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Monetary Stability Monetary Stability Despite a volatile global financial environment and concerns about the US Federal Reserve’s plan to reduce asset purchases, the Hong Kong dollar exchange rate remained stable in 2013, while the money market operated smoothly with abundant liquidity. The Linked Exchange Rate system continued to serve as the anchor for Hong Kong’s monetary and financial stability and proved highly resilient in a series of regional and global financial crises. Page 44 ANNUAL REPORT 2013 • HONG KONG MONETARY AUTHORITY
OBJECTIVES The overriding objective of Hong Kong’s monetary policy is currency stability. This is defined as a stable external exchange value of Hong Kong’s currency, in terms of its exchange rate in the foreign exchange market against the US dollar, within a band of HK$7.75 – 7.85 to US$1. The structure of the monetary system is characterised by Currency Board arrangements, requiring the Monetary Base to be at least 100% backed by US dollar reserves held in the Exchange Fund, and changes in the Monetary Base to be 100% matched by corresponding changes in US dollar reserves. The Monetary Base (Table 1) comprises: • Certificates of Indebtedness, which provide full backing to the banknotes issued by the three note-issuing banks • Government-issued notes and coins in circulation The stability of the Hong Kong dollar exchange rate is maintained through an automatic interest rate adjustment mechanism and the firm commitment by the HKMA to honour the Convertibility Undertakings (CUs). When the demand for Hong Kong dollars is greater than the supply and the market exchange rate strengthens to the strongside CU of HK$7.75 to the US dollar, the HKMA stands ready to sell Hong Kong dollars to banks for US dollars. The Aggregate Balance will then expand to push down Hong Kong dollar interest rates, creating monetary conditions that move the Hong Kong dollar away from the strong-side limit to within the Convertibility Zone of 7.75 to 7.85. Conversely, if the supply of Hong Kong dollars is greater than demand and the market exchange rate weakens to the weak-side CU of HK$7.85 to the US dollar, the HKMA will buy Hong Kong dollars from banks. The Aggregate Balance will then contract to drive Hong Kong dollar interest rates up, pushing the Hong Kong dollar away from the weak-side limit to stay within the Convertibility Zone. • the Aggregate Balance, which is the sum of clearing account balances of banks kept with the HKMA • Exchange Fund Bills and Notes issued by the HKMA on behalf of the Government. Table 1 Monetary Base $ million 31 December 2013 31 December 2012 Certificates of Indebtedness 1 329,325 291,675 Government-issued currency notes and coins in circulation 1 10,638 9,997 Balance of the banking system 164,093 255,851 Exchange Fund Bills and Notes (EFBN) issued 2 751,850 661,396 TOTAL 1,255,906 1,218,919 1 The Certificates of Indebtedness and the government-issued notes and coins in circulation shown here are stated at Hong Kong dollar face values. The corresponding items shown in the balance sheet of the Exchange Fund in this Annual Report are in Hong Kong dollars equivalent to the US dollar amounts required for their redemption at the prevailing exchange rates on the balance sheet date. This arrangement is in accordance with the accounting principles generally accepted in Hong Kong. 2 The amount of EFBN shown here is different from that in the balance sheet of the Exchange Fund in this Annual Report. In accordance with the accounting principles generally accepted in Hong Kong, the EFBN held by the HKMA on behalf of the Exchange Fund in relation to its trading of the EFBN in the secondary market are offset against the EFBN issued, and the net amount is recorded in the balance sheet. The EFBN issued on tender dates but not yet settled are included in the balance sheet but excluded from the Monetary Base. HONG KONG MONETARY AUTHORITY • ANNUAL REPORT 2013 Page 45
Page 1: 2013 Annual Report
Page 5 and 6: Contents 4 Highlights of 2013 6 Chi
Page 7 and 8: International Financial Centre Rese
Page 9 and 10: With this in mind, the HKMA continu
Page 11 and 12: THE HKMA AND THE HONG KONG SPECIAL
Page 13 and 14: Over the years the HKMA has progres
Page 15 and 16: Banking Advisory Committee The Bank
Page 17 and 18: Mr Lester HUANG, JP Managing Partne
Page 19 and 20: THE EXCHANGE FUND ADVISORY COMMITTE
Page 21 and 22: Terms of reference (1) To monitor t
Page 23 and 24: Terms of reference (1) The objectiv
