Increased Information Disclosure: Exchange Fund Abridged Balance Sheet and Currency Board Accounts

As part of its ongoing effort to increase transparency, the Hong Kong Monetary Authority (HKMA) will, on a monthly basis, publish an Abridged Exchange Fund Balance Sheet and a Currency Board Account. The first set of such accounts, referring to the position as at 31 January 1999, was released today.

In releasing these monthly figures on the Exchange Fund, a spokesman from the HKMA urged those interested to exercise great care in their interpretation. He said that "monthly figures are likely to fluctuate due to short-term market movements and seasonal factors".

Abridged Exchange Fund Balance Sheet

The Balance Sheet as at end-January 1999 shows that the total assets of the Fund stood at HK$915.4 billion. This is HK$3.1 billion more than the total assets as at 31 December 1998, and is made up of an increase in January in foreign currency assets of HK$8.1 billion and a decrease in Hong Kong dollar assets of HK$5.0 billion.

Currency Board Account

The Currency Board Account shows those items on the Exchange Fund Balance Sheet that are related to the operations of the currency board arrangements. It helps to demonstrate HKMA's compliance with the currency board principles, which require increases in the monetary base to be fully backed by foreign currency reserves.

As at end-January 1999, the monetary base stood at HK$196.5 billion, an increase of 1.4% over that at the end of December 1998. The foreign currency assets specifically backing the monetary base correspondingly increased by 2% to HK$213.9 billion. Both the monetary base and the backing assets are valued on a marked to market basis. During the month of January, the market value of Exchange Fund paper registered a decline reflecting the slight firming of Hong Kong dollar interest rates. This explains the smaller increase in the monetary base as compared with the increase in the foreign currency assets backing it.

In this connection, the HKMA disclosed that a specific portfolio of US dollar assets ("the backing portfolio") was established on 1 October 1998. It then contained US dollar assets adequate for backing 105% of the monetary base (the "backing ratio"). The excess of assets in the backing portfolio over the monetary base is intended to provide a prudent cushion against possible changes in the market value of US$ investments or Exchange Fund Bills and Notes, which could lead to fluctuations in the backing ratio. The increase in this ratio since the establishment of the backing portfolio primarily reflects the accumulated excess of earnings on US$ investments over interest payments on Exchange Fund Bills and Notes.
The appropriate level of the backing ratio will be reviewed from time to time by the Subcommittee on Currency Board Operations of the Exchange Fund Advisory Committee.

"While specific assets of the Exchange Fund have been earmarked to back the monetary base, the whole of the Exchange Fund, not just the backing portfolio, will continue to be available for the purpose of supporting the exchange value of the Hong Kong dollar under the linked exchange rate system," an HKMA spokesman explained.

Attachment

Annex 1 : Abridged Balance Sheet of the Exchange Fund
Annex 2 : Currency Board Account
Annex 3 : Technical note on the disclosure of data relating to the Exchange Fund

Hong Kong Monetary Authority
1 March 1999