Provisional Legislative Council
PLC Paper No. CB(1) 771
Ref : CB1/PL/FA/1
(These minutes have been
seen by the Administration)
Panel on Financial Affairs
Minutes of Meeting held on Monday, 1 December 1997, at 4:30 pm in Conference Room B of the Legislative Council Building
Members present :
Hon Paul CHENG Ming-fun, JP (Chairman)
Hon NGAN Kam-chuen (Deputy Chairman)
Hon NG Leung-sing
Hon Eric LI Ka-cheung, JP
Hon Henry WU
Hon Ronald ARCULLI, JP
Hon CHAN Choi-hi
Dr Hon Philip WONG Yu-hong
Hon CHIM Pui-chung
Dr Hon LAW Cheung-kwok
Members attending :
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon CHAN Kam-lam
Member absent :
Dr Hon David LI Kwok-po, JP
Public officers attending :
For Agenda items IV and V
- Mr Rafael HUI
- Secretary for Financial Services
- Mr Norman CHAN
- Deputy Chief Executive, Hong Kong Monetary Authority
- Ms Amy YIP
- Executive Director (Reserves Management),
- Hong Kong Monetary Authority
- Miss Julia LEUNG
- Acting Executive Director, External Department,
- Hong Kong Monetary Authority
For Agenda item VI
- Miss Emma LAU
- Deputy Secretary for the Treasury (3)
- Mr James Herd
- Principal Assistant Secretary for the Treasury (W)
Clerk in attendance :
Staff in attendance :
- Ms Estella CHAN
- Chief Assistant Secretary (1)4
- Miss Anita HO
- Assistant Legal Adviser 2
- Mr Andy LAU
- Senior Assistant Secretary (1)6
I.Confirmation of minutes and matters arising
(PLC Paper No. CB(1)551 -Minutes of meeting held on 31 October 1997)
The minutes of the meeting on 31 October 1997 were confirmed.
II.Information papers issued since last meeting
(PLC Paper No. CB(1)516(01) -A letter from Mr Tony FUNG on ways to improve the Stock Exchange of Hong Kong
PLC Paper No. CB(1)516(02) -An extract of the minutes of the Finance Committee meeting held on 3 October 1997 regarding interest on tax reserve certificates
PLC Paper No. CB(1)540 -Regional Monitor - Issue No. 7, October 1997 issued by the Stock Exchange of Hong Kong
PLC Paper No. CB(1)563 -First Quarterly Accounts of the Hong Kong Special Administrative Region Government including the full accounts for the quarter ended 30 September 1997)
2.Members noted the four information papers issued since the last meeting.
3.In considering whether to follow up the open letter from Mr Tony FUNG to all council members of the Stock Exchange of Hong Kong (the Exchange), members agreed that the Exchange should be requested, through the Administration, to provide a response to Mr FUNG 's views. The Panel would decide whether it was necessary to discuss the subject after reviewing the response.
4.The Chairman advised that as requested by members, he had written to the Administration, inquiring on the reasons for the long overlapping employment period between Mr Ivers Riley and Mr Robert Gilmore of the Hong Kong Futures Exchange Ltd and the resulting cost implication. Members noted that the reply from the Administration was still awaited.
III.Items for discussion at the next meeting scheduled for 5 January 1998
(PLC Paper No. CB(1)564(01) -.A letter from the Secretary for Financial Services on the agenda for the meeting on 1 December 1997)
5.Members noted the letter dated 21 November 1997 from the Secretary for Financial Services (SFS) regarding the Administration 's view that further discussion of the recent financial turmoil was not appropriate for the time being. However, members were of the view that the Administration should explain how different Government bureaux/departments and monitoring authorities had worked together in coping with the recent turmoil in the financial markets, and that an examination of the co-ordination mechanism would be beneficial to the review of the financial system to be carried out by the Administration. The Panel therefore agreed to invite the Administration again to discuss the subject.
6.Members agreed to discuss the following items at the next regular meeting to be held on 5 January 1998:
IV.Review of Financial Secretary 's authority in using the Exchange Fund
- Co-ordination among Government bureaus/departments and other monitoring authorities in dealing with the recent turmoil in the financial markets;
- Monitoring of the local London gold market; and
- Interest on tax reserve certificates.
