Briefing to the Legislative Council Panel on Financial Affairs

Briefing to the Legislative Council Panel on Financial Affairs

HONG KONG MONETARYAUTHORITYong>Briefingong> ong>toong> ong>theong> ong>Legislativeong> ong>Councilong>ong>Panelong> on Financial Affairs4 February 2002123• JUffz

DISCUSSION TOPICS* Currency* Banking* Financial Infrastructure* Exchange FundThis presentation covers ong>theong> four key responsibilities of ong>theong> HKMA:- ong>toong> maintain currency stability, within ong>theong> framework of ong>theong> linkedexchange rate system;- ong>toong> promote ong>theong> safety and stability of ong>theong> banking system;- ong>toong> enhance ong>theong> efficiency, integrity and development of ong>theong>financial infrastructure, particularly payment and settlementarrangements; and- ong>toong> manage ong>theong> Exchange Fund in a prudent manner.

CURRENCY STABILITY - FACTSHK$ / USS7.85 i7.807.75 -Exchange rate (LHS)b.p.y 1800-- 16001400-- 1200-- 1000-- 8007.70 -7.65 -HK - US interest rate differential (1 month) (RHS)-- 600--400--200V •^*" t ^ 7 17.60-i 1 1 1 —T 1 1 r~ ~T 1 1 1Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct1998 1999 2000 2001Jan-0-200Although ong>theong> external environment and ong>theong> domestic economicsituation have deteriorated, ong>theong> Hong Kong dollar exchange rate hascontinued ong>toong> be stable against ong>theong> US dollar.Reflecting strong confidence in ong>theong> linked exchange rate system, ong>theong>differential between Hong Kong and US dollar short-term interestrate has remained at close ong>toong> zero.-3-

CURRENCY STABILITY - RISKS• Yen weakness and implications forregional currencies and RMB exchangerate• Debt crisis in Argentina• Hong Kong markets used as proxy hedgeagainst Asian risks• Public finances in Hong Kong• Support for, and confidence, in ong>theong> LinkThe Japanese yen has weakened ong>toong> a three-year low of around 130.There are concerns that ong>theong> Japanese authorities may allow ong>theong> yen ong>toong>slide furong>theong>r so as ong>toong> stem deflation and ong>toong> revive ong>theong> economy. Thiscould exert increased pressure on regional currencies and ong>theong> RMB.Argentina's problems evolved inong>toong> a full-blown crisis in December.Argentina subsequently abandoned ong>theong> currency board arrangement inJanuary, and ong>theong> peso devalued sharply. There has seen no contagion onHong Kong, reflecting a rational differentiation of ong>theong> two economies infinancial markets.In ong>theong> absence of capital controls, our liquid financial markets are popularamongst invesong>toong>rs as a proxy hedge for ong>theong>ir investment in regionaleconomies, which impose various degrees of controls, and do not have afully convertible currency or an active forward market.Prudence in public finance in Hong Kong has been a crucial facong>toong>r in ong>theong>success of ong>theong> linked exchange rate system. There are increasingconcerns about this fundamental strength, after several years of deficitThe global financial system is facing an unprecedented confluence of risks.As an open international financial centre, Hong Kong may receive adisproportionate share of financial market volatility. It is ong>theong>refore crucialthat we retain, and strengong>theong>n, our ability ong>toong> identify, moniong>toong>r and manageong>theong>se risks as ong>theong>y affect Hong Kong. We need ong>theong> sympaong>theong>ticunderstanding and support of ong>theong> community in this work.-4-

CURRENCY - MARKETEXPECTATIONS12-month Hong Kong dollar forward points-1,000Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan1997 1998 1999 2000 I 2001 5The 12-month Hong Kong dollar forward points gradually declinedafter ong>theong> subsidence of ong>theong> Asian financial crisis and ong>theong> introductionof ong>theong> technical measures ong>toong> strengong>theong>n ong>theong> Currency Board systemin August 1998. It has, on ong>theong> whole, stayed close ong>toong> zero since ong>theong>middle of 2000.

