Hong Kong Monetary Authority

Currency Board Operations for the Period 30 September - 26 October 1999

1. The Sub-Committee noted that during the period under review the market exchange rate for the Hong Kong dollar had eased from 7.7680 to 7.7707, in line with the movement of the convertibility rate in respect of the Aggregate Balance. Some outflow of funds occurred in the first half of October in response to relatively low Hong Kong dollar interest rates. Further outflows occurred in the middle of October following a correction in the stock market. The convertibility undertaking was triggered on 1 October and during 13-15 October. As interest rates edged up in the third week of October, the flow of funds reversed. By the end of the reporting period the Aggregate Balance, which had in mid-October been forecast to fall to a negative level, was at HK$0.88 bn.

2. The Sub-Committee noted that changes in the monetary base throughout the period under review had been fully matched by corresponding changes in foreign reserves in accordance with the rules of the Currency Board system. The report on Currency Board operations for the period under review is at Annex A.

Report on Selected Millennium Indicators for the period 30 September - 26 October 1999

3. The Sub-Committee noted the regular monthly information paper on selected market indicators reflecting the Year 2000 positioning of market participants. Members noted that there had been a detectable increase in the three-month interbank rate for the Hong Kong dollar when trading first spanned into the new year, although this did not appear to be any sharper than for other currencies. Members also observed that the acceleration of the growth rate in cash holding by the public seemed to be attributable to the economic recovery rather than to any Year 2000 concerns.

Currency Options and the Defence of a Fixed Exchange Rate Regime

4. The Sub-Committee considered a paper examining the theory and practical implications of using currency options to assist in maintaining exchange rate stability under the currency board arrangements in Hong Kong. Members examined the growth and mechanics of options trading, the use of currency options in monetary management, and the various forms of currency options that might be suitable to Hong Kong's needs and conditions. The Sub-Committee considered that the writing of currency options by the HKMA appeared to be technically feasible and might be consistent with currency board principles if properly designed. The Sub-Committee further observed that, in theory at least, the writing of currency options by a central bank could be a useful tool in helping to stabilise exchange markets under certain conditions. The Sub-Committee concluded, however, that the theoretical benefits that might be offered by currency options seemed to be outweighed by the disadvantages that they could bring. These disadvantages included the complications that the writing of options would bring to the currency board system, and the possibility of negative perceptions that the HKMA was engaging in risky activities or lacked the means to support the currency board system in the spot market. The Sub-Committee also considered that the writing of options was not necessary in current conditions.

Hong Kong: Macroeconomic Impact of Recent Fiscal Measures

5. The Sub-Committee noted an information paper on the counter-cyclical impact of fiscal policy in Hong Kong's recent recession.

Annex A

Hong Kong Monetary Authority
1 December 1999

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