ENG-1995 — Page 122

FINANCIAL AND MONETARY AFFAIRS

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stages, after the partial deregulation of the Hong Kong Association of Banks' Interest Rate Rules on time deposits began in October 1994.

In line with subdued retail sales in the Hong Kong economy, transaction demand for money remained steady throughout the year. Hong Kong dollar M1, comprising currency in hands of public and demand deposits rose by a mere 2.1 per cent during the year. Hong Kong dollar M3, which is the broadest measure of money supply, grew 14.9 per cent in 1995. Total loans grew at a moderate rate of 14.5 per cent in 1995 while HK dollar loans grew by 10.6 per cent. Due to a slowdown in the property market, residential mortgage loans which are a considerable share of total domestic loans, showed modest growth of 16.4 per cent over 1994.

Exchange Fund

The Hong Kong Government's Exchange Fund was established by the Currency Ordinance of 1935 (later renamed the Exchange Fund Ordinance). Since its inception, the fund has held the backing to the note issue. In 1976, its role was expanded, with the assets of the Coinage Security Fund (which held the backing for coins issued by the government) as well as the bulk of foreign currency assets held in the government's General Revenue Account being transferred to the fund. On December 31, 1978, the Coinage Security Fund was merged with the Exchange Fund.

In 1976, the government began to transfer the fiscal reserves of its General Revenue Account (apart from the working balances) to the fund. This arrangement was introduced to avoid fiscal reserves having to bear exchange risks arising from investments in foreign currency assets and to centralise the management of the government's financial assets. The fiscal reserves are not permanently appropriated for the use of the Exchange Fund, but are repaid to the General Revenue Account when they are required to meet the obligations of the general revenue. Through this transfer of the fiscal reserves, the bulk of the government's financial assets are, therefore, with the fund.

The Exchange Fund's statutory role, as defined in the Exchange Fund Ordinance, is to influence the exchange value of the Hong Kong dollar. It is used to intervene, when necessary, in the local money market or foreign exchange markets to maintain stability. Its functions were extended on the enactment of the Exchange Fund (Amendment) Ordinance 1992 by introducing a secondary and subsidiary role of maintaining the stability and integrity of the monetary and financial systems, with a view to maintaining Hong Kong as an international financial centre.

The HKMA manages the fund. Apart from ensuring that the fund meets its statutory roles, the principal activity of the HKMA on a day-to-day basis is the active management of the fund's assets. These are held mainly in the form of bank deposits and marketable interest-bearing instruments in certain foreign currencies and in Hong Kong dollars.

Initiated on its formation in April 1993, the HKMA adopts an ongoing programme of reviewing its investment operations and strategy. Having regard to the statutory purposes for which the Exchange Fund was created and maintained, the investment style and strategies now in place closely resemble that of comparable central banks and monetary authorities. Strategies appropriate to a long-term fund, such as a benchmark approach and a greater use of the long-term capital markets, have been adopted, and the range of currencies and instruments used has also been increased.