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Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 16 October 2009

(Approved for Issue by the Exchange Fund Advisory Committee by circulation on 10 November 2009)

Report on Currency Board Operations (9 July 2009 - 30 September 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 with the Undertaking being triggered repeatedly between mid-July and early August and again in the second half of September. Strong inflows into the Hong Kong dollar had probably reflected equity-related demand. Hong Kong-dollar interbank interest rates had generally edged down in line with movements in their US-dollar counterparts.

2. The Sub-Committee noted that the Monetary Base had expanded during the period from HK$720.31 billion to HK$804.08 billion and the market value of outstanding Exchange Fund paper had continued to expand as additional Exchange Fund Bills were issued.

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 indicators in the developed economies had been mixed but that corporate sentiment had continued to improve. Equity markets had rallied in the early part of the review period but lost the gains in early October following negative news about the US job market. Risks to global growth were gradually receding but remained a concern. Such risks include a premature withdrawal of stimulus policy; a re-intensification of the adverse feedback loop between the real and financial sectors leading to credit deterioration; crowding out of the private sector by public investment; and vulnerability to shocks given economic fragility.

6. On the Mainland, growth momentum in the economy had remained strong. Striking a balance between preventing over-capacity in some industries and avoiding premature withdrawal of stimulus measures would be a challenge for the authorities.

7. In Hong Kong, recent releases of high-frequency indicators showed that the economy had continued to recover in the third quarter. Property prices had risen in August and, while no significant imbalances had appeared yet, risk surveillance was called for. The Hong Kong-dollar/US-dollar exchange rate had stayed close to the strong-side Convertibility Undertaking, which had been triggered repeatedly.

8. The Sub-Committee also noted an analysis of the potential economic impact on Hong Kong of an outbreak of infectious disease such as swine flu. Drawing on Hong Kong's experience during the SARS outbreak, the analysis noted that a pandemic in the aftermath of a global financial crisis could present challenges while monetary and fiscal policies were stretched and many financial institutions were still recovering.

Exchange Rate Regimes and the Management of Asset Price Bubbles: Implications for Hong Kong

9. The Sub-Committee noted a paper discussing the historical association between different exchange-rate regimes and asset-price bubbles and the role of monetary policy in managing such events and maintaining financial stability in floating-exchange-rate regimes, especially in small, open economies subject to large capital flows. It noted that, there is no systematic relationship between asset price performance and exchange rate regimes, and regardless of exchange rate regimes, macro prudential policies are important.

Dislocations in Foreign-Exchange Swap and Money Markets in Hong Kong and Policy Actions during the Financial Crisis of 2008

10. The Sub-Committee noted a paper on dislocations in the foreign-exchange swap and money markets during the 2008 financial crisis and the effectiveness of policy actions taken in Hong Kong. The study found that policy actions taken in Hong Kong, in particular the five temporary liquidity measures, had effectively ameliorated dislocations in the foreign-exchange swap market following the collapse of Lehman Brothers, thus mitigating the impact of credit-market tensions on local financial markets.

For further enquiries, please contact:

Peggy Lo, Manager (Communications), at 2878 1687 or
Natalie Wu, Officer (Communications), at 2878 8246

Hong Kong Monetary Authority
12 November 2009

Last revision date: 1 August 2011
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