ENG-2012 — Page 115

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Financial and Monetary Affairs

A Currency Board Sub-Committee under the Exchange Fund Advisory Committee (EFAC) oversees the operation of the currency board system in Hong Kong and recommends to the Financial Secretary through EFAC measures to enhance the robustness and effectiveness of Hong Kong's currency board arrangements.

The HKMA ensures 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 arrangements under that system.

Monetary Situation

In the first half of the year, the Hong Kong dollar exchange rate strengthened gradually from around 7.770 to 7.755 against the US dollar, although with occasional fluctuations amid the uncertainties surrounding the global economic and financial environment, particularly the on- going euro debt crisis. In July and August, the Hong Kong dollar exchange rate was broadly stable. However, strengthening pressure again gathered pace, moving the Hong Kong dollar exchange rate closer towards the strong-side Convertibility Undertaking (CU) of 7.75 for the rest of the year.

Between 19 October and 21 December, the strong-side CU was repeatedly triggered and the HKMA passively purchased a total of US$13.8 billion in response to banks' offers, creating HK$107.2 billion consistent with the currency board system. As a result, the Aggregate Balance increased to $255.9 billion at the end of 2012 from $148.7 billion a year ago. The inflows partly reflected the increased allocation to Hong Kong dollar assets by investors outside Hong Kong, as well as the proceeds from the issuance of foreign currency bonds by Hong Kong firms in exchange for Hong Kong dollars. The stronger equity initial public offerings activities in late November and December to some extent also supported the inflows.

Interbank liquidity improved steadily during the year. After temporary rises towards the end of 2011, the Hong Kong dollar interbank interest rates eased back in early 2012, tracking the downward movements in the US dollar interbank interest rates and partly due to a respite in the euro debt crisis. The interbank interest rates then held broadly stable, before easing again in the fourth quarter with the triggering of the strong-side CU and the corresponding rise in the Aggregate Balance. For the whole of 2012, short-dated interbank rates continued to stay much below the Base Rate of 0.5 per cent. Discount Window borrowing was not active and amounted to only $3 billion, compared with $6.7 billion in 2011. Overall, the money market and the forward market continued to operate in an orderly and smooth manner.

Exchange Fund

The Exchange Fund's primary statutory role under the Exchange Fund Ordinance 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.

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