Market operations conducted by the Monetary Authority within the convertibility zone should follow four broad principles, the Exchange Fund Advisory Committee Currency Board Sub-Committee says.

The sub-committee at its meeting on July 4 discussed the proposed broad guiding for operations within the convertibility zone, which has been introduced as one of the three refinements to the Linked Exchange Rate system since May.

Broad principals

Members said it will be difficult to lay down detailed and specific rules for such operations given complex and changing market conditions, and endorsed four broad principles that should govern them. These are:

* all operations within the convertibility zone should be conducted in accordance with Currency Board rule, that is, both the stock and changes in the Monetary Base should be fully backed by foreign exchange;

* the primary objective of any operations should be to preserve exchange rate stability implied by the Linked Exchange Rate system and to maintain confidence in the system;

* operations may be undertaken to support such interest rate adjustments to maintain exchange rate stability under the Linked Exchange Rate system and avoid destabilising behaviour in interest rates; and,

* operations may be undertaken to remove market anomalies, but judgement will need to be exercised case by case, taking account of market dynamics.

The sub-committee said while the four principles should be generally applicable for now, they should be kept under review in the light of experience and changing conditions.

Textile dispute minor

The sub-committee also noted a special analysis in the report examining the potential impact on Hong Kong of the recent trade dispute over Mainland textile, clothing and footwear exports to the US and Europe.

The analysis suggested the currently imposed limits on the growth of such exports will have only a minor impact on Hong Kong's GDP growth.