To the Monetary Authority, the passive purchase of US dollars from the banks through the creation of Hong Kong dollars will mean an increase in US dollar assets that earn some interest and a corresponding increase in Hong Kong dollar liabilities that cost no interest.

This is the message from the authority's Chief Executive Joseph Yam in his latest Viewpoint column posted on its website today.

Mr Yam said that when there are inflows into the Hong Kong dollar to the extent that US dollars are put to the authority, the Aggregate Balance in the clearing accounts of the banks (a key component of the Monetary Base) will increase.

The size of the Aggregate Balance is determined by the amount of US dollars put to the authority.

Mr Yam said this is a mechanical process involving no discretion on the part of the authority, other than the determination of the level of the exchange rate at which to accept offers in US dollars.

The larger the Aggregate Balance, the larger the profits

The Aggregate Balance can become very large if there is continuous inflow into the Hong Kong dollar and US dollar is put to the authority. The authority will be making profits for the account of the Exchange Fund. The larger the Aggregate Balance, the larger the profits will be, he said.

"With an interest rate differential of 1% and an Aggregate Balance of, say, $50 billion, the authority makes a profit of $1.37 million a day or $500 million a year for the account of the Exchange Fund," Mr Yam said.

A large Aggregate Balance means very loose monetary conditions, which may encourage monetary expansion to the extent of generating inflationary pressures.

"At a time when credit demand is still depressed, and there is still high unemployment and substantial deflation (measured by the year-on-year changes in the consumer price indices), they are not of immediate concern," he said.

"But obviously we should all bear in mind the possibility of another bubble developing. I hope the lessons learnt from the past are still fresh in our minds. We have all seen how the bursting of a bubble can be very damaging on the economy as a whole."