An exchange of letters between the Financial Secretary and the Monetary Authority last week set out the division of functions and responsibilities in monetary and financial affairs.
Readers may have noticed the publication last Friday of "an exchange of letters" between the Financial Secretary and myself as the Monetary Authority, as I am called legally under the Exchange Fund Ordinance. What happened was as follows. In the interests of clarity and transparency, the Financial Secretary formally issued a letter to the Monetary Authority to set out the division of functions and responsibilities in monetary and financial affairs between the two. In response, the Monetary Authority formally acknowledged the receipt of the letter and expressed his understanding and agreement to the contents therein.
I have mentioned before in this column that the International Monetary Fund has recently conducted an extensive Financial System Stability Assessment (FSSA) on Hong Kong. The overall result of the assessment is in my view positive and balanced, as readers can observe from the FSSA report, which was also published last Friday.
The FSSA also recommends the strengthening of regulatory governance, including the independence of the HKMA. The formal exchange of letters between the Financial Secretary and the Monetary Authority is a response to this recommendation. The letter starts by describing the legal framework within which both the Financial Secretary and the Monetary Authority discharge their responsibilities concerning monetary and certain financial affairs. Although the legal framework is unique when compared with international practice, in that the Monetary Authority is a person appointed by the Financial Secretary and with much of his authority in the monetary system derived from the Financial Secretary, it has worked well.
To the extent that there is a need for improvement, it should make more transparent the division of the functions and responsibilities between the two. This is the main body of the formal letter, which sets out the division of functions and responsibilities in respect of the four important areas of monetary policy, stability and integrity of the financial system, maintenance of the status of Hong Kong as an international financial centre, and the Exchange Fund. This part of the letter is not new. It is identical to the relevant paragraphs on the same subject included in an Information Note on the governance of the HKMA sent to the Legislative Council Panel on Financial Affairs on 27 September 2002. These paragraphs summarise arrangements that have, under the Exchange Fund Ordinance, Banking Ordinance and other relevant legislation, been in place for some time.
The letter also discloses, for the first time, the details of the delegation of statutory powers from the Financial Secretary to the Monetary Authority to enable the latter to discharge independently the functions and responsibilities delegated to him. It is important to note the requirement for the Financial Secretary to disclose publicly within three months the reason for his overriding the Monetary Authority by giving the Monetary Authority instructions or exercising powers that have already been delegated to the Monetary Authority, should he choose to do so. This is an important safeguard of the independence of the HKMA, and is introduced on the recommendation of the FSSA report, although there has not been any instance of such an overriding in the past. There is also an undertaking in the letter that any changes to the content of the letter and any additional delegations or changes to existing delegations shall be made public.
Also for the first time, at least in such clear terms, the monetary policy objective and the structure of the monetary system are laid down formally by the Financial Secretary. The monetary policy objective is "currency stability, defined as a stable exchange value of the currency of Hong Kong, in terms of its exchange rate in the foreign exchange market against the US dollar, at around HK$7.80 to US$1". The structure of the monetary system "shall be characterised by Currency Board arrangements, requiring the Hong Kong dollar monetary base to be at least 100 per cent backed by, and changes in it to be 100 per cent matched by corresponding changes in, US dollar reserves held in the Exchange Fund at the fixed exchange rate of HK$7.80 to US$1". The responsibility given by the Financial Secretary to me as the Monetary Authority to achieve independently this monetary policy objective and within the structure of the monetary system he has determined has now been formally put down in a public document. These have, in fact, been the arrangements in place for nearly the last 20 years and I am happy to continue to carry out this responsibility.
As Monetary Authority I welcome unreservedly this formal exchange of letters. It is yet another demonstration of the openness and transparency with which monetary and financial affairs are managed in Hong Kong.
Joseph Yam
3 July 2003
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