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Hcng Kong Monetary Authority

Fact Sheet 1
HONG KONG MONETARY AUTHORITY
THE HKMA's ROLE AND POLICY OBJECTIVES
Functions and
Objectives
The Hong Kong Monetary Authority (HKMA) was established on 1 April 1993 by merging the Office of
the Exchange Fund with the Office of the Commissioner of Banking. The functions and objectives of the
HKMA are:
• to maintain currency stability, within the framework of the linked exchange rate system, through
sound management of the Exchange Fund, monetary policy operations and other means deemed
necessary;
• to promote the safety and stability of the banking system through the regulation of banking business
and the business of taking deposits, and the supervision of authorised institutions; and
• to enhance the efficiency, integrity and development of the financial system, particularly payment
and settlement arrangements.
These functions and objectives are generally common to central banks around the world. Unlike many
other central banks, however, the HKMA does not carry out the following functions:
• Banknote Issue. This is currently undertaken by three commercial banks. They are the Hongkong
and Shanghai Banking Corporation Limited, the Standard Chartered Bank and the Bank of China.
• Banker to the Government. Although the bulk of the fiscal reserves are held by the Exchange Fund,
which is managed by the HKMA, the HKMA does not act as the banker to the Government, a
function which has been carried out historically by commercial banks.
The HKMA is organised into six departments: Banking Supervision Department, Banking Policy
Department, External Department, Reserves Management Department, Monetary Policy and Markets
Department, and Research Department, in addition to a Legal Office.
Integral part of the
Government
The HKMA is an integral part of the Hong Kong SAR Government, but is able to employ staff on terms
different from those of the civil service in order to attract personnel of the right experience and expertise. The
Chief Executive, appointed by the Financial Secretary, remains a public officer, as do his staff. The Financial
Secretary is advised by the Exchange Fund Advisory Committee (EFAC) on matters relating to the use of the
Exchange Fund and the operation of the HKMA. The Committee functions very much as a management board
of the HKMA and, among other things, advises the Financial Secretary on the HKMA's annual budget. The
HKMA is accountable to the public through the Financial Secretary, who appoints the Monetary Authority, and
through the laws passed by the Legislative Council that set out the HKMA's powers and responsibilities.
Enhanced transparency
and accessibility
The HKMA also recognises a broader responsibility to promote a better understanding of its role and
objectives and to keep itself informed of community concerns. In its day-to-day operations and in its wider
contacts with the community, the HKMA pursues a policy of transparency and accessibility. A number of
recent initiatives under this policy have made the HKMA one of the most transparent organisations of its
kind in the world. These initiatives include the HKMA's disclosure, since 1996, on a virtually real-time basis
of information about the Aggregate Balance of the clearing accounts maintained by banks with the HKMA,
and the daily publication, since November 1998, of the size of the monetary base and its components. With
the aim both of further increasing transparency and of encouraging public interest in the workings of Hong
Kong's currency board system, the records of the new EFAC Sub-Committee on Currency Board
Operations have, since November 1998, been published.

Fact Sheet 2
HONG KONG MONETARY AUTHORITY
EXCHANGE FUND AND RESERVES MANAGEMENT
History of the
Exchange Fund
The Hong Kong SAR Government's Exchange Fund (the Fund) was established by the Currency Ordinance
of 1935 (later renamed the Exchange Fund Ordinance) to provide backing to the banknotes issued. The
Fund was originally held in gold, silver and British pounds. In 1976, the role of the Fund was expanded to
include the management of the official reserves when the assets of the Coinage Security Fund (which held
the backing for coins issued by the Government) and the bulk of foreign currency assets held in the
Government's General Revenue Account were transferred to the Fund. In addition, from 1976 onwards, the
Government began to transfer its fiscal reserves to the Fund. The Fund now holds the official reserves of
Hong Kong predominantly in foreign currency assets including cash, short-term deposits, foreign
government bonds, equities and gold.
Management of the Fund
The Fund is managed by the Hong Kong Monetary Authority (HKMA) under powers delegated by the
Financial Secretary to the Monetary Authority under the Exchange Fund Ordinance.
Uses of the Fund
The main uses of the Fund as stipulated in the Exchange Fund Ordinance are to safeguard the exchange
value of the Hong Kong dollar, and to maintain the stability and integrity of the monetary and financial
systems of Hong Kong, with a view to maintaining Hong Kong as an international financial centre. The
Fund is used, when necessary, to undertake intervention and open market operations to maintain monetary
stability.
Investment strategy
The key objectives of the Fund's investment strategy are:
• to preserve capital;
• to ensure that the entire monetary base will be at all times fully backed by highly liquid short-term
US dollar denominated securities;
• to ensure sufficient liquidity for the purpose of maintaining monetary and financial stability; and
• to achieve an investment return that will preserve the long-term purchasing power of the assets.
To achieve these objectives, the funds are managed in two separate portfolios: a Backing Portfolio holding
short-term, highly liquid US dollar denominated securities to fully back the monetary base; and an
Investment Portfolio engaging in longer-term investments to preserve the value of the Fund for the future
benefit of the people of Hong Kong.
The Backing Portfolio, which accounts for about 30% of the assets of the Fund, is managed internally by
the direct investment division of the HKMA. The Investment Portfolio is jointly managed by the direct
investment division and about 30 external managers appointed by the HKMA. These external fund
managers, given their deeper experience in specific markets and their presence in other time zones,
complement the work of the internal direct investment division.
The HKMA regularly reviews its investment strategy and operations. In line with the statutory purposes for
which the Exchange Fund was created and maintained, the investment style and strategy are similar to those
of comparable central banks and monetary authorities. An investment strategy appropriate for a long-term
fund - such as a benchmark approach and a greater use of the long-term capital markets - has been adopted,

Fact Sheet 2
HONG KONG MONKTXRY UJTHOHITY
and the range of currencies and instruments used has also been increased. At the beginning of 1999, the
Exchange Fund adopted a new long-term asset allocation strategy, commonly known as an investment
benchmark, which includes 80% allocation to bonds and 20% allocation to equities. In terms of currencies,
the investment benchmark includes 80% in the US dollar bloc, 15% in the European bloc and 5% in the
Yen bloc.
Increased transparency
Prior to 1992, the accounts of the Fund were confidential. However, in keeping with the commitment to
greater transparency in disclosure, the Government started publishing the accounts of the Fund annually in
1992. Bi-annual accounts have been published since June 1995 and headline figures for the foreign
exchange reserves have also been released monthly since January 1997. The Financial Secretary has decided
to publish on a monthly basis, from 1999, an abridged balance sheet of the Fund and a set of Currency
Board Accounts. The first set of monthly figures, for the end of January 1999, was released in February.
Merger of the
assets of the Land
Fund into the
Exchange Fund
Upon the establishment of the Special Administrative Region on 1 July 1997, the assets of the Land Fund
Trust were vested in the Hong Kong SAR Government. Between 1 July 1997 and 31 October 1998, under
the direction of the Financial Secretary, the fund was managed by the HKMA as a portfolio separate from
the Exchange Fund. Effective 1 November 1998, the assets of the Land Fund were merged into the
Exchange Fund and managed as part of the Investment Portfolio of the Exchange Fund. Following the
merger, the Land Fund remains a separate government fund to be managed in exactly the same way as other
fiscal reserves placed with the Exchange Fund. This will enable the Land Fund to achieve a more optimal
and stable investment return under profit sharing arrangements similar to those for the fiscal reserves placed
with the Exchange Fund. Furthermore, the Land Fund will continue to be administered in accordance with
the Resolution of the Provisional Legislative Council in July 1997. The alignment exercise will not pre-empt
consideration of the long-term use of the Land Fund, and any proposal in this regard is subject to approval
by the Legislative Council in accordance with the Resolution establishing the Land Fund.
The acquisition of
Hong Kong Equities
and the establishment
of Exchange Fund
Investment Limited
As a result of the Government's operations in the stock market in August 1998, the Exchange Fund
acquired a substantial portfolio of Hong Kong equities. Exchange Fund Investment Limited (EFIL) was
established on 14 October 1998 to manage the Hong Kong equity portfolio purchased in August together
with the Hong Kong equities transferred from the Land Fund. EFIL has been charged with the
responsibility of recommending and executing a disposal programme under which the bulk of these Hong
Kong equities will be returned to private sector hands in an orderly manner without disrupting the market.
With the adoption of the new investment benchmark of the Exchange Fund, which includes a 5%
allocation to the Hong Kong equity market, the HKMA has also asked EFIL to manage, through external
managers, the Hong Kong equities to be held as a long-term investment portfolio.
Enquiries about the HKMA's work should be directed to the Resource Centre, HKMA, 8/F, 3 Garden Road, Hong Kong.
Tel: (852) 2878 8222 Fax : (852) 2878 2010 E-mail : hkma@hkma.gov.hk Website : http://www.info.gov.hk/hkma

