Hong Kong Monetary Authority
Encyclopedia
The Hong Kong Monetary Authority or HKMA (金管局) is Hong Kong
's central bank
ing institution (more precisely, currency board
). It is a government authority founded on 1 April 1993 via the consolidation of "Office of the Exchange Fund" and the "Office of the Commissioner of Banking". The organisation reports directly to the Financial Secretary
.
Under the Exchange Fund Ordinance, the HKMA's primary objective is to ensure the stability of the Hong Kong currency, and the banking system. It is also responsible for promoting the efficiency, integrity and development of the financial system.
The HKMA issues banknotes only in the denomination of ten Hong Kong dollars. The role of issuing other banknotes is delegated to the note-issuing banks in the territory, namely the Hong Kong and Shanghai Banking Corporation, Standard Chartered Bank
and the Bank of China
.
of Hong Kong and the bank
ing system are important underpinnings of the Linked Exchange Rate System
.
.
and noticeable features such as the Aggregate Balance, Certificates of Indebtedness and coins issued and the Outstanding Exchange Fund Bills and Notes.
The Interest Rate Adjustment Mechanism is an automatic system that maintains the stability of the Hong Kong dollar exchange rate. Lately the HKMA has been disclosing the forecast change in the
In 1995, Nobel Prize
winning economist Milton Friedman
mistakenly predicted the Hong Kong dollar's demise within two years of the 1997 handover
. He also predicted the absorption of the territory's financial reserves of US$43 billion (HK$335.4 billion) by Beijing, which would not be able to bear the subrogation of Hong Kong's monetary policy to the United States.
As with any monetary system not based on a fiat money (which includes currency boards, currency unions and the traditional Gold Standard) it is impossible to use monetary policy in order to stabilise the business cycle: this means that any macroeconomic adjustment has to be achieved by changes in the prices of assets and labour. In Hong Kong, this is made easier by two factors: the first is the openness of the economy, with an aggregate demand heavily dependent on international trading partners; this reduces the risk of classic liquidity trap
s. The second factor is the scarce political clout of the trade unions, which makes it easier to trim the nominal salaries during recessionary times. Moreover, the high saving rates and the moral stigma attached to bankruptcy have kept relatively low the level of defaults on mortgages even during the deep recessions after the Asian crisis after 1998 and the SARS epidemic in 2002/2003.
Under colonial rule, the HKMA did not place funds with local banks not rated by Moody's Investors Service or Standard & Poor's. Only the three note issuing banks could receive deposits because they had been rated by "objective international standards".
During the Asian financial crisis, currency speculators sold the Hong Kong dollar heavily and shorted local stocks and Hang Seng Index
futures. The government controversially used the exchange fund to acquire HK$120 billion (US$15 billion) worth of blue-chip shares in a two-week market intervention, beginning 12 August 1998 with the aim of punishing and deterring currency speculators. The intervention was widely criticised as being detrimental to the reputation as one of the world's financial centres. Instead of being a regulator, the government has become "a player, a very key player."
In hindsight, one speculator said : "Government intervention raised public confidence in the market when it was near total collapse. It prevented a bigger crisis and saved the market.
Most stocks acquired during that operation were successively disposed with the creation of a tracker fund, the TraHK. That reduced the portfolio of HK equities to 5.3% of the reserves in 2003. However, the percentage crept back and had risen above 10% by the year 2006.
In August 1998, as part of its wider remit to protect the currency, the Authority lent the Thai Government US$
1 billion from the fund as part of a 17 billion bailout organised by the International Monetary Fund
(IMF).
The HKMA's is headquartered in the International Finance Centre
. It purchased 14 floors in tower 2. The 55th, 56th and the 77th to 88th floors were bought for US$
480 million in 2001. An exhibition area, currently containing an exhibit of Hong Kong's monetary history, and a library of the Hong Kong Monetary Authority Information Centre occupy the 55th floor. The 88th floor of the tower contains the office of the Chief Executive of the HK Monetary Authority, and is served by an individual lift.
had been the Chief Executive since the founding of HKMA in April 1993, until 1 October 2009 when he was succeeded by Norman Chan
, for a term of five years. Chan was Director of the Chief Executive's Office.
and IMF in 1997, at an estimated cost of HK$485 million. Yam hoped that hosting the event would cement Hong Kong's status as an international financial centre. He added: "The presence of the world's leading finance ministers, central bank governors and top commercial bankers in Hong Kong so soon after the change of sovereignty will help boost international and local confidence in Hong Kong.
