Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 4 November 2014

(Approved for Issue by the Exchange Fund Advisory Committee on 3 December 2014) 

Report on the Currency Board Operations (20 June – 16 October 2014)

    The Sub-Committee noted that the Hong Kong dollar exchange rate stayed close to 7.75 against the US dollar during most of the review period.  The strong-side Convertibility Undertaking (CU) was repeatedly triggered between 1 July and 5 August on the back of strong commercial and equity-related demand.  The Hong Kong dollar exchange rate softened in late September and early October.  In the money market, the Hong Kong dollar interbank interest rates remained at low levels.  As a result of the triggering of the strong-side CU in July and August, the Aggregate Balance increased to HK$239.19 billion and the Monetary Base increased to HK$1,340.28 billion. 

2.  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. 

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

Monitoring of Risks and Vulnerabilities

4.  The Sub-Committee noted that in the US, as on-going economic recovery continued to build up domestic demand pressure while the weakening external economic environment could lower imported goods prices, the pace of the monetary normalisation process remained uncertain.

5.  The Sub-Committee noted the risk of stagnation and increasing deflationary pressure in the euro area.

6.  The Sub-Committee noted that in Japan, the government’s plan to introduce the second consumption tax hike was complicated by faltering economic and inflation momentum.  Meanwhile, the Bank of Japan had expanded the size of its Qualitative and Quantitative Monetary Easing programme in late October.

7.  The Sub-Committee noted that in Mainland China, the growth momentum slackened in the third quarter of 2014 with the property market being the main drag.  The Sub-Committee also noted the implications of the recent introduction of property market measures and guidelines on local government debt.

8.  The Sub-Committee noted that in Hong Kong, the banking and financial systems on the whole had functioned normally during the reporting period.  Property prices had increased, while housing affordability in terms of price-to-income ratio and income-gearing ratio remained stretched.

Streamlining of the Exchange Fund Bills and Notes Programme and the Government Bonds Programme

9.  The Sub-Committee noted that with the availability of Government Bonds (GBs) to provide the benchmark yield curve at the longer end, it was no longer necessary to continue to issue Exchange Fund Notes (EFNs) for longer tenors.  The Sub-Committee agreed that the issuance of new EFNs with tenors of three years and above would be discontinued starting from early 2015.  Additional Exchange Fund Bills would be issued to replace EFNs on maturity to maintain the Aggregate Balance.  GBs of larger size would be issued to meet investors’ demand for long-dated Government debt securities.

10.  The Sub-Committee noted that unlike Exchange Fund Bills and Notes, GBs were not part of the Monetary Base and were currently not accepted as collateral for obtaining overnight Hong Kong dollar liquidity through the Discount Window.  The Sub-Committee supported a proposed new discount facility for GBs, which would provide up to HK$10 billion overnight liquidity in total, against a sale and repurchase arrangement of GBs by banks.  The HKMA would seek to neutralise the effect of any usage of this facility on the Aggregate Balance through, for example, borrowing from the interbank market. 

Hong Kong Monetary Authority
15 December 2014