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Hong Kong Monetary Authority in funding boost

By Lillian Liu (China Daily)
Updated: 2008-10-21 16:53

The Hong Kong Monetary Authority (HKMA) is adding HK$4 billion to the banking system in order to ease liquidity pressures faced by potentially vulnerable financial institutions in the city.

Additional three-month exchange fund bills will be offered in two tenders of HK$2 billion each, later this month and early in November, HKMA said in a statement yesterday.

Related readings:  HK ready to ease local banks' liquidity crunch: HKMA chief  HKMA moves to boost liquidity

"Although HK$4 billion is a relatively small amount, the fund injection gives very timely support to worried lenders in the city," said Dick Lee, an analyst at Phillip Securities. "By boosting funds available for financial companies, the government is demonstrating its commitment to maintaining the stability of Hong Kong's banking system."

The injection will significantly improve inter-bank lending activities. Hong Kong's three-month inter-bank lending rate tumbled 0.53 percentage point, the most in 10 years, to 3.66 percent, following the injection, according to HKMA.

"The issuance of additional exchange fund paper will help meet the increased demand for the paper by banks for liquidity management purposes," said HKMA Chief Executive Joseph Yam.

"Increasing the supply of exchange fund paper can also improve banks' access to the discount window and other liquidity facilities recently introduced by the HKMA."

An exchange fund, also known as a swap fund, is usually corporate counsel and financial officers' preferred solution to concentrated wealth. Contributing stock to an exchange fund is likely to prevent the equity from being sold in the markets for several years.

The global credit crisis has boosted banks' demand for exchange fund paper in recent weeks, Hong Kong's banking regulator said.

However, Lee from Phillip Securities thinks the positive effect of the HK$4 billion injection will be transient, possibly only lasting for about one month.

"This is a small action by the government; I believe bigger support accompanying bigger solutions to stop the economy from falling sharply will be announced in the future."

The injection comes after the special administrative region's government expanded its deposit guarantee scheme aimed at safeguarding Hong Kong's banking stability.