Approved for Issue by the Exchange Fund Advisory Committee by
circulation on 7 January 2009)
Report on Currency Board Operations (20
September - 20 November 2008)
The Sub-Committee noted that the Hong Kong
dollar exchange rate against the US dollar had strengthened towards
the strong-side Convertibility Undertaking of 7.75 during the
review period due to the unwinding of carry trades and possible
repatriation of funds by domestic corporations. The Convertibility
Undertaking had been triggered 26 times between 31 October and 20
November. Local interbank rates had risen markedly after the global
financial crisis worsened in mid-September. To ease money-market
stress, the HKMA had injected liquidity into the banking system;
announced five temporary measures to provide liquidity assistance
to banks; amended the formula for calculating the Base rate,
effectively lowering borrowing costs at the Discount Window; and
increased the supply of Exchange Fund Paper. The Financial
Secretary had announced two pre-emptive measures on 14 October to
bolster confidence in the banking system: a temporary 100%
guarantee of bank deposits and a contingent bank capital facility.
As a result of these measures, local interbank rates had eased.
2. The Sub-Committee noted that the Monetary Base had expanded
during the period from HK$328.79 billion to HK$385.44 billion,
mainly reflecting an increase in the Aggregate Balance due to the
HKMA's operations within the Convertibility Zone and the repeated
triggering of the strong-side Convertibility Undertaking.
3. The Sub-Committee noted that, in accordance with Currency
Board Principles, changes in the Monetary Base had been fully
matched by corresponding changes in 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 volatility in international
financial markets had risen again in November. US stock market
indices had retreated to their lowest levels since the financial
crisis began as investors grew nervous about the depth of
recessions in major economies. Oil and other commodity prices had
continued to decline.
6. The euro area and Japan had entered recessions in the third
quarter and recession in the US was likely to have begun in the
fourth quarter. Leading indicators in these economies suggested
further contraction in the near term. Unemployment was rising and
consumer-price inflation in the US had declined by 1% month on
month in October, signalling an increased deflation risk.
7. Major central banks had cut interest rates further. Interbank
rates had declined from elevated levels but the banking sectors
remained reluctant to lend to firms and households since the
negative economic outlook implied higher default risk.
8. In Mainland China economic growth had slowed to 9% in the
third quarter. The authorities had moved aggressively on monetary
and fiscal policies, reducing deposit and lending rates by 108
basis points and announcing a four-trillion renminbi stimulus
package. Market expectations about the renminbi exchange rate with
the US dollar had shifted with investors anticipating a moderate
depreciation.
9. The Hong Kong economy had contracted in the third quarter,
the second consecutive quarter of negative growth. Unemployment had
increased while inflation had declined to 3.7% in October and was
expected to decline further. The Hong Kong dollar-US dollar
exchange rate had remained at the strong side of the Convertibility
Zone.
10. The Sub-Committee also noted an analysis suggesting that the
current economic downturn in Hong Kong was likely to be more severe
than that following the bursting of the IT bubble in 2001 and the
SARS period in 2003, but less severe than that following the Asian
financial crisis in 1997 to 1998. The main reasons for this are
that there is little economic excess compared with 1997; economic
fundamentals in Asia, particularly Mainland China, are much
stronger than in 1997; easier US monetary policy cushions Hong Kong
through the Linked Exchange Rate system; and policy measures in the
2008/09 Budget and supplementary relief measures announced in July
2008 provide a timely stimulus to the real economy.
Can Demand from China Shield East Asian
Economies from Global Slowdown
11. The Sub-Committee noted a paper quantifying the proportion
of exports from eight East Asian economies that was consumed by
consumers in China, the US, Japan, other developed economies, and
the rest of the world. The main findings were that roughly half of
exports from East Asian Economies to China were used as
intermediate inputs and exported from China; the role of demand
from developed economies declined only slightly from 2000 to 2006,
with US consumers still accounting for more exports from East Asian
economies than Chinese consumers; demand from China is less
important than commonly thought; and the share of exports from East
Asia consumed by the US, Japan, other OECD countries and China did
not change significantly between 2000 and 2006.
Measuring Financial Market Interdependence
and assessing Possible Contagion Risk in the EMEAP Region
12. The Sub-Committee noted a study of the interdependence
between the equity markets of the EMEAP economies and that of the
US. The study concluded that the linkages between these markets
were close and long term, implying that any large shock to the US
will be transmitted to the EMEAP economies.
Review of the Report on Currency Board
Operations
13. The Sub-Committee considered a review of the Report on
Currency Board Operations and agreed that, since the statistical
data contained in it are all published elsewhere, including on the
HKMA website, on a monthly and sometimes daily basis; market
practitioners were now much more familiar with the operation of the
Currency Board than when the current Report was conceived; and
given the desirability of providing more analysis and comment in
the Report, it should be published quarterly from the beginning of
2009. Members noted that, since all data in the current Report was
published elsewhere at least as frequently, this would not lead to
any reduction in the transparency of the operations of the Currency
Board.
Annex A
For further enquiries, please contact:
Thomas Chan, Communications Chief, at 2878 1480 or
Peggy Lo, Manager (Communications), at 2878 1687
Hong Kong Monetary Authority
8 January 2009
