Hong Kong is an exception to the general rule that it is only the central bank that issues legal currency and that it answers only to the government that owns it.
In these countries there cannot be any question about sovereign control over the sensitive function of issuing bank notes. Hypothetically, at least, that has not been the case in Hong Kong. Three commercial banks issue our bank notes, subject to conditions under an arrangement dating back to colonial times when there was no central banking authority.
The Hong Kong Monetary Authority, the city's de facto central bank, has seen a need to tighten the arrangement to protect Hong Kong's interests. It has closed a potential loophole in sovereign control by adding a condition to the note-issuing authorisations of HSBC and Standard Chartered, both London-based, and Bank of China Hong Kong.
Citing the more active profile of foreign sovereign investment funds in recent years, the HKMA effectively banned a foreign government-controlled entity, either alone or with associates, from holding or controlling 20 per cent or more voting power or bringing any influence to bear on the management of the three note-issuing banks.
A government source denied the new rule targeted Temasek, the investment arm of the Singapore government, a significant shareholder in Standard Chartered and the Bank of China, which controls BOC (Hong Kong), citing concerns that institutional investors actively trading in HSBC shares may also invest on behalf of foreign governments.
The move raises the question why it was not thought necessary earlier, given Hong Kong's rather peculiar note-issuing arrangements in this day and age. During most of its colonial history Hong Kong had no central banking authority. Instead there was an arrangement under which HSBC, Standard Chartered and the defunct Mercantile Bank were given the responsibility of issuing notes. The banks backed their issues with exchange fund deposits in US dollars. To this day the government is responsible only for issuing coins, except that the HKMA has issued HK$10 notes.