(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
