ENG-2012 — Page 114

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Financial and Monetary Affairs

reporting irregularities and non-compliance with accounting standards) to improve market quality and investor protection. The FRC reviews financial reports based on a risk-based approach and screens modified auditor's reports of financial statements of entities listed in Hong Kong.

Statistics on FRC's work

2010

2011

2012

Number of complaints received

9

7

19

Number of modified auditors' reports screened

142

131

138

Number of financial reports reviewed under

70

75

risk-based approach

Number of investigations initiated

4

6

9

Number of investigations completed

1

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5

9

Number of enquiries initiated

2

1

3

Number of enquiries completed

1

2

1

A Process Review Panel reviews the FRC's handling of cases to ensure its actions and decisions comply consistently with established procedures.

Monetary Policy

Hong Kong's monetary policy objective is currency stability, defined as a stable external exchange value of the currency of Hong Kong, in terms of its exchange rate in the foreign exchange market against the US dollar, at around $7.80 to US$1. This objective is achieved through the linked exchange rate system introduced in 1983.

The linked exchange rate system consists of currency board arrangements requiring the Hong Kong dollar monetary base to be at least 100 per cent backed by - and changes in it to be 100 per cent matched by corresponding changes in US dollar reserves held in the Exchange Fund at the fixed exchange rate of $7.80 to US$1. In Hong Kong, the monetary base includes the amount of currency notes and coins issued, the Aggregate Balance14, and the outstanding amount of Exchange Fund Bills and Notes (EFBNs). Banks have unrestricted access to a Discount Window for overnight liquidity through repurchase agreements using EFBNs as collateral. Under the currency board system, Hong Kong dollar exchange rate stability is maintained through an interest rate adjustment mechanism. The expansion or contraction in the monetary base leads interest rates for the domestic currency to fall or rise, respectively, creating the monetary conditions that automatically counteract the original capital movements, ensuring stability of the exchange rate.

14

Aggregate Balance is the sum of the clearing balances of banks held with the HKMA for the purpose of effecting the clearing and settlement of transactions between banks themselves and also between the HKMA and banks.

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