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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