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AN INTRODUCTION TO THE KONG AN INTRODUCTION TO THE MONETARY AUTHORITY ABOUT THE HKMA

About the HKMA

The Hong Kong Monetary Authority (HKMA) is the government authority responsible for maintaining monetary and banking stability in Hong Kong. It was established in April 1993 by merging the Offi ce of the Exchange Fund and the Offi ce of the Commissioner of Banking.

THE ROLE OF THE HKMA

The HKMA has four main functions1:

• maintaining stability within the • helping to maintain Hong Kong’s status as framework of the Linked an international financial centre, including system the maintenance and development of Hong Kong’s financial infrastructure • promoting the safety and integrity of the financial system, including the banking system • managing the Exchange Fund

BBanking Monetary SStability Stability HKMA Functions Hong Kong as an Exchangee International Fundd Financial Centre

1 The powers, functions and responsibilities of the Monetary Authority are set out in legislation, principally in the Exchange Fund Ordinance, the Banking Ordinance, the Deposit Protection Scheme Ordinance and the Clearing and Settlement Systems Ordinance.

1 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY ABOUT THE HKMA

EXCHANGE FUND ADVISORY COMMITTEE

The HKMA’s activities are financed by the Exchange Fund to ensure a level of resource independence appropriate to a central banking . The HKMA reports to the Financial Secretary, who is the Controller of the Exchange Fund. In this capacity, the Financial Secretary is advised by the Exchange Fund Advisory Committee (EFAC). Five specialised sub-committees report and make recommendations to EFAC.

Exchange Fund Advisory Committee

Governance Sub-Committee Oversight

Audit Sub-Committee

Currency Board Sub-Committee

Technical Investment Sub-Committee

Financial Infrastructure Sub-Committee

2 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY MONETARY STABILITY

MONETARY STABILITY

The Hong Kong is officially linked to the US dollar at the rate of HK$7.8 to US$1. The Linked Exchange Rate system underpins Hong Kong’s monetary system and plays an important role in supporting Hong Kong as a leading international trading, services and financial centre.

Currency Board mechanism

The Linked Exchange Rate system operates through a Currency Board mechanism, which requires the to be fully backed by foreign reserves and any change in the Monetary Base to be fully matched by a corresponding change in foreign reserves.

Under the Currency Board system, the stability of the exchange rate is maintained through an automatic adjustment mechanism, where interest rates rather than the exchange rate adjust to the inflow or outflow of funds. HK$ US$ 7.8 1

Operation of the Currency Board

Market participants CAPITAL Interest sell (or buy fewer) Monetary Base rates fall Hong Kong OUTFLOW expands

Currency Board sells Hong Kong dollars Market participants Upward pressure on sell Hong Kong the Hong Kong dollar dollars exchange rate Hong Kong dollar Downward pressure Market participants exchange rate on Hong Kong dollar buy Hong Kong stability exchange rate dollars Currency Board purchases Hong Kong dollars

CAPITAL Market participants Monetary Base buy (or sell fewer) Interest contracts INFLOW Hong Kong dollars rates rise

3 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY MONETARY STABILITY

Hong Kong’s Monetary Base comprises:

Governments-issued notes and coins in circulation

Certificates of fully back the Indebtedness issued by the note-issuing .

is the sum of balances The in the clearing accounts Aggregate maintained by commerical Balance banks with the HKMA

Exchange are Hong Kong-dollar Fund securities issued Bills and by the HKMA on behalf Notes of the Government.

4 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY MONETARY STABILITY

In recent years, the HKMA has strengthened and developed the Currency Board system to make it more rule-based, more transparent and less vulnerable to external shocks. The Currency Board system has ensured a high degree of exchange-rate stability. Between November 1974 and September 1983, Hong Kong adopted a fl oating rate regime but the experience was not satisfactory, with high volatility seen not only in the exchange rate but also on other fronts.