Page 25 and 26: THE EXCHANGE FUND ADVISORY COMMITTE
Page 27 and 28: Terms of reference (1) To recommend
Page 29 and 30: THE DEPOSIT-TAKING COMPANIES ADVISO
Page 31 and 32: Stefan GANNON, JP General Counsel F
Page 33 and 34: HKMA Organisation Chart 1 January 2
Page 35 and 36: THE ECONOMY IN REVIEW Overview The
Page 37 and 38: Inflation Inflationary pressures, w
Page 39 and 40: trended downwards, while the value
Page 41 and 42: PERFORMANCE OF THE BANKING SECTOR T
Page 43 and 44: Asset quality The asset quality of
Page 45: As a result of the average qualifyi
Page 49 and 50: Money market Interbank liquidity re
Page 51 and 52: Other activities The EFAC Currency
Page 53 and 54: Chart 7 Banknotes in circulation at
Page 55 and 56: PLANS FOR 2014 AND BEYOND While the
Page 57 and 58: REVIEW OF 2013 Overview Amid uncert
Page 59 and 60: The HKMA continued to monitor the i
Page 61 and 62: Supervisor-driven stress testing pr
Page 63 and 64: Following a noticeable increase in
Page 65 and 66: Basel III (continued) Pillar 3 The
Page 67 and 68: Basel III (continued) and haircuts
Page 69 and 70: Basel III (continued) Participation
Page 71 and 72: Accounting standards The Internatio
Page 73 and 74: Treat Customers Fairly Charter The
Page 75 and 76: Table 3 Banking complaints received
Page 77 and 78: The HKMA is a member of the SWIFT O
Page 79 and 80: PLANS FOR 2014 AND BEYOND Superviso
Page 81 and 82: Basel III Capital standards Under t
Page 83 and 84: Recovery and resolution During 2014
Page 85 and 86: Development of Supervisory Policies
Page 87 and 88: In accordance with the payout refor
Page 89 and 90: OVERVIEW A divergent trend in growt
Page 91 and 92: developments in domestic and cross-
Page 93 and 94: Development of Islamic finance The
Page 95 and 96: Hong Kong’s financial infrastruct
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Chart 4 Euro RTGS system Chart 5 Re
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The RTGS system links with Shenzhen
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Money settlement service for invest
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PLANS FOR 2014 AND BEYOND The HKMA
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Pan-Asian CSD Alliance project The
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THE EXCHANGE FUND The Exchange Fund
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PERFORMANCE OF THE EXCHANGE FUND Th
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Chart 1 Investment return of the Ex
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CORPORATE DEVELOPMENT Media relatio
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Staffing The establishment of the H
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Temporary resources will continue t
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on the budget and recommends any ch
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OFFICE OF THE GENERAL COUNSEL The O
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The Exchange Fund Report of the Dir
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Report of the Director of Audit (co
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Exchange Fund - Statement of Compre
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Exchange Fund - Statement of Change
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Exchange Fund - Statement of Cash F
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Exchange Fund - Notes to the Financ
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28 June The HKMA issues a circular
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Annex Authorized Institutions and L
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Table A Major Economic Indicators (
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Table C Authorized Institutions: Do
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Table E Presence of World’s Large
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Table G Major Balance Sheet Items b
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Table I Loans to and Deposits from
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Table K Deposits from Customers All
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Table L Geographical Breakdown of N
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Reference Resources The HKMA Annual
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HONG KONG MONETARY AUTHORITY 55 / F
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ar2013

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