(Approved for Issue by the Exchange Fund Advisory Committee by
circulation on 10 November 2009)
Report on Currency Board Operations (9 July
2009 - 30 September 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 Undertaking being triggered repeatedly between mid-July and
early August and again in the second half of September. Strong
inflows into the Hong Kong dollar had probably reflected
equity-related demand. Hong Kong-dollar interbank interest rates
had generally edged down in line with movements in their US-dollar
counterparts.
2. The Sub-Committee noted that the Monetary Base had expanded
during the period from HK$720.31 billion to HK$804.08 billion and
the market value of outstanding Exchange Fund paper had continued
to expand as additional Exchange Fund Bills were issued.
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 economic indicators in the
developed economies had been mixed but that corporate sentiment had
continued to improve. Equity markets had rallied in the early part
of the review period but lost the gains in early October following
negative news about the US job market. Risks to global growth were
gradually receding but remained a concern. Such risks include a
premature withdrawal of stimulus policy; a re-intensification of
the adverse feedback loop between the real and financial sectors
leading to credit deterioration; crowding out of the private sector
by public investment; and vulnerability to shocks given economic
fragility.
6. On the Mainland, growth momentum in the economy had remained
strong. Striking a balance between preventing over-capacity in some
industries and avoiding premature withdrawal of stimulus measures
would be a challenge for the authorities.
7. In Hong Kong, recent releases of high-frequency indicators
showed that the economy had continued to recover in the third
quarter. Property prices had risen in August and, while no
significant imbalances had appeared yet, risk surveillance was
called for. The Hong Kong-dollar/US-dollar exchange rate had stayed
close to the strong-side Convertibility Undertaking, which had been
triggered repeatedly.
8. The Sub-Committee also noted an analysis of the potential
economic impact on Hong Kong of an outbreak of infectious disease
such as swine flu. Drawing on Hong Kong's experience during the
SARS outbreak, the analysis noted that a pandemic in the aftermath
of a global financial crisis could present challenges while
monetary and fiscal policies were stretched and many financial
institutions were still recovering.
Exchange Rate Regimes and the Management of
Asset Price Bubbles: Implications for Hong Kong
9. The Sub-Committee noted a paper discussing the historical
association between different exchange-rate regimes and asset-price
bubbles and the role of monetary policy in managing such events and
maintaining financial stability in floating-exchange-rate regimes,
especially in small, open economies subject to large capital flows.
It noted that, there is no systematic relationship between asset
price performance and exchange rate regimes, and regardless of
exchange rate regimes, macro prudential policies are important.
Dislocations in Foreign-Exchange Swap and
Money Markets in Hong Kong and Policy Actions during the Financial
Crisis of 2008
10. The Sub-Committee noted a paper on dislocations in the
foreign-exchange swap and money markets during the 2008 financial
crisis and the effectiveness of policy actions taken in Hong Kong.
The study found that policy actions taken in Hong Kong, in
particular the five temporary liquidity measures, had effectively
ameliorated dislocations in the foreign-exchange swap market
following the collapse of Lehman Brothers, thus mitigating the
impact of credit-market tensions on local financial markets.
For further enquiries, please contact:
Peggy Lo, Manager (Communications), at 2878 1687 or
Natalie Wu, Officer (Communications), at 2878 8246
Hong Kong Monetary Authority
12 November 2009
