Convertibility Rate, Backing Arrangement for Coins and Treatment of Interest Payments on Exchange Fund Paper

The HKMA confirmed today that the following three measures to fine-tune the currency board arrangements in Hong Kong would take effect on 1 April 1999:

(a) the movement of the exchange rate under the Convertibility Undertaking in respect of the Aggregate Balance from 7.7500 to 7.8000 by 1 pip per calendar day (as announced on 26 November 1998);

(b) the provision of an explicit backing mechanism for the issuance of coins in circulation similar to that for banknotes (as announced on 1 February 1999); and

(c) allowing interest payments on Exchange Fund paper to expand the monetary base (as announced also on 1 February 1999).

Exchange Rate under the Convertibility Undertaking

Starting from tomorrow (1 April 1999), the exchange rate prescribed by the HKMA under the Convertibility Undertaking for the Aggregate Balance will move from its present level of 7.7500 by 1 pip per calendar day. Thus, for example, the rate will be 7.7501 on 1 April and 7.7507 on 7 April (which will be the next business day in Hong Kong). It will therefore take 500 calendar days for the rate to reach 7.8000, which is the exchange rate applicable since October 1983 for the issue and redemption of Certificates of Indebtedness, where it will remain. The gradual move of the convertibility rate is not expected to cause any disturbance to the foreign exchange or money markets.

Backing for Coins in Circulation

As from 1 April, the issue and withdrawal of coins in circulation will be conducted against US dollars at a fixed exchange rate of 7.8000, consistent with the framework for banknote issuance. This move will provide a more explicit backing arrangement for coins compared with the previous practice, under which coins were issued against Hong Kong dollars and such proceeds were only switched over time into foreign currencies.

The new arrangement only affects coin transactions between the HKMA and the agent bank, i.e. the Hongkong and Shanghai Banking Corporation (HSBC). Transactions between HSBC and other banks will continue to be conducted against Hong Kong dollar value, as is the case for banknotes.

Treatment of Interest Payments on Exchange Fund Paper

Also commencing 1 April, interest payments on Exchange Fund paper will be allowed to expand the monetary base. Instead of carrying out Hong Kong dollar operations to neutralize the effect of interest payments on the Aggregate Balance, the HKMA would allow the Aggregate Balance to increase along with such interest payments. It will then issue additional Exchange Fund paper to absorb the increase in the Aggregate Balance. An amount approximately equivalent to interest payments will be added to the regular issue from time to time, starting with the tender notice to be issued on 1 April 1999.

The new measure is consistent with the currency board discipline, as interest payments on Exchange Fund paper are backed by interest income on the US dollar assets backing the monetary base.

Following implementation of this measure, the HKMA page on the news services (including Reuters, Bloomberg and Bridge News) will be revised to show the actual and forecast changes in the Aggregate Balance due to interest payments on Exchange Fund paper and the subsequent issuance of Exchange Fund paper to absorb such increases. The revised format and a technical note on the interpretation of the additional information are at Annex A and Annex B.

"These three measures were announced earlier, having been endorsed by the Exchange Fund Advisory Committee (EFAC) upon the recommendation of the EFAC Sub-Committee on Currency Board Operations. Upon the completion of the preparatory work, we are now ready to implement these measures," an HKMA spokesman explained.

Hong Kong Monetary Authority
31 March 1999