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Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Sub-Committee on Currency Board Operations held on 5 September 2003

(Approved for Issue by the Exchange Fund Advisory Committee on 25 September 2003)

Report on Currency Board Operations (29 July - 25 August 2003)

The Sub-Committee noted that the Hong Kong dollar and the exchange markets had remained stable in August. Supported by improved confidence in Hong Kong's economic outlook and inflow of funds into equities, Hong Kong dollar forward points had eased to below 100 pips since late August. Interest rate spreads between the Hong Kong dollar and US dollar also declined further.

2. The Sub-Committee noted that the Asia-Pacific Economic Cooperation (APEC) held a Finance Ministers Meeting on 4-5 September in Phuket. After the meeting, APEC issued a Joint Ministerial Statement emphasising the importance of, among other things, adopting macroeconomic policies that promoted sustainable growth, supported by appropriate exchange rate policies that facilitated orderly and balanced external adjustment. Members noted that Hong Kong's Linked Exchange Rate system was not discussed at the Meeting, and that the Finance Ministers all accepted that there was no one single exchange rate regime that suited all economies under all circumstances.

3. The Sub-Committee noted that, in accordance with Currency Board principles, changes in the Monetary Base during the reporting period had been fully matched by changes in the foreign reserves.

4. The report on Currency Board operations for the period under review is at Annex A.

 

Monitoring of Risks and Vulnerabilities

5. The Sub-Committee noted that the global economic recovery had continued to be on track, with the US reporting a stronger-than-expected growth in the second quarter of 2003 and signs that the economy would likely remain robust in the third quarter. In Hong Kong, economic activity had rebounded since the end of May and, supported by the continued strong growth in exports of goods and services including an upturn in inbound tourism, was likely to continue to recover in the remainder of the year. Local financial market conditions had also improved markedly in line with overseas developments. Members noted, however, that the recent debate on the Mainland of China's exchange rate regime and domestic fiscal developments could impact on the Hong Kong dollar exchange markets.

6. The Sub-Committee noted an analysis on market expectations of real GDP growth. The analysis pointed out that there was an increasing trend for central banks to downplay point forecasts of GDP growth and inflation, but to aim to present a full picture of the extent of uncertainty and the balance of risks facing the economy.

 

The Economic Impact of SARS in Asia

7. The Sub-Committee noted an information paper on the economic impact of the spread of SARS in Asia. The Report found that as concerns about the disease receded, tourism and the retail sector had rebounded to various degrees in the region, and were likely to continue to grow in the remainder of this year, while the manufacturing and export sectors had been little affected by the epidemic.

Recent Developments in Labour Earnings in Hong Kong

8. The Sub-Committee noted a preliminary analysis on labour earnings in Hong Kong, which suggested that official labour earnings indicators might have underestimated the extent of wage adjustment in recent years. A wage index adjusted for changes in working hours, in particular, showed that declines in nominal wages in the past five years were likely to be larger than implied by the official statistics, pointing to a greater degree of wage flexibility. Members noted that unemployment had mainly affected relatively low-skilled and low-paid groups, as many of these positions had been relocated across the border.

 

For further enquiries, please contact:

Jasmin Fung, Manager (Press), at 2878 8246 or
Kevin Ip, Manager (Press), at 2878 1687

Hong Kong Monetary Authority
29 September 2003

Last revision date: 1 August 2011
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