Fact Sheet 3
HONG KONG MONETVRY AUTHORITY
equivalent amount of US dollars from the Exchange Fund. In the case of coins, which are issued by the
HKMA, transactions between the HKMA and the agent bank responsible for storing and distributing the coins
to the public are settled against US dollars at the rate of HK$7.80 to one US dollar.
Operating under the rule-based currency board system, the Aggregate Balance varies in accordance with the
flow of funds into and out of the Hong Kong dollar. In September 1998, the HKMA provided a clear
undertaking to licensed banks to convert Hong Kong dollars in their clearing accounts into US dollars at the
fixed exchange rate of HK$7.7500 to one US dollar. Starting from 1 April 1999, this convertibility exchange
rate in respect of the Aggregate Balance has been moving from 7.7500 by 1 pip per calendar day for a 500-day
period to 7.8000, where it will converge with the convertibility rate for Certificates of Indebtedness.
The proceeds from the issue of Exchange Fund Bills and Notes have over time been switched into US dollar
assets. The HKMA has also given the undertaking that additional Exchange Fund paper will only be issued
either when there is an inflow of funds (thus ensuring full backing by foreign currency reserves) or, starting
from 1 April 1999, in order to absorb the interest payments on such paper. The latter procedure also complies
fully with the currency board principles since the interest payments on Exchange Fund paper are fully backed
by interest income from US dollar assets backing the monetary base.
Under the currency board system, Hong Kong dollar exchange rate stability is maintained through the interest
rate adjustment mechanism. The monetary base increases when the foreign currency (in Hong Kong's case, US
dollars), to which the domestic currency is linked, is sold to the currency board for the domestic currency
(capital inflow). It contracts when the foreign currency is bought from the currency board (capital outflow).
The expansion or contraction in the monetary base causes interest rates for the domestic currency to fall or rise
respectively, creating the monetary conditions that automatically counteract the original capital movement, and
thereby stabilising the exchange rate.
The Currency
Board Account and
Backing Portfolio
The HKMA publishes the Currency Board Account on a monthly basis to demonstrate compliance with
currency board principles. The Currency Board Account shows on its liabilities side the monetary base and on
its assets side the backing assets. The backing assets represent the specific portfolio of US dollar assets designated
for backing the monetary base (the backing portfolio) which was established in October 1998. The backing
assets provide 110.3% backing for the monetary base as at the end of June 1999. The excess of assets in the
backing portfolio over the monetary base provides a prudent cushion against possible fluctuations in the market
value of the monetary base and the backing assets.
Although specific assets of the Exchange Fund have been earmarked to back the monetary base, the whole of
the Exchange Fund, and not just the backing portfolio alone, continue to be available for the purpose of
supporting the exchange value of the Hong Kong dollar under the linked exchange rate system. At the end of
July 1999, the total foreign currency assets of the Exchange Fund amounted to US$89.1 billion, representing
over three times the monetary base.
Sub-Committee on
Currency Board
Operations under the
Exchange Fund Advisory
Committee
The operations of the currency board system are overseen by the Sub-Committee on Currency Board
Operations under the Exchange Fund Advisory Committee, which was established in August 1998. This Sub-
Committee is chaired by the Chief Executive of the HKMA. Other members of the Sub-Committee include
market professionals, academics and senior officials of the HKMA. The Sub-Committee also recommends,
where appropriate, measures to enhance the robustness and effectiveness of Hong Kong's currency board
arrangements. The Sub-Committee has examined different aspects of the currency board arrangements in
Hong Kong. As a result of its recommendations, a number of reform measures have been introduced to
strengthen the system.
Enquiries about the HKMA's work should be directed to the Resource Centre, HKMA, 8/F, 3 Garden Road, Hong Kong.
Tel: (852) 2878 8222 Fax : (852) 2878 2010 E-mail: hkma@hkma.gov.hk Website : http://www.info.gov.hk/hkma

Fact Sheet 4
HONG KONG MONETARY AUTHORITY
DEBT MARKET DEVELOPMENT IN HONG KONG
In the course of the last decade, the Hong Kong Monetary Authority (HKMA) has taken a number of steps
to develop the infrastructure and assist in the growth of the debt market in Hong Kong These measures
have included
• the introduction of the Exchange Fund Bills and Notes Programme,
• the creation of a benchmark yield curve extending to 10 years,
• the establishment of an efficient central clearing and custodian system for debt securities (the
Central Moneymarkets Unit - the CMU) and linking it to Euroclear, Cedel and other central
securities depositories in the Asian Pacific region,
• the granting of profits tax exemption/concession for qualifying debt securities,
• the extending of the market making system for Exchange Fund paper to debt securities established
by statutory corporations,
• the use of Exchange Fund paper as margin collateral for trading in stock options and futures
• the listing and trading of Exchange Fund Notes on the Stock Exchange of Hong Kong,
• the implementation of the Real Time Gross Settlement (RTGS) System, and
• the establishment of the Hong Kong Mortgage Corporation
Partlv as a result of these measures, the debt market in Hong Kong has developed rapidly The total
outstanding public and private sector debt issues has increased more than fifteenfold from about HK$27
billion at end-1989 to HK$407 1 billion at the end of June 1999
Exchange Fund Bills
and Notes
Exchange Fund Bills and Notes are Hong Kong dollar debt securities issued by the HKMA to provide a
cost-effective instrument for conducting money market operations The issue of Exchange Fund Bills and
Notes has also facilitated the development of the local debt market by increasing the supply of high quality
Hong Kong dollar debt paper and establishing a reliable benchmark yield curve for Hong Kong dollar debt
(Chart 1)
The Exchange Fund Bills programme was introduced in March 1990 Under this programme, bills of 91 ,
182- and 364-day maturity are put up for tender regularly
Two-year and three-year Exchange Fund Notes were introduced in May 1993 and October 1993
respectively This was followed by the inaugural issue of five-year Exchange Fund Notes in September 1994,
seven-year Exchange Fund Notes in November 1995, and ten-year Exchange Fund Notes in October 1996
At the end of June 1999, the total amount of Exchange Fund Bills and Notes outstanding was HK$98 8
billion (US$12 7 billion) Trading in these instruments is highly active, with a daily average turnover of
HK$16 8 billion (US$2 2 billion), which represents about 17 0% of the outstanding amount
Central
Moneymarkets Unit
The HKMA operates the Central Moneymarkets Unit (CMU), which was set up in 1990 to provide a
computerised clearing and settlement facility for Exchange Fund Bills and Notes In December 1993, the
HKMA extended the service to other Hong Kong dollar debt securities It offers an efficient, safe and
convenient clearing and custodian system for Hong Kong dollar debt instruments Since December 1994,

