The fund is a margin issued by the Hong Kong government.
It was established under the Monetary Regulations (hereafter known as the Exchange Fund Regulations) promulgated in 1935.
The FUND’S INITIAL assets are $12.31 million FROM THE sale OF silver deposited BY THE GOVERNMENT IN note-issuing BANKS.
Since then, as the number of notes issued has increased, the amount of notes banks have to deposit in exchange for certificates of non-interest bearing liabilities has increased.
Under the provisions of the Exchange Fund Ordinance, the assets of the Exchange Fund may consist of qualified collateral, including banknotes issued, gold, silver, foreign exchange (primarily sterling at the beginning) or any other collateral approved by the Secretary of State of the United Kingdom.
Its main function is to influence the exchange rate by buying and selling sterling with 3 note issuing banks in advance.
Since THE PEG IN 1972, AND ESPECIALLY SINCE THE float OF THE Hong Kong DOLLAR in November 1974, THE government has stepped UP ITS intervention in the market through the Exchange Fund to maintain the basic stability of the Hong Kong dollar.
The Exchange Fund is the most important financial asset of the Hong Kong SAR Government. It is not the usual sovereign fund focused on investment purposes.
The purpose of the Exchange Fund is to support the monetary and financial stability of Hong Kong as stipulated in the Exchange Fund Ordinance.
The Exchange Fund has played an important role in every banking or financial crisis in Hong Kong over the past few decades.
For example, when several banks (including Overseas Trust, Hang Lung and Ka Wah) faced failure in the 1980s, the government used the Exchange Fund to take over or provide guarantees.
During the stock MARKET CRASH of 1987, the government used the exchange FUND to support the futures market from collapsing.
When there WERE runs ON several BANKS in 1991, THE EXCHANGE FUND PROVIDED LIQUIDITY ASSISTANCE TO several BANKS AND GUARANTEED HKBC against RUNS.
In August 1998, THE GOVERNMENT LAUNCHED THE EXCHANGE FUND TO COUNTER BILATERAL MANIPULATION OF THE FOREx AND STOCK MARKETS BY INTERNATIONAL FINANCIAL GIANTS.
When the global financial crisis erupted after the collapse of Lehman Brothers in 2008, Hong Kong’s banking sector was also affected by the global credit crunch and the withdrawal of funds from Hong Kong by European and American investors.
In October of the same year, the Government announced that the Exchange Fund would guarantee 100% of all bank deposits in Hong Kong, whether personal or corporate, local or foreign currency, and the Government also introduced the Standby Bank Capital Facility to inject capital into banks if necessary.
These two measures were taken at an extraordinary time to calm the situation and ensure market and public confidence in Hong Kong’s financial system.