(PLC Paper No. CB(1)564(02) - .Minutes of the special Briefing by the Financial Secretary on 12 August 1997 on Hong Kong 's contribution towards the financial package organized by the International Monetary Fund to assist Thailand
PLC Paper No. CB(1)564(03) - Financial Secretary 's letter to Dr Hon LEONG Che-hung detailing the information requested by Members at the special briefing by the Financial Secretary on 12 August 1997
PLC Paper No. CB(1)564(04) - .Legal opinion prepared by the Legal Adviser on " Lending from the Exchange Fund " )
7.Members noted that this agenda item was a follow-up to the special briefing given by the Financial Secretary (FS) on 12 August 1997 on Hong Kong 's contribution towards the financial package organized by the International Monetary Fund (IMF) to rescue the Thai baht. During the briefing, members were informed that in making the decision, FS had exercised his power under provisions in the Exchange Fund Ordinance (Cap. 66) (the Ordinance).
8.Noting that there could be different interpretations of the meaning of " control " in section 3(1) and that of " use " in section 3(1) and (1A) of the Ordinance, some members enquired if the Ordinance should be amended to avoid ambiguity.
9.The Deputy Chief Executive, Hong Kong Monetary Authority (DCE/HKMA) advised that the Administration had examined the legal opinion prepared by the Legal Adviser of the Provisional Legislative Council and considered that the interpretation of the relevant provisions contained in paragraph 10 of his report was consistent with those of the Government 's legal advisers solicited over different periods. In accordance with the narrow interpretation, there were differences between the meanings of " control " and " use " . He quoted the advice as follows: " Control " , in general, refers to the management and other investment issues. On the other hand, the " use " of the Exchange Fund shall be primarily for such purposes as the FS thinks fit. As such, the FS is only required to consult the Exchange Fund Advisory Committee over matters of control or management of the Exchange Fund. However, when it comes to making decisions on the use for such purposes as the FS thinks fit affecting, directly or indirectly, the exchange value of the currency of Hong Kong and for other purposes incidental thereto, he is not exercising the power of " control " and is therefore not required to consult any party. He further said that Section 3(1A) was subsequently added to the Ordinance and provided that, apart from the primary use of the Exchange Fund to affect the Hong Kong dollar exchange rate, FS might use the Exchange Fund to maintain the stability and the integrity of the monetary and financial systems of Hong Kong, with a view to maintaining Hong Kong as an international financial centre. SFS added that as the statutory basis for FS to use the Exchange Fund was clearly spelt out in the Ordinance, he did not see the need to make any changes to the Ordinance.
10.Given that FS usually had to decide within a very short time on committing the Fund strategically to maintain the stability of the Hong Kong dollar, members generally considered it impracticable to conduct any meaningful consultation, not to mention that some Members of the Executive Council or those of the Exchange Fund Advisory Committee might have direct pecuniary interest in the matter under consultation.
11.Notwithstanding the above, some members considered that better consultation should have been conducted before FS decided on the use of the Exchange Fund to rescue the Thai baht in August. Considering that the Hong Kong dollar was not in any imminent danger of being affected by the baht crisis in August and that the currency crisis in South East Asian countries did not happen overnight but was long in coming, they opined that there should be ample time for the Administration to consult the appropriate parties. A member pointed out that the decision on lending from the Exchange Fund to assist other countries was different from that of other uses aimed at affecting the exchange value of the Hong Kong currency, and urged the Administration to take note of members' views. Members also urged the Administration to properly consult the relevant parties before making a decision on lending from the Exchange Fund to assist other countries in future.
12.In reply, the Administration gave a brief account of the circumstances leading to Hong Kong 's contribution towards the financial package organized by IMF to rescue the Thai baht. They said that in August, IMF wrote to HKMA inviting Hong Kong to take part in a meeting in Tokyo and to consider contributing towards a financial package to assist Thailand. Given the fact that some other Asian currencies had already been affected due to the " contagion " effect, all countries present at the meeting except China had agreed to make a contribution. China subsequently also confirmed its contribution to the financial package. Whilst the Hong Kong dollar was not under attack in August, there was always the risk of the Hong Kong dollar being affected under the " contagion " effect as evidenced in the more recent financial turbulence in October. It was therefore important for FS to be given such discretionary power to effectively deal with crisis situations and not be subject to prior vetting and consultation. In making such a decision, FS was fully accountable to the public for his decision and there was also full consultation with the relevant Government officials as well as those of HKMA. Should circumstances permit, consultation with the Exchange Fund Advisory Committee or Executive Council could be made in future.
