Promise. HKMA promises to buy US dollars from licensed banks at the level of HK$ 7.75 to US$ 65,438 +0 (strong exchange guarantee [at the exchange rate of HK$ 7.75, HKMA promises to convert US dollars into Hong Kong dollars at the linked exchange rate]] and sell US dollars to licensed banks at the level of HK$ 7.85 to US$ 65,438 +0 (weak exchange guarantee [refers to the guarantee that HKMA will contact HKMA when the Hong Kong dollar weakens to a certain level] The purpose of these market operations is to ensure the smooth operation of the currency and foreign exchange markets.
Operation of linked exchange rate system
Hong Kong's linked exchange rate system belongs to the currency board system. Under this system, the flow and stock of the monetary base are fully supported by foreign exchange reserves. In other words, any change in the monetary base must be fully coordinated with the corresponding changes in foreign exchange reserves calculated at a fixed exchange rate. In Hong Kong, the monetary base includes:
Certificate of indebtedness to support notes issued by note-issuing banks.
Paper money and coins issued by the government.
Summary balance, that is, the total balance of the settlement account opened by the bank in HKMA.
Exchange Fund Bills and Notes are issued by HKMA on behalf of the Government.
Most banknotes in Hong Kong are issued by three note-issuing banks. According to the law, when issuing banknotes, note-issuing banks must submit the US dollar equivalent to HKMA at the exchange rate of HK$ 7.80 to US$ 65,438+0, and record it in the account of the Exchange Fund, so as to purchase debt certificates as support for the banknotes issued. Therefore, the Hong Kong dollar is fully backed by US dollars held by the Exchange Fund. On the contrary, when Hong Kong dollar bills are recovered, HKMA will redeem them.
In return for the certificate of indebtedness, the bank will recover the equivalent amount of US dollars from the Exchange Fund. As for the banknotes and coins issued by the government through HKMA, the correspondent bank is responsible for keeping them and distributing them to the public. The transactions between HKMA and the correspondent bank are also settled in US dollars, and the exchange rate is HK$ 7.80 to US$ 65,438 +0.
According to the operating mechanism of the currency board system, the only situation that will change the Aggregate Balance is that HKMA will take corresponding actions due to the inflow or outflow of Hong Kong dollars. On May 8, 2005, 18, HKMA launched a strong exchange commitment, committing 7.75 RMB to 1.
We bought RMB100000 yuan from a licensed bank, and announced that we would move the current exchange rate of weak exchange guarantee from HK$ 7.80 to HK$ 7.85, so that the two-way exchange guarantee between strong and weak exchange will operate symmetrically around the linked exchange rate of HK$ 7.80. Within the exchange range set by the strong convertibility undertaking and the weak convertibility undertaking, HKMA can choose the following ways to conduct market operations according to the operating principles of the currency board system.
This has promoted the smooth operation of the currency and foreign exchange markets. The introduction of strong convertibility guarantee for buying dollars can eliminate the uncertainty of the strength of the Hong Kong dollar exchange rate and make funds flow into or out of the Hong Kong dollar more quickly according to the price difference between the Hong Kong dollar and the US dollar. Under the currency board system, the inflow or outflow of funds will adjust the interest rate instead of the exchange rate. If banks sell foreign currency (US dollars in Hong Kong) linked to local currency to the currency board in exchange for local currency (that is, capital inflow), the monetary base will increase. If banks buy foreign currency from the currency board (that is, capital outflows), the monetary base will shrink. The expansion or contraction of the monetary base will cause the local interest rate to fall or rise respectively. This change in the monetary situation will automatically offset the impact of the original capital inflow or outflow, while the exchange rate remains stable. This is a fully automated mechanism.
In order to reduce excessive interest rate fluctuations, HKMA will provide liquidity through the discount window. Banks can use Exchange Fund bills and bonds and other eligible securities as collateral, sign repurchase agreements, and borrow overnight liquidity from HKMA through the discount window. The basic interest rate of the discount window-that is, the basic interest rate for calculating the discount rate applicable to the repurchase agreement-is determined according to the pre-published formula, which is based on the United States.
Based on the target interest rate of the federal funds and the Hong Kong Interbank Offered Rate. As exchange fund bills and bonds are fully backed by foreign exchange reserves, the liquidity of the Hong Kong dollar generated by this process is automatically supported by foreign exchange reserves, which fully conforms to the operating principle of the currency board system.
Source: HKMA website