(Approved for Issue by the Exchange Fund Advisory Committee on
18 January 2001)
Currency Board Operations for the Period 26 November -
20 December 2000
| 1. |
The Sub-Committee observed that markets had been generally
quiet during the period under review. The Hong Kong dollar exchange
rate had stayed very close to 7.8000 for most of the period. In
early December the Aggregate Balance had fallen to a negative level
following a triggering of the Convertibility Undertaking on 6
December. Subsequently in response to bank offers, the HKMA had
sold Hong Kong dollars to restore the Aggregate Balance to
positive. |
| 2. |
Members noted the substantial increase in the backing ratio
during the period under review. At 112.35% on the last day of the
period, it had come very near to the upper trigger level of 112.5%,
upon which assets from the backing portfolio would be transferred
to the investment portfolio sufficient to reduce the backing ratio
to 110%. A large part of the increase in December was attributable
to net interest income on the backing portfolio, helped by a
favourable interest differential. Although the backing ratio had
continued to be close to the upper trigger level in late December
and early January, the experience of past years suggested that it
could be substantially reduced in the weeks leading up to Chinese
New Year as the number of outstanding Certificates of Indebtedness
would increase to cover additional banknote issue. It was unlikely,
therefore, that the upper trigger would be reached in the near
future. The HKMA would continue to monitor the movements of the
backing ratio and take action as necessary. |
| 3. |
The Sub-Committee noted that, in accordance with the currency
board principles, changes in the monetary base during the reporting
period had been fully matched by corresponding changes in foreign
reserves. |
| 4. |
The report on Currency Board operations for the period under
review is at Annex A. |
Monitoring of Risks and Vulnerabilities
| 5. |
The Sub-Committee noted an information paper assessing risks
and vulnerabilities in the domestic and external environment
relevant to Hong Kong's financial stability. The paper examined,
among other topics, the general slowdown in economic activity in
the US, Europe and Japan and the continuing growth momentum in East
Asia, qualified by an expected slowdown in external demand and
continuing political problems in some countries. For the purpose of
comparison, the paper focused in particular on the recent financial
crisis in Argentina, which, like Hong Kong, operated a currency
board system. The paper noted that the crisis in Argentina was
induced more by public finance problems (such as extensive external
debt and a weak fiscal position) than by any weakness in the
monetary system. Members observed that, in contrast, Hong Kong
enjoyed strong fundamentals: it had been unaffected by the crisis
in Argentina partly because trade links between the two economies
were limited and partly because financial market participants were
increasingly able to differentiate the two currency board systems,
which rested on very different fundamentals. |
HKAB Rules on Deposit Charges
| 6. |
Members considered a paper on the Hong Kong Association of
Banks (HKAB) Rules on Deposit Charges. These rules had been made by
HKAB in 1988, after consultation with the Financial Secretary, to
allow for the imposition of charges on large Hong Kong dollar
deposit balances at a time when the Hong Kong dollar was under
significant upward pressure. The rules had not been applied at that
time: the mere possibility that they might be imposed was
sufficient to deter speculation. They had not been needed
since. |
| 7. |
The Sub-Committee noted that the full deregulation of the
Interest Rate Rules was expected to take place in July 2001.
Members recommended that this would also be an appropriate time to
remove the Rules on Deposit Charges. They observed that
considerable improvements to the currency board system since 1988
had provided the potential for unlimited creation of Hong Kong
dollars against US dollars, which would be a potent tool against
speculative inflows. They also considered that, should
circumstances warrant, this potential could be made more explicit
by setting a convertibility undertaking on the strong side of the
link. Members noted that, as a last resort, the Financial Secretary
had powers under section 3A of the Exchange Fund Ordinance which
would allow him to levy charges on Hong Kong dollar balances in
clearing accounts maintained by banks with the HKMA. Even in the
absence of the HKAB rules on deposit charges, banks could, at their
discretion, pass those charges on to their customers. |
Balance of Payments Statistics: Examining Some Received
Wisdom
| 8. |
Members noted an information paper questioning the conventional
view that a fall in foreign exchange reserve assets necessarily
reflected a deterioration in an economy's external position. The
paper argued that, in the case of Hong Kong in particular, changes
in reserve assets were mainly caused by changes in the demand for
banknotes, or in Exchange Fund holdings of US dollars due to, for
example, fiscal transfers. The paper pointed out that the deficit
in the overall BoP account in the first quarter of 2000 was largely
due to a decline in the demand for banknotes, rather than to a
decrease in portfolio demand for Hong Kong dollar assets, as some
analysis had suggested. |
For further enquiries, please contact:
Caitlin Wong, Manager (Press), at 2878 1687 or
Thomas Chan, Senior Manager (Press), at 2878 1480
