The Exchange Fund, managed by the Hong Kong Monetary Authority (HKMA), is the primary investment vehicle for the government of Hong Kong to support its currency and maintain monetary stability. Established in 1935, the Exchange Fund's primary objective is to ensure the stability of the Hong Kong dollar (HKD) and maintain the confidence of the financial community in Hong Kong's monetary system.
The Exchange Fund plays a crucial role in Hong Kong's Linked Exchange Rate System (LERS), which pegs the HKD to the US dollar (USD). Under the LERS, the HKMA uses the Exchange Fund to buy or sell HKD to maintain the exchange rate within a narrow trading range around the pegged rate. This intervention helps stabilize the value of the HKD and reduces exchange rate volatility, contributing to Hong Kong's role as a major international financial center.
The Exchange Fund's assets consist of foreign currency reserves, Hong Kong dollar assets, and other holdings. The fund is invested in a diversified portfolio, which includes government bonds, corporate bonds, equities, and other financial instruments. The HKMA aims to preserve the capital value of the fund and generate a reasonable return on investment while maintaining sufficient liquidity for its currency stabilization role.
The Exchange Fund's performance is regularly reported to Hong Kong's Legislative Council and is subject to oversight by the Council and the Financial Secretary. In addition to its primary function of maintaining currency stability, the fund is also used for other purposes, such as providing resources to the government for fiscal management and supporting the development of Hong Kong's financial markets.
In summary, the Exchange Fund is a key component of Hong Kong's monetary system, playing a critical role in maintaining the stability of the Hong Kong dollar and supporting the overall confidence in Hong Kong's financial markets.