Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 2 May 2012

(Approved for Issue by the Exchange Fund Advisory Committee on 30 May 2012)

Report on Currency Board Operations (22 December 2011 – 13 April 2012)

The Sub-Committee noted that the Hong Kong dollar exchange rate continued to trade within a narrow range during the review period.  The exchange rate strengthened in the first two months of 2012 as market sentiment improved amid a respite from the eurozone crisis, a buoyant local equity market and an appreciation in the regional currencies.  Afterwards, the exchange rate weakened amid some correction in the local stock market.  The Hong Kong dollar interbank interest rates softened slightly during the period, in line with the small downward adjustments in the corresponding US dollar rates.

2. The Sub-Committee noted that the Monetary Base increased from HK$1,068.41 billion to HK$1,085.98 billion, mainly driven by a rise in Certificates of Indebtedness.

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.

Monitoring of Risks and Vulnerabilities

5. The Sub-Committee noted that the financial markets stabilised after the European Central Bank (ECB) launched two rounds of 3-year Longer-Term Refinancing Operations.  However, concerns about the European sovereign debt crisis had recently resurfaced.   The Sub-Committee also noted that there was a risk that economic recession in Europe and the sovereign debt problems might set in motion a vicious cycle, potentially triggering another confidence crisis.

6. The Sub-Committee noted that while some upside surprises in the US in the near term were possible as earlier pick-up in employment growth could feed through to income and consumption spending, there remained doubts about the sustainability of the improvement.

7. The Sub-Committee noted that despite a moderation in the economic growth of Hong Kong, there were clear signs of renewed strength in property prices since February, and the risk of a property price bubble should not be overlooked.

An Assessment of the Usefulness of Non-core Liabilities as a Financial Stability Surveillance Indicator for Hong Kong

8. The Sub-Committee noted a paper on the usefulness of non-core liabilities (NCLs) as a financial stability surveillance indicator for Hong Kong.  The Sub-Committee noted that South Korea introduced a macroprudential stability levy on non-deposit foreign currency liabilities in August 2011, with the support of empirical evidence that rapid growth in NCLs was a reliable indicator of higher systemic risk in the banking sector in South Korea.  The Sub-Committee noted, however, that in Hong Kong’s context, the reliability of the share of NCLs to total liabilities as an early warning indicator was less conclusive based on empirical evidence.

Hong Kong Monetary Authority
8 June 2012