The Exchange Fund Ordinance

inSight

05 Sep 2002

The Exchange Fund Ordinance

The subsection of the Exchange Fund Ordinance dealing with the secondary purpose of the Exchange Fund is - for very good reasons - worded in a peculiar way.

When considering the necessary amendments to the Exchange Fund Ordinance in 1992 to facilitate the establishment of the HKMA, the Administration then was acutely aware of the need to maintain monetary and financial stability during the sensitive period of political transition. There was also the need, specified clearly in Article 109 of the Basic Law, for the Government of the Hong Kong Special Administrative Region to provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre. These were considered as rather challenging tasks, which could involve time-critical or strategic decisions and impose substantial demand on financial resources. The opportunity was therefore taken to expand the purpose for which the Exchange Fund could be used.

This was the origin of subsection 3(1A) of the Exchange Fund Ordinance, which specifies that:

"In addition to using the Fund for its primary purpose, the Financial Secretary may, with a view to maintaining Hong Kong as an international financial centre, use the Fund as he thinks fit to maintain the stability and the integrity of the monetary and financial systems of Hong Kong".

Those who are interested in monitoring the exercise of authority over the Exchange Fund may notice the rather peculiar formulation of this particular subsection of the Ordinance. The two objectives - the maintenance of Hong Kong as an international financial centre and the maintenance of the stability and integrity of the monetary and financial systems of Hong Kong - were linked up, even though each is highly desirable on its own. Instead of a rather more simple formulation of specifying that the Fund can be used for the two additional and separate purposes, the use of the Fund for achieving one of the two objectives was made conditional upon the other. It is only "with a view to maintaining Hong Kong as an international financial centre" that the Financial Secretary can use the Fund "as he thinks fit to maintain the stability and the integrity of the monetary and financial systems of Hong Kong".

The reason for the rather conservative legal formulation for the additional use to which the Exchange Fund can be put was well intended, although at the time there was, as I recall, considerable difference of opinion during our internal deliberation on the matter. Having worked with this additional subsection of the Ordinance for almost ten years now, I think the conservative approach was a correct one. Had the two objectives been laid down separately as two additional purposes for the use of the Exchange Fund, there might have been pressure for drawing on the Fund on the basis of some wide interpretation of its scope for use. This is particularly so in respect of the objective, enshrined in the Basic Law, of the maintenance of the status of Hong Kong as an international financial centre. For example, it could be argued that the presence in Hong Kong of a large number of financial institutions from many jurisdictions would enhance this status, and for that argument to be deployed as a justification for the use (or rather misuse) of the Exchange Fund to subsidise such presence.

The peculiar legal formulation also eliminated the scope for using the Fund indiscriminately "to maintain the stability and integrity of the monetary and financial systems of Hong Kong" by imposing the condition that the use should be "with a view to maintaining Hong Kong as an international financial centre". In practice we have not encountered any proposal aimed at achieving the former objective that did not satisfy the latter. But we still exercise great care in examining the many initiatives that we have in the HKMA. The annual budget of the HKMA approved by the Financial Secretary is charged to the Exchange Fund, and therefore constitutes a use of the Fund by him. None of our ideas aimed at helping to maintain the stability and integrity of the monetary and financial systems of Hong Kong would be taken forward unless we were satisfied that it would also help maintain Hong Kong as an international financial centre. The actions we have taken over the years to develop the debt market and the financial infrastructure are good examples of such legitimate use.

 

Joseph Yam

5 September 2002

 

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Last revision date : 05 September 2002