ENG-1999 — Page 128

FINANCIAL AND MONETARY AFFAIRS

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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 a higher long- term real rate of return. With effect from April 1, 1998, the return on the fiscal reserves placed with the Exchange Fund is linked to its overall return.

On July 1, 1997, the assets of the Land Fund Trust were vested in the Hong Kong SAR Government. The Hong Kong SAR Government Land Fund Trust was established on August 13, 1986 to facilitate the management of the Hong Kong SAR'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 the establishment of the Hong Kong SAR. The Chief Executive of the Hong Kong SAR appointed the Financial Secretary as the public officer to receive, hold and manage the fund, as part of the Hong Kong SAR Government reserves. Prior to the merger of the assets of the Land Fund with the Exchange Fund on October 31, 1998, the Land Fund was managed by the HKMA as a portfolio separate from the rest of the Exchange Fund.

As envisaged in his 1998-99 budget speech, the Financial Secretary streamlined the investment management of the Government's accumulated fiscal reserves by placing the assets of the Land Fund, along with the fiscal reserves, with the Exchange Fund. This enabled the Land Fund to enjoy the same rate of return as that of the Exchange Fund, as in the case of the fiscal reserves, in accordance with the arrangements laid down in the same budget speech. The streamlining exercise involved the merging of the assets of the Land Fund into the Exchange Fund. This took place on the reference date of October 31, 1998, when the Land Fund assets, amounting to about $211.4 billion, were placed with the Exchange Fund for the account of the Land Fund.

The Land Fund will continue to be administered in accordance with the Resolution of the Provisional Legislative Council of July 1997. The placement of the whole of the Land Fund, along with the fiscal reserves, with the Exchange Fund, for a return that is the same as that of the Exchange Fund, was an investment decision taken by the Financial Secretary under the terms of the Resolution. The Land Fund has remained a separate government fund since the merger. The alignment exercise will not pre- empt any consideration of the long term use of the Land Fund, and any proposal in this regard is subject to approval by the Legislative Council in accordance with the Resolution establishing the Land Fund.

The Exchange Fund's statutory role, as defined in the Exchange Fund Ordinance, is primarily to affect the exchange value of the currency of Hong Kong. Its functions were extended on the enactment of the Exchange Fund (Amendment) Ordinance 1992 by introducing a secondary 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 Exchange Fund. Apart from ensuring that the fund meets its statutory roles, the HKMA's principal activity on a day-to-day basis is the active