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Exchange Fund

Important Policy Initiatives Affecting The EFBN Programme & Other Hong Kong Dollar Debt Instruments

Important Policy Initiatives Affecting the Issuance of Exchange Fund Bills and Notes

  1. Seven technical measures to strengthen the currency board arrangements
    The seven measures to strengthen the Currency Board arrangements introduced on 7 September 1998 provide that no new Exchange Fund paper is issued except when there are significant inflows of funds. This arrangement ensures that new issues of Exchange Fund paper are fully backed by foreign reserves, in accordance with the discipline of the Currency Board system. Outstanding issues of Exchange Fund paper, which are already backed by foreign reserves, are rolled over when they mature.
  2. New measures to fine-tune Currency Board Arrangements
    Since 1 April 1999, new Exchange Fund papers are issued in line with the interest payments on outstanding Exchange Fund paper. The measure is consistent with the Currency Board principle, as interest payments on Exchange Fund paper are backed by interest income on the US dollar backing assets. This measure allows the size of Exchange Fund paper to grow gradually, and is conducive to the development of the local debt market.
  3. Streamlining Issuance of Exchange Fund Notes and Government Bonds
    The issuance of Exchange Fund Notes and Government Bonds has been streamlined to minimise overlap in longer tenors.  Starting from January 2015, the HKMA has stopped new issuance of Exchange Fund Notes of tenors of three years or above, while two-year Exchange Fund Note issuance continues.  At the same time, new issuance of two year Government Bonds has ceased and new issuance of Government Bonds will be for tenors of three years and above.

Listing of Exchange Fund Notes in Hong Kong

To enhance the liquidity of the secondary market of Exchange Fund Notes and facilitate access by retail investors to the Exchange Fund Notes market, the HKMA has listed the Exchange Fund Notes on the Stock Exchange of Hong Kong. Trading in these Notes on the Stock Exchange began on 16 August 1999. The listing and trading of Exchange Fund Notes has paved the way for the listing and trading of Hong Kong dollar bonds issued by other government-owned corporations.

Tax Exemption or Concession for Qualifying Debt Instruments

The Qualifying Debt Instrument (QDI) scheme provides tax exemption or concession to interest income and trading profits arising from qualified debt instruments in accordance with sections 14A and 26A of the Inland Revenue Ordinance (Cap 112).  Under the scheme, interest income and trading profits arising from renminbi-denominated bonds issued by the Central People’s Government of the People's Republic of China in Hong Kong, Exchange Fund Bills and Notes, Hong Kong Government Bonds and Hong Kong dollar-denominated multilateral agency debt instruments are exempt from profits tax in Hong Kong. 

Other debt instruments are also qualified for the scheme if they: 

(a) are lodged with the Central Moneymarkets Unit operated by the HKMA;

(b) have at all relevant times a credit rating acceptable to the Monetary Authority (MA) from a credit rating agency recognized by the MA;

(c) have a minimum denomination of HK$50,000 or its equivalent in a foreign currency;

(d) are, at issuance, issued in Hong Kong to –

(i) 10 or more persons, or

(ii) less than 10 persons none of whom is an associate of the issuer of the instrument.

Interest income and trading profits arising from these other qualified debt instruments are exempt from profits tax if they have an original maturity of seven years or more. Those with an original maturity of less than seven years can also enjoy a 50% concession from the normal profits tax rate.

For more information about the QDI scheme, please visit the Inland Revenue Department’s website.

Hong Kong Dollar Debt Instruments Other than Exchange Fund Paper

New issues of Hong Kong dollar debt instruments, other than Exchange Fund Bills and Notes (Excel File, 60KB)

Outstanding amount of Hong Kong dollar debt instruments, other than Exchange Fund Bills and Notes  (Excel File, 38KB)

Last revision date: 16 January 2015
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