ENG-1991 — Page 101

FINANCIAL AND MONETARY AFFAIRS

Trading in commodity futures and interest rate futures remained rather modest. For the year as a whole, total turnover in soyabeans, sugar and gold futures amounted to 31 200 lots (30 000 kg each), 34 237 lots (112 000 lb each) and 992 lots (100 troy ounces each) respectively. Turnover in interest rate futures was 1 261 contracts.

The price of loco-London gold was generally on a downtrend during 1991, except for a brief rebound in the early part of January upon the start of military action in the Gulf. From a high of US$403 per troy ounce on January 16, the price of gold fell to a low of US$343 on September 13 before closing the, year at US$353. The price of gold at the Chinese Gold and Silver Exchange Society showed similar movements and moved between $3,737 and $3,178 per tael during the year. Turnover totalled 31.3 million taels in 1991, compared with 47 million taels in 1990.

The number of unit trusts and mutual funds approved by the Securities and Futures Commission dropped to 854 at end-1991 from 936 at end-1990. This decline was partly due to the de-authorisation of some inactive funds and partly due to the merging of some sub-funds for greater operational efficiency.

Following the conclusion of the Gulf war and in line with moves by the international community, Hong Kong lifted on March 15 the freeze on certain assets of Kuwait which was introduced on August 6, 1990. The restrictions on certain Iraqi assets are still in place in accordance with the Hong Kong (Control of Gold, Securities, Payments and Credits; Kuwait and Republic of Iraq) Order 1990.

Monetary Policy

Unlike most major economies, Hong Kong does not have a formal central bank or a monetary authority. Most of the functions which might be performed by one - such as monetary management, reserve management, development of financial markets and prudential supervision of financial institutions - are carried out by different government offices within the Monetary Affairs Branch of the Government Secretariat. Bank note issue, management of the clearing house and the provision of retail banking services to government are the residual central banking functions performed by commercial banks.

To provide a well-defined structure for the conduct of monetary policy and the management of the Exchange Fund, the Office of the Exchange Fund was set up within the Monetary Affairs Branch in February 1991. The office is responsible for the development and execution of monetary policy; it also oversees the operation of both the money and foreign exchange markets and carries out money market operations, whenever there is a need to do so, to maintain stability in the market. The office manages the assets of the Exchange Fund. It is also responsible for the development of financial markets in Hong Kong. It runs the market for government debt.

There is a linked exchange rate system, which was introduced on October 17, 1983, after a period of much instability in the exchange rate of the Hong Kong dollar. In the system, 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

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