ENG-1979 — Page 71

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FINANCE AND ECONOMY

notes still in circulation are now legally the obligation of the latter bank. Notes in everyday circulation are $10, $50, $100, $500 and $1,000.

Coins of $5, $2, $1, 50 cents, 20 cents, 10 cents and five cents and currency notes of one cent denomination are issued by the government. The fourth of a series of $1,000 gold coins to commemorate the Chinese Lunar New Year was issued early in 1979. The total currency in circulation at the end of 1979 and details of its composition are shown in Appendix 11.

Exchange Fund

Bank notes are backed by the Exchange Fund, a government account set up in 1935. The fund is under the control of the Financial Secretary, but is managed in accordance with his directions by the Monetary Affairs Branch of the Government Secretariat.

Apart from authorised issues against approved securities up to a limit of $95 million for the two note-issuing banks, bank notes may only be issued against holdings of certificates of indebtedness, which are liabilities of the Exchange Fund. These certificates are non- interest-bearing and are issued and redeemed as the value of the notes in circulation rises and falls. The Exchange Fund bears the cost of maintaining the note issue except for a small proportion, equivalent to the proportion of authorised issues to the total note issue, which is met by the note-issuing banks. The fund's resources are held in Hong Kong dollars and in foreign currencies, and are employed in a variety of deposits and investments.

On April 1, 1976, the bulk of the foreign exchange assets previously held in the General Account and all the assets of the Coinage Security Fund were transferred to the Exchange Fund, against the issue of debt certificates denominated in Hong Kong dollars. On December 31, 1978, all the certificates held by the Coinage Security Fund were redeemed and that fund was merged with the Exchange Fund. The certificates issued to the General Account bear interest at appropriate market rates. In this way, all losses and gains resulting from changes in the Hong Kong dollar value of official foreign assets accrue to the Exchange Fund, which was established for the purpose of regulating the exchange value of the Hong Kong dollar. Consequently, the general revenue balance in the government's statement of assets and liabilities only reflects the difference between the government's cash receipts and payments. Since September, 1978, there has been a gradual transfer of the Hong Kong dollar balances of the General Account, apart from working balances, to the Exchange Fund. Now that this transfer has been completed, the bulk of the government's finan- cial assets are held by the Exchange Fund, which effectively has become banker to the government.

On May 1, 1979, the Exchange Fund (Amendment) Ordinance 1979 came into force. The effect of this measure is to prevent short-term balances held by the Exchange Fund with banks in Hong Kong from contributing to the growth of advances by the banking system; it also removes those balances from the money supply. Balances building up in the fund as a result of the government's fiscal surplus, or as a result of the expansion of the note issue, do not now automatically serve as a base for expanding the supply of credit to the economy.

Exchange Value of Hong Kong Dollar

The exchange value of the Hong Kong dollar was established in 1935 at about 1s. 3d. sterling ($16 to £1). On the setting up of the International Monetary Fund after World War II, the Hong Kong dollar was given its own gold parity at a rate reflecting this relation- ship. The relationship with sterling was, however, not a statutory one. It was established and