ENG-1980 — Page 73

FINANCIAL SYSTEM AND ECONOMY

Non-bank financial services

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Due partly to the wide range of facilities and services offered in Hong Kong by banks and deposit-taking companies, there is a relatively restricted range of other kinds of institutions. in the Hong Kong financial sector. The range includes insurance companies and pension funds, which are relatively small in terms of the local markets; also, credit unions, co- operative societies, pawnshops and private money-lenders - each of which is even smaller in terms of the markets as a whole. In the course of 1980, the Money-lenders Ordinance was repealed and replaced by an entirely new ordinance to apply effective controls to this sector. The ordinance lays down a maximum effective rate of interest for loan transactions of 60 per cent a year.

Financial Markets

Domestic Money Market

The domestic money market in Hong Kong is not a 'market' in the sense of a trading floor- the phrase is used to refer to the activities of banks and deposit-taking companies engaged in raising or placing Hong Kong dollar funds between themselves. There are a few large commercial companies which also place funds directly on the money market. The demand for funds on the money market comes principally from those institutions (mainly the local branches of banks incorporated outside Hong Kong), which do not have an adequate Hong Kong dollar deposit base to support their Hong Kong dollar lending.

Virtually all transactions in the domestic money market were in the form of straight deposits until about 1977. In that year, the issue of Hong Kong dollar certificates of deposit began to develop and these are now quite widely used by some banks as a means of raising Hong Kong dollar resources. The secondary market in these certificates of deposit is, however, still relatively undeveloped.

The money market, and in particular the market in straight deposits, was strengthened from the beginning of 1980, when deposits placed by banks with deposit-taking companies were classified as liquid assets for banks, under the Banking Ordinance. This had the effect of unifying the inter-bank market and the inter-deposit-taking company market, which had until then been effectively separated by statutory liquidity rules and definitions.

Another development in the domestic money market has been the use by the Mass Transit Railway Corporation of commercial paper, starting in February, 1979. The paper takes the form of negotiable bills of exchange accepted by the MTRC, and these have proved increasingly popular among investors.

There is now no marketable direct government debt, since the repayment of $250 million of Hong Kong Government 64% Bonds 1980 in November, 1980. There is a small amount of marketable government-guaranteed debt, comprising $400 million of 10-year bonds and $207 million of five-year notes issued by the Mass Transit Railway Corporation, and $150 million of notes issued by the Hong Kong Building and Loan Agency Limited.

Foreign Exchange Market

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An important feature of the domestic money market is its very close connection with the foreign exchange market in Hong Kong. This connection arises because the shortage of money market instruments in Hong Kong dollars and, in particular, the absence of marketable government debt, such as Treasury Bills means that the residual liquidity of licensed banks and registered deposit-taking companies has to be held in foreign currencies. In addition, the ability to buy Hong Kong dollars, against the sale of a foreign currency,