Hong Kong Monetary Authority - the disposal of Hong Kong equities

inSight

19 Sep 2002

The disposal of Hong Kong equities

The disposal programme for the majority of the Hong Kong equities acquired by the Exchange Fund in 1998 is now nearing completion.

Donald Tsang, Rafael Hui and I can now indulge in a quiet sigh of relief concerning the stock market intervention we engineered a little over four years ago. The fourth quarter of this year will see the end of the Tap of the Tracker Fund and the disposal programme for the stocks purchased in August 1998 will have been completed. A chapter in the monetary history of Hong Kong will have been closed.

The profits made - a total of HK$89.6 billion in cash and stocks - were considerable and all for the good of Hong Kong. But the decision will remain a controversial one. However well we explained it, intervention in the free operation of a market will always be regarded with scepticism, or worse, with hostility. I hope, nevertheless, that some of our past critics on the matter have now come around to accepting the simple fact that markets can and do fail, particularly small, open financial markets operating in a global environment. And when they do fail or threaten to do so, for whatever reason, the authorities have the responsibility to do whatever they can in their power to put things right or to pre-empt failure before it causes irreparable damage to society.

Looking back, we have also learned quickly from that traumatic experience. We have strengthened our monetary system, in terms of its ability to withstand further shocks and, with the passage of time, also in terms of market confidence in it. We now have one of the most transparent monetary systems in the world, with almost real time public monitoring of how it is being operated strictly in accordance with the monetary rule that characterises the system. We have managed to sustain confidence in the system through a rather delicate period in which Hong Kong has been affected by the deflationary pressures arising from cyclical world economic downturn and structural adjustment. Although our economic troubles are far from over, that degree of confidence in our monetary system has at least provided a stable environment for addressing the structural issues and the options for resolving them in the best interests of the community.

Yes, we will still have an estimated HK$51.5 billion of Hong Kong equities on the books of the Exchange Fund, on the basis of current prices, but as we have made clear this is a long-term investment that will not be sold in the foreseeable future. In other words, the "overhang", to the extent that there has been one, will be removed after the exhaustion of the fourth quarter Tap, and the Hong Kong stock market can then be rid of the Exchange Fund's presence. The Exchange Fund's investment portfolio of Hong Kong equities will be managed by a number of external managers, half passively (indexed) and half actively (through tactical deviations from a benchmark allocation). They will work with clear mandates that do not require day-to-day decision-making by the HKMA. There can be no question of a conflict of interest with our role as banking supervisor or in the conduct of rule-based monetary policy.

Great credit is due to the Chairman, the other board members and the staff of Exchange Fund Investment Limited for their remarkable achievement in organising a most innovative and successful disposal programme for the stocks.

Joseph Yam

19 September 2002

Related press release:

Tracker Fund of Hong Kong (TraHK) Tap Issue Limit, 16 September 2002