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AN INTRODUCTION TO THE
HONG KONG MONETARY AUTHORITY
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An Introduction to the Hong Kong Monetary Authority
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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 with the merger of the Office of the Exchange
Fund and the Office of the Commissioner of Banking.
THE ROLE OF THE HKMA
The HKMA has four main functions1:
• maintaining currency stability within the
framework of the Linked Exchange Rate
system
• promoting the safety and integrity of the
financial system, including the banking
system
• helping to maintain Hong Kong’s status as
an international financial centre, including
the maintenance and development of Hong
Kong’s financial infrastructure
• managing the Exchange Fund, which
comprises the official reserves of Hong
Kong.
1 The powers, functions and responsibilities of the Monetary Authority are set out in legislation, principally in the Exchange FundOrdinance, the Banking Ordinance, the Deposit Protection Scheme Ordinance and the Clearing and Settlement Systems Ordinance.
HKMA
Functions
Monetary
Stability
Banking
Stability
Financial
InfrastructureExchange
Fund
e
d
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An Introduction to the Hong Kong Monetary Authority
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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 institution. 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.
O v e r s i g h t
Exchange Fund
Advisory Committee
Technical
Governance Sub-Committee
Audit Sub-Committee
Currency Board Sub-Committee
Investment Sub-Committee
Financial Infrastructure
Sub-Committee
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An Introduction to the Hong Kong Monetary Authority
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Monetary stability
MONETARY STABILITY
The Hong Kong dollar is officially linked to the US dollar at the rate of
HK$7.8 to US$1. The Linked Exchange Rate 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, which requires the Monetary
Base to be fully backed by foreign-currency reserves. Any change in the Monetary Base is fully matched
by a corresponding change in foreign reserves at a fixed exchange rate of HK$7.8 to US$1.
Under the Currency Board system, the stability of the Hong Kong dollar exchange rate is maintained
through an automatic interest rate adjustment mechanism, where interest rates rather than the
exchange rate adjust to the inflow or outflow of funds.
Operation of the Currency Board
HKS7.8 USS1
Market participantsbuy Hong Kongdollars
Upward pressure onthe Hong Kong dollarexchange rate
Currency Board sellsHong Kong dollars
Monetary Baseexpands
Interestrates fall
CAPITALINFLOW
CAPITAL
OUTFLOW
Market participants sellHong Kong dollars
Downward pressure on theHong Kong dollar exchangerate
Currency Board purchasesHong Kong dollars
Market participants buyor sell fewer Hong Kongdollars
Market participants sellor buy fewer Hong Kongdollars
Monetary Base
contractsInterestrates rise
Hong Kongdollar
exchange ratestability
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An Introduction to the Hong Kong Monetary Authority
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Monetary stability
Hong Kong’s Monetary Base comprises:
Certificates ofIndebtedness
exactly back the banknotesissued by thenote-issuing banks.
are Hong Kong-dollar debtsecurities issuedby the HKMA on behalfof the Government.
Government-issued
notes and coinsin circulation
ExchangeFund
Bills andNotes
TheAggregate
Balance
is the sum of balancesin the clearing accountsmaintained by commercialbanks with the HKMA.
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An Introduction to the Hong Kong Monetary Authority
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Monetary stability
In recent years, Hong Kong has strengthened and developed its Currency Board system to make it more
rules-based, more transparent and less vulnerable to external shocks. The Currency Board system
has ensured a high degree of exchange-rate stability. Prior to its introduction in 1983, Hong Kong
experienced an uncomfortable nine-year period during the floating of the Hong Kong dollar with high
volatility not only in the exchange rate but on other fronts as well.
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
HK$/US$
World stock
market crash
(Oct 1987)
4 Jun 1989
Gulf
crisis
(Aug 1990)
Collapse of
BCCI (HK)
(Summer 1991)
ERM
turmoil
(Sep 1992)
Mexican
currency crisis
(Jan 1995) (Jul 1997 - 1998)
Asian
financial
crisis
Announcement of the
passing away of
Deng Xiaoping
(20 Feb 1997)
Introduction of
the Linked
Exchange
Rate system
(Oct 1983)
Abandonment
of Argentine
Currency
Board system
(Jan 2002)
Resilence against external shocks
11 Sep 2001
Reform of the RMB
exchange rate regime
(Jul 2005)
Collapse of
Lehman Brothers
and global
financial crisis
(Sep 2008)
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An Introduction to the Hong Kong Monetary Authority
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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 banks and deposit-taking companies
operate in an effective, responsible, honest and business-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 (AIs). The main distinctions lie
in the deposit business each tier is allowed to conduct under the Banking Ordinance.
