Hong Kong SAR

Hong Kong SAR[HKD]

Institutional framework

The Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China provides that the monetary and financial systems of Hong Kong shall be prescribed by law and the Government of Hong Kong shall, on its own, formulate monetary and financial policies.

The Financial Secretary shall be responsible for determining the monetary policy objective and the structure of the monetary system of Hong Kong. The Monetary Authority, who is the Chief Executive of the Hong Kong Monetary Authority (HKMA), shall on his/her own be responsible for achieving the monetary policy objective, including determining the strategy, instrument and operational means for doing so, and for maintaining the stability and integrity of the monetary system of Hong Kong.

The monetary policy objective of Hong Kong shall be currency stability, defined as a stable external exchange value of the currency of Hong Kong, in terms of its exchange rate in the foreign exchange market against the US dollar, at around HKD 7.80 to USD 1. The Exchange Fund Ordinance establishes the Exchange Fund under the control of the Financial Secretary. The Fund shall be used primarily for affecting the exchange value of the Hong Kong dollar.

Currency Board Arrangement

The structure of the monetary system, which is called the Linked Exchange Rate System (LERS), shall be characterised by Currency Board arrangements, requiring the Hong Kong dollar monetary base to be at least 100 per cent backed by, and changes in it to be 100 per cent matched by corresponding changes in, US dollar reserves held in the Exchange Fund at the fixed exchange rate of HKD 7.80 to USD 1.

Key features of the monetary policy implementation framework

The Monetary Base comprises: 1) Certificates of Indebtedness issued by the Financial Secretary, which provide full backing to the banknotes issued by the note-issuing banks in Hong Kong 2) Government-issued notes and coins in circulation 3) The Aggregate Balance, which is the sum of clearing account balances kept with the HKMA 4) Exchange Fund Bills and Notes issued by the HKMA on behalf of the Government.

A specific portion of the Exchange Fund assets has been allocated to back the Monetary Base. Under the LERS, while specific Exchange Fund assets have been designated for backing the Monetary Base, all Exchange Fund assets are available to support the Hong Kong dollar exchange rate. The stability of the Hong Kong dollar exchange rate is maintained through an automatic interest rate adjustment mechanism and the firm commitment by the HKMA to honour the Convertibility Undertakings (CUs).

When the demand for Hong Kong dollars is greater (or smaller) than the supply and the market exchange rate strengthens (or weakens) to the strong-side (or weak-side) CU of HKD 7.75 (or HKD 7.85) to USD 1, the HKMA stands ready to sell (or buy) Hong Kong dollars to (or from) banks for US dollars. The Aggregate Balance will then expand (or contract) to push down (or up) Hong Kong dollar interest rates, creating monetary conditions that move the Hong Kong dollar exchange rate away from the strong-side (or weak-side) limit to within the Convertibility Zone of HKD 7.75-7.85.

There are settlement facilities (Intraday Repo and Discount Window) through which banks can borrow Hong Kong dollar funds intraday or overnight from the HKMA through repurchase agreements using Exchange Fund Bills and Notes, which are fully backed by US dollar reserves, as collateral.

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Financial Secretary determines monetary policy objective and structure of monetary system 1
Major mandates 2 Currency stability in accordance with Currency Board arrangements 3
Decision-making process N/A
Frequency / length of meetings N/A
Frequency of announcements N/A
Main policy target Spot market exchange rate of around HKD 7.8 per USD

Overview of key features

Key policy rate N/A
maturity (days) N/A
Operating target Market exchange rate of HKD/USD
maturity (days) Spot
Standing facilities Lending
Corridor width (bp)
Reserve requirements No
maintenance period
Main operation 4 Convertibility undertaking at HKD 7.75 to USD 1 and HKD 7.85 to USD 1
functions To maintain spot exchange rate within HKD 7.75–7.85 to USD 1
maturity (days) To maintain spot exchange rate within HKD 7.75–7.85 to USD 1
regular interval To maintain spot exchange rate within HKD 7.75–7.85 to USD 1
frequency To maintain spot exchange rate within HKD 7.75–7.85 to USD 1
Overall frequency N/A
Discretion left to operational desk Market operations within the Convertibility Zone between 7.75 and 7.85, in accordance with Currency Board principles, to promote the smooth functioning of the Linked Exchange Rate System
Key policy signals via
announcement
keynote tender
standing facility
other

