The Hong Kong Monetary Authority (HKMA) could take the exceptional step of mopping up the large pool of Hong Kong dollars by issuing more Exchange Fund paper, according to its chief executive, Joseph Yam Chi-kwong.
This could mean the authority may use the Exchange Fund paper to absorb capital inflow instead of applying penalty charges to banks with substantial Hong Kong dollar holdings.
The HKMA launched the bills and notes programme, which has a maturity ranging from three months to 10 years, in 1990.
As one of seven technical measures introduced in 1998 to strengthen the authority's ability to defend the linked exchange rate system, in which the Hong Kong dollar is pegged at $7.80 to the US dollar, the HKMA added HK$123.91 billion worth of Exchange Fund paper fully backed by foreign reserves into the monetary base.
At the time, it promised that no extra paper, except for the roll-over, would be issued unless there was capital inflow.
However, the recent capital inflows may force the authority to issue more Exchange Fund paper for banks.
The HKMA has bought US$6.7 billion from banks since September last year because of capital inflows to the stock and property markets and speculation on the Hong Kong dollar. This resulted in the aggregate balance recording a high of HK$52 billion yesterday instead of the usual less than $1 billion.
