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Exchange Fund

Milestones of Monetary Reform

To strengthen the robustness and resilience of the Linked Exchange Rate System, a series of reforms have been implemented since 1987.

The main thrust of these measures has been to strengthen the Currency Board arrangements and to enable the efficient operation of the interest rate adjustment mechanism in maintaining exchange rate stability. The monetary reform measures, in chronological order, are as follows:

  DateReform Measures

1987-1988 Removal of interest rate floor and ceiling
The negative interest rate mechanism and the exemption of authorized institutions from the legal ceiling on lending rate of 60% in the Money Lenders Ordinance enable interest rate to move in both directions without restriction to support the exchange rate of the Hong Kong dollar.

* July 1988 Accounting Arrangements
Under the Accounting Arrangements, the Hongkong & Shanghai Banking Corporation Ltd. (as the Management Bank of the Clearing House of the Hong Kong Association of Banks) was required to maintain an account with the Exchange Fund, and to manage the net clearing balance of the other banks at a level not exceeding the balance in its account with the Exchange Fund, which is determined by the HKMA. (Note: The Hongkong and Shanghai Banking Corporation Ltd. ceased to be the Management Bank and the Accounting Arrangements were terminated after implementation of Real Time Gross Settlement (RTGS) System on 9 December 1996 when all banks in Hong Kong established accounts directly with the HKMA.)

* March 1990 Exchange Fund Bills Programme (expanded to Exchange Fund Notes in 1993)

The programme facilitates the development of the local debt market. It increases the supply of high quality Hong Kong dollar paper and establishes a reliable benchmark yield curve for Hong Kong dollar debt.

* June 1992 Liquidity Adjustment Facility (LAF)
The LAF was Hong Kong's version of a discount window. Banks could obtain liquidity assistance from the HKMA at the prescribed Offer rate through a Sale and Repurchase Agreement involving eligible securities. They could also place excess liquidity with the HKMA through the LAF at the Bid rate. (Note: The LAF was replaced by the Discount Window in September 1998.)

* December 1996 Real Time Gross Settlement (RTGS) system

With interbank transactions settled across the book of the HKMA, the Aggregate Balance was properly defined and was subject to the rule of Currency Board system.

* June 1998 Publication of the forecast change in Aggregate Balance due to HKMA's foreign exchange transactions

The announcement of forecast change in Aggregate Balance enhances the transparency of the Linked Exchange Rate System and facilitates a more efficient and orderly interest rate adjustments in money market.

* September 1998 Technical measures to strengthen Currency Board system
Two major planks of the technical measures are the provision of a Convertibility Undertaking in respect of the Aggregate Balance and modifications to the Discount Window facility. These measures demonstrate our strong commitment to the Linked Exchange Rate System and help to dampen excessive and potentially destabilising interest rate volatility.

* April 1999 Fine-tuning measures to further strengthen the Currency Board system

The Hong Kong dollar exchange rate under the Convertibility Undertaking in respect of the Aggregate Balance starts to move from 7.7500 to 7.8000 by 1 pip per calendar day to converge with the linked rate of 7.80 for the issue and redemption of Certificates of Indebtedness and coins.

Provision of an explicit backing mechanism for the issuance of coins in circulation, similar to that for banknotes.

Allowing interest payments on Exchange Fund papers to expand the Monetary Base.

* May 2005 Refinements to the Operation of the Linked Exchange Rate System

The HKMA introduced a strong-side Convertibility Undertaking to buy US dollars from licensed banks at 7.75, and announced the shifting of the existing weak-side Convertibility Undertaking from 7.80 to 7.85.

chart on resilience of the Hong Kong dollar against external shocks

Last revision date: 22 August 2011
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