Issuance of additional Exchange Fund Bills

The Hong Kong Monetary Authority (HKMA) announced today (Tuesday) that additional Exchange Fund Bills will be offered in the tenders on 13 and 20 January, totalling HK$18,000 million, to meet the increased demand for the paper by banks.

The issuance of additional Exchange Fund paper will be conducted in the following manner: on 13 January, a total of HK$12,000 million worth of additional Exchange Fund paper will be offered by increasing the size of a regular issue of 3-month Exchange Fund Bills and launching an issue of Exchange Fund Bills with an 84-day maturity.  In addition, an issue of 3-month Exchange Fund Bills to be offered on 20 January will be expanded by HK$6,000 million.  Details can be found in the revised issuance schedule for Exchange Fund Bills and Notes (Annex).

The additional supply of short-dated Exchange Fund paper is designed to meet the strong demand for Exchange Fund paper by banks for liquidity management due to continuing credit and liquidity concerns arising out of the international financial crisis.  The strong demand for the paper is reflected in the very low yield of short-dated Exchange Fund paper.

The increase in the supply of Exchange Fund Bills is consistent with Currency Board principles, since the additional issuance simply represents a change in the composition of the Monetary Base, with a shift from the Aggregate Balance to Exchange Fund paper.  The Monetary Base remains fully backed by foreign exchange reserves.  Interbank liquidity is expected to remain abundant after the issuance of additional Exchange Fund Bills, which is not expected to have a significant impact on liquidity conditions and interest rates.  The HKMA will monitor the situation closely and stand ready to take appropriate action to maintain adequate liquidity within the system if necessary.

The Aggregate Balance is projected to decline by about HK$12,000 million on 14 January (Wednesday) and fall further by about HK$6,000 million on 21 January (Wednesday).

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.

Annex

For further enquiries, please contact:

Thomas Chan, Communications Chief, at 2878 1480 or
Peggy Lo, Manager (Communications), at 2878 1687

Hong Kong Monetary Authority
6 January 2009