Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 30 April 2013

 (Approved for Issue by the Exchange Fund Advisory Committee on 4 June 2013)

Report on Currency Board Operations (14 December 2012 – 12 April 2013)

The Sub-Committee noted that the Hong Kong dollar exchange rate stayed close to the strong-side Convertibility Undertaking level of 7.75 in December 2012, with the strong-side Convertibility Undertaking being triggered occasionally.  The exchange rate softened in the remainder of the review period.  Additional issuance of Exchange Fund Bills and Notes in response to banks’ demand has led to increase in the outstanding Exchange Fund papers and a corresponding decrease in the Aggregate Balance.  At the end of the review period, the Monetary Base stood at HK$1,233.55 billion.

2. 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.

3. The Report on Currency Board Operations for the period under review is at Annex.

Monitoring of Risks and Vulnerabilities

4. The Sub-Committee noted that in the US, there were signs of the economy losing steam toward the end of Q1 with employment growth slowing sharply and many forward-looking indicators falling.

5. The Sub-Committee noted that in Europe, although the bail-out of Cyprus had averted a financial collapse, the levies on uninsured deposits along with the abandoned original plan to tap smaller deposits could potentially erode confidence in the security of deposits across the euro area, potentially making bank runs harder to stop in the future.

6. The Sub-Committee noted that in Mainland China, the new round of property-related policies were expected to help contain the risk of a resurgence of overheating risks, while the China Banking Regulatory Commission tightened the regulations on wealth management products issued by banks to control the risks related to shadow banking activities.

7. The Sub-Committee noted that in Hong Kong, while growth remained largely supported by strong domestic demand in Q1, there were signs of moderation further ahead.  Overheating in the property market remained a risk to financial stability.

Assessing the risk in the US bond market and their implications for Hong Kong

8. The Sub-Committee noted a paper on assessment of the risk in the US bond market and the likely impact on Hong Kong.  In the event of a sharp correction in the US bond market, the contagion impact could be transmitted to Hong Kong through channels such as fund flows, interest rates, credit stance and asset prices. 

Hong Kong Monetary Authority
10 June 2013