What Are Exchange Funds?

The Exchange Fund is a security deposit for currencies issued by the Hong Kong government. Established under the Monetary Regulations (hereinafter referred to as the "Exchange Fund Regulations") promulgated in 1935. The initial assets of the Exchange Fund were 12.31 million pounds of silver sold by the government to sell note-issuing banks. Since then, with the increase in the number of notes issued, the bank's preparation for issuing notes in exchange for non-interest bearing debt certificates has continued to increase. According to the Exchange Fund Regulations, Exchange Fund assets can be composed of qualified collateral, including issued Hong Kong dollar banknotes, gold, silver, foreign exchange (primarily sterling), or any other collateral recognized by the Secretary of State. Its main role is to influence the exchange rate by buying and selling the pound at a predetermined exchange rate with three note issuers. Since the Hong Kong dollar was pegged to the US dollar in 1972, especially since the Hong Kong dollar floated freely in November 1974, the Hong Kong government has strengthened its intervention in the market through the Exchange Fund to maintain the basic stability of the Hong Kong dollar exchange rate. ^[1]