New release: The Monetary Authority's Annual Report 2005 is now on sale.

The banking sector performed strongly last year, with retail banks' aggregate pre-tax operating profits surging 8.2% on 2004. But continued competition and cost pressure will likely make the operating environment challenging this year, Monetary Authority Chief Executive Joseph Yam says.

In the authority's 2005 annual report published today, Mr Yam said the exchange and money markets were largely stable during the year despite massive fund flows arising from speculation about revaluation of the renminbi and initial public offerings in the stock market.

The three refinements to the Linked Exchange Rate System introduced last May anchored exchange rate expectations on the strong side, discouraging speculative inflows, and promoting the smooth functioning of the money and foreign exchange markets in accordance with Currency Board arrangements.

The annual report contains the audited Exchange Fund accounts for last year. The fund earned an investment income of $38.2 billion in 2005. Its rate of return exceeded that of the investment benchmark approved by the Financial Secretary on the advice of the Exchange Fund Advisory Committee by more than 0.2%.

Yuan business expansion

Mr Yam said discussions with Mainland authorities are ongoing about further expansion on the renminbi business, including the settlement of trade transactions in Hong Kong in renminbi and the issuance of renminbi-denominated bonds.

Under Phase III of the Closer Economic Partnership Arrangement, Mainland authorities agreed to relax requirements regarding the amount of operating funds for Hong Kong banks to open branches on the Mainland to offer renminbi and foreign-currency business to local customers.

Meanwhile, on staff establishment, Mr Yam said the Financial Secretary has approved an addition of 10 posts this year to cope with a considerably expanded workload in key areas including the prevention of money laundering, supervision of banks' securities business and financial links with the Mainland. The move will increase the authority's staff to 614.

The report is on sale at the authority's information centre or by post at $100 a copy. An interactive version is also available here. Meanwhile, a summary version is available free at the information centre.