Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Sub-Committee on Currency Board Operations held on 3 January 2003

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04 Feb 2003

Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Sub-Committee on Currency Board Operations held on 3 January 2003

(Approved for Issue by the Exchange Fund Advisory Committee on 30 January 2003)

Currency Board Operations for the Period 27 November - 19 December 2002

The Sub-Committee noted that the period under review had been a stable one marked by a mild strengthening of the Hong Kong dollar exchange rate and a slight firming of short-term interest rate spreads against US dollar rates. Following a somewhat volatile time in October and November, Hong Kong dollar 12-month forward points had remained largely stable during the period, easing slightly to close the period at 190 pips. The Monetary Base had expanded from HK$239.78 billion to HK$242.72 billion as a result of an increase in the outstanding amount of Certificates of Indebtedness, reflecting the seasonal increase in bank note issuance.

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 were mixed signals in the global economy. While Germany and Japan continued to show a weak performance, in the US the Institute for Supply Management's manufacturing index had increased sharply. Nevertheless, the sluggish labour market and the low household savings rate in the US were expected to continue to restrain consumption, and many other uncertainties remained. In Asia, export-driven growth had continued, leading to a boost in real GDP growth in Hong Kong in the third quarter. Domestic demand, however, remained weak.

5. The Sub-Committee noted the special analysis in the report addressing concerns about the danger that a Japanese-style deflationary spiral might develop in Hong Kong. The broad conclusion of the research was that such a development was not taking place in Hong Kong, and was unlikely to take place. In contrast to Japan's, Hong Kong's economic performance was mainly determined by external demand: domestic price declines helped to boost external competitiveness, which would in turn bring benefits to Hong Kong in the form of growth and increased employment.

Export Performance in Hong Kong - Offshore Trade and Re-exports

6. The Sub-Committee noted a paper examining Hong Kong's export performance in the light of concerns about export growth in Hong Kong falling behind that of the Mainland and the growing tendency for Mainland exports to bypass Hong Kong. The main factors behind this process were the growth in direct shipment of goods between the Mainland and the rest of the world and the rapid growth as an industrial and trading centre of the Yangzi delta region, which was less integrated with Hong Kong than was the Pearl River delta region. The paper drew particular attention to the recent trend of rising offshore trade, reflecting Hong Kong's participation in the strong growth in direct trade between the Mainland and the rest of the world. Members noted that, since elasticity of employment was smaller for offshore trade than for domestic exports or re-exports, this change in the structure of exports had implications for employment in Hong Kong.

Alternative Measures of the Real Effective Exchange Rate

7. The Sub-Committee considered a paper exploring a number of alternative measures of the real effective exchange rate (REER) and comparing them with the REER series currently compiled and used by the HKMA. The conclusion of the paper was that the current HKMA REER series provided a good overall indicator of Hong Kong's competitiveness, although it could be supplemented by some of the alternative measures. The Sub-Committee recommended that the current REER index, in addition to its inclusion on a quarterly basis in the Government's Economic Report, should be published as a monthly series in the HKMA's Monthly Statistical Bulletin.

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Hong Kong Monetary Authority
4 February 2003

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Last revision date : 04 February 2003