Fact Sheet 4
HONG KONG MONETARY AUTHORITY
the CMU has been linked to Euroclear and Cedel. This helps promote Hong Kong dollar debt securities to
overseas investors. In January 1996, the CMU Service was further extended to cover non-Hong Kong dollar
debt securities.
The CMU handles debt instruments which are either immobilised or dematerialised, and transfer of title is
effected in computer book entry form. At the end of June 1999, 822 private debt issues, with a total
nominal value of HK$226.6 billion (US$29.1 billion) were lodged with the CMU, an increase of 17.4%
compared with the end of 1997.
In December 1996, a seamless interface between the CMU and the newly launched Real Time Gross
Settlement (RTGS) interbank payment system was established. The CMU system now provides real time
and end-of-day Delivery versus Payment (DvP) services.
In April 1997, an agreement was reached between the HKMA and the Reserve Bank of Australia (RBA) for
the CMU of the HKMA to join the RBA's Reserve Bank Information and Transfer System (RITS) which is
the central clearing and settlement system for Australian government paper.
Subsequent to the linkage with Australia, the CMU set up a securities link with the Austraclear New
Zealand System, a clearing system operated by the Reserve Bank of New Zealand (RBNZ), in April 1998.
The bilateral linkage was established on a reciprocal basis. Both the HKMA and the RBNZ have become
members of each other's clearing system. The bilateral linkages between Hong Kong and Australia and New
Zealand will help to broaden the investor base of the debt markets in these economies by facilitating crossborder
trading and holding of securities.
The third bilateral securities link in the region, with South Korea, commenced operation on 8 September
1999.
Granting of profits tax
exemption/concession
for qualifying debt
securities
As a measure to promote the development of a high quality debt market, Exchange Fund Bills and Notes
have been exempted from profits tax. Since 1992, the SAR Government has also granted the exemption
of profits tax on Hong Kong dollar debt securities issued by the multilateral agencies with top credit
ratings. To date, ten multilateral agencies have been granted tax-exempt status. At the end of June 1999,
the outstanding amount of Hong Kong dollar debt securities issued by the multilateral agencies was
HK$68.9 billion.
In addition, since May 1996, interest income and trading profits derived from eligible debt securities can
enjoy a concessionary tax rate equal to 50% of the standard profits tax rate. All debt instruments, regardless
of their currency denomination, will qualify for the tax concession if they fulfill the eligibility criteria. There
are two such types of eligible securities:
• debt instruments issued by the MTRC, KCRC, AA and HKMC, lodged with and cleared through
the CMU, with a minimum denomination of HK$50,000 or its equivalent in a foreign currency,
with an original maturity of not less than five years, and issued to the public in Hong Kong; and
• debt instruments lodged with and cleared through the CMU, with an investment grade rating
specified by the HKMA, with a minimum denomination of HK$50,000 or its equivalent in a
foreign currency, with an original maturity of not less than five years, and issued to the public in
Hong Kong.

Fact Sheet 4
HONG KONG MONETARY AUTHORITY #i4MSrtff Jt/4
Promotion of a deep
and liquid domestic
bond market
Following the HKMA's Note Issuance Programme on behalf of the MTRC in 1995 and the Airport
Authority in 1997, the HKMA arranged a similar programme for the HKMC in January 1998 and for the
KCRC in March 1999. Under this Programme, the HKMA acts as the arranger, custodian, agent and
operator for the debt issues. The securities are covered by the existing market making arrangements for
Exchange Fund Bills and Notes, which should help improve their secondary market liquidity. The first issue
under the HKMC Note Issuance Programme was successfully launched in May 1998.
New initiatives have recently been launched to further develop the local debt market. With effect from 1
April 1999, new Exchange Fund paper is being issued in line with interest payments on existing Exchange
Fund paper. This will allow the size of Exchange Fund paper to grow gradually, and will be conducive to the
development of the local debt market.
Another initiative is to allow use of Exchange Fund paper as margin collateral for trading in stock options
and futures. This can enhance liquidity management by participants in the stock options and futures
exchange. It can also promote market-wide use of Exchange Fund paper, increase the liquidity of fixedincome
market, and help reduce systemic risk.
With a view to enhancing the liquidity of the secondary market for Exchange Fund Notes and facilitating
access by retail investors to the Exchange Fund Notes market, the HKMA has listed the Notes on the Stock
Exchange of Hong Kong. Trading in these Notes on the Stock Exchange began on 16 August 1999. The
listing and trading of Exchange Fund Notes also paves the way for the listing and trading of Hong Kong
dollar bonds issued by government-owned corporations, such as the HKMC, MTRC, AA and KCRC, and
eventually corporate bonds.
Payment system
To help Hong Kong maintain its competitiveness as an international financial centre, the HKMA has been
working closely with the banking industry to enhance the efficiency and robustness of the interbank
payment system.
The successful launch in 1996 of the new Real Time Gross Settlement (RTGS) system, one of the most
advanced in Asia was an important milestone in the development of Hong Kong's interbank payment
system. With the implementation of the RTGS system, real time DvP capability has been achieved for all
debt securities transactions cleared and settled through the CMU.
The Hong Kong
Mortgage Corporation
The Hong Kong Mortgage Corporation (HKMC), which was incorporated in March 1997, plays an
important role in promoting banking stability, monetary stability and home ownership. The HKMC also
helps stimulate the development of the local debt market through the supply of high quality paper to meet
the rising demand from institutional investors, such as pension and insurance funds.
The HKMC is now a major supplier of high quality Hong Kong dollar debt securities. It was one of the
most active corporate issuers in 1998. If market conditions permit, the HKMC will also consider the
feasibility of launching its Mortgage-backed Securities Programme in 1999. More information on the
HKMC can be found in Fact Sheet 6.

Fact Sheet 5
HONG KONG MONETARY AUTHORITY
THE REAL TIME GROSS SETTLEMENT SYSTEM
Hong Kong's interbank payment system entered a new era on 9 December 1996 with the launch of the Real
Time Gross Settlement (RTGS) system by the Hong Kong Monetary Authority (HKMA) and the Hong
Kong Association of Banks (HKAB). The new system is one of the HKMA's major initiatives to enhance the
robustness of the financial infrastructure and the competitiveness of Hong Kong as an international
financial centre. It is one of the most advanced interbank payment systems in the Asia Pacific region.
RTGS - a simple and
direct system
Prior to the establishment of the RTGS system, the Hongkong and Shanghai Banking Corporation Ltd
(HSBC) was the Management Bank responsible for all interbank payment and settlement arrangements.
Some 171 licensed banks needed to go through 10 designated banks, called the Settlement Banks, which
would in turn clear payments with the HSBC. Under the new RTGS system, which is simple, robust and in
full compliance with international standards, all licensed banks in Hong Kong are required to open
settlement accounts directly with the HKMA and have direct access to the system. A new company, Hong
Kong Interbank Clearing Ltd, jointly owned by the HKMA and HKAB, was set up to replace the HSBC as
the operator of the clearing house to settle all interbank payments (Chart).
Automated intraday
repurchase (repo)
arrangement
While no daylight overdraft is allowed, banks can obtain intraday liquidity through intraday repo
arrangement with the HKMA, using mainly government paper, i.e. Exchange Fund Bills and Notes. The
intraday repo transactions are fully automated. When a bank does not have sufficient balance in its account
to effect an outgoing payment but has sufficient eligible securities in its intraday repo account, the system
will automatically trigger an intraday repo transaction to generate the required amount of credit balance to
cover the shortfall. A bank with excess liquidity in its settlement account may reverse the repo transaction
any time.
The HKMA's functions
Under the RTGS system, the HKMA performs the following roles:
• acting as the settlement institution for all licensed banks in Hong Kong;
• operating the Central Moneymarkets Unit system, which is a computerised clearing and settlement
facility for debt securities;
• providing intraday liquidity through intraday repos to prevent payment gridlocks; and
• overseeing the operation and development of Hong Kong's interbank payment system.
Measures to improve
payment flows
To address concerns among some banks about other banks holding on to liquidity until late in the
afternoon and the risk of technical default of time-critical bulk clearing payments, the HKMA has
introduced several liquidity management measures under the RTGS system. These include:
• a guideline implemented in December 1996 by the HKMA to encourage all banks to make
payments in a timely and orderly manner throughout the day. A bank is required to release and
settle 35% by noon and 65% by 2:30 p.m. the value of its total daily Clearing House Automated
Transfer System payments; and

