Annual Report on Exchange Arrangements and Exchange Restrictions, 2007
Chapter

PEOPLE’S REPUBLIC OF CHINA—HONG KONG SAR

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
October 2007
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(Position as of March 31, 2007)

Status under IMF Articles of Agreement
Article VIIIYes.
Exchange Measures
Restrictions and/or multiple currency practicesNo restrictions as reported in the latest staff report as of December 31, 2006.
International security restrictions
Other security restrictionsIn accordance with the UN Sanctions Ordinance, the chief executive is required to make regulations to put into effect an instruction from the Ministry of Foreign Affairs of the People’s Republic of China to implement sanctions agreed to by the UN Security Council.
References to legal instruments and hyperlinksUN Sanctions Ordinance (Cap. 537); www.legislation.gov.hk.
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) around an exchange rate of HK$7.85 per US$1. A symmetric convertibility zone of HK$7.75 to HK$7.85—within which the Hong Kong SAR Monetary Authority (HKMA) may choose to conduct market operations consistent with currency board principles—was introduced May 18, 2005.
The monetary base includes the notes and coins issued, the balance of clearing accounts of banks held with the 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 paper.
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.
Exchange taxNo.
Exchange subsidyNo.
Forward exchange marketThe forward exchange markets operate on private sector initiatives, and the government has no official role.
References to legal instruments and hyperlinksArticle 111 of the Basic Law; www.info.gov.hk/basic_law/fulltext/index.htm; Exchange of Letters between the Financial Secretary and the Monetary Authority to Specify the Monetary Policy Objective and the Structure of the Monetary System of Hong Kong under the Exchange Fund Ordinance; www.info.gov.hk/hkma/eng/press/2003/20030627e4.htm.
Arrangements for Payments and Receipts
Prescription of currency requirementsNo.
Payments arrangementsNo.
Administration of controlNo.
Payments arrearsNo.
Controls on trade in gold (coins and/or bullion)No.
Controls on exports and imports of banknotesNo.
References to legal instruments and hyperlinksn.a.
Resident Accounts
Foreign exchange accounts permittedYes.
Held domesticallyYes.
Held abroadYes.
Accounts in domestic currency held abroadYes.
Accounts in domestic currency convertible into foreign currencyYes.
References to legal instruments and hyperlinksn.a.
Nonresident Accounts
Foreign exchange accounts permittedYes.
Domestic currency accountsYes.
Convertible into foreign currencyYes.
Blocked accountsNo.
References to legal instruments and hyperlinksn.a.
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 different government agencies. Most of the import licenses are required for reasons of public health, safety, environmental protection, or security, or for the fulfillment of Hong Kong SAR’s international trade obligations. Imports of rice, textiles, and clothing 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.
References to legal instruments and hyperlinksTrade and Industry Department: Trade Controls, www.tid.gov.hk/service/ie/jsp/IE_Gen_eService_e.jsp.
Exports and Export Proceeds
Repatriation requirementsNo.
Financing requirementsNo.
Documentation requirementsNo.
Export licenses
Without quotasExports of certain articles are subject to licensing control by different government agencies. Most of the export licenses are required for reasons of public health, safety, environmental protection, or security, or for the fulfillment of Hong Kong SAR’s international trade obligations. The export of ozone-depleting substances, rice, textiles, and clothing is subject to licensing requirements.
Export taxesNo.
References to legal instruments and hyperlinksTrade and Industry Department: Trade Controls, www.tid.gov.hk/service/ie/jsp/IE_Gen_eService_e.jsp.
Payments for Invisible Transactions and Current Transfers
Controls on these transfersNo.
References to legal instruments and hyperlinksn.a.
Proceeds from Invisible Transactions and Current Transfers
Repatriation requirementsNo.
Restrictions on use of fundsNo.
References to legal instruments and hyperlinksn.a.
Capital Transactions
Controls on capital transactionsNo.
Repatriation requirementsNo.
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, Ltd., which oversees the Stock Exchange of Hong Kong, the Hong Kong Futures Exchange, and the three associated clearing houses, imposes disclosure and position limits on derivative products. The disclosure and position limits are also stipulated in the subsidiary legislation. Effective February 10, 2006, the position limits for stock option contracts were increased in response to the growth of the market. The position limits for futures and options contracts were increased, effective March 30, 2007, from 6,000 contracts a futures contract month or options series to a combined limit of 12,000 contracts applicable to all futures contract months and options series.
Purchase locally by nonresidentsYes.
Sale or issue locally by nonresidentsYes.
Controls on credit operationsNo.
Controls on direct investmentNo.
Controls on liquidation of direct investmentNo.
Controls on real estate transactionsNo.
Controls on personal capital transactionsNo.
References to legal instruments and hyperlinksSecurities and Futures (Contracts Limits and Reportable Positions) Rules (Cap. 571Y); www.legislation.gov.hk.
Provisions Specific to the Financial Sector
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 the interest is 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 must set internal limits on their open position in each foreign currency and their aggregate open position for all foreign currencies. No regulatory foreign exchange position limits are set out by the HKMA. However, locally incorporated authorized institutions are required to provide justification to the HKMA if their aggregate open foreign exchange position limits are higher than 25% of their capital base. Regarding the foreign banks’ branches in Hong Kong SAR, the foreign exchange limits of such branches are monitored by their head offices and home supervisory authorities. However, a foreign bank’s branches in Hong Kong SAR may be required to demonstrate the effectiveness of its risk management systems if its aggregate open foreign exchange position limit is higher than 5% of the bank’s capital base. All authorized institutions are required to report their foreign exchange positions to the HKMA on a monthly basis.
Provisions specific to institutional investors
Insurance companies
Limits (min.) on investment portfolio held locallyThere is no minimum limit on the amount that insurers may hold in investments in locally issued securities. However, insurers carrying on general (or non-life) insurance business locally, other than as professional reinsurers or captive insurers, are required to maintain assets in Hong Kong SAR to match their liabilities from such insurance business. The eligible assets are not limited to local securities and may be in the form of cash, bank deposits, or landed properties.
Currency-matching regulations on assets/liabilities compositionAn insurer whose long-term (or life) business liabilities in any particular currency are not (fully) matched by assets in that currency must set up a prudent provision for such currency mismatch.
Pension fundsFor 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.
Currency-matching regulations on assets/liabilities compositionYes.
References to legal instruments and hyperlinksBanking Ordinance; www.legislation.gov.hk/eng/index.htm; Insurance Companies Ordinance (Cap. 41): Requirement for Assets in Hong Kong and Assets That Qualify as Assets in Hong Kong under Section 25A and the Eighth Schedule of Cap. 41; Requirement for Currency Matching (or Reserve for Mismatch) under Section 6 of the Insurance Companies (Determination of Long-Term Liabilities) Regulation (Cap. 41E); www.oci.gov.hk; www.legislation.gov.hk/eng/home.htm; Mandatory Provident Fund Schemes Ordinance (Cap. 485); Mandatory Provident Fund Schemes (General) Regulation (Cap. 485A); MPF Guidelines (Part III on Investment) and Codes (Code on MPF Investment Funds and Erratum to the Code on MPF Investment Funds).
Changes during 2006
Capital transactions
Controls on derivatives and other instrumentsFebruary 10. The position limits for stock option contracts were increased in response to the growth of the market.
Changes during 2007
Capital transactions
Controls on derivatives and other instrumentsMarch 30. The position limits for futures and options contracts were increased from 6,000 contracts a futures contract month or options series to a combined limit of 12,000 contracts applicable to all futures contract months and options series.

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