Resilience against external shocks HK$/US$ 9.5 Introduction of Asian the Linked Closure of Mexican 9.0 Currency Exchange 911 incident Reform of RMB BCCI (HK) Crisis Rate system Turmoil (July (Sep 01) exchange rate (Summer 91) (Jan 95) 8.5 (Oct 83) 97-98) regime (Jul 05)

8.0

7.5

7.0 World Gulf War ERM Abandonment Collapse of Lehman Market Crash (Aug 90) Turmoil of Argentine Brothers and Global 6.5 (Oct 87) (Sep 92) Currency Board Financial Crisis system (Jan 02) (Sep 08) 6.0

5.5

5.0 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 (Year)

5 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY BANKING STABILITY

BANKING STABILITY

The principal function of the HKMA as banking supervisor is to promote the general stability and effective working of the banking system in Hong Kong. The HKMA seeks to ensure that authorized operate in an effective, responsible, honest and -like manner and to provide a measure of protection to depositors. Its powers to meet these objectives come from the Banking Ordinance.

The three-tier banking system

Banks in Hong Kong are divided into three tiers of authorized institutions. The main distinctions lie in the deposit business each tier is allowed to conduct under the Banking Ordinance.

The three tiers of authorized institutions

Licensed Banks Restricted Licence Banks Deposit-taking

May operate current and May only take deposits Restricted to taking savings accounts, accept from the public in deposits of HK$100,000 deposits of any size and amounts of HK$500,000 or more with an original maturity from the public or more without term to maturity of at and pay or collect cheques restriction on maturity least three months drawn by or paid in by customers

Deposit protection

Depositors in Hong Kong are protected by the Deposit Protection Scheme. The Scheme was established in accordance with the Deposit Protection Scheme Ordinance to provide protection up to HK$500,000 per depositor per bank. In addition to protecting depositors, the Scheme helps maintain the stability of Hong Kong’s banking system.

6 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY HONG KONG AS AN INTERNATIONAL FINANCIAL CENTRE

HONG KONG AS AN INTERNATIONAL FINANCIAL CENTRE

A combination of factors, including a strategic location, high speed communications to the rest of the world, the free flow of information, no restrictions on capital flows, and effective and transparent regulations which meet international standards, have helped establish Hong Kong as a leading international financial centre.

Indeed, the HKMA sees regional co-operation as particularly important in improving financial stability and surveillance, and continues to maintain and strengthen contacts with the international central banking and financial community to:

• promote international understanding of, and support for, monetary and banking policies in Hong Kong

• information with other central banks about financial developments to facilitate the proper oversight of financial markets and the prudential supervision of financial institutions

• improve understanding of international economic and financial trends to facilitate more effective policy formulation, particularly in monetary management and reserves management

• improve access to technical expertise in major central banks and multilateral institutions

• help other central banks and institutions to obtain a better understanding of monetary and general economic developments in Hong Kong and the region. Offshore business in Hong Kong

The HKMA works closely with the Mainland authorities and the fi nancial industry in Hong Kong to promote the development of Hong Kong as the offshore renminbi business centre. With the expansion of offshore renminbi business since 2004, Hong Kong has developed a reliable and highly effi cient renminbi fi nancial platform providing one-stop services, including banking and settlement, fi nancing and wealth management, to corporates and fi nancial institutions. Hong Kong now hosts the largest offshore renminbi liquidity pool, and is a global hub for renminbi trade settlement and issuance. International and regional co-operation

Hong Kong is a member of a number of international and regional bodies, including the Asian Development Bank, the -Pacific Economic Co-operation forum, the Bank for International Settlements, the Basel Committee on Banking Supervision, the Executives' Meeting of and Pacific Central Banks, the Financial Stability Board and SEANZA (South East Asia, and ). It also participates in the activities of ASEAN + 3 (Association of Southeast Asian Nations and , and ), the Group of Twenty (G20), the International Monetary Fund, SEACEN (South East Asian Central Banks), the World Bank, and other international and regional bodies.

7 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY FINANCIAL INFRASTRUCTURE

FINANCIAL INFRASTRUCTURE

A prerequisite of a stable fi nancial market and an international fi nancial centre is a safe, reliable and effi cient fi nancial infrastructure. The HKMA is committed to ensuring that Hong Kong continues to meet current and future best international standards. The infrastructure components fall into three broad types:

(a) Payment systems for the settlement of interbank payments:

• Hong Kong dollar Real-Time Gross Settlement (RTGS) system launched in 1996

• US dollar RTGS system launched in 2000

• RTGS system launched in 2003

• Renminbi RTGS system launched in 2007 (upgraded from Renminbi Settlement System launched in 2006)

(b) The debt securities settlement system, called the Central Moneymarkets Unit, established in 1990, for the settlement and custody of debt securities

(c) Domestic and external system links to provide payment-versus-payment and delivery-versus- payment services, locally and across the border.

