ENG-2007 — Page 138

98 | Financial and Monetary Affairs

Government reserves, which were merged into the Exchange Fund and has been managed as part of the Investment Portfolio of the Exchange Fund since November 1, 1998.

A resolution was 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. A further transfer of $40 billion was made under a similar resolution passed by the Legislative Council in June 2004.

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 to keep Hong Kong as an international financial centre, when the Exchange Fund (Amendment) Ordinance 1992 went 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.

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 distinct portfolios. The Backing Portfolio holds highly liquid US-dollar-denominated debt securities to fully back the monetary base. The Investment Portfolio 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. A Strategic Portfolio was set up in 2007 to hold all the shares of Hong Kong Exchanges and Clearing Limited acquired for strategic purposes by the Financial Secretary using the Exchange Fund.

On December 31,

31, 2007, the Exchange Fund's total assets stood at $1,414.4 billion, of which foreign currency assets amounted to $1,198.9 billion. The accumulated surplus of the Exchange Fund amounted to $617.0 billion. Foreign currency asset

asset figures have been published monthly since

since January 1997 demonstrating 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.