ENG-2003 — Page 139

FINANCIAL AND MONETARY AFFAIRS

in the second half. Notwithstanding a pick-up in consumer spending, the drop in credit card advances reflected mainly a tightening of credit card issuance and lending policies by banks, write-offs and restructuring of credit card receivables during the year. Trade financing remained robust, alongside strong external trade performance. Lending to stockbrokers and financial concerns increased in the second half of the year, attributable to active stock market activity. The contraction in Hong Kong dollar loans, coupled with an expansion in Hong Kong dollar deposits led to a fall in the Hong Kong dollar loan-to-deposit ratio to 81.5 per cent at the end of 2003, from 88.5 per cent a year earlier.

Exchange Fund

The Exchange Fund was established by the Currency Ordinance of 1935 (later renamed as the Exchange Fund Ordinance). Since its establishment, the Fund has assumed the role to back the bank note issuance of Hong Kong. In 1976, the Fund's role was expanded. The backing for coins issued and the majority of the foreign currency assets held in the Government's General Revenue Account, were 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 to centralise the investment management of its financial assets. Through this transfer, the bulk of the Government's financial assets are placed with the Fund. The Coinage Security Fund was merged with the Exchange Fund on December 31, 1978.

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 have 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 Hong Kong 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 separated from the Exchange Fund. Effective from November 1, 1998, the assets of the Land Fund, which itself has still remained as a separate government 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. Following an investment decision taken by the Financial Secretary under the terms of the Resolution, the placement of the entire Land Fund, along with the fiscal reserves, with the Exchange Fund, yields a return that is the same as that of the Exchange Fund. In 2003, a Resolution was made and passed by the Legislative Council under the Public Finance Ordinance to authorise the transfer of $120 billion from the Land Fund to the General Revenue Account to meet the Government's expenditure requirement. The Exchange Fund's primary statutory role, as defined in the Exchange Fund Ordinance, is to affect the

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