ENG-2019 — Page 98

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Financial and Monetary Affairs

(weak-side Convertibility Undertaking). The expansion or contraction in the monetary base arising from these currency board operations will cause interest rates for the domestic currency to fall or rise respectively, creating the monetary conditions that automatically counteract the original capital movements and ensuring exchange rate stability.

The Currency Board Sub-Committee under the EFAC monitors and reports on the Currency Board system, and recommends to the Financial Secretary measures to enhance the robustness and effectiveness of the Currency Board arrangements.

Monetary Situation

The HKD monetary situation was stable in 2019. The forex market operated in a smooth and orderly manner, and the HKD exchange rate traded between HK$7.7860 and HK$7.8500 to US$1. The weak-side Convertibility Undertaking was triggered eight times in March, with the HKMA buying HK$22.1 billion against the USD upon requests from banks according to the design of the Linked Exchange Rate System. Hong Kong's monetary conditions remained stable, with the monetary base amounting to HK$1.7 trillion at the year end.

The HKD money market also operated in a smooth and orderly manner in 2019. HKD interbank interest rates picked up broadly, reflecting in part the reduced aggregate balance and vibrant fund-raising activities in the equity market. Overnight and one-month interbank interest rates averaged 1.27 per cent and 1.89 per cent respectively. Average daily turnover of HKD interbank transactions was around $502 billion.

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. The fund is managed as distinct portfolios to meet the objectives of preserving capital, fully backing the entire monetary base, providing liquidity to maintain financial and monetary stability and preserving the fund's long-term purchasing power. The Backing Portfolio holds highly liquid USD-denominated assets to fully back the monetary base. The Investment Portfolio aims to preserve the fund's long-term purchasing power.

The fund's asset allocation strategy is guided by an investment benchmark determined by the Financial Secretary in consultation with the EFAC. A Strategic Portfolio holds all HKEX shares acquired for strategic purposes by the Financial Secretary using the fund. To better manage risks and enhance returns in the medium and long term, the HKMA diversifies part of the fund's investment in a prudent and incremental manner into a wider variety of asset classes, including private equity and real estate investments.

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