ENG-1999 — Page 124

FINANCIAL AND MONETARY AFFAIRS

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enacted in early 2000. The merger proposal will become effective upon enactment of the legislation and completion of certain procedural steps.

Legislative Reform

Hong Kong needs to have a modern and flexible regulatory framework for the securities and futures market to facilitate the development of new financial products and effective trading methods. Such a framework is essential to strengthen the SAR's competitive edge amidst rapid changes in the international financial markets. In March, the Government announced a series of legislative reforms for the securities and futures market, to be enshrined in the composite Securities and Futures Bill. The bill will aim at providing a regulatory framework which is on a par with international standards and promotes a fair, orderly and transparent market. New measures will also be introduced to enhance the accountability and transparency of the regulatory authority.

As an effort to enhance the accountability of the SFC, the Government plans to establish an independent Process Review Panel to review the SFC's internal operations, including investigative procedures. The panel will comprise a majority of independent, prominent public persons, to be appointed by the Chief Executive, as well as Non-Executive Directors of the SFC. It will make independent reports to the Financial Secretary.

Monetary Situation

Monetary conditions were largely stable in 1999, notwithstanding occasional turbulence in the external environment in the aftermath of the Asian financial turmoil. The stable foreign exchange and money market conditions reflected in part the successful implementation of the technical measures to improve the currency board system in September 1998. The Hong Kong dollar exchange rate vis-à-vis the US dollar traded within a narrow range of 7.7460 to 7.7499 from early January to end-March, before easing gradually alongside the movement of the Convertibility Undertaking in respect of the Aggregate Balance by 1 pip per calendar day. At the end of December, the Hong Kong dollar exchange rate was at 7.7734, 40 pips stronger than the convertibility rate.

The deepening of the financial crisis in Brazil and the liquidation of Guangdong International Trust and Investment Corporation (GITIC) in mid-January had no significant impact on the Hong Kong dollar exchange rate. On the back of rumours about RMB devaluation in late-January, there were some outflows of funds. The Convertibility Undertaking was triggered and interest rates firmed up briefly. One- month HIBOR rose to 6.50 per cent on January 25 but quickly eased back to 5.88 per cent the next day.

Liquidity conditions in general improved in February and March, except in the period ahead of the Lunar New Year holiday. Reflecting increased purchases of US dollars before the Lunar New Year, partly by note-issuing banks to provide backing for additional banknote issuance, the exchange rate briefly weakened and touched the convertibility rate of 7.75 in mid-February. The market adjustment was mild and orderly. Overnight interest rates firmed up moderately to 6.25 per cent on February 19. As the outflow of funds was quickly reversed after the New Year holiday, money market conditions began to ease.