(Approved for Issue by the Exchange Fund Advisory Committee on 22 July 1999)
Currency Board Operations for the Period 1 - 23 June 1999
- The Sub-Committee noted that the period under review had seen some outflows from the Hong Kong dollar, as a result of which the Aggregate Balance declined from a level of HK$3.83 bn on 1 June to a negative level of HK$1.73 bn on 23 June. These outflows might be attributable to relatively low short-term Hong Kong dollar interest rates, combined with expectations that short-term rates in the US would rise in the period ahead. The market response to the negative Aggregate Balance had been very smooth and had demonstrated that the Currency Board system was working efficiently. In accordance with the automatic adjustment mechanism under the Currency Board system, the reduction in the Aggregate Balance had led to a moderate increase in interbank interest rates, following which an inflow of funds restored the Aggregate Balance to a positive level on 24 June. The Sub-Committee observed that market participants seemed to have been well prepared for the implications of a negative Aggregate Balance, and that the Currency Board operations during the month had provided an interesting and useful test of the system. The Sub-Committee noted that changes in the Monetary Base throughout the review period had been fully matched by corresponding changes in foreign reserves in accordance with the rules of the Currency Board system. The report on Currency Board operations for the period under review is at Annex A.
Year 2000 Contingency Arrangements for the Money Market
- The Sub-Committee examined a paper on the broad contingency arrangements for the money market in the event of pressures arising from the Year 2000 problem. Among the main potential sources of pressure were liquidity problems by individual banks, increased public demand for holding currency, and outflows from the Hong Kong dollar. The Sub-Committee considered that, given the many uncertainties surrounding the issue, it was impossible to predict with any accuracy to what extent, and in what ways, the money market would be affected by the Year 2000 issue. It was therefore important that a flexible approach should be adopted. At the same time, the Sub-Committee advised that, while unusual or extreme conditions might render it necessary for the HKMA to temporarily relax the Currency Board rules in responding to certain situations, this should only be done as a last resort, after other options had been exhausted. The Sub-Committee noted that the HKMA's lender of last resort policy, which had recently been clarified and elaborated, provided a suitable framework for further liquidity support by the HKMA to individual institutions and to the system as a whole.
Dollarisation
- The Sub-Committee considered an analysis of the feasibility and desirability of pursuing dollarisation in Hong Kong. The analysis had been prepared in the light of international interest in the subject, particularly in the context of the Argentinian proposal for dollarisation. The Sub-Committee noted that the main advantage of dollarisation was that it would help eliminate the possibility of speculative attack on the currency. It concluded, however, that the benefits of dollarisation were outweighed by the considerable technical and legal difficulties and by the costs involved, and also by the uncertainties that would accompany the transition from a domestic currency. The Sub-Committee further noted that there were, in any event, no restrictions on the use of foreign currencies in conducting transactions in Hong Kong. In connection with this topic, the Sub-Committee considered that it would be productive to pursue initiatives for the development of a US-dollar-based clearing system in Hong Kong: this would help further promote Hong Kong as an international financial centre, and would bring benefits quite separate from any consideration of the question of dollarisation.
Legal Frameworks of Currency Board Systems
- The Sub-Committee noted an information paper comparing the legal frameworks of six currency board systems throughout the world.
Real Interest Rates in Hong Kong
- The Sub-Committee noted an information paper on the calculation and interpretation of real interest rates in Hong Kong.
