The Convertibility Undertaking


14 Oct 1999

The Convertibility Undertaking

A Twenty-Four-Hour Commitment

The recent opening of the HKMA's London Representative Office enables twenty-four-hour monitoring of the world's markets and strengthens our commitment to the monetary rule of our Linked Exchange Rate System.

A couple of weeks ago I was in London to open the Hong Kong Monetary Authority's Representative Office there. This is the second HKMA Representative Office overseas: the first was established three years ago in New York. With the London Representative Office now in operation we shall have continuous twenty-four-hour coverage of the events and developments that have a bearing on some of our primary policy objectives: the maintenance of monetary and financial stability in Hong Kong, and the prudent management of our substantial foreign reserves.

For some time now international finance has demanded twenty-four-hour monitoring - and, at times, operations - by the HKMA. Our linked exchange rate system makes this particularly important because it is characterised by a firm commitment on the part of the HKMA to convert all Hong Kong dollars within the clearly defined Monetary Base into US dollars. This commitment is backed by transparent arrangements, at the centre of which is an explicit Convertibility Undertaking. Under the Convertibility Undertaking the HKMA stands ready to convert into US dollars, at a specified exchange rate, any amount of Hong Kong dollars that licensed banks have in the clearing accounts they maintain with the HKMA. This Convertibility Undertaking is unconditional. As long as the banks have adequate Hong Kong dollar funds in their clearing accounts to settle their purchases of US dollars from the HKMA under the Convertibility Undertaking they are free to make use of it.

Many of our licensed banks are international banks with branches or head offices in other financial centres. They have customers outside Hong Kong who may have a need to buy or sell Hong Kong dollars, for whatever reason, on a twenty-four-hour basis. They might be importers and exporters trading with Hong Kong, or they might be investors of whatever description, and Hong Kong licensed banks are there to serve their needs. It is up to them whether or not to allow their customers access, through them, to the Convertibility Undertaking. Should they choose to do so, they will obviously need to take into account the risks involved, particularly the risk of having to provide the Hong Kong dollar funds necessary to settle the transaction on behalf of the customers on settlement day. And they will need to manage and price those risks accordingly.

Since the introduction of the formal Convertibility Undertaking in September last year and up until the end of September this year, the Convertibility Undertaking has been triggered on thirty-three occasions, involving the sale of about US$4 billion in total.* Only ten of these triggerings occurred in Hong Kong, although the amounts involved in Hong Kong were on average larger. So the overseas demand for buying US dollars with Hong Kong dollars, at least in terms of its frequency, is higher than in Hong Kong. But I must confess that I am a little puzzled about why this should be the case, just as I am curious to know the true identity of those who might be behind these transactions. Surely the foreign exchange market involving the Hong Kong dollar should be a lot more liquid during Hong Kong hours. And why should the transactions be so urgent that they cannot wait until Hong Kong opens, especially when, with foreign exchange transactions normally settled on a T+2 basis, the money is not available immediately? Could it be that those market participants whose job it is to play the market were testing whether the HKMA was there? If this is the case, what then was the intention behind the tests?

Whatever the reason, we are an open market. We honour the Convertibility Undertaking unconditionally and in strict accordance with the monetary rule of our Currency Board system. We know that such a policy is essential to the long-term credibility of the system. The establishment of the HKMA's London Representative Office will facilitate this from now on. All licensed banks will have direct access to the HKMA's Convertibility Undertaking on a twenty-four-hour basis. Concurrently, with the help of the licensed banks concerned, we shall strive to understand market sentiment and market dynamics better so that we can discharge our responsibility to deliver monetary and financial stability more effectively.


Joseph Yam
14 October 1999

* Over the same period, about US$4 billion was also sold back to the HKMA on a total of thirty occasions, twenty-three of which were conducted in Hong Kong.


More information on the convertibility undertaking can be found here.

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Last revision date : 14 October 1999