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LE Paper 7 · Topic 2
Paper 7 asks how Hong Kong's financial system is governed and who works in it, not the licensing detail Paper 1 drills. Expect questions on who sets monetary policy and who carries it out, what the Exchange Fund is for, how the three tiers of authorized institutions differ, what each regulator and industry body does, and how fiscal policy, the Mainland, the US and technology move the Hong Kong market. Learn the tables below: most questions turn on one figure or one split of roles.
14 min read7 sections
Checked 11 October 2026 against hkma.gov.hk (The HKMA; Money; Linked Exchange Rate System; Base Rate; Exchange Fund history and statutory purposes; EFAC; Three-tier Banking System; Digital Banks; Money Brokers; Notes; Wealth Management Connect; Faster Payment System; Fintech Supervisory Sandbox; CBDC), elegislation.gov.hk (Cap. 66 s.3; Cap. 155 Sch. 7 and s.118C; Cap. 364 ss.3, 4, 6, 7, 12; Cap. 41 ss.4AAA, 4A; Cap. 571D ss.2, 5, 6), basiclaw.gov.hk (Chapter V), dps.org.hk (Features of DPS, FAQs, History), mpfa.org.hk (Mission and role, Background, Mandatory contributions, eMPF Platform), sfc.hk (Our role; Family Offices FAQs), afrc.org.hk (Our role), hkexgroup.com (HKEX Milestones), hkmc.com.hk and ird.gov.hk (FIHV tax concessions). Independent prep, not endorsed by HKSI Institute or the SFC.
Hong Kong's financial system is run by statute. The Basic Law (Chapter V) sets the frame: the Government formulates its own monetary and financial policies (Art. 110), the Hong Kong dollar must be backed by a 100 per cent reserve fund and designated banks may be authorised to issue it (Art. 111), no foreign exchange controls may apply and capital moves freely (Art. 112), and the Exchange Fund is managed and controlled by the Government primarily to regulate the exchange value of the Hong Kong dollar (Art. 113). The Financial Services and the Treasury Bureau sets financial services policy; the regulators implement it.
The Exchange Fund was set up by the Currency Ordinance of 1935 (now the Exchange Fund Ordinance, Cap. 66) to back the note issue. Under s.3 it is under the Financial Secretary's control, exercised in consultation with the Exchange Fund Advisory Committee (EFAC). The Financial Secretary is EFAC's ex officio chairman and the Chief Executive appoints the other members. Since the 1992 amendment (s.3(1A)) the Fund may also be used to maintain the stability and integrity of the monetary and financial systems, with regard to its primary purpose.
| Exchange Fund investment objectives (set by the Financial Secretary on EFAC's advice) | Order |
|---|---|
| Preserve capital | 1 |
| Keep the entire Monetary Base fully backed by highly liquid US dollar assets | 2 |
| Keep enough liquidity to maintain monetary and financial stability | 3 |
| Subject to the first three, earn a return that helps preserve long-term purchasing power | 4 |
Since 1976 the Government's fiscal reserves have been placed with the Fund, and since 1 January 2016 so has the Future Fund. The Fund is split into portfolios: the Backing Portfolio (short-term liquid US dollar securities backing the Monetary Base, since 1998), the Investment Portfolio (bonds and equities, including emerging market and Mainland assets) and the Long-Term Growth Portfolio (private equity and overseas real estate, part of the diversification begun in 2008). The HKMA calls the Fund the last line of defence: it supported the futures market in the 1987 crash, countered attacks on the currency and stock markets in August 1998, and guaranteed all Hong Kong deposits in October 2008.
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Other public bodies around the system: the Hong Kong Mortgage Corporation (established March 1997, wholly owned by the Government through the Exchange Fund; mortgage insurance, reverse mortgages, SME guarantee schemes) and the Hong Kong Deposit Protection Board, which runs the Deposit Protection Scheme but does not regulate banks.
Trap: saying the HKMA controls the Exchange Fund. The Financial Secretary controls it; the Monetary Authority manages it under delegation.
Takeaway: Financial Secretary controls the Exchange Fund, advised by EFAC. Primary purpose: exchange value. Since 1992, also monetary and financial stability.