Annual Report on Exchange Arrangements and Exchange Restrictions 2005
Chapter

PEOPLE’S REPUBLIC OF CHINA—HONG KONG SAR

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
September 2005
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(Position as of January 31, 2005)

Status Under IMF Articles of Agreement
Article VIIIYes.
Exchange Arrangement
CurrencyThe currency of Hong Kong SAR is the Hong Kong dollar.
Other legal tenderCommemorative gold coins of HK$1,000 are legal tender, but are kept mostly by collectors and seldom circulate.
Exchange rate structureUnitary.
Classification
Currency board arrangementThe currency board system in Hong Kong SAR, adopted on October 17, 1983, requires the monetary base to be backed by the reserve currency (i.e., the U.S. dollar) at the fixed exchange rate of HK$7.80 per US$1. The monetary base includes the amount of notes and coins issued, the balance of clearing accounts of banks held with the Hong Kong Monetary Authority (HKMA) (i.e., the aggregate balance), and the outstanding amount of exchange fund bills and notes. Operating under the rule-based currency board system, the HKMA has undertaken to issue additional exchange fund paper only when there is an inflow of funds, but the size of the program is allowed to expand along with the interest payments on such papers.
The issue and redemption of Certificates of Indebtedness, which provide backing for banknotes issued by the note-issuing banks, are required to be made against U.S. dollars at the fixed exchange rate of HK$7.80 per US$1. The issue and withdrawal of coins and government-issued notes are settled against the U.S. dollar at the same fixed rate.
Effective May 18, 2005, the HKMA established a trading band of HK$7.75 to HK$7.85 per US$1. Previously, an explicit convertibility undertaking was made by the HKMA for banks to convert Hong Kong dollar balances in their clearing accounts into U.S. dollars at the fixed exchange rate of HK$7.75 per US$1. This convertibility rate moved by 1 pip (i.e., HK$0.0001) a calendar day until it reached the rate of HK$7.80 on August 12, 2000.
Exchange taxNo.
Exchange subsidyNo.
Forward exchange marketThe forward exchange markets operate on private sector initiatives, and the government has no official role.
Arrangements for Payments and Receipts
Prescription of currency requirementsNo.
Payments arrangementsNo.
Administration of controlNo.
International security restrictions
In accordance with UN sanctionsIn accordance with the relevant regulations under the UN Sanctions Ordinance, UN sanctions are implemented by the Chief Executive of the Hong Kong SAR government on the instructions of the Ministry of Foreign Affairs of the People’s Republic of China.
Payments arrearsNo.
Controls on trade in gold (coins and/or bullion)No.
Controls on exports and imports of banknotesNo.
Resident Accounts
Foreign exchange accounts permittedEffective February 25, 2004, banks may accept Chinese renminbi deposits and offer renminbi-denominated accounts, provide foreign exchange and remittance services, and issue credit cards for resident individuals. Additional services are offered to certain businesses for the conversion of renminbi deposits into Hong Kong dollars.
Held domesticallyYes.
Held abroadYes.
Accounts in domestic currency held abroadYes.
Accounts in domestic currency convertible into foreign currencyYes.
Nonresident Accounts
Foreign exchange accounts permittedNo distinction is made between resident and nonresident accounts except for renminbi clearing services, which are not provided for renminbi accounts held by nonresidents.
Domestic currency accountsYes.
Convertible into foreign currencyYes.
Blocked accountsNo.
Imports and Import Payments
Foreign exchange budgetNo.
Financing requirements for importsNo.
Documentation requirements for release of foreign exchange for importsNo.
Import licenses and other nontariff measures
Negative listImports of certain articles are subject to licensing control by the Director General of Trade and Industry. Import licenses are required for reasons of public health, safety, environmental protection, security, or for the fulfillment of Hong Kong SAR’s international trade obligations. Imports of rice are also subject to licensing requirements.
Licenses with quotasIn compliance with the Montreal Protocol, the import of ozone-depleting substances is subject to licenses and quota arrangements.
Import taxes and/or tariffsAll imports are free of duty, although an excise tax for revenue and health purposes is levied on imported and domestically produced cigarettes and other tobacco products, liquors, methyl alcohol, and hydrocarbon oils.
State import monopolyNo.
Exports and Export Proceeds
Repatriation requirementsNo.
Financing requirementsNo.
Documentation requirementsNo.
Export licenses
Without quotasExports of certain articles are subject to licensing control by the Director General of Trade and Industry. Export licenses are required for reasons of public health, safety, environmental protection, security, and for the fulfillment of Hong Kong SAR’s international trade obligations. The export of ozone-depleting substances is subject to licensing requirements.
With quotasWith the expiration of the WTO Agreement on Textiles and Clothing on January 1, 2005, textile quotas maintained by WTO member countries under this agreement no longer apply. Previously, some importing countries maintained quotas under this agreement on certain textile exports from Hong Kong SAR.
Export taxesNo.
Payments for Invisible Transactions and Current Transfers
Controls on these transfersNo.
Proceeds from Invisible Transactions and Current Transfers
Repatriation requirementsNo.
Restrictions on use of fundsNo.
Capital Transactions
Controls on capital transactionsNo.
Controls on capital and money market instrumentsNo exchange control requirements are imposed on capital receipts or payments by residents or nonresidents. A license or an authorization is required for companies, whether incorporated in Hong Kong SAR or elsewhere, to conduct banking, insurance, securities, and futures dealings. All overseas companies are required to register with the Companies Registry within one month of establishing a business in Hong Kong SAR.
Controls on derivatives and other instrumentsHong Kong Exchanges and Clearing, Limited, which oversees the Stock Exchange of Hong Kong, the Hong Kong Futures Exchange, and the Hong Kong Securities Clearing Company imposes disclosure and position limits on derivative products.
Controls on credit operationsNo.
Controls on direct investmentNo.
Controls on liquidation of direct investmentNo.
Controls on real estate transactionsNo.
Controls on personal capital transactionsNo.
Provisions specific to commercial banks and other credit institutionsThe limits and restrictions stated below are set by the HKMA for prudential reasons only.
