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Record of Discussion of the Meeting of
the Exchange Fund Advisory Committee
Currency Board Sub-Committee held on 17 April 2009

(Approved for Issue by the Exchange Fund Advisory Committee by circulation on 8 May 2009)

Report on Currency Board Operations (21 November 2008 - 30 March 2009)

The Sub-Committee noted that the Hong Kong dollar exchange rate against the US dollar had stayed close to the strong-side Convertibility Undertaking of 7.75 during the review period. The Convertibility Undertaking had been triggered repeatedly in November and December 2008 and in late March 2009, with the Aggregate Balance expanding markedly as result. The market value of outstanding Exchange Fund Bills and Notes had increased, mainly as a result of additional issuance of Exchange Fund Bills. The interbank money market had stabilised and Hong Kong-dollar interbank interest rates had declined following the introduction of temporary liquidity-assistance measures in late 2008. The HKMA had announced on 26 March 2009 that it would incorporate foreign-exchange swap and term repurchase arrangements into its continuing market operations to offer Hong Kong-dollar liquidity assistance to banks, if needed, on a case-by-case basis after expiry of the five temporary liquidity-assistance measures at the end of that month.

2. The Sub-Committee noted that the Monetary Base had expanded during the period from HK$398.71 billion to HK$570.41 billion, mainly reflecting an increase in the Aggregate Balance and outstanding Exchange Fund Bills and Notes.

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 economic activities remained weak globally during the review period and Asian economies had been affected, because of their reliance on exports. Equity markets in major economies had recovered some of their earlier losses. Markets had largely reacted positively to the announcement of the Public-Private Investment Program in the US. The better-than-expected performance of some financial institutions in early 2009 had also led to speculation that the worst of the credit crisis was over. The effects of quantitative easing by the US Federal Reserve on bank lending remained to be seen.

6. The Mainland economy had shown some positive signs in the review period as the fiscal-stimulus package worked its way into the real economy. CPI and PPI inflation had remained negative in recent months and the renminbi had remained stable against the US dollar.

7. The Hong Kong economy had contracted by 2.0% in the last quarter of 2008, its third consecutive quarter of contraction, as the global downturn continued to weigh on local economic activities. Sentiment remained weak. However, the equity and housing markets had shown signs of stabilisation.

Dislocations in the Foreign Exchange and Money Markets during the Credit Crisis of 2007-2008

8. The Sub-Committee noted a paper analysing the impact of the global credit crisis on the money market and its potential implications. The analysis concluded that risk premiums had moved in tandem with the spreads of money-market rates over their corresponding overnight index swaps across the economies studied, and that the risk premiums bore a negative relationship with the spot rates of the currencies considered.

The Effect of Financial Markets in US and China on Financial Markets in Hong Kong during Current Financial Crisis

9. The Sub-Committee noted a study of how financial markets in the US and the Mainland had affected the equity, money and foreign-exchange markets in Hong Kong during the current financial crisis. The main findings of the study were that the influence of the Mainland equity market on its Hong Kong counterpart had increased substantially in the current crisis, but remained less important than that of the US equity market; the US market had started to influence Hong Kong indirectly through its influence on the Shanghai market in recent years; and shocks from the US equity market affected H-share stocks more than they affected stocks of Hong Kong companies in the Hang Seng Index. The role of money-market linkages between Hong Kong and other economies had changed little compared with when the IT bubble burst: HIBOR and LIBOR had moved together in both crises and the Mainland money market had not affected Hong Kong because of the Mainland's capital controls. In the foreign-exchange market, while the Hong Kong-dollar exchange rate had been influenced by equity-market-related capital flows before the current crisis, this had ceased to be a significant factor during the crisis.

For further enquiries, please contact:
Thomas Chan, Communications Chief, at 2878 1480 or
Peggy Lo, Manager (Communications), at 2878 1687

Hong Kong Monetary Authority
13 May 2009

Last revision date: 1 August 2011
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