Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Sub-Committee on Currency Board Operations held on 1 November 2002
(Approved for Issue by the Exchange Fund Advisory Committee on 2 December 2002)
Currency Board Operations for the Period 26 September - 21 October 2002
The Sub-Committee noted that during the period under review the Hong Kong dollar exchange rate had remained stable and had strengthened slightly towards the end of the period, reflecting higher Hong Kong dollar interest rates. Interest rate spreads between the Hong Kong dollar and US dollar had widened significantly in the second half of the period and Hong Kong dollar 12-month forward points had risen to 368 pips in mid-October before easing to 295 pips at the end of the period. Members noted that these movements reflected renewed concerns about the budget deficit and generally nervous market sentiment. It was also observed that similar rises had taken place in the months leading up to the budget in previous years.
2. The Sub-Committee noted that, in accordance with Currency Board principles, changes in the Monetary Base during the reporting period had been fully matched by corresponding changes in the foreign reserves.
3. The report on Currency Board operations for the period under review is at Annex A.
Monitoring of Risks and Vulnerabilities
4. The Sub-Committee noted that there had been a slowdown in growth in the US and in Europe, although Asia, outside of Japan, had continued to record strong export growth. Concerns were growing about the sustainability of consumption growth in the US, with the sharp decline in consumer confidence, and about the weak labour market.
5. The Sub-Committee noted that some signs of recovery were emerging in Hong Kong. The unemployment rate had declined. Exports had continued to grow. Inbound tourism had increased strongly. There had been signs of some improvement in private investment. Private consumption, however, remained weak, and deflationary pressure had intensified.
External Circulation of Hong Kong Dollar Currency
6. The Sub-Committee considered a paper on the circulation of the Hong Kong dollar outside of Hong Kong. The paper estimated that some 15-25% of the total outstanding Hong Kong dollar stock (around HK$15-25 billion) was held outside of Hong Kong. Most of it was held in the southern parts of Mainland China, where the demand for Hong Kong dollars had grown in recent years, despite a stable renminbi. The demand was attributable to the increased economic integration of Hong Kong and the southern China region, the non-convertibility of the renminbi, and the relatively larger denominations of Hong Kong dollar banknotes.
Lithuania's Re-pegging from the US dollar to the euro
7. As part of its work in studying the operation of currency
board systems in other economies, the Sub-Committee considered a
paper on the
re-pegging of the Lithuania litas from the US dollar to the euro in February 2002 under the currency board system employed by Lithuania. The decision to re-peg the litas was designed to facilitate the growing economic integration of Lithuania with the economies in the European Union. Members noted that the re-pegging had been carried out successfully in a transparent manner, with clear notice given, against a favourable economic environment, stable exchange rates and broad support from the public. Members also noted that there had been no devaluation of the litas during the re-pegging: the exchange rate to the euro had been determined by the market rate on the day prior to repegging.
Consumer Credit, Household Debt Service and Consumption
8. The Sub-Committee considered a paper on the relationship between consumer credit, household debt servicing, and consumption against the background of relatively strong external demand and relatively weak internal demand in the Hong Kong economy. The paper noted that, despite substantial growth in consumer credit, and an easing of the debt service burden over the past two years following interest rate cuts, private consumption remained subdued. The paper found that the main determinants of consumer spending appeared to be real income and wealth as captured by property prices. The paper further noted that shifts in credit conditions and debt service burden play a significant role in predicting consumption in the short term. But the availability of consumer credit did not appear to be statistically significant.
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Hong Kong Monetary Authority
2 December 2002