CURRENCY - MARKETEXPECTATIONSpips500-30012-month Hong Kong dollar forward pointsSino-US tensions / yenArgentina / rumoursabout ong>theong> LinkArgentina / yenn/\pips500400300-200-1000-100In April, owing ong>toong> unfavourable external developments, including renewedweakness in regional currencies and escalating Sino-US tensions, ong>theong>forward discount disappeared and a smal premium of around 450 pipsemerged.In Ocong>toong>ber, worsening conditions in Argentina, and rumours aboutpossible alterations of ong>theong> Link, led ong>toong> a rise in ong>theong> forward points ong>toong>around 200 pips. In December, ong>theong> forward points rose furong>theong>r, but mildly,ong>toong> 250 pips when Argentina developed inong>toong> a full-blown crisis and ong>theong> yenweakened furong>theong>r.The forward points stayed at around 180 pips in January, which was nothigher than ong>theong> pre-crisis average of 240 pips, and far below ong>theong> high ofnearly 8,000 pips during ong>theong> Asian financialcrisis.Jan-Feb- Mar-Apr-May-Jun-Jul-Aug-Sep-Get-Nov-Dec- Jan--20020012001 20012001 20012001 20012001200120012001 2001 2002 6-6-

CURRENCY - RISKS OF YENWEAKNESSThai bahong>toong> o o Indonesian rupiahJapanese yenPhilippine peso---Korean wonNov Dec Jan200113513012512011511010510095908580The yen has depreciated by nearly 15% since last September. Risks arethat a sharp depreciation in ong>theong> yen may exert pressure on oong>theong>r Asiancurrencies, especially those which compete closely with Japan in similarmarket segments, e.g. Korea. So far this has generally not been ong>theong> casedue in part ong>toong> ong>theong> stronger financial positions of Asian economies after ong>theong>crisis of 1997-1998.

CURRENCY - MARKET EXPECTATIONS ON RMBpips3000pips.30002500RMB 12-month forward25002000HK dollar 12-month forward.2000. 15001000500-5001 r~Jan Feb Mar Apr May Jim Jul Aug Sep Oct Nov Dec Jan2001-500Some analysts / commentaong>toong>rs may perceive that ong>theong> Hong Kongdollar and ong>theong> RMB should move in parallel, even though it is clearthat ong>theong>y are two independent currencies. As seen from ong>theong> forwardrates of ong>theong> two currencies, ong>theong>re seem ong>toong> be a larger degree ofdecoupling between ong>theong> two. The Mainland authorities have in anycase continued ong>toong> keep ong>theong> RMB exchange rate stable.

CURRENCY - RISKS OF ARGENTINEAN DEBT CRISISpipspips12-month Argentinean peso forward (LHS)12-month HK dollar forward (RHS)Jan Feb Mar Apr " May Jun Jul Aug Sep Oct Nov Dec Jan2001-500Argentina developed inong>toong> a full blown crisis in December 2000.Neverong>theong>less, reflecting invesong>toong>rs 1 increased differentiation of HongKong and Argentina, ong>theong> debt crisis in Argentina had little impact onour money and exchange markets.-9-

BANKING SECTORPERFORMANCECapital adequacy ratio 1: 18.30% (Sep oi) 18.00% (Jun 01}Liquidity ratio 2: 51.38% (Se P oi) 52.47%

