XN000022-1996-12-04 — Page 19

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Reply:

(a)

(b)

whether the HKMA is currently holding Chinese bonds; and

if the answer to (a) is in the negative, in order to address the concern of the people in Hong Kong and of the international financial community whether the HKMA will state categorically that the HKMA will not hold Chinese Government or Renminbi debt?

Regarding investments of the Exchange Fund, the following three criteria are currently adopted for inclusion in the list of approved assets:

(i)

(ii)

only sovereign (ie. Government) issuers with credit ratings of investment grade or above are included';

there must be a liquid secondary market for the financial instrument; and

(iii) the underlying currencies of the bond or debt issues must be fully

convertible.

The answer to (a) is that China is currently not a sovereign issuer on the list of approved assets in the investment policy of the Exchange Fund, hence the Exchange Fund does not hold any Chinese bonds.

$

As regards (b), whether China, or any other sovereign issuer, should in future be included into the list of approved assets of the Exchange Fund will have to be considered against the three criteria set out in the first paragraph of my reply. We will also need to take into account prevailing international best practice relating to treatment of foreign currency reserve assets and other new developments that may arise in future.

(1)

Market defines investment grade as, only issuers, such as corporates, coming from countries with a credit rating BBB or above on the Standard and Poor's scale (or equivalent) are included. Exchange Fund requirements for investment grade credit are higher than market practice.

End