Fact Sheet 6
HONG KONG MONETARY AUTHORITY
THE HONG KONG MORTGAGE CORPORATION
Hong Kong offers fertile ground for the development of a secondary mortgage market, as has been shown by
the strong increase in outstanding residential mortgage loans from 8% of GDP in 1980 to 40% in 1998. A
properly developed secondary mortgage market can play a useful role in channelling long-term funds, such as
insurance and pension funds, to meet the rising demand for long-term home financing.
The Hong Kong Mortgage Corporation Limited (HKMC) was incorporated in March 1997 with the mission
of developing Hong Kong's secondary mortgage market. The HKMC is a public limited company, wholly
owned by the Government through the Exchange Fund, and incorporated under the Companies Ordinance.
The HKMCs business is being developed in two phases. The first phase involves the purchase of mortgage
loans for its own portfolio, funding the purchases largely through the issuance of unsecured debt securities. In
the second phase, the HKMC will securitise the mortgages into mortgage-backed securities (MBS) and offer
them for sale to investors.
Since commencing business in October 1997, the first phase of the HKMCs business plan has proceeded
smoothly. On the mortgage purchase side, the outstanding principal balance of the Corporation's mortgage
portfolio expanded quickly to HK$10.59 billion, as of 30 June 1999. Following a successful six-month pilot
scheme, the purchase programme for fixed-rate mortgages was introduced as a standard programme in
September 1998. Because of the HKMC's prudent purchasing criteria, the mortgages in its portfolio are of
excellent asset quality. As of 30 June 1999, the delinquency ratio of loans overdue for more than 90 days was
0.02%, substantially below the industry average of 1.14%.
On the funding side, the Corporation successfully issued a total of HK$5.2 billion of unsecured debts in 1998
through its HK$20 billion Note Issuance Programme (NIP) and HK$20 billion Debt Issuance Programme
(DIP), making it one of the most active issuers of Hong Kong dollar fixed-rate securities during the year. This
momentum was maintained in 1999. Ten private placements under the DIP and one public issue under the
NIP were made in the first four months of 1999, and a total of HK$1.75 billion was raised through these
issues. The HKMC debt securities were well received by financial institutions and institutional investors. The
average oversubscription rate for these NIPs was more than five times the notes issued. The HKMA acted as
arranger, custodian, agent and operator for these NIPs.
Mortgage Insurance
Programme
On 3 December 1998, the Board of Directors of the HKMC gave its approval in principle for the Corporation
to partner with mortgage insurers to launch a Mortgage Insurance Programme to enable home buyers to secure
mortgage loans of up to 85% loan-to-value ratio. Under the Programme, the HKMC provides mortgage
insurance at a fee to the lending bank for an amount up to 15% of the value of the property. The HKMC will
fully hedge the exposure of the mortgage insurance by taking out re-insurance of an equal amount with a
mortgage insurer. The Programme, launched on 31 March 1999, has been well received by banks and
homebuyers. By 30 June 1999, 38 of the HKMCs 40 Approved Sellers had signed the Master Mortgage
Insurance Policy. Up to the same date, the HKMC had received 789 applications from 24 Approved Sellers,
involving a total mortgage amount of HK$1,658 million. More than 90% of the applications were for
secondary accounts, indicating that the Programme has served to improve liquidity in the secondary market.

Fact Sheet 6
HONG KONG MONETARY AUTHORITY
The Corporation will consider launching an inaugural issue of mortgage-backed securities in 1999, a core
component of the second phase of its business plan, if market conditions permit.
The Hong Kong Mortgage Corporation: Facts and Figures
Ownership
100% owned by the Government through the Exchange Fund
Share Capital
Authorised share capital of HK$3 billion (US$0.38 billion). HK$2 billion (US$0.26 billion) already
paid up with the balance of HK$1 billion (US$0.13 billion) on a callable basis. Capital-to-assets ratio as
at 30 April 1999 is 9.9%.
Structure
Limited company registered under the Companies Ordinance, with participation from the public and
private sectors on the Board of Directors.
Business strategy
Business scope to be expanded in phases, starting with the purchase of mortgage loans for retained
portfolio funded largely by the issue of unsecured paper, followed by the issue of mortgage-backed
securities.
Enquiries about the HKMAs work should be directed to the Resource Centre, HKMA, 8/F, 3 Garden Road, Hong Kong.
Tel: (852) 2878 8222 Fax : (852) 2878 2010 E-mail: hkma@hkma.gov.hk Website : http://www.info.gov.hk/hkma

Fact Sheet 7
HONG KONG MONETARY AUTHORITY
BANKING POLICY AND SUPERVISION
The three-tier
banking system
Hong Kong maintains a three-tier system of deposit-taking institutions, namely, licensed banks, restricted
licence banks and deposit-taking companies. They are collectively known as authorised institutions (AIs)
under the Banking Ordinance.
Only licensed banks may operate current and savings accounts, and accept deposits of any size and maturity.
Restricted licence banks are principally engaged in merchant banking and capital market activities. They
may take deposits of any maturity of HK$500,000 (approximately US$64,103) and above.
Deposit-taking companies are mostly owned by, or otherwise associated with, banks. They engage in a range
of specialised activities, including consumer finance and securities business. These companies may take
deposits of HK$100,000 (approximately US$12,821) or above with an original term to maturity of at least
three months.
Hong Kong has one of the highest concentrations of banking institutions in the world. At the end of June
1999, there were 166 licensed banks, 59 restricted licence banks and 86 deposit-taking companies in
business. Between them, these 311 authorised institutions operate a comprehensive network of 1,583 local
branches. Of these 311 AIs, 279 are beneficially owned by interests from over 30 countries. There are, in
addition, 131 representative offices of overseas banks in Hong Kong. A local representative office is not
allowed to engage in any banking business. Its role is confined mainly to liaison work between the bank and
its customers in Hong Kong.
Authorisation
The authorisation criteria for licensed banks, restricted licence banks and deposit-taking companies seek
to ensure that only fit and proper institutions are entrusted with public deposits. The Hong Kong
Monetary Authority (HKMA) conducts periodic reviews of the authorisation criteria and, when necessary,
introduces amendments to reflect the changing needs of the regulatory environment and to meet new
international standards.
Under the Banking Ordinance, the HKMA is the licensing authority responsible for the authorisation,
suspension and revocation of all three types of authorised institutions. Checks and balances are provided in
the Ordinance with the requirement that the HKMA consult the Financial Secretary on important
authorisation decisions, such as suspension or revocation. The Chief Executive-in-Council is the appellate
body for hearing appeals against decisions made by the HKMA.
Authorised institutions have to comply with the provisions of the Banking Ordinance which, among
other things, require them to maintain adequate liquidity and capital adequacy ratios, to submit periodic
returns to the HKMA on required financial information, to adhere to limitations on loans to any one
customer or to directors and employees, and to seek approval for the appointment of controllers, directors
and senior management.
Overseas-incorporated banks licensed in and after 1978 and overseas-incorporated restricted licence banks
authorised in and after 1990 were previously subject to the one-building condition, which effectively
restricts these institutions to operate out of one branch. The original intention of imposing branching

