international standards.

Although the growth of the banking sector's profits derived from operations in Hong Kong was more subdued in 1994, Mr Yam is confident that the banks in Hong Kong are well placed to meet the challenges ahead.

Mr Yam said: "While 1995 is likely to be another challenging year for the banking sector, its basic position remains sound. The return on assets enjoyed by locally incorporated banks remains high and they are well capitalised by international standards."

The consolidated capital adequacy ratio of the locally incorporated institutions improved to 17.5% in 1994 from 17.0% in 1993, according to the report.

Turning to the supervisory role of the HKMA in safeguarding the safety and stability of the banking system in Hong Kong, Mr Yam said HKMA had worked closely with the banking community to address a number of supervisory issues. Measures were also taken to enhance the competitiveness of Hong Kong's banking system.