Hong Kong Monetary Authority (HKMA)

The de facto central bank of Hong Kong

What is the Hong Kong Monetary Authority (HKMA)?

The Hong Kong Monetary Authority (HKMA) is a government entity that was founded on April 1, 1993 as the de facto central bank and Hong Kong’s currency board. HKMA was established following the merger of the Office of the Commissioner of Banking and the Office of the Exchange Fund.

 

Hong Kong Monetary Authority (HKMA)

 

As Hong Kong SAR’s de-facto central bank, HKMA is tasked with ensuring the stability of the Hong Kong dollar and the entire economy through monetary policy. It is also tasked with controlling inflation and developing Hong Kong’s financial systems to ensure the free flow of money. HKMA ensures the stability of the Hong Kong dollar (HKD) by linking the HKD to the U.S. dollar, helping maintain a stable exchange dollar between the two dominant currencies.

 

Summary

  • The Hong Kong Monetary Authority (HKMA) maintains monetary and banking stability as the de facto central bank of Hong Kong.
  • HKMA is tasked with maintaining the stability of the Hong Kong dollar and the economy through monetary policies.
  • The Financial Secretary is mandated to appoint the monetary authority, who heads the HKMA.

 

Understanding the Hong Kong Monetary Authority

The Hong Kong Monetary Authority was established subject to the Legislative Council’s amendment to the Exchange in 1992. The amendment empowered the Financial Secretary to appoint a Monetary Authority, who also acts as the Chief Executive of the HKMA. The chief executive serves a five-year term, and it is renewable with no term limits.

The Monetary Authority assists the Financial Secretary in performing his responsibilities under the Exchange Fund Ordinance and other ordinances, such as The Deposit Protection Scheme Ordinance and the Banking Ordinance.

The Exchange Fund Advisory Committee (EFAC), established under the Exchange Fund Ordinance, advises the Financial Secretary on the control of the exchange fund. EFAC performs its advisory role with the assistance of five committees that monitor specific areas of the HKMA’s mandate to make recommendations to the Financial Secretary through IFAC.

 

Functions of the Hong Kong Monetary Authority

Hong Kong serves as an important financial hub for the People’s Republic of China; it hosts dozens of multinational corporations. As the currency board and de facto central bank, HKMA is tasked with maintaining Hong Kong as an international financial hub by performing the following functions:

 

1. Maintain Currency Stability

The HKMA maintains the stability of the Hong Kong dollar within the framework of the Linked Exchange Rate System (LERS). The system works to stabilize the exchange rate between the U.S. dollar and the Hong Kong dollar and maintains the parity between the two currencies within a tight range.

The note-issuing banks are required to issue new notes after depositing an equivalent value of U.S. dollars with the HKMA. It helps stabilize the exchange rate and keep currency fluctuations at a minimum. The three commercial banks authorized to issue banknotes in the region include the Bank of China, the Hong Kong and Shanghai Banking Corporation, and Standard Chartered Bank.

 

2. Preserve Integrity of the Financial System

Hong Kong is an important financial hub that hosts over 70 of the 100 largest banks in the world. It is also home to over 29 multinational banks that operate their regional headquarters in the territories. HKMA promotes and regulates the integrity of the financial system by supervising banks and other institutions that are in the business of taking deposits, lending, managing investments, and providing insurance services.

HKMA requires all financial institutions to perform their functions prudently, maintain adequate capital, and keep their risks at optimal levels. It also reviews the regulatory framework often to ensure the regulations are in line with international banking standards.

 

3. Manage Exchange Fund

The Exchange Fund is the investment arm of HKMA. The fund was established in 1935 to provide backing to the HK dollar. The fund’s mandate now includes the management of private equity, foreign currency reserves, and fiscal reserves.

As of December 2019, the Exchange Fund manages over HK$4 trillion worth of assets. The fund runs three main portfolios – i.e., backing portfolio, investment portfolio, and long-term growth portfolio. Overall, it helps maintain the stability and integrity of the territory’s monetary and financial systems.

 

4. Keep Hong Kong as an International Financial Center

Hong Kong operates as an autonomous territory, with a reported annual GDP of $362 billion as of 2018. HKMA is tasked with maintaining the territory as an important financial hub in the Asian region and the world. The authority performs its function by maintaining and developing the region’s financial infrastructure to meet international standards.

For example, HKMA developed the Faster Payment System in 2018, which is a real-time gross settlement payment system that integrates electronic payments, traditional banks, and digital wallet operators.

The payment system allows users to perform instant money transfers to other users using their phone number, email, or QR code with the user’s numeric identifier. Users can also initiate transfers using the recipient’s full name and account number.

 

Related Readings

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • European Central Bank (ECB)
  • Fiscal Policy
  • Federal Reserve (The Fed)
  • Inflation Targeting

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