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Financial and Monetary Affairs 93

The HKMA pursues a policy of transparency to ensure that the financial industry and the wider public are fully informed of the currency board operations.

The Government is fully committed to the maintenance of the linked exchange rate system, which is a cornerstone of Hong Kong's monetary and financial stability, and to the strict discipline of the currency board arrangement under that system.

Monetary Situation

Notwithstanding the European sovereign debt crisis, volatile international capital flows and buoyant fund raising activities in the local equity market, currency stability was well maintained during the year. As concerns over European sovereign debt problems intensified in May, the Hong Kong dollar market exchange rate weakened to around 7.80. Between June and October, the exchange rate strengthened towards 7.75, supported by equity-related demand associated with IPOs and a buoyant stock market. Partly reflecting the repatriation of funds raised in the equity market, the exchange rate weakened in November and December. Overall, the exchange rate moved within a narrow range between 7.7511 and 7.8034 during the year.

The money market was stable in a low interest rate environment. Underpinned by low US dollar interest rates and ample interbank liquidity locally, HIBORS9 generally stayed below 1 per cent during the year. Term HIBORS increased slightly in May and June following upward movements in their US dollar counterparts. The temporary rise in US dollar interbank rates partly reflected the concerns about the exposure of European banks to the debt-ridden countries in the Euro area. HIBORS rose occasionally in the second half of the year due to increased demand for equity funds.

The markets did not have any unusual reaction when the temporary Full Deposit Guarantee and Contingent Bank Capital Facility provided by the Exchange Fund expired at the end of the year as scheduled.

Exchange Fund

According to the Exchange Fund Ordinance, the Exchange Fund's primary statutory role is to affect the exchange value of the Hong Kong dollar. It can also be used to maintain the stability and integrity of the monetary and financial systems, with a view to maintaining Hong Kong as an international financial centre.

The HKMA is responsible to the Financial Secretary for the use and the investment management of the Exchange Fund. 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 approved by the Financial Secretary on the

9 Hong Kong Interbank Offered Rate is the rate of interest offered on Hong Kong dollar loans by

banks in the interbank market for a specified period ranging from overnight to one year.

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