Backing Arrangement for Coins in Circulation and Interest Payments on Exchange Fund Bills and Notes

Press Releases

01 Feb 1999

Backing Arrangement for Coins in Circulation and Interest Payments on Exchange Fund Bills and Notes

With the approval of the Exchange Fund Advisory Committee (EFAC), the HKMA announced today the setting up of an explicit and transparent backing arrangement for coins in circulation, as well as a plan to allow interest payments on the Exchange Fund Bills and Notes to expand the outstanding amount of Exchange Fund paper. In addition, a Report on Currency Board Operations for the period 9 November to 31 December 1998 will be published today as part of the record of the meeting of the EFAC Sub-committee on Currency Board Operations (the Sub-committee) held on 8 January 1999 (Annex I).

 

Backing Arrangements for Coins in Circulation

Under the new backing arrangements, the issue and withdrawal of coins in circulation will be settled against US dollar value at the fixed exchange rate of HK$7.80 to US$1. This will provide an explicit and transparent backing mechanism for coins that is consistent with the issue and redemption of banknotes. Up to now, the issue and withdrawal of coins has been conducted through an agent bank against Hong Kong dollar value and the proceeds have over time been switched into foreign currency assets. As a result, the coins in circulation are all fully backed by foreign reserves. The new backing arrangements will further ensure that a change in the amount of coins in circulation will be automatically matched by a corresponding change in the foreign reserves at the fixed rate of HK$7.80 to US$1. It is anticipated that the operational procedures involving transactions between the agent bank and the HKMA will be put in place by April 1, and that the new backing arrangements will take effect on that day.

 

Interest Payments on Exchange Fund Bills and Notes

The EFAC agreed that the outstanding size of the Exchange Fund paper should be allowed to rise in line with interest payments on Exchange Fund paper. Since the interest paid on Exchange Fund paper is fully backed by the interest received from the foreign reserves backing the monetary base, allowing the outstanding amount of Exchange Fund paper to grow in line with interest payments is in full compliance of currency board principles.

When consulting academics and market practitioners on the proposed measure, there is a general consensus that, by allowing the outstanding amount of Exchange Fund Bills and Notes to grow in such a non-discretionary manner consistent with the currency board principles, the arrangement will allow the cushion to the level of interbank liquidity to rise over time. Allowing the outstanding amount of Exchange Fund paper to gradually increase will also be conducive to the development of Hong Kong's overall debt market.

The issuance of additional Exchange Fund Bills and Notes to accommodate interest payments will commence once the operational procedures are finalized and put in place.

 

Publication of the Report on Currency Board Operations

To promote general understanding of the currency board operations in Hong Kong, a regular report on currency board operations is published as part of the record of the meeting of the Sub-committee. As a regular agenda item, the Sub-committee examines the Report and discusses whether movements in the monetary base and foreign reserves have been consistent with the principles of the currency board system. The first report published today shows that, for the period from 9 November to 31 December 1998, changes in the monetary base were fully matched by corresponding changes in foreign reserves.

When commenting on these measures, Mr. Joseph Yam, Chief Executive of the Hong Kong Monetary Authority said, 'The backing arrangements for coins in circulation and the plan to allow interest payments on Exchange Fund Bills and Notes to expand the outstanding amount of such paper are in full compliance with the currency board principles and will help to strengthen the currency board arrangements in Hong Kong. The publication of the regular report on Currency Board Operations, in addition to the record of the Sub-committee meeting, represents another move of the HKMA towards greater transparency in the operation of the currency board and our commitment to maintaining the rule-based linked exchange rate system. The Sub-committee will continue to review the current system and introduce measures, as and when appropriate, to enhance the robustness of the currency board arrangements in Hong Kong.'

Latest Press Releases
Last revision date : 01 February 1999