Economics

1. Economics Chapter 3 Money and Banking system

2. What is money? • People use money to: • settle payment • pay for goods and services • Money is • generally accepted means of payment • a medium of exchange • Definition • Money can be anything that is generally accepted as a means of payment or a medium of exchange.

3. Barter system • Before using money • Exchange of goods directly. • E.g. a loaf of bread  a jar of wine • Limitation • Double coincidence of wants* • Both parties want the goods from others • No trade if can’t match other’s need • From barter to the use of money • 1st stage fish vegetable • Fish  salt / sugar / metal / jewels • Fish  shells / precious metals • Fish  coins and notes

4. Functions of money 1. As a medium of exchange • A means of payment • Avoid the need for double coincidence of wants

5. Functions of money 2. As a store of value • Money is a form of asset • Store the value of purchasing power  use the power to purchase later • Avoid perishable goods, high storing cost • Types of assets and liquidity

6. Functions of money 3. As a unit of account • For measurement • How much…? • Price / revenues / income… • Value for comparison 4. As a standard of deferred payment • Outstanding accounts • Wages • Mortgages • Instalments

7. Properties of money • Generally accepted • As a medium of exchange • Without acceptance by people, no use • Scarce and has a stable value • Hard to obtain, otherwise no one wants • Without stable value, purchasing power can’t be stored • Limitation: inflation or deflation is inevitable • Durable • If perishable, can’t store the value • If easy to wear out, high cost to use

8. Properties of money • Homogeneous and easily recognised • Uniform standard  value and authenticity • Reduce argument when using • Divisible • Can be divided into smaller value for small-value transaction • Portable • Easy to carry out transaction in different location

9. Barter vs. Using money

10. Determination of money (Properties)                               Are they money? Money

11. Determination of money (function)                     The cheque or card itself is not money. The deposits for the service is money. Money

12. Money in modern society • Legal tender (Cash) • Coins • Banknotes • Deposit • EPS payment • Credit card payment • Payment by cheque

13. Money supply • the total amount of money in a region • Formula:Money supply = Cash + Deposits • Cash held by the public • Money that circulated in the market • Deposits (in deposit-taking institutes in HK) • Licensed banks • Restricted licence banks (RB) • Deposit-taking companies (DTC) • Total money supply = Money supply of HKD + foreign currencies

14. Money supply • Types of deposits

15. Cheque

16. Measuring money supply • Types of deposits

17. M1 = Cash + Demand deposits = $80 + $70 = $150 • M2 = M1 + deposits in licensed banks = $150 + 120 = $270 • M3 = M2 + Deposits & NCDs in RBs & DTCs = $270 + $20 + $40 = $330

18. Money supply Describe the immediate effect the transaction below have on M1, M2 and M3. • John deposits $500 cash into a current account. M1 remains unchanged. M1 = Cash + Demand deposits. With cash decreases by $500 but demand deposits increases by $500, M1 remains unchanged. There is no effect on M2 and M3.

19. Money supply Describe the immediate effect the transaction below have on M1, M2 and M3. • Mary transfer $1,000 from a current account to a saving account. M1 decreases by $1,000 because demand deposits are part of M1. M2 remains unchanged because both demand deposits and savings deposits are components of M2. There is no effect on M3.

20. Banking System • What is a Bank? • A bank is a financial intermediary which provides special types services relating to finance. • A bank is a company which carries on “banking business” with a valid banking license. (Banking Ordinance)

21. Banking System • 2 types of bank • Central banks • Commercial banks

22. Central banks • A central bank • a non-profit making government body • monitoring the monetary system • controlling the money supply • Accepting deposit from and providing loans to commercial banks(bankers’ bank)

23. Central banks • USA: • The Federal Reserve System (The Fed)美國聯邦儲備局 • China • People’s Bank of China (PBC)中國人民銀行 • UK • Bank of England英倫銀行 • HK • Hong Kong Monetary Authority (HKMA)香港金融管理局 • HSBC香港上海匯豐銀行

24. Functions of a central bank • Issuing banknotes and coins • ensuring circulation & stability of value • in HK: • HSBC • Standard Chartered Bank • Bank of China • HMKA • Acting as the government’s banker • offering bank services to the gov’t • in HK: HKMA + HSBC

25. Functions of a central bank • Providing discount windows (貼現窗)services • borrow loans to commercial banks • named as: “discount window” • interest rate: “discount rate” (貼現率) • in HK: HKMA • Lender of the last resort (最後貸款人) • to help banks or financial institutions survive a bank run. • avoid widespread bank failure &collapse of banking system • in HK: HKMA

26. Functions of a central bank • Monitoring commercial banks • formulate banking regulations • monitor irregular banking business • in HK: HKMA • Formulating monetary policies • money supply and interest rate • increase interest rate to reducing C and I (not in HK) • in HK: Financial Secretary and HKMA

27. Functions of a central bank • Acting as a clearing house (結算所) • cheque clearing for commercial banks • settle cheque payment • in HK: Hong Kong Interbank Clearing Limited (HKICL)香港銀行同業結算有限公司(結算公司) A’s bank 4. HKICL sends the cheque to A’s bank A 5. A’s bank agree the payment HKICL 1. Mr. A writes a cheque to Mr. B 6. B’s bank receive the payment B’s bank 2. Mr. B saves the cheque to his account B 3. B’s bank sends the cheque to the clearing house

28. Who has the role of a central bank in HK?

29. Commercial banks • 3 Tier system • Licensed bank (LBs) 持牌銀行 • Restricted licence banks (RBs) 有限制牌照銀行 • Deposit-taking companies (DTCs) 接受存款公司

30. Deposit-taking institutes in HK(The 3-tier banking system)

31. Functions of a commercial bank • Receive deposits of various types including demand, savings and time deposits • Make loans of various types including bank overdraft, mortgage, tax loans and trade finance • Issue letters of credit (LC) (信用證) and bills of exchange (BOE) (匯票) • Accept and pay bank drafts • Rent safety deposit boxes • Currency exchange • Gift cheque

32. Deposit-taking institutes in HK(The 3-tier banking system)

33. HK as an international financial centre • China market • Economic reform in China  allow export from & import to China • HK provides: • Re-exports • Commercial services • Insurances • Loans • Foreign exchange • Infrastructure development connected to Mainland, such as highway, railway…

34. HK as an international financial centre • Professionals: • Financial experts • Security markets • Law experts • Contract • Science experts • New inventions

35. HK as an international financial centre • HK has well-developed infrastructure • Judicial system • Law and order to protect business • Financial and banking system • Ease the running of business • Communication system • Ease the communication with oversea businessmen

36. HK as an international financial centre • Government policies • A free flow of information • Local and foreign investors can enter and leave HK freely • A free port • No foreign exchange control • Low tax rates and simple tax structure

37. HK as an international financial centre • Favourite time zone • Continuous trading: New York + London + HK

38. Benefits to HK economy • Wealth creation • GDP: • Banking (8%) • Insurance (1.3%) • Others, e.g. financial consultation, legal related (3.4%) • Employment • Banking (2.2%) • Insurance (1.3%) • Others (1.7%)

39. Benefits to HK economy • Providing investment opportunities • Security market, for capital raising • Further enhance investment

40. Negative effect to HK economy • Fluctuates with external factors • International financial crisis (e.g. Lehman’s mini-bond) • Rely on capital from China (e.g. hot money from China) • Lack of autonomy • Easily affected by the change of interest rate in USA and worldwide • Speculations against linked exchange rate • Chance to be damaged by international speculators (to be discussed later)