Hong Kong Monetary Authority

Local unit rises as Monetary Authority bares HK$6b issue

PUBLISHED : Saturday, 05 January, 2008, 12:00am
UPDATED : Saturday, 05 January, 2008, 12:00am

The Hong Kong dollar touched a high of HK$7.796 to the US dollar yesterday after the de facto central bank said it would launch an additional HK$6 billion in an Exchange Fund paper next week for the first time since 1998.

Analysts said they expected the currency would hover at the HK$7.79 level in light of firmer interbank rates as the aggregate balance in the banking system would be reduced from HK$10.6 billion to HK$4.6 billion on January 14 after the note issuance.

The Hong Kong Monetary Authority said yesterday it would sell three-month bills worth HK$6 billion in a special tender next Friday.

Exchange Fund paper is a special form of debt issued by the HKMA that banks can use as collateral to make short-term borrowings from the authority to settle interbank payments.

'The issuance of the additional Exchange Fund paper will help meet demand and satisfy banks' intraday liquidity needs,' HKMA chief executive Joseph Yam Chi-kwong said.

He said demand for the short-term Exchange Fund paper had increased in recent months alongside the rise in equity-market transactions, so issuing more Exchange Fund papers would help smooth settlement between banks.

The authority can issue additional Exchange Fund papers only when there is capital inflow, following the introduction of measures to strengthen the currency peg in 1998.

The Exchange Fund paper's outstanding balance is about HK$139 billion. The additional issuance effectively will shift funds within the monetary system from aggregate balance to the Exchange Fund paper, reducing the former to about HK$4.6 billion after the paper is issued.

The Hong Kong dollar rose to as high as HK$7.796 per US dollar from HK$7.806, trading at about HK$7.7977 in the late session.

'The market has already reacted to the news [on Thursday, after Mr Yam gave a preview on issuing more Exchange Fund papers],' said Andrew Fung Hau-chung, a deputy general manager at Hang Seng Bank.

Mr Fung said the overnight rate could stand at about 1.5 per cent to 2.5 per cent when the aggregate balance is reduced to HK$4.6 billion.

Closing little changed at about 1.5 per cent yesterday, the one-month interbank rate rose to 3.275 per cent from 2.975 per cent.

Kelvin Lau Kin-heng, a Standard Chartered Bank economist, predicted some market jitters in the near term but no significant impact.

Individual market players said the HKMA's move was a way to interfere indirectly with interest rates despite its avowed no interest-rate policy.


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