Hong Kong Monetary Authority

Currency Board Operations for the Period 27 October - 24 November 1999

1. The Sub-Committee noted that, during the period covered by the report, there had been a substantial inflow of funds into the Hong Kong dollar. Further inflows had continued beyond the reporting period, driven by the generally positive economic news for Hong Kong, the agreement reached between China and the US on the terms of the Mainland's entry into the World Trade Organisation, and perceptions of Hong Kong as a safe haven for the Year 2000. As a result, during the reporting period, the market exchange rate of the Hong Kong dollar had strengthened slightly relative to the convertibility rate, and had continued to strengthen in early December. Interbank liquidity had increased, and local interbank interest rates had shown a general decline, with the lowest spread between US dollar and Hong Kong dollar rates at the one-year horizon since the Asian financial crisis began. Because of the high liquidity, the best lending rate for the Hong Kong dollar had remained unchanged, despite the 25 bp increase in US interest rates. Members noted that high liquidity appeared also to have eased concerns about a tightening of monetary conditions as the Year 2000 approached.

2. The Sub-Committee noted that changes in the monetary base had been fully matched by corresponding changes in foreign reserves in accordance with the Currency Board arrangements.

3. The report on Currency Board operations for the period under review is at Annex A.

Report on Selected Millennium Indicators for the period 27 October - 24 November 1999

4. The Sub-Committee noted the regular monthly information paper on selected market indicators reflecting the Year 2000 positioning of market participants. Members observed that the indicators continued to be generally stable and in line with those for other markets. Cash holding by the general public had continued to increase, although it appeared to be attributable more to economic recovery than to Year 2000 concerns, and had remained stable as a percentage of Hong Kong dollar M1. A rise in 2-month HIBOR rates had occurred at the end of October (along with a further, similar rise in 1-month rates at the end of November), reflecting a premium on borrowing straddling the new year: a similar trend was observable for other major currencies. Members noted that there had so far been no use of the enlarged Discount Window facilities introduced on 15 November and that, in fact, there had been a decline even in the use of normal Discount Window facilities owing to the high level of the Aggregate Balance.

Implications of Electronic Money

5. The Sub-Committee considered a paper examining the nature and monetary implications of electronic payment instruments. Members noted that, while there was great variety among these different instruments, and while not all of them could be clearly defined as money, their growing popularity had implications for the use of money generally, and raised questions about whether the growth of electronic money would undermine monetary control.

6. Members concluded that, given the present monetary arrangements in Hong Kong and the importance of the Aggregate Balance, rather than cash, in the operation of the Currency Board system, it appeared unlikely that the growth of electronic money in Hong Kong would undermine monetary control. Members further considered that it was not desirable or necessary at this stage to grant legal tender status to electronic cash. They observed that practical problems would in any case arise if all businesses were required to install machines to handle the various forms of electronic cash now in use.

7. Members examined the question of whether some form of backing requirement should be introduced for electronic payment instruments that were close substitutes for cash. They considered that, given the current early stage of development of electronic money, such a requirement was not necessary. Members also concluded that it would be premature to introduce legislation to require issuers to redeem electronic money on request for conventional payment instruments, although measures of this kind might be worth considering in the future.

8. Members considered the implications of the growth of electronic money on seignorage, concluding that the potential loss of seignorage under current conditions was not particularly large. Nor was it likely to affect the robustness of the Currency Board arrangements.

9. With regard to the question of whether the HKMA should look into the feasibility of participating in the issue of electronic payment instruments, the Sub-Committee advised that this was undesirable at present, since it might have the effect of stifling private sector initiatives. They observed, however, that there might be a case for returning to this question at some time in the future, particularly if the market for electronic money developed to the point at which consideration of a unified system became relevant.

Annex A

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