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The Exchange Fund - Risks and Responsibilities


My accountant friends have jokingly nicknamed me the 'Ace Broker' of the HKSAR. They are, of course, referring to my recent appointment as a director of the Exchange Fund Investment Company Limited (EFIL).

As you know, the EFIL has been give the important task of safeguarding the value and interests of the substantial portfolio of Hong Kong equities recently acquired by the Government. To be exact, this translates into a heavy HK $118.1 billion responsibility, not to mention the very real and considerable political risks that come with the job.

The fact of the matter is, the EFIL has to manage the fund for the public (the HKSAR) which is almost impossible to please. The initial buying spree caused quite a stir in the market place and when this process is reversed, it is easy to foresee that the eventual exit of this huge portfolio will be met by similar difficulties and criticisms.

Worse still, as such a buying spree supports the stock and share markets and pleases the public, an unskilled dumping exercise could easily trigger a free fall in the value of shares. This would result in the EFIL being made an obvious scapegoat for any associated economic and financial problems, taking the wrath of public anger. So with such real risks and a heavy responsibility, was it worth taking the job?

I pledged in my recent election campaign that I would:

1. cultivate a close working relationship with the Hong Kong Government
2. support Government's reasonable financial and fiscal policy and help accountants in public service, and
3. promote wide recognition of accountants' professional qualifications and raise our social status.

Accepting the appointment as a director of the EFIL will serve to enhance the status of accountants.

In my quarterly report to the HKSA Council on 20 October 1998 (available on my web sits at http://www.ericli.org), I explained that the unexpected move by the Government to directly intervene in the financial markets on 14 August 1998 was justified because it had little choice but to do all it could to maintain market order.

I predicted that the move would result in an immediate profit windfall for the Exchange Fund, but that the Government should refrain from intervening after that. I also urged the Government to actively seek international support and co-operation as a matter of urgency and to restructure the financial markets to increase transparency, and to push up the costs borne by speculators.

The Government did exactly this and when the Financial Secretary offered me a directorship of the EFIL, I felt duty-bound to accept in my capacity as a professional accountant. How else could your LegCo representative, who persistently champions the cause of responsible stewardship and openness in public finance, have reacted?

The 11-member board of the EFIL is balanced in its mix of people who are drawn from different sectors of the community. Our principle role is to act as an external manager advising the Government on the timing and method of disposal of the portfolio so as not to disrupt the market. The EFIL will also liaise with the Central Clearing and Settlement System and attend to all corporate matters on the part of the shareholders.

Our additional brief from the HKMA is not to undertake active trading of the portfolio, but to dispose of all or any part of it in a manner conductive to the maintenance of an orderly market. Our actions will also be guided by the HKMA on the advice of the Exchange Fund Advisory Committee.

To safeguard against any possible conflict of interest, all directors of the EFIL will be regarded as public servants under the Prevention of Bribery Ordinance. Furthermore, we will be subject to the EFIL's strict internal code of conduct. We will also have to adhere to the guidelines set down by the Security and Futures Commission for registered investment advisers.

In addition, I have publicly pledged not to personally hold or trade in any of the 33 listed securities while serving as a director of the EFIL.

Besides demonstrating the highest possible standard of ethical conduct for Government boards and committees, I have also spoken out clearly on many public occasions to explain the role, functions and intentions of the EFIL. This high level of transparency has helped to calm investors' nerves and avoid further unnecessary speculation which may prove harmful to the already fickle market sentiment.

The Board has only met once to establish the modus operandi of the EFIL. But the impatient public cannot wait to get answers. And rightly so, because important decisions that will effect their investments will need to be made and soon.

I look forward to contributing the point of view of the accountancy profession during this difficult, but challenging task. If you have any bright ideas, please do not hesitate to let me know. Let us take a forward, responsible stance and work hard with the Government to regain some of the lost trust and confidence in Hong Kong's vibrant free-market system.

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