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Commenting on a further reduction of HK$1,705 mn in the forecast Aggregate Balance published by the HKMA today, a HKMA spokesman said that this was mainly due to the purchase of US$ by the Note Issuing Banks (NIBs) to provide backing for additional bank notes to meet the seasonal demand ahead of the Chinese New Year holidays. The HKMA sold a total of US$220 mn under the Convertibility Undertaking today. Correspondingly, the Aggregate Balance of the banking system is forecast to decline further from HK$739 mn on February 19 to a negative level of HK$966 mn on February 22.

As in past years, the amount of bank notes in circulation has increased substantially, by about HK$19 bn, ahead of Chinese New Year holidays. The decline in the Aggregate Balance is considerably smaller than the increase in banknotes, suggesting that the NIBs have funded the US$ backing partly by their own holding of US$ and partly by the purchase of US$ from market sources other than the HKMA. The entire monetary base and the corresponding US$ backing have risen accordingly.

The outflow of funds related to the seasonal increase in HK$ bank note issuance is expected to reverse after the Chinese New Year holidays when the public deposit the surplus bank notes back to the banking system. This is likely to lead to an increase in the Aggregate Balance as and when the HKMA starts to buy US$ sold by NIBs on the redemption of Certificates of Indebtedness.

End/Monday, February 15, 1999

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