Regulations in Hong Kong: The Hong Kong Monetary Authority

What is HKMA?

As the central banking institution, the Hong Kong Monetary Authority is responsible for maintaining the city’s monetary and banking stability. The Hong Kong Monetary Authority (HKMA) was established on 1 April 1993, as a merger of the city’s Office of the Commissioner of Banking, and Office of the Exchange Fund. Governed by the Exchange Fund Ordinance, and the Banking Ordinance, the HKMA functions as Hong Kong’s currency board, and as its de-facto central bank – making it responsible for the stability of the city’s banking system and monetary policy, and the issuance of currency (Hong Kong dollars). The HKMA’ s current chief executive is Norman Chan – at an organizational level, the HKMA is overseen by Hong Kong’s Financial Secretary, currently Paul Chance Mo-po.

What Does the Hong Kong Monetary Authority Do?

According to its own policy statement, the HKMA’s objectives are:

• Maintaining Hong Kong’s monetary stability through the Linked Exchange Rate system.
• Promoting the stability and integrity of Hong Kong’s financial system – including its banking system
• Maintaining Hong Kong’s status as an international financial center – including the development of the city’s financial infrastructure
• Managing Hong Kong’s Exchange Fund

Beyond the general responsibilities of a central bank and monetary authority, the four policy objectives of the HKMA involve the following unique functions:

Monetary Stability

As part of its responsibility to promote monetary stability, the Hong Kong Monetary Authority controls the following financial functions:

• Money Printing: The HKMA delegates the responsibility of issuing Hong Kong banknotes to three commercial banks, HSBC, the Bank of China, and the Standard Chartered Bank. HKD notes are issued in denominations of $10, $20, $50, $100, $500, and $1000.
• Interest Rates: HKMA uses an automatic interest rate adjustment mechanism to maintain the stability of the exchange rate. When demand for HKD assets decreases and subsequently weakens the conversion rate, HKMA will move to purchase HKD from banks – and in doing so, contract the Monetary Base, create capital inflows, and promote stability. The reverse also applies: HKMA will sell HKD to banks, expand the Monetary Base, and so lower interest rates.
• Linked Exchange Rate System: As part of its mission to maintain currency stability, the HKMA uses the Linked Exchange Rate System that closely pegs the Hong Kong dollar (HKD) to the United States dollar (USD). In practice, that rate works out at around HKD7.80 to USD1. The Linked Exchange Rate System requires Hong Kong’s Monetary Base to be fully backed by foreign reserves, and fully match changes in those foreign reserves. To meet this backing requirement, HKMA uses the Exchange Fund, which is explained in greater detail below.

Hong Kong Monetary Authority And The Exchange Fund

HKMA operates Hong Kong’s Exchange Fund, which is used to affect the exchange value of the HKD, and provide backing to the country’s currency. Beyond facilitating the fund’s statutory functions, HKMA actively manages its assets on a day-to-day basis, which mainly constitute interest-bearing instruments and foreign currency equities.

The investment strategy taken by the Hong Kong Monetary Authority broadly mirrors that of other central banking authorities – that is, a long-term approach involving a wide range of currencies and instruments. The Exchange Fund is split into two portfolios: the Backing Portfolio which ensures Hong Kong’s Monetary Base is backed by USD assets, and the Investment Portfolio, which focuses on preserving value for future generations of Hong Kong residents.

Hong Kong Monetary Authority And Banking Stability

HKMA’s policy objective of maintaining banking stability means that it must ensure Hong Kong’s financial institutions are resilient to shocks, respond appropriately to crises, and remain capable of providing the services the economy needs. HKMA also works to ensure that, in the worst case scenarios, financial institutions which fail to do so in an orderly manner, without adverse damage to Hong Kong’s economy.

HKMA’s wider supervisory responsibilities to Hong Kong’s banking system include oversight of financial market infrastructures, implementation of international standards, and anti money laundering policies.

International Financial Center

As part of its policy to promote Hong Kong as an international financial center, the Hong Kong Monetary Authority adopts several strategies and works in combination with a range of associated government authorities. Beyond the general development of the city’s financial infrastructure, HKMA specifically promotes initiatives which strengthen the competitiveness of its financial services, and maintains active participation in global financial and banking forums.

HMKA and Fintech

Given the increasing importance of fintech on the global financial landscape, HKMA actively works to facilitate its healthy development and implementation across Hong Kong. To coordinate those efforts, HKMA set up the Fintech Facilitation Office (FFO) in 2016: a platform dedicated to fintech research and the nurture of technology talent, the FFO also serves as a space for market participants to interface with the authority over fintech issues.

The Fintech Supervisory Sandbox (FSS) is a prominent FFO initiative. The FSS is a platform for Hong Kong’s banks and their partner tech firms to test fintech tools with a limited group of participating customers, and without the need to achieve full Hong Kong Monetary Authority compliance. Financial institutions can use the FFS to gather data and feedback – and use that to expedite the implementation of fintech across Hong Kong.