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
's central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
ing institution (more precisely, currency board
Currency board
A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target....
). It is a government authority founded on 1 April 1993 via the consolidation of "Office of the Exchange Fund" and the "Office of the Commissioner of Banking". The organisation reports directly to the Financial Secretary
Financial Secretary (Hong Kong)
Financial Secretary , often abbreviated as FS, is a position of the Government of Hong Kong. The FS assists the Chief Executive in supervising the policy bureaux as directed by the CE, mostly finance and economy-related, and plays a key role in ensuring harmonisation in policy formulation and...
.
Responsibilities
The fund was established and managed originally by the "Currency Ordinance" in 1935. It is now named the "Exchange Fund Ordinance".Under the Exchange Fund Ordinance, the HKMA's primary objective is to ensure the stability of the Hong Kong currency, and the banking system. It is also responsible for promoting the efficiency, integrity and development of the financial system.
The HKMA issues banknotes only in the denomination of ten Hong Kong dollars. The role of issuing other banknotes is delegated to the note-issuing banks in the territory, namely the Hong Kong and Shanghai Banking Corporation, Standard Chartered Bank
Standard Chartered Bank
Standard Chartered PLC is a multinational financial services company headquartered in London, United Kingdom with operations in more than seventy countries...
and the Bank of China
Bank of China (Hong Kong)
Bank of China Limited is the second-largest commercial banking group in Hong Kong in terms of assets and customer deposits, with more than 300 branches in Hong Kong. It was established on 1 October 2001 from a merger of 12 subsidiaries and associates of the Bank of China in Hong Kong, and listed...
.
Policies
The official reservesBank reserves
Bank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in the bank's vault . The central banks of some nations set minimum reserve requirements...
of Hong Kong and the bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
ing system are important underpinnings of the Linked Exchange Rate System
Linked exchange rate
A linked exchange rate system is a type of exchange rate regime to link the exchange rate of a currency to another. It is the exchange rate system implemented in Hong Kong to stabilise the exchange rate between the Hong Kong dollar and the United States dollar...
.
Tools
Since 1995, the HKMA has entered into a stability pact with central banks in Malaysia, Thailand, Indonesia and Australia to engage in repurchase agreements, which provide liquidity on a two-way basis.Infrastructure
The Central Money Markets Unit (CMU), established in the 1990, provide computerised clearing and settlement facilities for Exchange Fund Bills and Notes. It extended the service to other Hong Kong dollar debt securities in late 1993. A seamless interface allow the co-existence of the CMU and the newly launched Real Time Gross Settlement (RTGS) inter-bank payment system. This enables end-of-day "Delivery Versus Payment" services as opposed to Non-DVPNon-DVP
Non-DVP trading is defined as securities trading where a client's custodian will have to release payment or deliver securities on behalf of the client before there is certainty that it will receive the counter-value in cash or securities, thus incurring settlement risk.DVP stands for Delivery...
.
Currency board system
It is included the Linked Exchange Rate SystemLinked exchange rate
A linked exchange rate system is a type of exchange rate regime to link the exchange rate of a currency to another. It is the exchange rate system implemented in Hong Kong to stabilise the exchange rate between the Hong Kong dollar and the United States dollar...
and noticeable features such as the Aggregate Balance, Certificates of Indebtedness and coins issued and the Outstanding Exchange Fund Bills and Notes.
The Interest Rate Adjustment Mechanism is an automatic system that maintains the stability of the Hong Kong dollar exchange rate. Lately the HKMA has been disclosing the forecast change in the
In 1995, Nobel Prize
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
winning economist Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
mistakenly predicted the Hong Kong dollar's demise within two years of the 1997 handover
Transfer of the sovereignty of Hong Kong
The transfer of sovereignty over Hong Kong from the United Kingdom to the People's Republic of China, referred to as ‘the Return’ or ‘the Reunification’ by the Chinese and ‘the Handover’ by others, took place on 1 July 1997...
. He also predicted the absorption of the territory's financial reserves of US$43 billion (HK$335.4 billion) by Beijing, which would not be able to bear the subrogation of Hong Kong's monetary policy to the United States.