The three tiers ofauthorized institutions
(AIs)
Licensed Banks Restricted Licence Banks Deposit-taking Companies
May operate current andsavings accounts, acceptdeposits of any size andmaturity from the public
and pay or collect chequesdrawn by or paid in by
customers
May only take depositsfrom the public in
amounts of HK$500,000or more without
restriction on maturity
Restricted to takingdeposits of HK$100,000or more with an original
term to maturity of at leastthree months
Deposit protection
Depositors in Hong Kong are protected by the Deposit Protection Scheme and, up to the end of 2010, a
guarantee offered by the Hong Kong SAR Government’s Exchange Fund.
Under the Scheme established by the Hong Kong Deposit Protection Board, depositors are compensated
in the event of a bank failure in accordance with the Deposit Protection Scheme Ordinance. In addition
to protecting depositors, the Scheme helps maintain the stability of Hong Kong’s banking system.
B A N K
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An Introduction to the Hong Kong Monetary Authority
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Financial infrastructure
FINANCIAL INFRASTRUCTURE
A prerequisite of stable financial markets and an international financial
centre is safe, reliable and efficient financial 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
• Euro RTGS system launched in 2003
• Renminbi RTGS system launched in 2006
(b) The debt securities settlement system, called the Central Moneymarkets Unit (CMU), established
in 1990, for the settlement and custody of debt securities
(c) System links to provide payment-versus-payment and delivery-versus-payment services, and
external links to facilitate cross-border transactions.
A securities-delivery arrangement
in which the delivery of securities takes
place as soon as
payment is made and is
confirmed to be final and irrevocable
A mechanism for settling
a foreign-exchange transaction to ensure
that a final transfer of one
currency occurs only if the transfer of the
other currency or currencies also takes
place at the same time
Delivery versus payment (DvP)Payment versus payment (PvP)
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An Introduction to the Hong Kong Monetary Authority
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Financial infrastructure
Hong Kong’s financial infrastructure allows financial institutions to:
• provide efficient payment and settlement services to their customers
• make real-time payments in Hong Kong during local hours, in Hong Kong dollars, US dollars, euros
and renminbi
• execute payment-versus-payment foreign exchange transactions between four currency pairs–
US dollar Hong Kong dollareuro US dollar
euro Hong Kong dollar
Hong Kong dollar renminbi
• trade and hold multi-currency-denominated debt securities.
PvP foreign exchange transactions available to banks through Hong Kong’s payment
and settlement systems
USSUS dollar Hong Kong dollar
renminbieuro
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An Introduction to the Hong Kong Monetary Authority
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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
While not primarily an investment fund, the Exchange Fund is invested in a wide range of fixed-income
and equity 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 long-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.
Investment
objectives
of the
Exchange Fund
To preserve
capital
To ensure theentire Monetary Base
is at all timesfully backed by
highly liquidUS dollar-denominated
securities
To ensure
sufficient liquidity
for maintaining
monetary andfinancial stability
To achieve
an investment
return that will
preserve the
long-termpurchasing power
of the Fund
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An Introduction to the Hong Kong Monetary Authority
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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 stabilityand surveillance, and is continuing 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
• share 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.
Hong Kong as China’s international financial centre
The HKMA communicates and co-operates closely with the People’s Bank of China and other Mainland
authorities. An important factor in recent years has been the continuous development of renminbi
business in Hong Kong, ranging from deposit and remittance services to the issue of renminbi bonds
and the use of the renminbi to settle trade transactions. There is now increasing mobility of renminbi
funds between the Mainland and Hong Kong.
International and regional co-operation
Hong Kong is a member of a number of international and regional bodies, including the Asian
Development Bank, the Asia-Pacific Economic Co-operation forum, the Bank for International
Settlements, the Basel Committee on Banking Supervision, the Executives' Meeting of East Asia and
Pacific Central Banks, the Financial Stability Board and SEANZA (South East Asia, New Zealand and
Australia). It also participates in the activities of the World Bank, the International Monetary Fund,SEACEN (South East Asian Central Banks), the Group of Twenty (G20) and other international and
regional bodies.
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An Introduction to the Hong Kong Monetary Authority
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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 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
a public enquiries service.
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An Introduction to the Hong Kong Monetary Authority
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Contacting the HKMA
CONTACTING THE HKMA
Hong Kong Monetary AuthorityGeneral enquiry: [email protected]
Website technical enquiry and suggestions: [email protected]
Recruitment: [email protected]
HKMA Public Enquiries ServiceEnquiry line: (852) 2878 8222
Fax: (852) 2878 2010E-mail: [email protected]
HKMA Banking Services Complaint UnitEnquiry line: (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
Enquiry line: (852) 2878 1111
Fax: (852) 2147 9480
E-mail: [email protected]
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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