BANKING - EFFICIENCY ANDCOMPETITION• Commercial Credit Reference Agency• Positive consumer credit data• Review of market entry criteria• Banking consumer protectionCommercial Credit Reference Agency (CCRA)• will help banks ong>toong> channel more funds ong>toong> SMEs with acceptable credit risk.• agreement on a voluntary approach: ong>theong> market will take ong>theong> lead in establishing ong>theong> CCRA. This has ong>theong>support from ong>theong> Working Group on CCRA, which comprises representatives of banks and SMEs.• ong>theong> HKMA will encourage banks* participation by supervisory guidelines.• ong>theong> industry Associations will form a working group ong>toong> thrash out ong>theong> details.Positive consumer credit data• will help prevent bankruptcy.• will help promote more competition, ong>theong>reby benefiting cusong>toong>mers. Positive consumer credit data sharingis a norm in ong>theong> more advanced economies, e.g. ihe UK and ong>theong> US.• ong>theong> HKMA has been discussing with ong>theong> Privacy Commissioner and ong>theong> Consumer ong>Councilong> ong>toong> ensure thatprivacy and consumer interests will be properly safeguarded.• more sharing of positive consumer credit data will need approval by ong>theong> Privacy Commissioner andAmendment ong>toong> ong>theong> Code of Practice on Consumer Credit Data before implementaion.Review of market entry criteria• we aim ong>toong> furong>theong>r open up Hong Kong's banking secong>toong>r ong>toong> allow a broader range of domestic andinternational institutions ong>toong> participate in ong>theong> Hong Kong financialmarkets as full licensed banks.• we propose, among oong>theong>r things, ong>toong> remove ong>theong> US$16 billion asset size criterion applicable ong>toong>overseasincorporatedbanks wishing ong>toong> set up a branch in Hong Kong. Foreign banks should instead be subject ong>toong>ong>theong> same size criteria with respect ong>toong> ong>toong>tal assets and cusong>toong>mer deposits as locally incorporated banks -proposed ong>toong> be increased ong>toong> HK$5 billion and HK$4 billion respectively.• ong>theong> response ong>toong> ong>theong> HKMA has so far been supportive.Banking consumer protection• comparative study on consumer protection arrangements in different jurisdictions passed ong>toong> ong>theong>ong>Legislativeong> ong>Councilong> in May 2001.• revised Code of Banking Practice in 2001, with enhanced protection for consumes In various areas, card services, use of debt collection agencies. A Code of Banking Practice Committee has beenformed by HKAB and DTCA, with representation fromong>theong> HKMA.• a guideline cm complaint handling procedures, setting certain minimum standards forAls, is beingfinalised. This will be formallyissued very shortly.

BANKING - SAFETY ANDSOUNDNESS• Deposit Insurance Scheme• Bank consolidation• New Capital Accord• Mortgage loans in negative equityDeposit Insurance Scheme• preliminary design of ong>theong> scheme largely completed, following consultation with ong>theong> bankingindustry on specific issues such as funding and premium assessments.• aim ong>toong> issue anoong>theong>r consultation paper setting out our detailed proposals in ong>theong> 1st quarter of2002, and ong>toong> introduce draft legislation in ong>theong> 4th quarter of ong>theong> year.Bank consolidation• gaong>theong>red momentum in 2001, e.g. acquisition of Dao Heng Bank by Development Bank ofSingapore, ong>theong> consolidation of Bank of China's ten subsidiary banks inong>toong> one local bank.These developments will furong>theong>r strengong>theong>n ong>theong> local banking secong>toong>r.New Capital Accord• aim ong>toong> implement ong>theong> New Accord in Hong Kong in 2005 in line with ong>theong> timetable set by ong>theong>Basel Committee on Banking Supervision.• ong>theong> HKMA has formed an internal working group ong>toong> implement ong>theong> New Accord and a steeringcommittee ong>toong> oversee ong>theong> implementation process.Mortgage loans in negative equity• issued letter ong>toong> Als on 10 Ocong>toong>ber allowing departure from 70% LTV ratio in refinancing.• issued letter ong>toong> Als on 22 November recommending ong>theong> establishment of centralised units ong>toong>handle inquires. Some banks have offered more relief measures ong>toong> mortgagors, e.g.adjustment of ong>theong> mortgage terms, lowering of ong>theong> mortgage rate.• survey ong>toong> assess extent of problem: 14% of mortgage borrowers or 23% of outstandingmortgage Joans at end-September, Survey being updated for aid-December position.12-12-

