Expanding the Exchange Fund Bills and Notes Programme to improve banks' liquidity management

The Hong Kong Monetary Authority (HKMA) announced today (Monday) that additional 3-month Exchange Fund Bills will be offered in the two upcoming tenders, HK$2,000 million each, on 28 October and 4 November respectively.  As a result of issuing the additional paper, the supply of Exchange Fund Bills will be increased by about HK$4,000 million.

This increase in the supply of Exchange Fund Bills is consistent with Currency Board principles.  In order to maintain the current liquidity of the banking system, the HKMA operated within the Convertibility Zone today by purchasing US dollars against Hong Kong dollars, so that the level of the Aggregate Balance will be little affected by the issuance of new paper.  The Aggregate Balance is projected to increase by HK$3,996 million to HK$14,079 million on 22 October (Wednesday).

Such increase in the Aggregate Balance will be largely offset in two steps by completing the allotments of the additional Exchange Fund Bills on 29 October and 5 November.  In other words, there will be a transitory increase in the Aggregate Balance, which will eventually be largely unchanged at the end.

The increase in the supply of short-dated Exchange Fund paper is primarily to meet the increased demand by banks for liquidity management purposes.  In recent weeks, there has been unusually strong demand for Exchange Fund paper by banks for liquidity management purposes due to heightened credit and liquidity concerns.  The strong demand for the paper is reflected in the very low yield of short-dated Exchange Fund paper.

"The issuance of additional Exchange Fund paper will help meet the increased demand for the paper by banks for liquidity management purpose," Mr Joseph Yam, the Chief Executive of the HKMA, said.  "Increasing the supply of Exchange Fund paper can also improve banks' access to the Discount Window and other liquidity facilities recently introduced by the HKMA," Mr Yam added.

The forecast change in the Aggregate Balance arising from the additional issuance of Exchange Fund paper is published on the HKMA website, the Reuters screen (HKMAOOC) and Bloomberg.

The revised issuance schedule for Exchange Fund Bills and Notes is attached in the Annex.

Annex

For further enquiries, please contact:
Peggy Lo, Manager (Press), at 2878 1687 or
Hing-fung Wong, Manager (Press), at 2878 1802

Hong Kong Monetary Authority
20 October 2008