Fact Sheet 7
HONG KONG MONETARY AUTHORITY
restriction on foreign banks was to avoid over-crowding in the retail banking market Having regard to the
latest developments in the banking market, the HKMA is now of the view that this policy has outlived its
usefulness and is becoming less relevant to the banking development in Hong Kong Accordingly, the onebuilding
condition was relaxed in September 1999, and from that time onwards, foreign banks are allowed
to carry out their business in not more than three buildings In addition, the restriction on the number of
regional and back offices that overseas-incorporated institutions can maintain was lifted at the same time
The HKMA will review the situation and consider further relaxation of this policy in 2001
In view of the increasing interest in the issue of multi-purpose stored value cards with the potential to
substitute to a significant degree for cash and cheques, the Banking (Amendment) Ordinance 1997 was
enacted to empower the HKMA to regulate the issue of these cards The Ordinance provides that only
licensed banks should have the ability to issue multi-purpose cards that are unrestricted in terms of the
goods and services which they can be used to purchase The objectives are to maintain the stability of the
payment system and provide a measure of protection to cardholders A non-bank service provider may,
however, be authorised as a deposit-taking company whose principal business is to issue or facilitate the
issue of multi-purpose cards which are more limited in scope of usage Furthermore the new legislation
provides for the HKMA to grant exemption from the approval process to certain types of multi-purpose
cards where the risk to the payment system and to cardholders is considered to be slight
The Banking (Amendment) Ordinance 1997 also established the legal framework for the authorisation of
money brokers operating in the wholesale foreign exchange and deposit markets Only persons who satisfy
the fit and proper criteria set out in a Schedule to the Ordinance will be approved as money brokers Among
other things, approved money brokers will be required to comply with relevant codes and guidelines on the
conduct of business
Regulatory framework
The Banking Ordinance provides the legal framework for banking supervision in Hong Kong The HKMA
seeks to establish a regulatory framework which is fully in line with international standards, especially those
recommended by the Basle Committee on Banking Supervision (Basle Committee) The objective is to
devise a prudential supervisory system to help preserve the general stability and effective working of the
banking system, while at the same time providing sufficient flexibility for authorised institutions to take
commercial decisions
In response to the Basle Committee's paper on the Core Principles for Effective Banking Supervision, the
HKMA carried out a self-assessment of the position of Hong Kong in 1997 The assessment revealed that
Hong Kong's supervisory framework substantially complies with the Core Principles The enactment of the
Banking (Amendment) Ordinance 1999 in July 1999 brings Hong Kong's framework of banking
supervision fully in line with the Core Principles
Approach to
supervision
The supervisory approach of the HKMA is based on a policy of'continuous supervision' This involves the
on-going monitoring of institutions using a wide variety of techniques which are aimed at detecting any
problem at an early stage
At the core of this approach is the on-site examination of individual institutions Depending on the risk
assessment of the institution concerned, the scope of an examination may range from an investigation of
specific areas to a comprehensive review of an institution's operations On-site examinations provide a
valuable opportunity to assess at first hand how an institution is managed and controlled They are
particularly useful for verifying asset quality However, they are periodic in nature and, to achieve
'continuous supervision', on-site examination is supplemented by on-going off-site analysis of the financial

Fact Sheet 7
HONG KONG MONETARY AUTHORITY
condition of individual institutions and the assessment of the quality of their management, including the
systems for controlling exposures and limiting risk. The scope of off-site analysis varies from regular analysis
of statistical returns covering various aspects of the operations of individual institutions to an extensive
annual review of their performance and financial position. Off-site reviews may be followed by a prudential
interview with senior management. Frequent contacts are also made with individual institutions at various
levels of management as specific issues arise.
In the continuous assessment of the performance of individual institutions, close attention is paid to capital,
liquidity, earnings, asset quality, loan loss provisioning, concentration of risks, interest rate risk, risk
management systems and internal controls.
Discussion with both internal and external auditors is another important aspect of the supervisory process.
Annual tripartite discussions are held with institutions and their auditors, normally following the annual
audit. Matters discussed typically include the annual audit, adequacy of provisions and compliance with
prudential standards.
The HKMA regularly makes use of its powers under the Banking Ordinance to commission reports from
auditors on the accuracy of prudential returns and the adequacy of institutions' systems to compile
prudential returns. Additionally, the HKMA may commission reports from auditors on the internal control
systems of individual institutions.
Given the evolving financial and economic environment, there is an on-going need for the HKMA to
enhance the supervisory process for maintaining the stability of the banking system. To ensure the
effectiveness of its supervisory framework, the HKMA is developing a more formalised risk assessment
approach and quality assurance programme.
Risk-based supervision
The HKMA continues to refine its risk-based supervisory approach, which is similar to that found in the
advanced economies that are used for benchmarking purposes. These include a more systematic risk
assessment framework and organisational changes designed to increase staff capabilities and provide more
comprehensive career development. The HKMA has initiated work on mapping out a plan for
implementing the recommendations in the Banking Sector Consultancy Study report (see the last section),
including the establishment of the Licensing and Compliance Division. This will enable the HKMA to
focus more clearly its attention on risk areas of individual institutions as well as the sector as a whole. The
HKMA expects to adopt a fully-fledged risk-based supervision approach within two years.
Capital adequacy
The internationally accepted capital adequacy framework proposed by the Bank for International
Settlements (BIS) in 1988 has been applied in Hong Kong since the end of 1989, against the Basle
Committee's deadline for full implementation before the end of 1992. The consolidated capital adequacy
ratio for locally incorporated institutions as a whole was 19.5% at end-June 1999, well in excess of the
minimum international standard of 8% set by the BIS. The HKMA has developed a market risk capital
adequacy regime in Hong Kong based on the Amendment to the Capital Accord to incorporate market risks
issued by the Basle Committee in January 1996. The market risk capital adequacy regime has been in effect
since 31 December 1997. The HKMA has adopted a three-tier approach in implementing the regime,
namely the standardised approach, the models approach (the use of which is subject to the HKMA's
approval) and a de minimis exemption.
Supervision of
liquidity
The HKMA assesses the adequacy of an institution's liquidity by examining a number of criteria, including
the institution's liquidity ratio, maturity mismatch profile, ability to borrow in the interbank market,

Fact Sheet 7
HONG KONG MONETARY AUTHORITY
diversity and stability of the deposit base, loan-to-deposit ratio and intra-group transactions. This approach
aims to ensure, as far as possible, that institutions can meet their obligations when they fall due in normal
circumstances and that an adequate stock of high quality liquid assets is maintained to provide them with a
breathing space in the event of a liquidity crisis.
Financial disclosure
In line with the international trend towards greater transparency and accountability, the HKMA supports
greater disclosure by authorised institutions in Hong Kong. The standard of financial disclosure in Hong
Kong has been brought substantially in line with that of other major financial centres following institutions'
adoption in 1994 of the Best Practice Guide on Financial Disclosure issued by the HKMA. Authorised
institutions incorporated in Hong Kong (except for the smaller restricted licence banks and deposit-taking
companies) are required to disclose adequate financial information, including profit and loss accounts,
balance sheets, cash flow statements and off-balance sheet exposures in their audited annual accounts and
their annual reports.
Further steps were taken by the HKMA in 1998 to increase the transparency of the financial position of Als
and hence to enhance market discipline among these institutions. For local banks, the focus of the 1998
disclosure package was on the quality of banks' loan portfolios. Institutions are required to disclose more
detailed information on overdue and rescheduled assets. Disclosure requirements in relation to the Year
2000 problem have also been enhanced. Overseas incorporated Als are required to disclose on a half-yearly
basis selected key financial information drawn from the Best Practice Guide on Financial Disclosure by Als.
Local institutions are required to make interim disclosures with effect from June 1999. This brings the
frequency of disclosure by non-listed local institutions in line with that for listed local institutions and
institutions incorporated outside Hong Kong.
Interest rate
deregulation
Historically, interest rates paid to depositors on all Hong Kong dollar deposits of up to HK$500,000
(approximately US$64,103) and with a maturity of less than 15 months were governed by the Interest Rate
Rules (IRR) of the Hong Kong Association of Banks (HKAB) of which all licensed banks are members. The
IRR were partially liberalised in phases starting from 1 October 1994. With the implementation of the final
phase of deregulation on 1 November 1995, all small time deposits fixed for 7 days or more have been
deregulated. The IRR now apply only to current accounts, savings accounts and time deposits with a
maturity or call period below seven days. In July 1999, the HKMA announced a plan to remove the
remaining IRR by a two-phase approach (see the last section).
Electronic banking
The Banking Sector Consultancy Study has advised that technology will be one of the major driving forces
for longer-term changes in the financial services industry globally and in Hong Kong. It has also revealed
that a high proportion of local banks has plans to launch internet banking services in the next five years. In
fact, the HKMA has issued a series of circulars on its supervisory policy with respect to internet banking
and a number of banks are now offering internet banking services of various kinds. Meanwhile, the
Government is establishing a safe and secure environment for the conduct of electronic transactions over the
internet, in the form of a local public key infrastructure and the necessary legal framework in Hong Kong.
The HKMA will continue to keep abreast of technological developments and will refine as appropriate its
regulatory framework to continue to provide a sound and secure basis for the development of internet
banking in Hong Kong.