FINANCIALINFRASTRUCTUREObjective: reinforce Hong Kong's role as anInternational FinancialCentreOur competitive advantage: a financialinfrastructure in which financialintermediation and oong>theong>r financialtransactions can be conducted safely andefficiently• Domestic financial activities• International financial activities• Mainland / Hong Kong financial activities13It is one of our primary responsibilities ong>toong> maintain Hong Kong's status as aninternational financial centre. By bringing in more demand for financial services,Hong Kong's economy will benefit and more jobs will be created.We believe that ong>theong> main competitive advantage in being an international financialcentre lies in ong>theong> robustness and efficiency of its financial infrastructure. Financialtransactions have no geographical boundaries in a wired world, and will gravitateong>toong>wards a centre where ong>theong>y can be conducted safely and efficiently. Our latestcontribution ong>toong>wards building this competitive advantage is a sophisticatedpayment system in both Hong Kong and US dollars. We will furong>theong>r build on thisadvantage through initiatives on three fronts:- Domestic financial activities - ong>toong> link up our domestic debt, equity andpayment systems so that straight-through-processing can be achieved inHong Kong dollar transactions.- International financial activities - ong>toong> provide safe and efficient clearingsystems in foreign currency transactions in ong>theong> Asian time zone and ong>toong>extend ong>theong> linkages of our infrastructure with those of oong>theong>rs in ong>theong> region,so that more international financial transactions will be attracted ong>toong> HongKong.- Mainland/Hong Kong financial activities - ong>toong> attract Mainland institutions ong>toong>make more use of Hong Kong as ong>theong> platform for conducting ong>theong>irinternational transactions and ong>toong> strengong>theong>n ong>theong> linkage of ong>theong> infrastructureof ong>theong> Mainland and Hong Kong so that two-way payment and settlementwill be made more efficient.-13-

FINANCIAL INFRASTRUCTURE FORDOMESTIC FINANCIAL ACTIVITIESDebt market development - expansion ofmarket size and promotion of retail invesong>toong>rbaseRetail payment systems - self regulaong>toong>ryapproach; preparation of industry codes ofpractices; moniong>toong>ring e-money developmentIntegration of payment, clearing and settlementsystems for money, debt securities, equitiesand ong>theong>ir derivatives ong>toong> enhance liquidity andpromote real time DvP14Debt market development• expansion of debt market size:- Exchange Fund Bills / Notes. Outstanding size: HK$113.8 billion- HKMC debt securities. Outstanding size: HK$20.3 billion-tax exemption / concession for qualified debt instruments, e.g. trading profit and interestincome from Exchange Fund Bills and Notes are exempted from profit tax• promotion of retail bond market:-Exchange Fund Notes and HKMC Notes listed on ong>theong> Song>toong>ck Exchange of Hong Kong- HKMC issues retail bonds ong>toong> promote ong>theong> retail bond market. Outstanding size: HK$1.1billion. The latest issue, which closed on 30 January, comprises three tranches with tenorof 2 years ong>toong> 5 years. The subscription exceeded HK$1 billion. Almost 3,500 invesong>toong>rshave submitted applications-working closely with SFC ong>toong> streamline procedures for public offer of debt securitiesRetail payment system• review completed in Ocong>toong>ber 2001• self-regulaong>toong>ry approach: working groups chaired by ong>theong> HKMA set up ong>toong> encourage operaong>toong>rsand banks ong>toong> prepare codes of practices for credit card, debit card and song>toong>red value cards• Hong Kong is a world pioneer in e-money, with extensive usage and deep penetration.Development of e-money will be moniong>toong>red closely In ong>theong> light of ong>theong> impact on marketdevelopment and on seignorageIntegration of payment clearing and settlement systems• our debt settlement system (CMU) is already linked with ong>theong> payment system in both US andHong Kong dollars ong>toong> provide delivery versus payment (DvP) facility for debt transactions• ong>theong> equities settlement system {CCASS) is linked with ong>theong> payment system in both US and HongKong dollars ong>toong> provide DvP facility for equities transactions. Working an extending ong>theong> existinglink with CCASS ong>toong> enable CMU ong>toong> set up an account with CCASS ong>toong> dear and settle OTC tradein Hong Kong equities• CCASS is linked ong>toong> CMU, enabling CCASS members ong>toong> hold Exchange Fund Notes and HKMCNotes fisted on ong>theong> Song>toong>ck Exchange of Hong Kong-14-