Monetary policy communication

Explicit use of forward guidance N/A
Timing / media of policy announcement N/A
Policy announcement and documents N/A
Explaining policy decisions N/A
Dissemination of minutes (timing / media) N/A
Content of minutes N/A
Publication of forecasts 5 N/A
Publication of projected path of policy rate 6 N/A

Reserve requirements: ratios and size

Main functions served N/A
Domestic currency N/A
Foreign currency N/A
Average N/A
Required reserves N/A
Required reserve as % of GDP N/A
Actual reserves N/A
Actual reserve as % of GDP N/A

Main features of reserve requirements

Averaging N/A
Carry-over N/A
Type N/A
Maintenance period N/A
end (day) N/A
Calculation period N/A
end (day) N/A
Lag before maintenance N/A
Vault cash N/A
restrictions N/A
Remuneration N/A
average rate N/A
marginal rate N/A
Framework last changed N/A

Liquidity position and forecasting

Structural Position Surplus
Most volatile factor(s) Capital flows
Most unpredictable factor(s) Capital flows
Forecast horizon(s) 3 days
Frequency Daily
Frequency of revision Daily
Forecast published? Yes

Standing facilities: lending / market ceiling

Name Discount Window
Form Repo
Pricing method For the first 50% of collateral holding: Base rate
For the next 50%: either Base Rate plus 5% or the overnight HKD HIBOR, whichever is the higher 7
Maturity O/N
Access limited by/to Collateral 8
Function(s) Facilitate smooth operation of the interbank payment system and thus preserve systemic stability

Standing facilities: deposit / market floor

Name N/A
Form N/A
Pricing method N/A
Maturity N/A
Access limited by/to N/A
Function(s) N/A

Open market operations: repo or reverse repo

Name/Type 9 N/A
Maturity N/A
Frequency N/A
Pricing method N/A
Access limited by/to N/A
Function(s) N/A

Open market operations: central bank bills

Name N/A
Total issuance N/A
Maturity N/A
Restrictions on possible maturities N/A
Pricing method N/A
Access limited by/to N/A
Discretion left to operational desk N/A

Open market operations: FX swaps

Maturity N/A
Frequency N/A
Pricing method N/A
Access limited by/to N/A
Function(s) N/A

Other significant liquidity management means

Name/Type 10 Liquidity Facilities Framework
Form Term repo, FX swap, credit facilities
Frequency As and when need, upon banks’ requests
Maturity Determined case by case
Pricing Method Determined case by case
Access limited by/to Authorised institutions
Function(s) Maintenance of financial stability

Settlement systems and intra-day liquidity facilities

Settlement system RTGS, since 1996
Intra-day liquidity facility Automatic intraday repo
Charge No charge, with haircut applied
Foreign currency settlement system RMB, USD and EUR RTGS
CLS participation by banks Yes
Other settlement system(s) Yes 11

Collateral

Standing facilities: List of eligible collateral Exchange Fund paper
Standing facilities: Discretion of central bank on collateral 12 Yes
Open market operations: List of eligible collateral N/A
Open market operations: Discretion of central bank on collateral 13 N/A

Dissemination of operational information: liquidity forecast

Forecast published? Yes
Channel(s) Reuters, Bloomberg, and HKMA website
Timing Real time on Reuters and Bloomberg and daily release on website
Remarks

Dissemination of operational information: open market operations

Volume and price published? N/A
Channel(s) N/A
Timing N/A

Dissemination of operational information: standing facilities

Lending facility usage: Channel(s) Reuters, Bloomberg, HKMA website
Lending facility usage: Timing Daily
Deposit facility usage: Channel(s) N/A
Deposit facility usage: Timing N/A

Other information dissemination

Type FX operations 14
Channel(s) Reuters, Bloomberg, HKMA website
Timing Real time

1 The HKMA is responsible for achieving the monetary policy objective including determining the strategy, instrument and operational means for doing so.

2 Describe as well the legal status of the mandate and involvement of government

3 Basic Law; Exchange Fund Ordinance; Functions and Responsibilies in Monetary and Financial Affairs (dated 25 June 2003)

4 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).

5 For instance, economic and inflation forecasts related to policy decision.

6 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.

7 Base Rate is set as either 50 basis points above the lower end of the target range for US Fed funds rate or the average of the five-day moving averages of the overnight and 1-month HIBORs, whichever is higher.

8 Exchange Fund paper.

9 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).

10 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.

11 CMU system – a clearing and settlement system for debt securities.

12 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.

13 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.

14 FX operation refers to market operations due to the triggering of the Convertibility Undertaking and operations within the Convertibility Zone.