Hong Kong: Record of Discussion of Meeting of Exchange Fund Advisory Committee Currency Board Sub-Committee held on October 25, 2012

The following is issued on behalf of the Hong Kong Monetary Authority:

(Approved for issue by the Exchange Fund Advisory Committee on November 28, 2012)

Report on Currency Board Operations (June 20, 2012 - October 4, 2012)

The Sub-Committee noted that the Hong Kong dollar exchange rate remained stable during the review period. There were only small fluctuations in the exchange rate, mainly reflecting equity-related demand for Hong Kong dollars, as well as liquidity management of banks towards the end of September.The announcements of the European Central Bank to undertake Outright Monetary Transactions and of the US Federal Reserve to purchase additional agency mortgage-backed securities (i.e. the third round of quantitative easing) had led to some strengthening of the Hong Kong dollar exchange rate during the review period.

The Sub-Committee noted that the Monetary Base increased from HK$1,081.33 billion to HK$1,103.29 billion during the review period, largely due to the rise in Certificates of Indebtedness.

The Sub-Committee noted that, in accordance with Currency Board principles, changes in the Monetary Base had been fully matched by corresponding changes in foreign reserves.

The Report on Currency Board Operations for the period under review is at Annex.

The Sub-Committee noted that after the review period, the spot rate of Hong Kong dollar against US dollar strengthened to 7.75 on
October 19. The strong-side Convertibility Undertaking was triggered during New York hours that day, and there were three more triggerings on October 23. As a result, the Aggregate Balance increased by about HK$14.36 billion to HK$163.0 billion on October 25, the date of the meeting of the Sub-Committee. The Sub-Committee noted that the Hong Kong Monetary Authority would remain vigilant of market developments and maintain stability of the Hong Kong dollar in accordance with the Currency Board mechanism.

Monitoring of Risks and Vulnerabilities

The Sub-Committee noted that market worries about Greece and Spain had resurfaced. The market was concerned that Greece might need to undergo another round of debt restructuring amid repeated failure to meet its austerity targets, while Spain might not be able to sustain its austerity and reform efforts in the face of growing financing difficulties and political instability in its autonomous regions.

The Sub-Committee noted that in the US, the decline in unemployment rate in September was not confirmed by non-farm payroll employment growth, casting doubt on the extent of labour market improvement. Fiscal uncertainties remained the biggest drag on US growth.

The Sub-Committee noted that in Hong Kong, while recent data releases suggested increased downside risks to growth, the local property market continued to see a brisk rebound in trading activities and further gains in housing prices. Overheating in the property market continued to pose risks to financial and macroeconomic stability.

Change in Hong Kongs current account balance

The Sub-Committee noted a paper on the underlying causes for the change in current account balance in Hong Kong from 2008 to the first half of 2012. The Sub-Committee noted that the change in current account balance over the period mainly reflected the decrease in savings rate caused by strong domestic consumption. The study also showed that the increase in net housing wealth had contributed to the consumption growth.