The Hong Kong Monetary Authority has written to nine supranational institutions encouraging them to issue Hong Kong dollar bonds with longer maturities in a bid to curtail opportunities for speculative activity. The HKMA last night said it was asking the institutions, which include such bodies as the World Bank and Asian Development Bank, to confine future issues of Hong Kong dollar bonds to maturities of three years or more so the currency swaps attached to such issues could not be used by speculators to accumulate Hong Kong dollars for selling. HKMA chief executive Joseph Yam Chi-kwong yesterday told a Legislative Council financial services panel meeting that the Government noticed some speculators had accumulated up to HK$40 billion in this way since the beginning of the year. That explained why the HKMA had, during the latest speculative attack on the currency, opted not to sharply increase short-term interest rates to increase the cost of borrowing. Supranational bodies always swap the proceeds from their Hong Kong dollar debt issues into United States dollars for their own financing commitments. Speculators might act as a swap counterparty if these swaps carried maturities short enough to fit into their manipulative action plans. The longer the maturity, the higher the cost of taking the swaps. An HKMA spokesman said the authority still welcomed debt issues by multilateral agencies in Hong Kong, which had provided an important impetus for the development of the local debt market. But he said the HKMA believed longer-term issues could better enhance the depth of the market. Legislators asked Mr Yam if he aimed to strengthen the HKMA's function as a true central bank in the wake of the intervention by the Exchange Fund in the stock and futures markets. He said that, in the area of monetary management, the HKMA had a clearly defined objective to maintain Hong Kong's exchange rate stability. He said the HKMA would never use the discretionary powers - possessed by other central banks - to raise interest rates for the purpose of taming inflation, or to increase money supply to boost the economy. Mr Yam said the discretion vested with the HKMA in the area of monetary management had been reduced after the implementation of its seven-point package, which was unveiled on September 5 in a bid to purify the SAR's currency board system. The only discretion left was the power to set the base rate for the newly launched discount window, he said. The HKMA was consulting the Hong Kong Association of Banks and academics in an effort to work out a transparent and reasonable methodology to determine the base rate. Mr Yam defended comments he made earlier that the HKMA would eventually move the rate at which it would undertake to all licensed banks to convert Hong Kong dollars in their clearing accounts into US dollars from HK$7.75 to HK$7.80 per US dollar. He believed Hong Kong's currency board would work best if the two important components of money supply - bank notes and banks' clearing balances - were fully backed by foreign reserves at the same exchange rate. Mr Yam said the chaos sparked by the market's misunderstanding of his comments had ended and the US$1.2 billion which flowed out on Monday had returned. Mr Yam, answering questions from legislators, admitted he might have misjudged the situation when he made the very sensitive comment. Bank and corporate treasurers had told the HKMA it would take about six months for them to settle, unwind or square stop-loss or arbitrage positions set at HK$7.75 per US dollar.