ENG-2020 — Page 94

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Financial and Monetary Affairs

The Exchange Fund Advisory Committee's (EFAC) Currency Board Sub-Committee monitors and reports on the currency board arrangements that underpin Hong Kong's Linked Exchange Rate System. Its responsibilities include ensuring that currency board operations are in accordance with established policy, recommending improvements to the currency board system, and ensuring a high degree of transparency in the system's operation.

Monetary Situation

The HKD monetary situation was stable in 2020. The forex market operated in a smooth and orderly manner, and the HKD exchange rate traded mostly between HK$7.75 and HK$7.80 to US$1. The strong-side Convertibility Undertaking was triggered 85 times between April and October, with the HKMA selling HK$383.5 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$2.1 trillion at the year end.

The HKD money market also operated in a smooth and orderly manner in 2020. HKD interbank interest rates declined broadly, reflecting an accommodative monetary environment. Overnight and one-month interbank interest rates averaged 0.48 per cent and 0.85 per cent respectively. Average daily turnover of HKD interbank transactions was around $469 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 Hong Kong Exchanges and Clearing Limited (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.

At the end of 2020, the fund had total assets of $4,500.8 billion and an accumulated surplus of $852.4 billion3.

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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. An abridged balance sheet of the Exchange Fund and a set of currency board accounts are also published monthly.

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