ENG-2005 — Page 135

Financial and Monetary Affairs | 105

The Exchange Fund's primary statutory role, as defined in the Exchange Fund Ordinance, is to affect the exchange value of the Hong Kong dollar. Its functions. were extended to maintaining the stability and integrity of the monetary and financial systems, with a view to maintaining Hong Kong as an international financial centre, when the Exchange Fund (Amendment) Ordinance 1992 came into force

The HKMA manages the Exchange Fund. Apart from ensuring that the fund meets its statutory responsibilities, the HKMA's principal activity is the day-to-day management of the fund's assets. These are invested mainly in Organisation for Economic Cooperation and Development (OECD) bonds and equities.

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, which holds highly liquid US-dollar-denominated debt securities to fully back the monetary base. The second is an Investment Portfolio, which aims to preserve the fund's long-term purchasing power. The asset allocation strategy of the Exchange Fund is guided by the investment benchmark, which defines the bonds and equities mix as well as the overall currency composition of the fund. The details of the management of the fund and the investment style adopted are set out and explained in the HKMA's annual report.

On December 31, 2005, the Exchange Fund's total assets stood at $1,066.8 billion, of which foreign currency assets amounted to $971.2 billion (or US$125.3 billion). The accumulated surplus of the Exchange Fund amounted to $443.1 billion. The fund's financial position from 2000 to 2005 inclusive is shown in the Appendices. Foreign currency asset figures have been published monthly since January 1997 to demonstrate the Government's continued commitment to greater openness and transparency. In addition, an abridged balance sheet of the Exchange Fund and a set of Currency Board accounts are published monthly.

Another function related to the Exchange Fund is currency issuance. Bank notes in denominations of $20, $50, $100, $500 and $1,000 are issued by the three note- issuing banks: Standard Chartered Bank (Hong Kong) Limited, the Hongkong and Shanghai Banking Corporation Limited and Bank of China (Hong Kong) Limited. 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 from the notes.

Through the HKMA, the Government issues new $10 currency notes and coins of $10, $5, $2, $1, 50 cents, 20 cents and 10 cents denominations. Sufficient quantities of the $10 note and all denominations of coins have been maintained for injection into the market when required. The total value of notes and coins in circulation at year-end was $156.3 billion.

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106 | Financial and Monetary Affairs