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I would like to report briefly the major issues considered by the EFIL Board at its meeting this morning.

Firstly, the Directors considered the recommendations presented by the three financial advisers on the optimal disposal strategy. Clearly our primary objective remains the disposal of the shares in the Hong Kong equity portfolio in an orderly manner without disrupting the market. Having considered various methods of disposal, the Board has concluded that it would be appropriate to launch the disposal programme in the form of a unit trust product tracking the Hang Seng Index. I hope that you will understand that I cannot be too specific about the unit trust product, since more work is needed before we can finalise the details. However, we can say at this stage that our recommendation would be for an application to be made for this unit trust to be listed on The Stock Exchange of Hong Kong and that the minimum denomination of the units should be of a size that would facilitate participation by the retail public in Hong Kong. This type of product has proved popular in other developed markets and we expect that it would be attractive to both local and overseas investors interested in investing in the Hong Kong market.

Compared with other disposal methods, the unit trust approach as a first step, offers a number of advantages. First, it can cater for the needs of both retail and institutional investors. Secondly, it does not involve the selection of individual stocks and is therefore "market neutral". Thirdly, in our view, among the various alternatives we have considered, it offers the prospect of the least disruption to the market. While these alternative disposal methods are not being pursued for the launch of the disposal programme, they may be considered for its subsequent stages.

As I mentioned earlier, a great deal of preparatory work is required to develop this unit trust product further. We are conducting market research to ascertain more precisely investor appetite and preferences. We shall need to prepare the necessary documentation, and the listing and other regulatory approvals will need to be sought from the relevant authorities. Last but not least, we envisage an extensive marketing programme to promote this new investment product, both locally and overseas. We expect that we shall need at least four to five months to complete the preparatory work. Needless to say, quite apart from getting ready in terms of documentation and procedures, the decision to launch this unit trust product and the timing of the launch will depend on the prevailing market conditions.

The second issue that the Board considered today relates to the appointment of external managers to assist EFIL in the management of the Exchange Fund's long term Hong Kong equity investment portfolio. With the help of an investment consultant Watson Wyatt, EFIL has agreed on a framework for appointing external managers, having regard to their professional expertise, track record and presence in, and commitment to, Hong Kong. We shall need to appoint two types of managers: passive managers and active managers. The passive managers will be required to track the Hang Seng Index closely, whereas the active managers will be expected to outperform the Hang Seng Index by investing in individual HSI constituent stocks within predefined permissible limits. Our consultants will soon be inviting indications of interest from the fund management community. I should add that, in selecting the external managers, smaller fund management firms with proven expertise in the Hong Kong stock market will be given the opportunity to participate.

END/Monday, June 21, 1999

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