Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 3 July

(Approved for Issue by the Exchange Fund Advisory Committee on 22 July 2014) 

Report on the Currency Board Operations (12 April – 19 June 2014) 

The Sub-Committee noted that the Hong Kong dollar exchange rate strengthened from 7.7537 to 7.7509 during the review period, in part reflecting mild portfolio inflows and stronger corporate demand for Hong Kong dollar liquidity before the half-year end to meet operation needs and make dividend payments, as well as increased funding demand for equity initial public offering activities.  In the money market, the Hong Kong dollar interbank interest rate remained stable at low levels, while the Hong Kong dollar forward discounts narrowed.  The Aggregate Balance remained stable at around HK$163.9 billion during the review period.  The Monetary Base edged down to HK$1,254.08 billion from HK$1,256.18 billion due to a decline in Certificates of Indebtedness. 

The Report on Currency Board Operations for the period under review is at Annex.   

The Sub-Committee also noted that the strong-side Convertibility Undertaking was triggered during the Hong Kong and New York hours on 1 July as the spot rate of Hong Kong dollar against US dollar strengthened to 7.75.  As a result, the Aggregate Balance increased by HK$16.3 billion to HK$180.1 billion on 3 July, reflecting in part the increased corporate demand due to commercial activities, including merger and acquisition activities and dividend distribution.  The Monetary Base increased to HK$1,275.49 billion on 3 July.    

The Sub-Committee noted that, in accordance with the Currency Board principles, changes in the Monetary Base had been fully matched by corresponding changes in foreign reserves. 

Monitoring of Risk and Vulnerabilities

The Sub-Committee noted that in the US, the Federal Reserve maintained its highly accommodative stance of monetary policy at the June Federal Open Market Committee meeting, and there has recently been a pick-up in the inflation data and a faster-than-Fed’s projected decrease in the unemployment rate.  The Sub-Committee also noted the risks posed to the global financial markets stemming from any abrupt unwinding of interest rate expectations. 

The Sub-Committee noted that in Europe, the European Central Bank (ECB) announced a package of monetary easing measures to support bank lending and combat disinflation, including cuts in policy interest rates and the introduction of the Targeted Longer-term Refinancing Operation.  The Sub-Committee noted that the reaction of the financial market to the ECB’s decision was relatively mild.  

The Sub-Committee noted that in Mainland China, authorities continued to fine tune economic policies to support growth.  The Sub-Committee also noted that market concerns over the property market remained as a result of a drop in aggregate property prices in May for the first time since mid-2012, and a weakening in transactions and construction activities. 

The Sub-Committee noted that in Hong Kong growth momentum of the economy remained moderate in recent months owing to a fall in retail sales, in particular in big ticket items, and sluggish export performance.  The Sub-Committee also noted that property prices edged up in recent months, accompanied by a rise in transaction volume and newly approved mortgage loans, but property market prospects remained uncertain and warrant close monitoring. 

An Update on Shadow Banking in Mainland China  

The Sub-Committee noted a paper providing an update on the recent developments in shadow banking in Mainland China and the regulatory response.   

Annex

Hong Kong Monetary Authority
11 August 2014