Link upgrade: Monetary Authority Chief Executive Joseph Yam announces meausres to improve the operation of the Link Exchange Rate System.

Refinements to the operation of the Linked Exchange Rate System will be introduced to remove uncertainty, boost the smooth functioning of money and foreign exchange markets, and reduce the Hong Kong dollar's use as a vehicle for speculation on renminbi revaluation.

Monetary Authority Chief Executive Joseph Yam today announced the three refinements as:

* the introduction with immediate effect of a strong-side Convertibility Undertaking by the authority to buy US dollars from licensed banks at 7.75;

* the shifting of the existing weak-side Convertibility Undertaking by the authority to sell US dollars to licensed banks from 7.8 to 7.85, so as to achieve symmetry around the Linked Rate of 7.8. This shift will be achieved in a gradual manner over five weeks by moving the exchange rate of the weak-side Convertibility Undertaking by 100 pips on every Monday starting with 7.81 on May 23 until it reaches 7.85 on June 20; and,

* within the zone defined by the levels of the Convertibility Undertakings, the authority may choose to conduct market operations consistent with Currency Board principles. These market operations shall be aimed at promoting the smooth functioning of the Linked Exchange Rate System, for example, by removing any market anomalies that may arise from time to time.

The improvements were discussed and approved by the Currency Board on May 13, with the agreement of the Financial Secretary Henry Tang following consultation with the Exchange Fund Advisory Committee today.

No Linked Exchange Rate System change

Mr Tang said the refinements will contribute to enhancing monetary and financial stability which is clearly in the public interest.

"The Government has no plan or intention to change Hong Kong's Linked Exchange Rate System," he said, adding the refinements have taken into account changing market conditions and the recent experience in the operation of the system.

He said the 12-month Hong Kong dollar forward points and the 12-month RMB non-deliverable forward points have been moving on a similar trend, while the aggregate balance is around $4 billion, eight times higher than the normal range of $500 million.

Mr Yam said the high aggregate balance in the past 18 months has led to low interest rates, with difference in Hong Kong and US interest rates remaining at around 1%.

Removing uncertainty

Although Hong Kong's monetary conditions have been healthy, he said it is time to remove uncertainty on the strong side and improve the operating system as the economy is picking up and the city has been out of deflation since early this year.

"The introduction of the Convertibility Undertaking on the strong-side should remove uncertainty about the extent to which the exchange rate may strengthen. It should also reduce the usage of the Hong Kong dollar as a vehicle for speculation on an RMB revaluation."

The move also sends out a clear message on the levels of the Convertibility Undertakings, he added.

The authority will maintain a high degree of transparency in the system's operation. The impact on the Aggregate Balance arising from deals initiated by licensed banks at the levels of the Convertibility Undertakings and market operations initiated by the authority, if any, within the Convertibility Zone will, as is the current practice, be announced immediately.

The information will also be included in the monthly reports on Currency Board Operations to the Exchange Fund Advisory Committee Currency Board Sub-Committee, which are published on the authority's website and in its Quarterly Bulletin.