Maintenance of accounts abroadThe HKMA may prohibit authorized institutions from maintaining accounts (including for the purpose of granting loans and credits) with foreign banks if transactions conducted through these accounts are not made in the interest of the depositors of these institutions.
Lending to nonresidents (financial or commercial credits)Authorized institutions incorporated in Hong Kong SAR are permitted to extend loans and credit facilities to one person or company only up to 25% of their respective capital base.
Lending locally in foreign exchangeAuthorized institutions incorporated in Hong Kong SAR are permitted to extend loans and credit facilities to one person or company only up to 25% of their respective capital base.
Purchase of locally issued securities denominated in foreign exchangeAuthorized institutions incorporated in Hong Kong SAR are permitted to hold the securities of one person or company only up to 25% of their capital base.
Investment regulationsNo distinction is made between local and overseas investments.
Abroad by banksAuthorized institutions incorporated in Hong Kong SAR may not acquire shares worth more than 5% of the capital base of the institution at the time of acquisition without the approval of the HKMA. In addition, they may not acquire shares in aggregate worth more than 25% of the capital base of the institution. This restriction does not apply if the share capital (1) is held as security for facilities granted; (2) was acquired through an underwriting or subunderwriting contract for a period not to exceed seven days; or (3) was acquired through satisfaction of debts, in which case the share capital must be disposed of at the earliest suitable opportunity, but not later than 18 months after its acquisition.
No authorized institution incorporated in Hong Kong SAR may purchase or hold any interest in foreign or domestic land of an aggregate value in excess of 25% of the capital base of the institution. This restriction does not apply to (1) land that is necessary for conducting the business of the institution or providing housing or amenities for its staff, subject to HKMA approval; (2) interest in land that was mortgaged to the institution to secure a debt due to the institution; and (3) interest in land that accrues after the institution has come into possession of the land, provided that the interest be disposed of at the earliest suitable opportunity, but not later than 18 months after acquisition.
The aggregate holdings of share capital and interests in land (including land that is necessary for conducting business or providing housing or amenities for staff), together with the aggregate unsecured facilities to directors (or related parties) of an authorized institution incorporated in Hong Kong SAR, may not at any time exceed 80% of the institution’s capital base.
In banks by nonresidentsNo person may become a majority shareholder controller, a minority shareholder controller, or an indirect controller of an authorized institution incorporated in Hong Kong SAR without HKMA approval. Any person who becomes such a controller must notify the HKMA within 14 days.
Open foreign exchange position limitsAll authorized institutions incorporated in Hong Kong SAR are required to report to the HKMA their consolidated foreign currency positions. Other authorized institutions are required to report to the HKMA their foreign currency positions (including options) monthly. The aggregate net overnight open position (calculated as the sum of net long/short positions of individual currencies) should not normally exceed 5% (and, in any event, not more than 15%) of the capital base of any institution, and the net overnight open position in any individual currency should not exceed 10% of the capital base. For subsidiaries of foreign banks, when the parent bank consolidates the foreign exchange risk on a global basis and for which there is adequate home supervision, the HKMA may accept higher limits. For branches of foreign banks, the foreign exchange limits are monitored by their head offices and home supervisory authorities. The HKMA will assess the expertise of any branch that has an aggregate overnight limit that appears large, i.e., in excess of 5% of the relevant bank’s capital base.
In addition to these limits, locally incorporated institutions are required to provide regulatory capital for foreign exchange risk such that their adjusted capital adequacy ratio (incorporating market risk) is above the respective statutory minimum ratios.
Provisions specific to institutional investors
Limits (min.) on investment portfolio held locallyFor the Mandatory Provident Fund (MPF) schemes, at least 30% of a constituent fund must be held in Hong Kong dollar–denominated currency investments, as measured by effective currency exposure. An MPF scheme may consist of one or more constituent funds, each with its own investment policy. A constituent fund may maintain a portfolio of direct investment in equities, bonds, or other debt instruments or may invest in approved pooled investment funds, which may be in the form of unit trusts authorized by the Securities and Futures Commission or insurance policies issued by authorized insurers. A constituent fund may also invest in some other types of financial products, such as index-tracking collective investment schemes, subject to prior approval by the Mandatory Provident Fund Schemes Authority.
There is no minimum limit on the amount that insurance companies may hold in investments in locally issued securities. However, insurance companies carrying on direct general insurance business locally are required to maintain assets in Hong Kong SAR to match their liabilities from such insurance business. The form of assets is not limited to local securities and may be in the form of cash, bank deposits, or landed properties.
Currency-matching regulations on assets/liabilities compositionInsurance companies with long-term foreign currency liabilities must enact prudential provisions to limit the effects of exchange rate changes on their asset base, unless these liabilities are covered by adequate foreign currency holdings not subject to exchange risk.
Other controls imposed by securities lawsNo.
Changes During 2004
Resident accountsFebruary 25. Banks were allowed to accept renminbi deposits, offer renminbi-denominated accounts, provide foreign exchange and remittance services, and issue credit cards for resident individuals.
Changes During 2005
Exchange arrangementMay 18. The HKMA established a trading band of HK$7.75 to HK$7.85 per US$1.
Exports and export proceedsJanuary 1. With the expiration of the WTO Agreement on Textiles and Clothing, quotas imposed by WTO members on certain textile imports from Hong Kong SAR were eliminated.

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