ENG-1989 — Page 97

FINANCIAL AND MONETARY AFFAIRS

Seng Index rebounded and ended the year at 2 837. For 1989 as a whole, the turnover was $299 billion, as compared to $200 billion in 1988.

Events in China caused several companies to defer plans to raise funds through the issue of shares. Total funds raised on the stock market for 1989 as a whole, at $8.5 billion, was thus lower than the $17.0 billion in 1988. During the year, there were seven new share issues amounting to $1.1 billion. Also 18 companies raised $4.6 billion through rights issues and 32 companies raised $2.8 billion through private placements.

The Hang Seng Index futures market experienced the same degree of volatility as the stock market. Turnover amounted to 235 979 contracts, compared with 140 155 in 1988. Trading in commodity futures remained moderate in 1989. Turnover in soyabean, sugar and gold futures amounted to 154 696 lots (30 000 kg each), 143 989 lots (112 000 lb each) and 1 172 lots (100 troy ounces each) respectively.

The price of loco-London gold fluctuated between US$358 and US$410 a troy ounce during the year, while the gold price on the Chinese Gold and Silver Exchange Society ranged between $3,335 and $3,805 per tael. Turnover on the latter exchange totalled 51 million taels in 1989, compared with 59 million taels in 1988.

Monetary Policy

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The government has consistently worked towards providing a favourable environment in the financial sector, with sufficient regulation to ensure, as far as possible, sound business standards and confidence in the institutional framework, but without unnecessary im- pediments of a bureaucractic or fiscal nature.

Unlike most major economies, Hong Kong has no central bank. Most of the functions which might be performed by one - such as prudential supervision of financial institutions, managing official foreign exchange reserves, undertaking certain types of market opera- tions, holding the backing to the note issue and providing central banking services to the government - are carried out by different government offices under the Monetary Affairs Branch of the Government Secretariat.

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On October 17, 1983, after a period of much instability in the exchange rate of the Hong Kong dollar, a revised exchange rate system was introduced. Under the new arrangement, certificates of indebtedness (CIs) issued by the Exchange Fund, which the two note-issuing banks are required to hold as cover for the issue of Hong Kong dollar notes, are issued and redeemed against payments in US dollars at a fixed exchange rate of HK$7.80 US$1. In practice, therefore, any increase in note circulation is matched by a US dollar payment to the Exchange Fund, and any decrease in note circulation is matched by a US dollar payment from the Exchange Fund. The two note-issuing banks in turn extend this fixed exchange rate to their note transactions with all other banks in Hong Kong. In the foreign exchange market, the rate of the Hong Kong dollar continues to be determined by forces of supply and demand. However, the interplay of arbitrage and competition between banks ensures that the market exchange rate stays close to the rate of HK$7.80 to US$1 fixed for the CIS.

With adoption of the linked rate system, the exchange rate is no longer a variable in the economy's adjustment process. Under this system, interest rates, the money supply and the level of economic activity adjust automatically to balance of payments pressures.

The Hong Kong Association of Banks, which sets the maximum rates of interest payable on deposits of original maturities up to 15 months (except those of $500,000 or above with a term to maturity of less than three months) with licensed banks, has a statutory

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