As with any monetary system not based on a fiat money (which includes currency boards, currency unions and the traditional Gold Standard) it is impossible to use monetary policy in order to stabilise the business cycle: this means that any macroeconomic adjustment has to be achieved by changes in the prices of assets and labour. In Hong Kong, this is made easier by two factors: the first is the openness of the economy, with an aggregate demand heavily dependent on international trading partners; this reduces the risk of classic liquidity trap
Liquidity trap
A liquidity trap is a situation described in Keynesian economics in which injections of cash into an economy by a central bank fail to lower interest rates and hence to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as...
s. The second factor is the scarce political clout of the trade unions, which makes it easier to trim the nominal salaries during recessionary times. Moreover, the high saving rates and the moral stigma attached to bankruptcy have kept relatively low the level of defaults on mortgages even during the deep recessions after the Asian crisis after 1998 and the SARS epidemic in 2002/2003.
Exchange fund
The fund was established and managed originally by the "Currency Ordinance" in 1935. It is now named the "Exchange Fund Ordinance".Under colonial rule, the HKMA did not place funds with local banks not rated by Moody's Investors Service or Standard & Poor's. Only the three note issuing banks could receive deposits because they had been rated by "objective international standards".
During the Asian financial crisis, currency speculators sold the Hong Kong dollar heavily and shorted local stocks and Hang Seng Index
Hang Seng Index
The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong...
futures. The government controversially used the exchange fund to acquire HK$120 billion (US$15 billion) worth of blue-chip shares in a two-week market intervention, beginning 12 August 1998 with the aim of punishing and deterring currency speculators. The intervention was widely criticised as being detrimental to the reputation as one of the world's financial centres. Instead of being a regulator, the government has become "a player, a very key player."
In hindsight, one speculator said : "Government intervention raised public confidence in the market when it was near total collapse. It prevented a bigger crisis and saved the market.
Most stocks acquired during that operation were successively disposed with the creation of a tracker fund, the TraHK. That reduced the portfolio of HK equities to 5.3% of the reserves in 2003. However, the percentage crept back and had risen above 10% by the year 2006.
In August 1998, as part of its wider remit to protect the currency, the Authority lent the Thai Government US$
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
1 billion from the fund as part of a 17 billion bailout organised by the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF).
Banking stability
Banking Stability mainly depends on the "Banking System and Supervision". A "Three-Tier System" was implemented in the 1980s. Institutions are also managed differently depending on whether they are categorised as Licensed Banks, Restricted License Bank or Deposit-taking Institutions. Overseas banks may also establish local representative offices in Hong Kong.Location
The HKMA's is headquartered in the International Finance Centre
International Finance Centre
The International Finance Centre is an integrated commercial development on the waterfront of Hong Kong's Central District....
. It purchased 14 floors in tower 2. The 55th, 56th and the 77th to 88th floors were bought for US$
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
480 million in 2001. An exhibition area, currently containing an exhibit of Hong Kong's monetary history, and a library of the Hong Kong Monetary Authority Information Centre occupy the 55th floor. The 88th floor of the tower contains the office of the Chief Executive of the HK Monetary Authority, and is served by an individual lift.
The Chief Executive's Committee
Joseph YamJoseph Yam
The Honourable Joseph Yam Chi-kwong, GBM, GBS, CBE, JP is a Hong Kong statistician, economist and civil servant. Yam was the Chief Executive of the Hong Kong Monetary Authority from April 1993 to 1 October 2009.-Biography:...
had been the Chief Executive since the founding of HKMA in April 1993, until 1 October 2009 when he was succeeded by Norman Chan
Norman Chan
Norman Chan , CHAN Tak-Lam Norman, SBS, JP , is a Chinese banker, treasury official, and civil servant. Chan currently serves as the Chief Executive of the Hong Kong Monetary Authority, a position he has held since on 1 October 2009, following the retirement of his predecessor, Joseph Yam...
, for a term of five years. Chan was Director of the Chief Executive's Office.
Other
The Hong Kong Monetary Authority hosted the meeting of the World BankWorld Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
and IMF in 1997, at an estimated cost of HK$485 million. Yam hoped that hosting the event would cement Hong Kong's status as an international financial centre. He added: "The presence of the world's leading finance ministers, central bank governors and top commercial bankers in Hong Kong so soon after the change of sovereignty will help boost international and local confidence in Hong Kong.