Fact Sheet 7
HONG KONG MONKTARY AUTHORITY
Derivatives and risk
management
The HKMA continues to take a proactive approach in the supervision of authorised institutions' derivatives
activities The HKMA adopts a three-pronged approach in developing its supervisory framework for
managing the risks of AIs' derivatives activities They are
• controls (to ensure that AIs have adequate internal control systems to manage the risks of their
derivatives activities),
• capital (to ensure that AIs have adequate capital to support possible losses in their derivatives
business), and
• capability (to ensure that there is adequate expertise within the HKMA to develop risk management
policies and to supervise AIs' derivatives activities)
In December 1994, the HKMA adopted as an industry guideline the Basle recommendation on risk
management of derivatives, which focuses on high level controls by board and senior management In
March 1996, a more detailed operational guideline on financial derivatives was issued which drew on,
among other things, observations from internal control reviews, treasury visits to AIs, and the lessons from
the Barings and Daiwa Bank incidents Since 1994, a specialised team has been formed to examine the
derivatives and trading activities of institutions which are active in this business, as well as the adequacy of
their risk management systems
Supervisory
co-operation
To ensure supervisory co-operation the HKMA entered into a Memorandum of Understanding (MOU)
with the Securities & Futures Commission (SFC) in October 1995 In 1996, with the assistance of the SFC,
the HKMA developed an on-site examination guide on the securities activities of AIs and formed a
specialised team to conduct examinations of institutions active in securities activities The HKMA and the
SFC currently meet once a month to discuss supervisory issues and cases of mutual interest
The exposure of banks to new types of risk around the world has increased the need for supervisors to cooperate
with one another, both geographically and functionally To enhance the exchange of supervisory
information and co-operation, the HKMA has entered into MOUs with supervisory authorities in Thailand,
Indonesia, Macau, the United States and the United Kingdom The HKMA continues to participate in this
process by extending its bilateral co-operation with banking supervisors in other countries The HKMA also
holds regular meetings with the People's Bank of China to discuss matters of common interest
The HKMA plays an increasingly active role in international and regional forums of banking supervision It
currently chairs the Executives' Meeting of East Asian-Pacific Central Banks' (EMEAP) Study Group on
Banking Supervision and was one of the participants in a working group formed by the Basle Committee to
draft the Core Principles for Effective Banking Supervision
Further
development and
reform of the
banking sector
Early in 1998, the HKMA commissioned a consultancy study on the Hong Kong banking sector aimed at
developing an appropriate strategy to effectively supervise and regulate the sector for the next five years The
study was completed in December 1998
Given the new emerging financial environment, the consultancy study suggested four strategic mandates for
the HKMA in promoting future developments of the banking sector These are
• to ensure that the regulatory and supervisory framework for Hong Kong remains appropriate,
• to improve the competitive environment to ensure the positive benefits of global and local trends are
developed in the Hong Kong market,
• to ensure that increasing levels of risk associated with global and local trends are prudently managed, and
• to increase the level of transparency allowing the forces of market discipline to work more effectively

Fact Sheet 7
HONG KONG MONETARY 4UTHORITY
Having regard to the recommendations of the study and the views received from a three-month public
consultation exercise, the HKMA will undertake a package of policy initiatives, as set out below, to reform
and further develop Hong Kong's banking system:
(a)
Overall approach:
• encourage market liberalisation and enhance the level of competitiveness of the Hong Kong banking
sector in order to promote greater efficiency and innovation in the market;
• in parallel with the item above, strengthen the banking infrastructure with a view to enhancing the
safety and soundness of the sector; and
• by gradual elimination of regulatory barriers, allow market forces to play a greater role in
determining the appropriate number of institutions in the banking sector.
(b)
Market reform and liberalisation measures:
• subject to a monitoring process, adopt a two-phased approach to deregulate the remaining Interest
Rate Rules with the first phase to begin on 1 July 2000 with the remaining regulated time deposits
with a maturity of below seven days. The second phase is expected to begin on 1 July 2001 with
deregulation of savings and current account deposits;
• relax the one branch policy in the second half of 1999 by allowing foreign banks currently subject to
the one building condition to open up to three branches initially to which customers have access
(full relaxation of this policy will be considered upon a review in 2001);
• subject to appropriate contractual arrangements being agreed with Hong Kong Interbank Clearing
Limited, allow access by restricted licence banks to the Real Time Gross Settlement system in the
second half of 1999 for the purpose of settling CHATS payments;
• conduct a detailed review in the second half of 2000 on ways to reform the three-tier authorisation
system into a two-tiered system and review the minimum paid-up capital requirements for different
tiers of authorised institutions at the same time; and
• review the existing market entry requirements for a local banking licence towards the second half of
2001.
(c)
Safety and soundness enhancement measures:
• conduct a detailed study in the first half of 2000 on the issue of establishing an explicit depositor
protection scheme in Hong Kong and review the desirability of setting an asset maintenance
requirement for banks in Hong Kong in relation to the Priority Payment Scheme for small
depositors under the Companies Ordinance;
• clarify HKMA's role of lender of last resort for banks in Hong Kong;
• continue the efforts to improve the financial disclosure requirements for banks in line with
international best practices;
• develop a more formal risk-based supervisory system in Hong Kong;
• conduct a detailed feasibility study in the first half of 2000 on a commercial credit register for the
banking system in Hong Kong; and
• promote high standards of corporate governance within the banking system.
This package of policy initiatives has been endorsed by the Government. The overall timetable would
envisage these policy initiatives to be completed over a period of around three years.
Enquiries about the HKMA's work should be directed to the Resource Centre, HKMA, 8/F, 3 Garden Road, Hong Kong.
Tel: (852) 2878 8222 Fax : (852) 2878 2010 E-mail: hkma@hkma.gov.hk Website : http://www.info.gov.hk/hkma

Fact Sheet 8
HONG KONG MONETARY AUTHORITY
BANKNOTES AND COINS
Currency and coins
in circulation
The Government, through the Hong Kong Monetary Authority (HKMA), has given authorisation to three
commercial banks, the Hongkong and Shanghai Banking Corporation Limited, the Standard Chartered Bank and
the Bank of China, to issue currency notes in Hong Kong (Chart 1). Authorisation is accompanied by a set of
terms and conditions agreed between the Government and the three note-issuing banks. Banknotes are issued by
the three banks, or redeemed, against payment to, or from, the Governments Exchange Fund in US dollars, at a
specified rate of US$1 to HK$7.80 under the linked exchange rate system. Banknotes issued by the three
commercial banks are printed in Hong Kong by Hong Kong Note Printing Limited (HKNPL).
Currency notes in everyday circulation are $10, $20, $50, $100, $500 and $1,000. The $10 notes are gradually
being phased out and replaced by the $10 coin, a process which began in November 1994. The one-cent note
was demonetised and ceased to be legal tender on 1 October 1995.
The Government issues coins of $10, $5, $2, $1, 50 cents, 20 cents and 10 cents. Until 1992 these coins were
embossed with the Queens Head. In 1993, a programme was initiated to replace the Queens Head series with a
new series depicting the Bauhinia flower. The first Bauhinia coins, the $5 and $2 coins, were issued in January
1993. New $1, 50 cents and 20 cents coins were issued in October 1993, and a new 10 cents coin in May 1994.
The $10 coin, the last of the Bauhinia series of coins, was issued in November 1994. Since the beginning of the
coin replacement programme in 1993, about 549 million coins of Queens Head design have been withdrawn
from circulation. The Queens Head coins remain legal tender while the replacement programme continues.
At the end of 1998, the total value of banknotes in circulation in Hong Kong was HK$86,465 million, while
coins in circulation amounted to HK$5,554 million (excluding commemorative coins), representing about 6%
of total currency in circulation (Charts 2 & 3).
To commemorate the establishment of the Hong Kong Special Administrative Region on 1 July 1997, the
HKMA, on behalf of the Government, issued a HK$ 1,000 commemorative proof gold coin, a proof set and a
brilliant uncirculated set of seven coins with the same denominations as the coins currently in circulation. On
the obverse side of each of these seven coins is the standard Bauhinia design, with its own special
commemorative design and denomination on the reverse.
To mark the opening of the Hong Kong International Airport in July 1998, a commemorative $1,000
commemorative proof gold coin was issued. The gold coin features a design symbolising Hong Kong's ascent
into the new century and bears the standard Bauhinia design on the obverse side.
Banknote printing
In April 1996, the HKMA acquired the note printing plant from the De La Rue Group of the UK on behalf of
the Government. The plant has been operating under the name of HKNPL since then. The acquisition of the
plant enables the Government, through the HKMA, to be direcdy involved in the production of Hong Kong
currency notes, which is in line with the responsibilities conferred upon the Government under the Legal Tender
Notes Issue Ordinance and the Basic Law. In March 1997, the Government sold 15 percent of its shareholding in
HKNPL to the China Banknote Printing and Minting Corporation, a PRC state-owned enterprise. In October
1997, the Government sold to the three note-issuing banks, each 10 percent of HKNPLs issued shares. The
Government continues to exercise management control and maintains a majority stake in HKNPL, with the
Chief Executive of the HKMA as the Chairman of the company.