13.In order to exercise proper control over the use of the Exchange Fund which was indeed in the public purse, a few members considered it necessary to impose a ceiling on the amount that FS could use. SFS said that the development of the central banking role of the Exchange Fund made it desirable for FS to be free of any statutory limit on the amount that he could use. It was important for him to have the authority to use the Fund so as to effectively deal with crisis situations and to maintain the stability of the Hong Kong dollar. This also explained the need for setting up an independent body, the HKMA, to manage the Exchange Fund. He further advised that governors of other central banks in the world were not subject to such a constraint.
14.Noting that it would be for the court to decide if FS was challenged on not fulfilling procedural requirements under existing provisions in the Ordinance, a member enquired how the court could be requested to make a decision in this respect. Assistant Legal Adviser advised that a challenge would normally be raised in conjunction with a court case. A narrow interpretation of the provisions had already been set out in paragraph 10 of the legal opinion prepared by the Legal Adviser. With regard to the member 's enquiry, she would research further and provide more information in writing after the meeting.
15.In response to a member, SFS said that he was confident that Thailand would be able to repay the loan as its economy had a healthy and solid basis despite its present state of affairs.
16.Regarding the financial package to assist Indonesia, the Administration said that the IMF, World Bank Group, Asian Development Bank and the Indonesian Government had initially committed a sum of US$23 billion to the financial package organized by IMF to assist Indonesia. Depending on the effectiveness of the initial package, a further amount of US$15 billion might be solicited from other countries. However, this would be subject to detailed deliberation and a concrete proposal had yet to be made. SFS confirmed that Hong Kong had not committed itself to contributing to the financial package to assist Indonesia. A member requested the Administration to consult the Provisional Legislative Council (PLC) in case a decision needed to be made to provide financial assistance to Indonesia. SFS replied that given that contributions from other countries might not be necessary under the proposed financial package and that there was no statutory responsibility for the Administration to consult PLC before FS decided to use the Exchange Fund, he could not make such a commitment on behalf of FS nor the Special Administrative Region Government. However, he trusted the Administration would consult the Exchange Fund Advisory Committee should situations permit and members of the public would be informed of the details in due course.
17.Regarding the financial package to assist Korea, SFS said that the IMF, the United States and the Japan Government were still working on an assistance package. A decision would be made in the near future but, so far, Hong Kong had not made any financial commitment in this regard.
V.Shortage of coins
(PLC Paper No. CB(1)567(01) -.Information paper prepared by the Administration)
18.At the invitation of the Chairman, the Executive Director (Reserves Management), Hong Kong Monetary Authority (ED/HKMA) briefed members on the salient points of the information paper.
19.Members expressed grave concern about the problems of coin shortage and the resulting impact on the community. A member pointed out that the subject matter had been discussed by the Council earlier on but instead of the problem having been resolved, it appeared to have become more serious.
20.ED/HKMA said that the bulk of the 800 million pieces of Queen 's Head (QH) coins which were still in active circulation in Hong Kong at the end of May 1997, had been diverted from general circulation into collections for commemorative, investment or speculative purposes. By early June, HKMA began to deplete existing stocks and place additional orders of a substantial magnitude with the Royal Mint in response to the coin shortage. Having regard to the capacity constraint at the Royal Mint, HKMA also used the service of the Royal Canadian Mint. It was estimated that the 800 million QH coins would be fully replaced by mid-December 1997. In the 11 months between 1 May 1997 and 31 March 1998, a total of 1,255 million pieces would have been injected into the market. This represented an additional 37% of the 3.4 billion pieces in active circulation as at end-May 1997. HKMA would continue to mint and release into circulation new coins until the shortage was relieved.
