ENG-1997 — Page 131

FINANCIAL AND MONETARY AFFAIRS

from the overnight to the one-month area. To restore market order, on November 12 the HKMA issued a circular to banks clarifying the definition of 'repeated borrowers'. Helped by this measure, the term rates in the interbank market started to come down in the third week of November.

Nevertheless, reflecting the risk premium arising from the uncertainties in the region, the Hong Kong dollar interest rates remained at levels considerably higher than their US dollar counterparts. The three-month interbank interest rate fluctuated between 8.5 per cent and 12 per cent in November and December, compared with the prevailing level of 6 to 8 per cent before the October event. As a result, the average daily differential between the three-month Hong Kong dollar interest rate and its US dollar counterpart widened from 61 bps in the first nine months of the year to 408 bps in the last quarter.

The yields of seven-year and 10-year Exchange Fund Notes reached a high of 8.91 per cent and 9 per cent respectively on October 23, along with the hike in short-term interest rates. The yields eased gradually after the October incident but were still at levels considerably higher than at the beginning of the year. At the end of 1997, the yields of the seven-year and 10-year Exchange Fund Notes stood at 9.23 per cent and 9.22 per cent respectively, 209 bps and 181 bps above the yields at the beginning of 1997. The average spread between 10-year Exchange Fund Notes and 10-year US Treasuries in the last quarter of 1997 also widened to 225 bps as compared with an average of 63 bps in the first nine months of the year.

Following the successful defence of the Hong Kong dollar in October 1997, the Hong Kong dollar exchange rate remained very stable, trading within the narrow range of $7.725 to $7.750 against the US dollar, notwithstanding the sharp depreciation of Korean Won in November.

The overall exchange value of the Hong Kong dollar, as measured by the trade- weighted Effective Exchange Rate Index (EERI), is predominantly affected by the exchange rate of the US dollar vis-a-vis other major currencies. During 1997, the US dollar strengthened against the Deutschmark and Japanese Yen. Coupled with a stable Renminbi, the EERI of the Hong Kong dollar rose to 137.9 at the end of the year, from 125.3 as at end-1996.

With market corrections in the asset markets, due to the firming up of the Hong Kong dollar interest rates, credit expansion slowed down in the last quarter of 1997. For the year as a whole, the Hong Kong dollar M1 fell by 5.1 per cent. The growth rate of Hong Kong dollar M3, the broad money supply, decelerated to 9.9 per cent.

Land Fund

The HKSAR Government Land Fund Trust was established on August 13, 1986. The Land Fund Trust was set up to facilitate the management of the HKSAR's share of revenue obtained from land sales during the period commencing from the entry into force of the Joint Declaration (i.e. May 27, 1985) until China's resumption of exercise of sovereignty.

Upon the establishment of the Special Administrative Region on July 1, the assets of the Land Fund Trust were vested in the HKSAR Government. The Chief Executive of the HKSAR has appointed the Financial Secretary as the public officer to receive, hold and manage the fund, as part of the HKSAR Government

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