Information paper on Agenda V: Shortage of Coins for Provisional Legislative Council Panel on Financial Affairs Meeting to be held on 1 December 1997

THE COIN SHORTAGE IN HONG KONG

Background

1. The first signs of a possible shortage came to notice in May when the normal coin sorting activities revealed an acceleration in the decrease in the ratio of Queen's Head (QH) coins to Bauhinia (B) coins. This became more obvious as the media focused on the speculative activities surrounding the QH coins in both mainland China and Hong Kong during and after the handover. These activities then extended from QH coins to the 1997 commemorative design coins and most recently to the standard 1997 B coins.

2. Historically, since the start of the compilation of statistics on coin issuance, some 4.4 bn pieces of coins have been issued. Based on historical injection patterns and sorting statistics, it is estimated that some 3.4 bn pieces were in active circulation in Hong Kong at the end of May 1997. Of these 3.4 bn pieces, about 800 mn pieces were QH's coins. The balance of the 1 bn pieces are assumed lost, collected or circulating outside of Hong Kong.

3. As the conversion from QH to B coins which began in 1993 started with the larger denomination coins, of the 800 mn pieces of QH coins still in active circulation in Hong Kong, it is estimated that about 75% are in the smaller denominations of 10 cents, 20 cents and 50 cents pieces.

4. Recent sorting statistics confirm our assumption that the bulk of the 800 mn pieces of QH coins which were still in active circulation in Hong Kong at the end of May 1997, have been diverted from general circulation in Hong Kong into collections for commemorative, investment or speculative purposes.

Manifestation of the shortage

5. Public manifestations of the shortage include:

1. queues at banks;

2. hoarding psychology of genuine end-users;

3. reports of shops/restaurants using goods in lieu of coins as small change;

4. reports of opportunistic elements engaging in selling coins at a profit;

5. allegations of local banks refusing to provide coin changing services; and

6. security transport companies engaging in coin distribution activities.

These manifestations are symptomatic of the underlying issues of supply, distribution, and demand.

Solutions provided from the supply side to meet the shortage

6. By early June, we began to issue existing stocks and place additional orders of substantial magnitude with the Royal Mint to meet the coin shortage. Because of capacity constraints at the Royal Mint, we also used the service of the Royal Canadian Mint. In 1997, total coin orders amounted to 1.1 bn pieces, which represent 32% of the coins in active circulation. A more normal annual order would be about 200 mn to 300 mn pieces.

7. The actual and expected injections of new coins into circulation between 1 May 1997 to 31 March 1998 are provided in the table below:

These numbers exclude the 80 mn pieces of 1997 commemorative design coins already injected into circulation as we assume that these 80 mn pieces have also been diverted from general circulation into collection.

8. As the above table indicates, the estimated 800 mn QH coins will be fully replaced by mid-December 1997. The above figures also indicate that in the 11 months between 1 May 1997 and 31 March 1998, new coins injected total 1,255 mn pieces which is a historic record and represents an additional 37% of the 3.4 bn pieces in active circulation as at end-May 1997.

9. Additional orders and delivery schedule after April 1998 are to be confirmed.

10. The normal order and delivery lead time for coins other than 10 cents and 50 cents is 4 to 6 months, and for 10 cents and 50 cents pieces is 6 to 8 months due to the special metal alloy used in these two coins. We have already negotiated with the mints to shorten this lead time substantially.

11. We are also expanding the usage of mints beyond the two mints currently in use. Hong Kong coins are of very high quality due to the high usage in vending machines. The number of mints capable of producing coins of this high standard is limited. Production capacity worldwide is also constrained as other economies are also experiencing shortage in small denomination coins.

12. The massive coins coming into circulation may relieve the above mentioned symptoms of coin-shortage which we will describe briefly in the paragraphs below.

Queues at banks

13. Queues to exchange coins have been forming at banks. We understand that in addition to genuine users of coins, these lines include opportunists who in turn sell their positions in the lines as well as coins exchanged at a profit. One much publicised media report interviewed individuals who alleged that they are able to do two turns per day. Our own investigations indicate that $20 bags of 10 cents coins sell at $35 and $50 bags of 20 cents coins can fetch $65. It is believed that coins thus purchased are resold to "users" The voluntary sale and purchase of coins between two parties is a legal transaction. Since the shiny coins are most in demand, it follows that some of these coins may be going to collectors. Banks are reluctant to limit the coin change to regular customers due to possible adverse public reaction. To discourage the "collection" appeal, we are investigating the possibility of "pre-aging" the coins to reduce the shine prior to injection into circulation.

"Hoarding" psychology of the genuine "end-users"

14. To forestall the possibility of running out of small change, genuine "end-users" may be induced to "hoard" coins in excess of their normal needs. It is hoped that the dissemination of information to the public concerning the coming supplies will ease this psychology.

Shops and restaurants using goods instead of coins to provide change

15. As these exchanges are de facto commercial agreements between the seller and the buyer, we cannot interfere.

Allegations of local banks refusing to provide coin changing services

16. There are over 1,500 retail bank branches in Hong Kong. Most of these branches are small, with limited storage space and on profits budgets. Coins require more storage space than notes, and coins services are expensive to maintain due to the transportation costs. The decision on providing coin service to clients is a commercial decision on the part of the banks?guidelines. We understand that some of the banks have been unable to obtain the needed coins. The additional arrivals would relieve this shortage.

Distribution channels

17. The usual arrangement is to ship new coins to major bank centres for further distribution to the smaller branches. In turn, unused coins are returned to the main bank vaults for sorting and redistribution. Security transport companies are engaged in the transport of these coins from point to point. Over the past few years, instead of returning all unused coins from the large users to the bank vault for redistribution, some of the surplus coins have been transported directly between the large users to the end-users by the security transport companies. This is not a recent phenomenon and has arisen out of voluntary arrangements made between the various parties. This may not have impaired the efficiency of the distribution, and may have influenced the re-allocation of coins in the process of re-distribution. We are looking into this matter and are engaged in discussions with the major relevant parties on the issue of distribution costs. The intention is to arrive at a policy of fair allocation of the distribution costs involved which will be equitable to parties concerned.

Use of Hong Kong coins in mainland China

18. There are no exchange controls in Hong Kong and estimates suggest that some 25% of Hong Kong notes and coins issued are circulated outside of Hong Kong. This is particularly common in Macau and southern China. Our sources indicate that such usage of Hong Kong coins outside of Hong Kong have not arisen significantly in recent months; but we will continue to monitor this situation.

Return of coins hoarded

19. There are indications that the investment value of these coins have receded. However, small denomination coins are more difficult to spend; and the return to circulation therefore slower. We are also looking into means of "re-attracting?the small denomination coins back into circulation.

20. Meanwhile, we are fully committed to continue to mint and release into circulation new coins until the shortage is relieved.

Hong Kong Monetary Authority
27 November 1997

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