Fact Sheet 9
HONG KONG MONETARY AUTHORITY
HONG KONG'S MONETARY SYSTEM AND
THE 'ONE COUNTRY, Two SYSTEMS' PRINCIPLE
Under the principle of 'one country, two systems' enshrined in the Smo-Bntish Joint Declaration and the
Basic Law (Annexes 1 & 2), Hong Kong enjoys a high degree of autonomy except in foreign affairs and
defence matters In particular, Hong Kong's monetary system remains separate from that of the Mainland of
China, and the Government of the Hong Kong Special Administrative Region (HKSAR) formulates its own
monetary and financial policies The Hong Kong dollar, as the only legal tender in the HKSAR, remains
freely convertible The free flow of capital within, into and out of the HKSAR is guaranteed and no
exchange control policies may be applied in Hong Kong The Hong Kong dollar continues to circulate as a
freely convertible currency, and the authority to issue Hong Kong currency is vested in the HKSAR
Government Hong Kong's foreign exchange reserves, held in the Exchange Fund, are managed and
controlled by the Government of the HKSAR primarily for regulating the exchange value of the Hong
Kong dollar
Mutually independent
monetary systems
These provisions form the foundation for Hong Kong's monetary and financial arrangements between the
Mainland of China and Hong Kong The People's Bank of China (PBoC) has pledged that under the 'one
country, two systems' principle, there will be 'two currencies, two monetary systems and two monetary
authorities which are mutually independent' This means that neither has precedence over the other, neither
is superior to the other, and neither takes instructions from the other The PBoC has pledged its readiness to
use China's foreign reserves to support the currency stability of Hong Kong when necessary at the request of
the Hong Kong Monetary Authority (HKMA) But China will not draw on or resort to Hong Kong's own
reserves or other assets in any way, or for any reason
Financial institutions from the Mainland of China are treated in the same way as any other foreign
institutions in Hong Kong and do not enjoy any special privileges Like any other organisations with a
presence in Hong Kong, these Mainland financial institutions are required to abide by the laws of Hong
Kong and be regulated by the relevant supervisory authorities in Hong Kong
Co-operation
between the HKMA
and PBoC
Co-operation between the two central banking institutions - the PBoC and the HKMA - has been
strengthened in recent years In February 1996, the two institutions signed a repurchase agreement in
respect of US dollar government securities to provide liquidity on a bilateral basis Both sides have also
agreed in principle to the linkage of their respective interbank payment systems Co-operation between the
two authorities in other areas, including the supervision of banks, is being further enhanced, in strict
accordance with the principle and spirit of 'one country, two systems'

Fact Sheet 9
HONG KONG MONETARY AUTHORITY
Monetary relations between the Mainland and Hong Kong
1. The monetary and currency systems of the Mainland and Hong Kong are mutually independent.
The Renminbi and the Hong Kong dollar circulate as legal tender in the Mainland and Hong
Kong respectively and will be regarded as foreign currencies in each other's territory.
2. The HKMA and the PBoC maintain a mutually independent relationship. The HKMA is
accountable only to the Government of Hong Kong.
3. The financial supervisory authorities of the Mainland and Hong Kong co-operate with each other
on a number of issues.
4. The PBoC will provide support for maintaining the currency stability of Hong Kong if necessary
and only at the request of the HKMA.
5. All financial claims and liabilities between the Mainland and Hong Kong are handled in accordance
with internationally accepted rules and practices.
6. Mainland financial institutions operating in Hong Kong are supervised by the relevant regulatory
authorities in Hong Kong.
Enquiries about the HKMA's work should be directed to the Resource Centre, HKMA, 8/F, 3 Garden Road, Hong Kong.
Tel: (852) 2878 8222 Fax : (852) 2878 2010 E-mail: hkma@hkma.gov.hk Website : http://www.info.gov.hk/hkma

Fact Sheet 9
HONG KONG MONETARY AUTHORI1Y
Annex 1
The Joint Declaration of
the Government of the United Kingdom of
Great Britain and Northern Ireland
and the Government of
the People's Republic of China
on the Question of Hong Kong
(Annex I: Part Vand Part VII)
(Signed on 19 December 1984)
Part V.
FINANCE
Budget
The Hong Kong Special Administrative Region shall deal on its own with financial matters, including disposing of its
financial resources and drawing up its budgets and its final accounts The Hong Kong Special Administrative Region
shall report its budgets and final accounts to the Central People's Government for the record.
Taxation and public expenditure
The Central People's Government shall not levy taxes on the Hong Kong Special Administrative Region. The Hong
Kong Special Administrative Region shall use its financial revenues exclusively for its own purposes and they shall not be
handed over to the Central People's Government The systems by which taxation and public expenditure must be
approved by the legislature, and by which there is accountability to the legislature for all public expenditure, and the
system for auditing public accounts shall be maintained
Part VII.
MONETARY SYSTEM
Previous monetary and financial systems
The Hong Kong Special Administrative Region shall retain the status of an international financial centre The monetary
and financial systems previously practised in Hong Kong, including the systems of regulation and supervision of deposit
taking institutions and financial markets, shall be maintained
Monetary and financial policies
The Hong Kong Special Administrative Region Government may decide its monetaiv and financial policies on its own
It shall safeguard the free operation of financial business and the free flow of capital within, into and out of the Hong
Kong Special Administrative Region No exchange control policy shall be applied in the Hong Kong Special
Administrative Region Markets for foreign exchange, gold, securities and futures shall continue
Hong Kong dollar
The Hong Kong dollar, as the local legal tender, shall continue to cnculate and remain freelv convertible The authority
to issue Hong Kong currency shall be vested in the Hong Kong Special Administrative Region Government The Hong
Kong Special Administrative Region Government may authorise designated banks to issue or continue to issue Hong
Kong currency under statutory authority, aftei satisfying itself that any issue of currency will be soundly based and that
the arrangements for such issue are consistent with the object of maintaining the stability of the currency Hong Kong
currency bearing references inappropriate to the status ot Hong Kong as a Special Administrative Region of the People's
Republic of China shall be progressively replaced and withdrawn from circulation
Exchange Fund
The Exchange Fund shall be managed and controlled by the Hong Kong Special Administrative Region Government,
primarily for regulating the exchange value of the Hong Kong dollar