FINANCIAL INFRASTRUCTURE FORINTERNATIONAL FINANCIAL ACTIVITIES• Promotion of US dollar RTGS in ong>theong>region• Proposal ong>toong> develop a RTGS system foreuro and yen• International linkages of paymentsystems• Promotion of international linkages ofdebt clearing systemsPromotion of US dollar RTGS in ong>theong> region• help Hong Kong ong>toong> extend its financial infrastructure ong>toong> ong>theong> rest of ong>theong> region• aim ong>toong> develop ong>theong> most widely used US dollar clearing system outside ong>theong> US15Proposal ong>toong> develop a RTGS system for euro and yen• attract euro and yen payments ong>toong> Hong Kong• provide PvP for ong>theong> G3 currencies: US dollar, euro and yen• promote ong>theong> market for euro and yen-denominated debt securities in Hong KongInternational linkages of payment systems• more than 80 banks outside Hong Kong have joined our US dollar RTGS system as indirectparticipants• PvP for US dollar and Hong Kong dollar, implemented on 25 September 2000• discussing with Bank of Thailand on possible PvP link between ong>theong> Thai baht RTGS systemand ong>theong> US dollar RTGS system in Hong KongInternational linkages of debt clearing systems• advantages:-facilitate cross border holding and settlement of debt securities in Hong Kong andoverseas-reduce settlement risk by providing DvP settlement for cross-border securitiestransactions-enlarge ong>theong> invesong>toong>r base for debt securities in Hong Kong-enhance ong>theong> attractiveness of ong>theong> CMU by providing members in Hong Kong and in ong>theong>region access ong>toong> debt securities in ong>theong> world market• linkages:-one-way link from Eurociear and Clearstream ong>toong> CMU (December 1994)- one-way link from CMU ong>toong> Australia (December 1997)-two-way link between CMU and New Zealand (April 1998)-two-way link between CMU and Korea (September 1999)-a real time auong>toong>mated link from CMU ong>toong> Eurociear (ong>toong> be implemented by end 2002)-CMU clearing US Treasuries in Hong Kong (ong>toong> be implemented before end 2002)-15-

FINANCIAL INFRASTRUCTURE FORMAINLAND / HONG KONG FINANCIAL ACTIVITIESWarrants special attention because ofexchange controls and non-convertiblecurrency in ong>theong> Mainland, and rapidliberalisationObjective 1: greater use of Hong Kong for ong>theong>Mainland's international financial activitiesObjective 2: address asymmetric mobility ofcapital by developing appropriate channels ong>toong>facilitate cross-border flow of funds17With ong>theong> rapid economic development of ong>theong> Mainland, weneed ong>toong> strengong>theong>n ong>theong> linkage between our infrastructuresystem and that of ong>theong> Mainland ong>toong> ensure that financialtransactions between ong>theong> two can be conducted safely andefficiently. We also need ong>toong> find ways ong>toong> attract moreMainland institutions ong>toong> conduct ong>theong>ir international financialtransactions in Hong Kong. These efforts require special andcareful attention because ong>theong> Mainland exercises exchangecontrols and ong>theong> RMB remains non-convertible.Our efforts in this area focus on two objectives:- ong>toong> encourage ong>theong> Mainland institutions, both official andprivate, ong>toong> make greater use of Hong Kong for ong>theong>irinternational financial activities; and- ong>toong> address ong>theong> asymmetric mobility of capital bydeveloping appropriate channels ong>toong> facilitate cross-borderflow of funds.-17-

MAINLAND / HONG KONGFINANCIALACTIVITIES -INITIATIVESLocation of international treasuryof Mainland banks in Hong KongoperationJoint cheque clearing betweenand Hong KongGuangdongLinkages in debt clearingsystemsLinkages in paymentsystems18Location of international treasury operation of Mainland banks in Hong Kong• following ong>theong> Mainland's accession ong>toong> ong>theong> WTO, it is envisioned that more financialinstitutions and individuals would be able ong>toong> purchase foreign currency assets abroad.Demand for fund management and treasury product services is set ong>toong> grow rapidly.Hong Kong is well placed ong>toong> become ong>theong> treasury centre for ong>theong> Mainland• ong>theong> HKMA has worked on relevant authorities and banking institutions with anobjective of attracting a critical mass of Mainland asset management / treasurybusiness ong>toong> Hong KongJoint cheque clearing between Guangdong and Hong Kong• nearly 30 cities in Guangdong, including Guangzhou and Shenzhen, have joined thisjoint cheque clearing with Hong Kong• existing one-way service: Hong Kong dollar cheques issued by banks in Hong Kongand presented in Guangdong. Soon ong>toong> be extended ong>toong> Hong Kong dollar chequesissued by banks in Guangdong and presented in Hong Kong, i.e. two-way serviceLinkages in debt clearing systems• CDC's Government Securities Book-entry System ong>toong> CMU link - ong>toong> facilitateauthorised financial institutions in ong>theong> Mainland ong>toong> buy and hold securities cleared inong>theong> CMULinkages in payment systems• 41 banks in ong>theong> Mainland have already joined our US dollar RTGS system as indirectparticipants• PBoC Guangzhou Branch has suggested a linkage between ong>theong> Hong Kong dollarRTGS system in Hong Kong and ong>theong>ir Hong Kong dollar system operating on ong>theong>books of SAFE Guangzhou Branch-18-

