ENG-1998 — Page 131

FINANCIAL AND MONETARY AFFAIRS

Exchange Fund Investment Limited

The Hang Seng Index constituent stocks acquired by the government during the market operation in August were worth $118 billion. In October, the Exchange Fund Investment Limited (EFIL) was set up to manage these shares. EFIL is responsible for safeguarding the government's interests and rights in these shareholdings, and for identifying value-added opportunities for the eventual disposal of the shares with minimum disruptions to the market. EFIL is not allowed to conduct active trading of the stocks.

EFIL is an independent limited company with its own Board of Directors. The majority of the directors are drawn from distinguished members of the community, including members of the Legislative Council. EFIL is subject to the full regulation by the Securities and Futures Commission. All directors and staff of EFIL have already declared their interests in Hong Kong equities. They will have to report their future transactions. The government will designate EFIL as a public body under the Prevention of Bribery Ordinance. This ensures that EFIL directors and staff will have to comply with the high standard of conduct imposed on public servants. In order to enhance transparency, the government has disclosed the stock portfolio acquired during market operation following the advice of the Board of Directors of EFIL.

EFIL will keep an open mind and respond flexibly to changing market conditions and investor appetite in considering the approach for the orderly disposal of the equities. EFIL will appoint a panel of financial advisers to assist in the design and implementation of a detailed framework for the disposal programme. It is expected that the selection process will complete in early 1999.

Exchange Fund

The 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, the fund's role was expanded. 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, were 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, placed with the fund.

Prior to April 1, 1998, fiscal reserves were placed with the Exchange Fund as deposits on which market interest rates were paid by the fund to the General Revenue. As the official reserves had grown significantly over the years, it was decided that the fiscal reserves placed with the Exchange Fund should seek to achieve

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