LCQ9: Exchange Fund assets

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Following is a question by the Hon Cheung Man-kwong and a written reply by the Secretary for Financial Services, Mr Rafael Hui, in the Legislative Council today (Wednesday):

Question:

Given that the Financial Secretary, subject to Section 8 of the Exchange Fund Ordinance (Cap. 66), "may transfer from the Fund to the general revenue ...... any sum or part of any sum in excess of the amount required to maintain the assets of the Fund at 105% of the total obligations of the Fund for the time being outstanding ....."...", will the Government inform this Council:

(a) whether the Hong Kong Monetary Authority has assessed the assets value of the Exchange Fund required for performing each of the following obligations:

(i) providing full backing to the monetary base;

(ii) acting as the lender of last resort for financial institutions; and

(iii) performing other central banking obligations (please give a breakdown);

(b) whether the total assets value of the Exchange Fund at present exceeds the amount required for the performance of various obligations; if so, whether the Administration has plans to invest the excess assets in infrastructure or allocate them to other public expenditure purposes; and

Reply:

Madam President,

Parts (a) & (b)

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The question seems to presume that the Government may transfer to the general revenue from the Exchange Fund any assets in excess of 105% of the Exchange Fund's liabilities. This presumption is incorrect.

Under Section 8 of the Exchange Fund Ordinance, the Financial Secretary may consider a transfer from the Exchange Fund to the general revenue or other fund of the Government only when he is "satisfied that such transfer is not likely to affect 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) ...." Section 3(1) and (1A) provide that the purposes of the Exchange Fund are to support the exchange value of the Hong Kong dollar and to maintain the stability and integrity of Hong Kong's monetary and financial systems. The 105% threshold is merely the absolute statutory minimum that the Exchange Fund must maintain to meet its liabilities in the unlikely event that a transfer is contemplated. Even then, any such transfer could only proceed after consultation with the Exchange Fund Advisory Committee and the approval of the Chief Executive in Council.

Given the increasingly volatile and potentially destabilising nature of international capital flows, as was clearly demonstrated during the Asian financial crisis, the very substantial foreign reserves held by the Exchange Fund provided the foundation which enabled us to fend off very severe speculative attacks and retain public confidence on Hong Kong's monetary and financial systems. Although difficult to make quantitative judgements, public confidence in the HKSARG's resolve and ability to deliver monetary and financial stability is likely to be adversely affected if there is any significant run down in the level of reserves held by the Exchange Fund.

Part (c)

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For the reason stated in parts (a) and (b) above, the Financial Secretary does not consider it necessary or desirable to contemplate making any transfer from the Exchange Fund to the general revenue, which anyway still has a very substantial surplus accumulated over the years. It is important that any proposals on or requests for government spending, whether or not for infrastructural projects, should be subject to the discipline of fiscal prudence (including that laid down in the Basic Law) and the usual budgetary criteria.

End/Wednesday, March 8, 2000

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