ENG-1995 — Page 526

APPENDICES

APPENDIX 16

(Chapter 6: Financial and Monetary Affairs) EXCHANGE FUND BALANCE SHEET

Note

$ Million

1989

1990

As at end of

1991

1992

1993 *

1994

Assets

Foreign Currency Assets

149,152

Hong Kong Dollar Assets

1

9,625

192,323 3,874

225,333 10,788

274,948

335,499

384,359

12,546

12,987

24,126

158,777

196,197

236,121

287,494

348,486

408,485

Liabilities

Certificates of Indebtedness

Transfers of Fiscal Reserves

23

37,191

40,791

46,410

58,130

68,801

74,301

52,546

63,226

69,802

96,145

115,683

131,240

Coins in Circulation

2,012

2,003

2,299

2,559

2,604

3,372

Exchange Fund Bills and notes

6,671

13,624

19,324

25,157

46,140

Other Liabilities

4

1,603

391

4,834

3,220

7,314

22,614

Balance of Banking System

5

978

480

500

1,480

1,385

2,208

94,330

113,562

137,469

180,858

220,944

279,875

Accumulated Earnings

64,447

82,635

98,652

106,636

127,542

128,610

NOTES ON THE ACCOUNTS

2.

3.

4.

5.

(a) Investments

The fund is invested in interest-bearing deposits with banks in Hong Kong and overseas and in a variety of financial instruments, including bonds, notes, treasury bills and US equities.

(b) Foreign currency assets distribution

A large proportion of the Fund's foreign currency assets are held in US dollars. Apart from the US dollar, the Fund also holds assets denominated in other major foreign currencies, such as the Australian dollar, Belgian franc, Canadian dollar, Danish Krone, Deutschemark, Dutch guilder, the ECU, French franc, Japanese yen, pound sterling, Swiss franc, etc.

(c) Location of assets

The assets are held in deposit, trustee and safe-keeping accounts with banks, central banks and custodial organizations situated in Hong Kong and other major financial centres.

(d) Valuation of assets and liabilities

In order to give a more appropriate presentation of the results and financial position of the Exchange Fund, the accounting policy with respect to the valuation of assets and liabilities has been changed in accordance with the recommendation of the International Accounting Standards Committee Exposure Draft E48. For 1992 and prior years, all assets were shown at market value, with the exception of fixed deposits, which were shown at cost. All liabilities were shown at their face amount, with the exception of Exchange Fund Bills and notes, which were shown at discounted or amortized value. From 1993 onwards, all assets of Exchange Fund, and its liabilities in respect of Exchange Fund Bills and Notes and other borrowings, are now shown at the market value on the last day of each accounting period. The Fiscal Reserves Account is still shown at its face amount, with the difference between its market value and the face amount being included in other liabilities.

(e) Translation of foreign currency assets and liabilities

US dollar assets and liabilities are translated into HK dollars at the linked exchange rate of US$1 = HK$7.80. Assets and liabilities in other foreign currencies are translated into HK dollars based on US dollar middle market cross rates in London at the close of business on the last business day of the accounting period.

As backing for their bank note issues, the three note-issuing banks are required to hold non-interest bearing Certificates of Indebtedness issued by the Exchange Fund. Issuance and redemption of these Certificates are made against payments in US dollars at a fixed rate of US$1 = HK$7.80.

This comprises the fiscal reserves which have been transferred from the General Revenue Account, Capital Investment Fund, Loan Fund and Capital Works Reserve Fund of Hong Kong Government to the Exchange Fund on an interest earning basis.

Other liabilities comprise expenses accrued at the year end, in the main interest due on transfer from fiscal reserves, other borrowings, provision for contingency related to Overseas Trust Bank Limited and the difference between the market value and the face amount of the Fiscal Reserves Account (see Note 1(d)).

In accordance with the Accounting Arrangements introduced in July 1988, The Hongkong and Shanghai Banking Corporation Limited, as the Management Bank of the Clearing House of Hong Kong Association of Banks, is required to maintain a Clearing Account with the Exchange Fund. The balance in the Account, which represents the level of liquidity in the interbank market, is determined by the Monetary Authority. The Accounting Arrangements enable the Monetary Authority to maintain exchange rate stability more effectively by influencing the level of interbank liquidity through money market operations.

* Figures for 1993 shown above reflect the accounting policies adopted in 1994. Figures for 1992 and prior years have not been restated.