Fact Sheet 9
HONG KONG MONETARY AUTHORITY
Annex 2
Basic Law of the
Hong Kong Special Administrative Region of the
People's Republic of China
(Article 106 and Articles 109 to 116)
(promulgated on 4 April 1990)
Article 106
The Hong Kong Special Administrative Region shall have independent finances
The Hong Kong Special Administrative Region shall use its financial revenues exclusively for its own purposes, and they
shall not be handed over to the Central People's Government
The Central People's Government shall not levy taxes in the Hong Kong Special Administrative Region
Article 109
Article 110
The Government of the Hong Kong Special Administrative Region shall provide an appropriate economic and legal
environment for the maintenance of the status of Hong Kong as an international financial centre
The monetary and financial systems of the Hong Kong Special Administrative Region shall be prescribed by law
The Government of the Hong Kong Special Administrative Region shall, on its own, formulate monetary and financial
policies, safeguard the free operation of financial business and financial markets, and regulate and supervise them in
accordance with law
Article 111
The Hong Kong dollar, as the legal tender in the Hong Kong Special Administrative Region, shall continue to circulate
The authority to issue Hong Kong currency shall be vested in the Government of the Hong Kong Special Administrative
Region
The issue of Hong Kong currency must be backed by a 100 per cent reserve fund The system regarding the issue of
Hong Kong currency and the reserve fund system shall be prescribed by law
The Government of the Hong Kong Special Administrative Region may authorize designated banks to issue or continue
to issue Hong Kong currency under statutory authority, after satisfying itself that any issue of currency will be soundly
based and that the arrangements for such issue are consistent with the object of maintaining the stability of the currency
Article 112
No foreign exchange control policies shall be applied in the Hong Kong Special Administrative Region The Hong Kong
dollar shall be freely convertible Markets for foreign exchange, gold, securities, futures and the like shall continue
The Government of the Hong Kong Special Administrative Region shall safeguard the free flow of capital within, into
and out of the Region
Article 113
Article 114
Article 115
Article 116
The Exchange Fund of the Hong Kong Special Administrative Region shall be managed and controlled by the
government of the Region, primarily for regulating the exchange value of the Hong Kong dollar
The Hong Kong Special Administrative Region shall maintain the status of a free port and shall not impose any tariff
unless otherwise prescribed by law
The Hong Kong Special Administrative Region shall pursue the policy of free trade and safeguard the free movement of
goods, intangible assets and capital
The Hong Kong Special Administrative Region shall be a separate customs territory
The Hong Kong Special Administrative Region may, using the name ' Hong Kong, China , participate in relevant
international organisations and international trade agreements (including preferential trade arrangements), such as the
General Agreement on Tariffs and Trade and arrangements regarding international trade in textiles
Export quotas, tariff preferences and other similar arrangements, which are obtained or made by the Hong Kong Special
Administrative Region or which were obtained or made and remain valid, shall be enjoyed exclusively by the Region

Fact Sheet 10
HONG KONG MONETARY AUTHORITY
HONG KONG As AN INTERNATIONAL FINANCIAL CENTRE
Hong Kong is one of the worlds major financial centres. It has achieved this position through its strategic
geographical location, a liberal economic policy, the free flow of capital and information, a diligent workforce, a sound
legal system, a low tax rate (Chart 1), and an efficient physical infrastructure.
Banking is the linchpin of financial activities in Hong Kong. About 440 authorised institutions (including licensed
banks, restricted licence banks and deposit-taking companies) and representative offices of banks from 42 countries
operate in Hong Kong (Chart 2). Of the worlds top 100 banks, 76 have established business in Hong Kong: 71 of
these operate with a full banking licence. Around 60% of banking business is denominated in foreign currencies
(Chart 3).
Hong Kong is the seventh largest foreign exchange trading centre in the world (Chart 4). The average daily turnover
(as at April 1998) is around US$79 billion. The absence of exchange controls and the favourable time zone location
have helped to stimulate the development of the foreign exchange market in Hong Kong. Hong Kong also has a well
developed interbank money market, where wholesale Hong Kong dollars are traded among banking institutions. The
average daily turnover in the Hong Kong dollar interbank market in 1998 was HK$156 billion (US$20.1 billion).
Hong Kong is among the worlds largest gold bullion markets. Its stock market is Asia's second largest after Tokyo,
with capitalisation of about US$344 billion at December 1998 (Chart 5). The stock market not only serves Hong
Kong, but also acts as an important source of funding for companies in the Asian region, particularly in Mainland
China. At present, there are 41 Mainland Chinese companies listed on the Stock Exchange of Hong Kong (known as
H-shares). These companies have raised about HK$61 billion (US$7.9 billion) for enterprises operating in China.
The debt market has grown rapidly in recent years. The size of the debt market (as at end-June 1999), as measured by
the outstanding amount of Hong Kong dollar debt securities, is HK$407.1 billion (US$51.6 billion). Of this,
Exchange Fund Bills and Notes amount to HK$98.8 billion (US$12.7 billion) (Chart 6).

Fact Sheet 10
Hong Kong's
external relations
and the HKMA
Hong Kong maintains close and active co-operation with the international financial community and with multilateral
and regional forums. These contacts are crucial to Hong Kong's ability to maintain its competitiveness and to its role
as an international financial centre. The establishment of the Hong Kong Monetary Authority (HKMA) has enabled
Hong Kong to strengthen its contacts with other central banks and multilateral financial organisations and to
promote Hong Kong's standing as an international financial centre. Such contacts enable the HKMA:
• to promote international understanding of, and support for, monetary and banking matters in Hong Kong;
• to share information with other central banks about financial developments so as to facilitate the proper
regulation of financial markets and the prudential supervision of financial institutions;
• to improve understanding of international economic and financial trends so as to facilitate more effective
policy formulation in the HKMA, particularly in monetary management and reserves management;
• to improve the HKMA's access to the technical expertise available in major central banks and multilateral
institutions, which helps keep Hong Kong in the forefront of financial innovation and institutional
development; and
• to help other central banks and institutions to obtain a better understanding of monetary and general
economic developments in Hong Kong and the region.
The HKMA pursues these aims through the following activities:
(a) Active and autonomous participation in central banking forums
Hong Kong is a member of the Asian Development Bank, the Bank for International Setdements, the South East
Asia, New Zealand and Australia Group of Central Banks and Monetary Authorities (SEANZA) and the Executives'
Meeting of East Asian-Pacific Central Banks (EMEAP). It also actively participates in the activities of the World Bank,
the International Monetary Fund (IMF), South East Asian Central Banks (SEACEN), and other central banking
forums. In 1997, the HKMA became one of the 25 participants in the New Arrangements to Borrow, a standby
credit facility extended to the IMF for use in stabilising the global monetary system.
(b) Strengthening of the international financial architecture
As a leading international financial centre, Hong Kong participates in a number of international and regional initiatives
to reform the international financial architecture. The focus has been on enhancing the transparency and accountability
of the public sector, the private sector and international financial institutions to make the global economy more resilient
to volatile capital flows. Throughout 1998, the HKMA was engaged in the G22 process and its working groups: it cochaired
the Working Group on Transparency and Accountability and participated in the Working Group on
International Financial Crises. The HKMA is also a member of the Working Group on Enhanced Disclosure by
Individual Institutions and the Working Group on Enhanced Transparency Regarding Aggregate Positions, which are
sub-groups of the Basle-based Committee on the Global Financial System (formerly known as Euro-currency Standing
Committee). In summer 1999, Hong Kong, along with Singapore, Australia and the Netherlands were invited to
participate in the G7 Financial Stability Forum. The HKMA is also a member of the Working Group on Highly
Leveraged Institutions (HLIs) formed by the Forum. The Group is mandated to study the activities of HLIs and will
produce a final report around the spring of 2000.

Fact Sheet 10
HONG KONG MONETARY AUTHORITY
Hong Kong has actively contributed to promoting the development of bond markets in the region. Under the
auspices of Asia-Pacific Economic Co-operation (APEC), Hong Kong, China co-ordinates the Collaborative Initiative
on Development of Domestic Bond Markets. The Collaborative Initiative has recendy published a Report on the
Compendium of Sound Practices, which provides guidelines to facilitate the development of domestic bond markets
in APEC member economies. A total of 36 essential elements under five inter-related areas of Government Policies,
Regulatory Framework, Market Infrastructure, Liquidity and Risk Management have been identified in the
Compendium. They are intended to encourage relevant authorities to adopt policies conducive to the development of
domestic bond markets. Hong Kong will continue to participate in other initiatives aimed at fostering the
development of bond markets.
(c) Regional monetary co-operation and participation in multilateral agencies
The HKMA continues to pursue relationships with regional central banks and multilateral agencies through
organising various meetings, seminars, workshops and by participating in regional and international forums.
(d) Transparency and information dissemination
The HKMA is committed to transparency and public access to economic data by meeting the international standards
expected of a leading international financial centre. Accordingly, Hong Kong subscribed to the IMF Special Data
Dissemination Standard in November 1996 and started providing economic data in the IMF International Financial
Statistics in July 1997.
Enquiries about the HKMA's work should be directed to the Resource Centre, HKMA, 8/F, 3 Garden Road, Hong Kong.
Tel : (852) 2878 8222 Fax : (852) 2878 2010 E-mail: hkma@hkma.gov.hk Website : http://www.info.gov.hk/hkma