(Approved for Issue by the Exchange Fund Advisory Committee on
30 July 2009)
Report on Currency Board Operations (31
March 2009 - 8 July 2009)
The Sub-Committee noted that the Hong
Kong-dollar exchange rate against the US dollar had stayed close to
the strong-side Convertibility Undertaking of 7.75 during the
review period with the Convertibility Undertaking being triggered
repeatedly between 1 April and 7 July 2009 and the Aggregate
Balance expanding markedly as result. The inflow of funds partly
reflected equity-related demand and increased IPO activity. The
market value of outstanding Exchange Fund Bills and Notes had
increased as a result of additional issuance of Exchange Fund
Bills.
2. The Sub-Committee noted that the Monetary Base had expanded
during the period from HK$570.72 billion to HK$718.65 billion,
mainly reflecting the increases in the Aggregate Balance and
outstanding Exchange Fund Bills and Notes. The Backing Ratio (the
ratio of the Backing Assets to the Monetary Base) had declined from
108.16% to 106.14%. This was mainly an arithmetical effect
resulting from the simultaneous increases in the Backing Assets and
the Monetary Base. The Sub-Committee noted the possibility that the
lower trigger level of 105% might be reached for the first time,
resulting in a transfer of assets from the Investment Portfolio to
the Backing Portfolio to restore the Backing Ratio to 107.5%.
3. The Sub-Committee noted that, in accordance with Currency
Board Principles, changes in the Monetary Base had been fully
matched by corresponding changes in foreign reserves.
4. The report on Currency Board operations for the period under
review is at Annex A.
Monitoring of Risks and Vulnerabilities
5. The Sub-Committee noted that earlier optimism about recovery
of the global economy had faded somewhat. In the US, while the pace
of economic contraction had slowed, neither investment nor
consumption had yet shown positive growth. In the EU sentiment
indicators reflected stabilisation but the real economy continued
to lag behind and, in Japan, industrial production and exports had
rebounded in June but a strong recovery was not yet visible.
6. On the Mainland, fiscal and monetary stimulus had kept
investment growth high and officials had made clear that
expansionary fiscal and monetary policies would continue with.
Credit conditions remained loose with new lending had reaching RMB
1.5 trillion in June. Rapid credit growth had led to some concerns
about credit quality in the banking sector.
7. In Hong Kong, retail sales and business confidence indicators
had shown signs of stabilising. Merchandise exports had risen in
May for the first time in six months and the unemployment rate had
levelled off at 5.3%. Inflation had remained virtually unchanged.
There had been persistent inflows into the Hong Kong dollar and
strong momentum in the equity and property markets.
8. The Sub-Committee also noted a special analysis of the
potential risks to monetary stability of continued capital inflows
and the possible reversal of such inflows, and policy measures to
address them. The Sub-Committee agreed that should inflows
continue, more Exchange Fund paper may be issued against the
expanding Aggregate Balance, with the pace and the size of issuance
determined in response to market demand. Such issuance was
consistent with Currency Board principles. Should inflows continue
to the extent that generates risks of asset price and consumer
price inflation, non-monetary policies, such as prudential
measures, may be deployed to mitigate the associated risks.
A Framework for Monitoring Capital Flows in
Hong Kong
9. The Sub-Committee noted a paper discussing conceptual issues
relating to the definition of capital flows and proposing a
framework for organising data to enable judgements to be formed of
the nature and scale of fund flows in Hong Kong. Clarity about the
definition and measurement of such flows is essential given their
importance to monetary and financial stability.
Financial Services Sector as a Driver of
Productivity Growth in Hong Kong
10. The Sub-Committee noted a paper analysing the contribution
of various sectors to labour-productivity growth in Hong Kong in
recent years. The study found that overall gains were driven by
strong growth in the financial-services sector. Although growth in
labour productivity had recently slowed because of the global
financial crisis, the study concluded there the potential for
financial systems in Asia, and in particular the Mainland, to
expand meant that Hong Kong had good prospects for further
productivity growth.
For further enquiries, please contact:
Peggy Lo, Manager (Communications), at 2878 1687 or
Hing-fung Wong, Manager (Communications), at 2878 1802
Hong Kong Monetary Authority
6 August 2009
