ENG-2015 — Page 114

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Financial and Monetary Affairs

Interbank liquidity remained abundant during the year. The HKD interbank interest rates were little changed compared with last year, with some fluctuations due to equity fund-raising activities and seasonal and quarter-end liquidity demand. Overall, the HKD money market and foreign exchange market continued to operate in an orderly and smooth manner.

Exchange Fund

The fund's primary statutory role under the Exchange Fund Ordinance is to affect the exchange value of the HKD. 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 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 USD- denominated debt securities to fully back the monetary base. The Investment Portfolio aims to preserve the fund's long-term purchasing power. The Exchange Fund's asset allocation strategy is guided by an investment benchmark approved by the Financial Secretary on the advice of the EFAC15. A Strategic Portfolio was set up in 2007 to hold all the shares of the HKEX acquired for strategic purposes by the Financial Secretary using the Exchange Fund. To better manage risks and enhance returns in the medium and long term, the HKMA has been diversifying part of the Exchange Fund's investment in a prudent and incremental manner into a greater variety of asset classes, including private equity and real estate investments housed under the Long- Term Growth Portfolio (LTGP). At the end of 2015, the Exchange Fund's total assets stood at $3,422.9 billion and its accumulated surplus amounted to $544.9 billion16.

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: Bank of China (Hong Kong) Limited, The Hongkong and Shanghai Banking Corporation Limited and Standard Chartered Bank (Hong Kong) Limited. The note-issuing banks may issue currency notes only by surrendering non-interest-bearing USD backing at a fixed exchange rate of HK$7.80 to US$1.

Through the HKMA, the government issues $10 currency notes and coins in denominations of $10, $5, $2, $1, 50 cents, 20 cents and 10 cents. The value of all notes and coins in circulation at the end of 2015 was $371.8 billion.

15 The details of the management of the fund and the investment style adopted are set out and explained in the HKMA's

annual report.

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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.

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