EXCHANGE FUND PERFORMANCE(HK$ billion)200120001999Gain / (Loss) on HK equities*Gain / (Loss) on oong>theong>r equities*Exchange gain / (loss)Total return from bonds, etc(27.1)(3.2)(13.1)50.4(7.3)0.5(11.2) income7.045.1103.8* including dividends19The Exchange Fund recorded a positive investment income of HK$7.0billion in 2001. The main components of this income were:• a profit of HK$50.4 billion from bonds and oong>theong>r investments• a loss of HK$27.1 billion on ong>theong> Hong Kong equities portfolio• a loss of HK$3.2 billion on oong>theong>r equities• an exchange loss of HK$13.1 billion, as a result of ong>theong> depreciationof ong>theong> euro and ong>theong> yen against ong>theong> US dollar-19-

EXCHANGEFUNDINVESTMENTBENCHMARKBonds80%Equities20% (Hong Kong : 5%)Currencies80% US dollar bloc15% European bloc5% Yen20The investment benchmark, which directs ong>theong> long-term strategicinvestment of ong>theong> Exchange Fund, is derived from ong>theong> investmenong>toong>bjectives of ong>theong> Exchange Fund.The investment benchmark of ong>theong> Exchange Fund adopted by ong>theong>Exchange Fund Advisory Committee is an optimal mix of assetsdesigned ong>toong> meet ong>theong> following investment objectives :- ong>toong> preserve capital- ong>toong> ensure that ong>theong> entire monetary base will be at all times fullybacked by highly liquid short-term US dollar denominatedsecurities- ong>toong> ensure sufficient liquidity for ong>theong> purpose of maintainingmonetary and financial stability- subject ong>toong> above, ong>toong> achieve an investment return that willp reserV e ong>theong> long-term purchasing power of ong>theong> assets-20-

EXCHANGE FUNDPERFORMANCE AGAINST BENCHMARK12%10%8%10.8%• |D Investment Return of ExchangeFund's Investment Benchmark• Investment Return of Exchange Fund6%4%4.8%^^^H 3.8% 1• 12%0%1999 2000* Preliminary, unaudited figures for 2001n•^^^H0.4% ®^^^2001*!21The investment return achieved in 2001 was substantially higherthan ong>theong> return on ong>theong> investment benchmark (0.4% return on ong>theong>investment benchmark return vs. 0.7% actual return on ong>theong>Exchange Fund).This compares favourably with a large number of investment fundsin ong>theong> market.-21-

INVESTMENT PERFORMANCE OF EXCHANGE FUNDAND COMPARABLE BALANCED FUNDSReturn16%14%12%10%8%6%4%2%0%-2%-4% |-6% |10.8%4.8%• Exchange FundlstQuartile j2nd Quartile |3rd Quartile j4th Quartile0.7%-8% |1999 2000 2001Balanced Funds with 20% - 30% Equity ComponentSource: Watson Wyatt and Standard & Poor's22Although direct comparisons are not always easy or appropriate,generally speaking, ong>theong> Exchange Fund achieved an investmentreturn more favourable than those of oong>theong>r similar funds in ong>theong>private secong>toong>r, which range from -0.1 % ong>toong> -6.1 %.- 2 2 -

EXCHANGE FUND HISTORICALRETURN1994 1995 1996 1997 1998# Hong Kong CPI-A at end-November 2001Compounded AverageAnnual Annual HKInvestment CPI-AReturn (1994-2001 )#(1994-2001) 23T h e investment performance of ong>theong> E x c h a n g e Fund should also beviewed against a backdrop of a c o m p o u n d e d 6 . 5 % annualinvestment return achieved for ong>theong> 8-year period from 1994 ong>toong> 2 0 0 1 .- 2 3 -

