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SCMP Reporter

The Hong Kong Monetary Authority will issue a further HK$18 billion in Exchange Fund bills, a special form of debt, to  satisfy demand and mop up liquidity in the banking system.
Andrew Fung Hau-chung, a general manager at Hang Seng Bank, said the ample liquidity in the banking system prompted increasing demand.
'Banks can get some return from the Exchange Fund bills. Even [though the yield is low], it is better than sitting on too much idle  funds,' he said.
When banks buy the bills, they are not required to set aside capital to back  these holdings and  can earn  interest on them.
The HKMA said yesterday banks had been seeking more of such paper to help manage liquidity amid the continuing global credit crunch.
'The strong demand for the paper is reflected in the very low yield of short-dated Exchange Fund paper,' it said.
The average accepted yield of a three-month Exchange Fund bill tendered yesterday was 0.18 per cent. By comparison, the three-month interbank rate ranged between 0.7 per cent  and 0.9 per cent yesterday.
The HKMA will issue HK$12 billion worth of extra Exchange Fund bills on January 13, half by increasing the size of a regular issue of three-month bills to HK$8.145 billion and half by a separate issue of 84-day paper.
It will add  a further HK$6 billion of the  bills by expanding the regular issue on January 20.
The de facto central bank has been pumping liquidity into the banking system  since the collapse of Lehman Brothers last September, to help local banks seeking liquidity.
A dealer said banks preferred Exchange Fund paper, as  it could be pledged as collateral  to obtain funding from the discount window - a lending facility between the HKMA and banks.
The aggregate balance will be reduced to HK$157.44 billion from  HK$175.47 billion after the additional paper has been issued.
The HKMA said it did not expect the additional bills to have a significant impact on liquidity  conditions and interest rates.
'The HKMA will monitor the situation closely and stand ready to take appropriate action to maintain adequate liquidity within the system if necessary,' it added.
The one-month  interbank rate  was 0.2 per cent  yesterday, while the Hong Kong dollar stood at 7.7538 to the US dollar.
Low yield
Rather than sit on idle funds, banks get some return from the paper
Average accepted yield of a three-month Exchange Fund bill tendered yesterday: 0.18%



HKMA to issue HK$18b Exchange  Fund bills to meet bank demand