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FINANCIAL AND MONETARY AFFAIRS

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deposits than Hong Kong dollar loans, the Hong Kong dollar loan-to-deposit ratio declined to 89.4 per cent at end-December, from 91.3 per cent a year earlier.

Exchange Fund

The Exchange Fund was established by the Currency Ordinance of 1935 (later renamed the Exchange Fund Ordinance). Since its creation, the Fund has held the backing to the banknote issues of Hong Kong. In 1976, the Fund's role was expanded. The backing for coins issued and the bulk of the foreign currency assets held in the Government's General Revenue Account, were also transferred to the Exchange Fund. Meanwhile, 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 centralise the investment management of the Government's financial assets. Through this transfer of the fiscal reserves, the bulk of the Government's financial assets are, therefore, placed with the Fund. On December 31, 1978, the Coinage Security Fund was merged with the Exchange 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.

Upon the establishment of the Special Administrative Region on July 1, 1997, the assets of the Land Fund Trust were vested in the Hong Kong SAR Government. The Chief Executive of the Hong Kong SAR appointed the Financial Secretary as the public officer to receive, hold and manage the Land Fund, as part of the Hong Kong SAR Government reserves. Subsequently, the Land Fund was established by resolution made and passed by the Provisional Legislative Council under Section 29 of the Public Finance Ordinance. Between July 1, 1997 and October 31, 1998, under the direction of the Financial Secretary, the Land Fund was managed by the HKMA as a portfolio separate from the Exchange Fund. Effective from November 1, 1998, the assets of the Land Fund were merged into the Exchange Fund and managed as part of the Investment Portfolio of the Exchange 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 on 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 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 day-to-day activity is the management of the Fund's assets. These are invested mainly in the OECD bonds and