EXCHANGE FUNDABRIDGEDBALANCESHEET(HK$ billion)20012000ChangeASSETSDepositsDebt securitiesHong Kong equitiesOong>theong>r equitiesOong>theong>r assetsTotal assets98.6733.385.935.327.5980.673.1729.8152.940.627.01,023.425.53.5(67.0)(5.3)CL5(42.8)LIABILITIES AND ACCUMULATED SURPLUSCertificates of IndebtednessCoins in circulationBalance of banking systemExchange Fund Bills and NotesPlacements by oong>theong>r HKSAR government fundsOong>theong>r liabilitiesTotal liabilitiesAccumulated surplusTotal liabilities and accumulated surplus107.55.70.7118.2380.665.2677.9302.7980.699.25.90.7109.3417.284.0716.3307.11,023.48.3(0.2)-8,9(36.6)(18.8)(38.4)(4,4)(42.8)24Owing mainly ong>toong> ong>theong> net drawdown of ong>theong> fiscal reserves amountingong>toong> HK$36.6 billion, ong>theong> Abridged Balance Sheet shows that in ong>theong>year 2001, ong>theong> ong>toong>tal assets of ong>theong> Exchange Fund decreased byHK$42.8 billion, from HK$1,023.4 billion at ong>theong> end of December2000 ong>toong> HK$980.6 billion at ong>theong> end of December 2001.-24-

EXCHANGEFUNDCHANGE IN ACCUMULATEDSURPLUSU 2001 •* 2000(HK$ billion) Full year Q1 Q2 Q3 Q4 Full yearInvestment income/(Ioss) 7.0 (14.6) (2.0) 10.4 13.2 45.1Oong>theong>r income 0.2 0.1 0.0 0.1 0.0 0.2Interest and expenses (9^1 (2.8) (2.8) (2.3) (2.0) (11.0)Net investment income/(loss) (2.7) (17.3) (4.8) 8.2 11.2 34.3Treasury's share 1111 M M* (4^1* (Ml* (18.1)Increase/(Decrease) inEF accumulated surplus (4.4) (11.2) (3.8) 4.2 6.4 16.2Treasury's share in ong>theong> first three quarters of financial year 2001-02 : HK$7.8 billion.25After deducting interest and oong>theong>r costs, and ong>theong> sharing ofinvestment income with ong>theong> fiscal reserves placed with ong>theong>Exchange Fund, ong>theong> Accumulated Surplus registered a decline ofHK$4.4 billion.Return ong>toong> fiscal reserves for ong>theong> first nine months of ong>theong> financialyear 2001-02 was HK$7.8 billion.Quarterly returns ong>toong> fiscal reserves under ong>theong> return sharingarrangement, started on 1 April 1998, are as follows:1998999(HK dollar billion)2000 2001Q1Q2Q3Q4n.a.4.16.915. 42.6(4.2)7.712.018.1(6-1)(1.0) is up ong>toong> ong>theong> Treasury ong>toong> decide when ong>toong> settle ong>theong> return ong>toong> fiscalreserves with ong>theong> Exchange Fund.-25-

EXCHANGE FUND HONG KONG EQUITY PORTFOLIO(HK$ billion)Investment in August 1998Income from Disposal and Dividends (end-Dec 2001)118.1139.9Size of remaining portfolio (end-Dec 2001) 85.9Disposal 36.9Long Term Investment* 49.0* Including Hong Kong equities transferred from ong>theong> Land Fund in 1998(valued at HK$9 billion in 1998).26Already fully recouped ong>theong> investment of HK$118.1 billion in August1998Managed ong>toong> dispose of a substantial portion of Hong Kong song>toong>ckswithout any noticeable effect on ong>theong> market.Of ong>theong> remaining Hong Kong equity portfolio, we intend ong>toong> keep 5%of ong>theong> size of ong>theong> Exchange Fund (i.e. HK$49 billion as at end-December 2001), in accordance with ong>theong> investment guideline of ong>theong>Exchange Fund.Exchange Fund Investment Limited will continue ong>toong> manage ong>theong>disposal of ong>theong> excess in an orderly way with minimum disruption ong>toong>ong>theong> market, just as it has done with ong>theong> disposal so far.^§*^T>ry-26-

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