ENG-2000 — Page 133

FINANCIAL AND MONETARY AFFAIRS

equities. To meet the Government's operational needs, part of the Exchange Fund is also held in Hong Kong dollar denominated securities.

To meet the objectives of preserving capital, providing liquidity to maintain financial and currency stability and generating an adequate long-term return, the Exchange Fund is managed as two distinct portfolios. The first is a Backing Portfolio to ensure that the monetary base related to the currency board operations is fully backed by highly liquid, short-term US dollar denominated interest-bearing securities. The second is an Investment Portfolio to preserve the Fund's value for future generations in Hong Kong. The long-term asset allocation strategy of the Exchange Fund is guided by the investment benchmark, which defines the allocation. of investments to bonds and equities by country as well as the overall currency composition of the Fund. The management of the Fund and the investment style adopted are set out and explained in the HKMA's annual report.

On December 31, 2000, the Exchange Fund's total assets stood at $1,023 billion, of which foreign currency assets amounted to $857 billion (or US$110 billion). The accumulated surplus of the Exchange Fund amounted to $307 billion. The Fund's financial position from 1995 to 2000 inclusive is shown at Appendix 20. With a view to showing the Government's continued commitment to greater openness and transparency, foreign currency asset figures have been published monthly since January 1997. In addition, an abridged balance sheet of the Exchange Fund and a set of Currency Board accounts are published for each month.

Another function related to the Exchange Fund is currency notes and coins. issuance. Banknotes in denominations of $20, $50, $100, $500 and $1,000 are issued by the three note-issuing banks in Hong Kong: The Standard Chartered Bank, The Hongkong and Shanghai Banking Corporation Limited and the Bank of China. The note-issuing banks may issue currency notes only by surrendering non-interest- bearing US dollar backing at a fixed exchange rate of 7.80. Thus the Fund enjoys the seigniorage of the currency notes.

Through the HKMA, the Government issues coins of $10, $5, $2, $1, 50 cents, 20 cents and 10 cents denominations. Sufficient quantities of all denominations of coins have been maintained for injection into the market when required. The total of notes and coins in circulation at the end of 2000 was HK$105 billion. There was an increase in the detection of counterfeit notes during the year. However, the scale of the problem was not large by international standards. On December 18, The Hongkong and Shanghai Banking Corporation Limited put into circulation its enhanced HK$1,000 banknote bearing new security features in addition to its existing ones, including a holographic windowed thread, fluorescent fibres (red, green and blue) and highlight watermark showing the number '1 000'. If required, similar security features can be applied to other banknotes.

Exchange Fund Investment Limited

Exchange Fund Investment Limited (EFIL) was established in October 1998 as a private limited company under the Companies Ordinance to manage the share portfolio acquired by the Exchange Fund during the market operation in August 1998 together with the Hong Kong equity portfolio transferred from the Land Fund to the Exchange Fund in November 1998. The investment benchmark of the Exchange Fund, announced in March 1999, provides for 5 per cent of the Exchange Fund to be invested in Hong Kong equities. This investment portfolio will be

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