2003 Research Report

A Reappraisal of the Form and Functions of the Hong Kong Monetary Authority, the Usage of the Exchange Fund, and Related Aspects of Hong Kong’s Fiscal and Foreign Exchange Policies

31 July 2003

The Hong Kong Monetary Authority is unusual among central banking institutions in its structure and in being under the close control of the Financial Secretary; tensions have arisen in the recen past over its spending; and there is room for doubt as to whether the HKMA is properly empowered to carry out all the functions expected of it. Meanwhile the Excahnge Fund, which, among other things, finances the HKMA, appears to have excess captial, yet still retains all of its annual surpluses. A review of the legal structure, governance and financial arrangements of the HKMA and Exchange Fund, and an examination of wehther surplus moneis might be employed to better effect elsewhere, seem desirable. Rules of thumb concerning the need for a fiscal reserve, the aversion to government borrowing and the desirability of maximising foreign reserves are examined, and found to lack a solid economic basis; there are also ripe for review.