21.In response to members' further queries, EDHKMA explained the problems encountered by HKMA in the ordering and delivery of new coins. She said that the coins in use in Hong Kong were of a very high quality due to high usage in vending machines and hence, the number of mints capable of producing coins of this high standard was very limited. The normal order and delivery lead time for coins other than 10 cents and 50 cents was four to six months, and that for 10 cents and 50 cents pieces was six to eight months due to the special metal alloy used in these two types of coins. HKMA had already negotiated with the mints for a substantial shortening of the lead time.
22.In response to a member, ED/HKMA said that the cost of production including speed post by air would be absorbed by the Exchange Fund. Regarding the unit cost for producing coins of different denominations, she said that it would vary, depending on the materials and the procedures involved. More details of the costing in this regard would be found in the annual report of HKMA.
23.Some members considered that the proposal to discourage the " collection " appeal by reducing the shine of coins prior to injection into circulation was not an effective mean to address the problem of coin shortage, bearing in mind the production of small denomination coins already involved a higher production costs than their face values. Rather, the Administration should concentrate on improving the re-allocation and re-distribution of existing coins in circulation.
24.ED/HKMA said that over the past few years, instead of returning all unused coins from the large users to the bank vault for redistribution, some surplus coins had been transported directly from the large users (such as transport companies) to the end-users (such as supermarkets) by the security transport companies. This was not a recent phenomenon and had arisen from voluntary arrangements made between the various parties. This might not have impaired the efficiency of the distribution, but might have influenced the re-allocation of coins in the process of re-distribution. HKMA was looking into this matter and was engaged in discussion with major relevant parties on the issue of distribution costs. The intention was to arrive at an arrangement of equitable allocation of the distribution costs involved which would be fair to parties concerned.
VI.Resolution to amend the resolution of the Capital Works Reserve Fund under section 29(1) of the Public Finance Ordinance
(PLC Paper No. CB(1)552(01) -.Information paper prepared by the Administration)
25.At the invitation of the Chairman, the Deputy Secretary for the Treasury (3) (DS for Tsy) briefed members on the salient points of the information paper. She said that the Resolution of the Legislative Council on the Capital Works Reserve Fund (CWRF) (last amended on 12 December 1996) contained provisions for the sharing of land premia between the former Hong Kong Government and the Hong Kong Special Administrative Region Government (HKSARG) under paragraph 6 of Annex III to the Sino-British Joint Declaration on the Question of Hong Kong (JD). With the establishment of the HKSARG on 1 July 1997, these provisions were no longer applicable. Since then, the income from land premium had been deposited into the General Revenue Account. The purpose of the proposed Resolution was to amend the resolution of the CWRF to remove the obsolete provisions on the sharing of income from land transactions and provide for such income to be credited directly to the CWRF for the purpose of funding the capital works programme. The Administration 's intention was to bring the amendments into effect on 1 January 1998 and for that purpose, would move the resolution to amend the CWRF at the Council meeting on 17 December 1997.
26.DS for Tsy further advised that a resolution was passed by the Provisional Legislative Council in July to set up the Land Fund with effect from 1 July 1997 to receive, hold and invest the assets of the Land Fund Trust, which had been transferred to the Government of the HKSAR upon its establishment on 1 July 1997.
27.In response to a member ' s question, DS for Tsy clarified that when the proposed Resolution came into operation, the suspense account, works account and reserve account of the CWRF would be cancelled and that any moneys remaining in those accounts would be carried forward in their entirety in the CWRF. This was essentially returning to the situation before the amendments in 1985 which introduced the premium sharing arrangements. Other changes to the CWRF introduced over the years would remain intact.
28.Regarding the investment strategy for the CWRF, DS for Tsy said that the majority of the moneys in the CWRF was put in the Exchange Fund under the management of HKMA. A certain amount was placed on bank deposits to meet operational needs.
29.Referring to paragraph 7(c) of the information paper, a member enquired on the delegation limits to FS on expending from the CWRF. DS for Tsy advised that the current limits on the delegation to FS to expend moneys from the CWRF was $ 15 million, above which, the Administration had to submit separate proposals to the Finance Committee via the Public Works Subcommittee for members' approval. For items costing less than $15 million each, the Administration would normally use funds from one of the block allocations. In this regard, the Finance Committee would approve funds for the block allocations as lump sums to cover expenditure on a multitude of small items.
VI.Any other business
30.There being no other business, the meeting ended at 5:50 pm.
Provisional Legislative Council Secretariat
9 January 1998