Press Release
LCQ17: Transfer from Exchange Fund governed by Ordinance
Wednesday, May 31, 2000
Following is a question by the Hon Cheung Man-kwong and a written reply by the Acting Secretary for Financial Services, Mrs Rebecca Lai, in the Legislative Council today (May 31):
Question:
Regarding the management of the Exchange Fund, will the Government inform this Council whether:
(a) the situation will arise in which the fiscal reserves deposited by the Government in the Exchange Fund will be frozen and cannot be withdrawn in order to pay for public expenditure, when a substantial amount of the assets of the Exchange Fund has been utilised for stabilizing the monetary and financial systems of Hong Kong;
(b) any criteria have been set to specify the respective ratios in respect of which the assets of the Exchange Fund could be allocated for such purposes as defending the exchange value of the Hong Kong dollar, maintaining the stability of the financial system and safeguarding the long-term purchasing power of the assets etc., during crises in the financial market; and
(c) any guidelines are in place to specify the prime purposes and asset allocation of the various components of the Exchange Fund, as well as the ceiling of the Exchange Fund assets transferable by the Financial Secretary in case of emergency and the principles he should follow?
Reply:
Madam President,
(a) A main objective in the management of the assets of the Exchange Fund is to ensure sufficient liquidity to meet the objective of the Fund in maintaining the monetary and financial stability of Hong Kong and other obligations of the Fund, including the withdrawal of fiscal reserves by the Government. Withdrawal of funds from the Exchange Fund can be satisfied by the cash holdings of the Exchange Fund, or by short-term borrowing from the interbank money market, or by liquidating the Exchange Fund's Hong Kong dollar or foreign currency denominated assets. Past experience suggests that the situation envisaged in the question is highly unlikely to arise.
(b) The whole of the Exchange Fund is available to the Financial Secretary for use to meet the primary and other purposes in accordance with sections 3(1) and (1A) of the Exchange Fund Ordinance. The assets of the Exchange Fund are grouped under two portfolios (Backing Portfolio and Investment Portfolio) to facilitate the management and investment of the assets. There are no specific ratios governing the division of the portfolios within the Exchange Fund, other than the requirement that the Backing Portfolio provides full backing of the monetary base of Hong Kong to the extent of 105% to 112.5% of the monetary base.
(c) Apart from the provisions of the Exchange Fund Ordinance and the requirement on the Backing Portfolio mentioned in part (b) above, there are no guidelines on the prime purposes and allocation of assets among the various portfolios within the Exchange Fund.
The transfer of funds from the Exchange Fund is governed by section 8 of the Exchange Fund Ordinance. The Financial Secretary may consider a transfer only when he is "satisfied that such transfer is not likely to affect adversely his ability to fulfill any purpose for which the Exchange Fund is required to be or may be used under section 3(1) or (1A)" of the Exchange Fund Ordinance. There is an additional requirement that such transfer will need to maintain the assets of the Exchange Fund at a minimum threshold equal to 105% of the liabilities of the Exchange Fund. The Financial Secretary may proceed with such transfer only after consultation with the Exchange Fund Advisory Committee and with the approval of the Chief Executive in Council.