Delivery versus payment (DvP) Payment versus payment (PvP)

A mechanism for settling A securities-delivery arrangement a foreign-exchange transaction to ensure in which the delivery of securities takes that a final transfer of one place as soon as currency occurs only if the transfer of the payment is made and is other currency or also takes confirmed to be final and irrevocable place at the same time

8 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY FINANCIAL INFRASTRUCTURE

Hong Kong’s fi nancial infrastructure allows fi nancial institutions to:

• provide effi cient payment and settlement services to their customers

• make real-time payments in Hong Kong during local hours, in Hong Kong dollars, US dollars, and renminbi

• trade and hold multi-currency-denominated debt securities

• execute PvP foreign-exchange transactions, covering eight currency pairs, through domestic links among Hong Kong RTGS systems and external links with overseas RTGS systems:

MalaysianRM ringgit MYR* IDR**

US dollar Hong Kong dollar

euro renminbi

* Through the linkage between Hong Kong’s USD RTGS system and ’s ringgit RTGS system ** Through the linkage between Hong Kong’s USD RTGS system and Indonesia’s rupiah RTGS system

9 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY THE EXCHANGE FUND

THE EXCHANGE FUND

The Exchange Fund, established in 1935, comprises Hong Kong’s official reserves and provides the backing to safeguard the exchange value of the Hong Kong dollar. The Fund also helps preserve the stability and integrity of Hong Kong’s monetary and financial systems to enhance the city’s status as an international financial centre.

Investment Management

The Exchange Fund is not primarily an , and it is predominantly invested in a wide range of fixed-income, equity and other assets in major international markets.

The Exchange Fund is divided into portfolios:

• the Backing Portfolio, which provides backing for the Monetary Base

• the Investment Portfolio, which preserves the -term purchasing power of the Fund

• the Strategic Portfolio, which contains assets purchased by the Hong Kong Government for the account of the Exchange Fund for strategic purposes.

In addition to managing assets of the Fund itself, the HKMA employs external fund managers operating in various international financial centres to tap the best investment expertise available and diversify investment styles.

To ensure the entire Monetary To preserve Base is at all times capital fully backed by highly liquid US dollar -denominated securities

Investment objectives of the Exchange Fund

To achieve an investment To ensure return that will sufficient liquidity preserve the for maintaining long-term monetary and purchasing power financial stability of the Fund

10 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY ACCOUNTABILITY AND TRANSPARENCY

ACCOUNTABILITY AND TRANSPARENCY

The HKMA is accountable to the people of Hong Kong through the Financial Secretary and the laws passed by the Legislative Council. There is a formal commitment from the Chief Executive of the HKMA to appear before the Legislative Council’s Panel on Financial Affairs three times a year to brief Members and to answer questions on the HKMA’s work. Representatives from the HKMA also attend Legislative Council meetings from time to time to explain and discuss particular issues, and to assist Members in their scrutiny of draft legislation.

The HKMA seeks to follow international best practices in its transparency arrangements through:

maintaining extensive relations with the media

a range of regular and special publications

a comprehensive website (www.hkma.gov.hk)

an Information Centre

public education programmes

public enquiry service.

11 AN INTRODUCTION TO THE HONG KONG MONETARY AUTHORITY CONTACTING THE HKMA

CONTACTING THE HKMA

Hong Kong Monetary Authority General enquiry: [email protected] Website technical enquiry and suggestions: [email protected] Recruitment: [email protected]

HKMA Public Enquiry Service Telephone: (852) 2878 8222 Fax: (852) 2878 2010 E-mail: [email protected]

HKMA Complaint Processing Centre Telephone: (852) 2878 1378 Fax: (852) 2509 3990 E-mail: [email protected]

HKMA Information Centre Address: 55th Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong Telephone: (852) 2878 1111 Fax: (852) 2147 9408 E-mail: [email protected]

12 HONG KONG MONETARY AUTHORITY

55/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong Telephone : 852 2878 8196 Facsimile : 852 2878 8197 E-mail : [email protected] www.hkma.gov.hk