SECRET
diversification facility which was granted only to the Hong Kong Bank.
In the event as the Hong Kong dollar was weak at the time the sterling
released was used both for direct market intervention and for indirect
support by way of the sale of sterling to the Bank of China. More
recently, as a result of the weakness of the U.S. dollar, the Hong Kong
dollar has been strong and the U.S. dollar has been supported both by
the Exchange Fund and, according to current cables from Hong Kong,
also by the banks by sales of Hong Kong dollars presumably for their
own account. It should be noted that when the Exchange Fund acquires
U.S. dollars they accrue to Hong Kong's official reserves and will thus,
other things being equal, reduce the proportion held in sterling for
MSP purposes but when the Hong Kong Bank and other banks buy dollars
they do not count as part of official reserves unlike the banks'
guaranteed sterling.
In addition to the Exchange Fund and the commercial banks,
independent foreign exchange dealers and brokers, three or four of
which are branches/subsidiaries of London firms, also operate in the
market.
1
Hong Kong's exchange policy must always take into account
that China is an important trading partner supplying about 16% of the
Colony's retained imports and, in particular, about half of her food
imports, an important element in the cost of living. However, the
largest supplier to Hong Kong is Japan whose exports to the Colony
represent about 26% of retained imports. A large part of China's
foreign exchange receipts from and through the Colony accrues to her
in Hong Kong dollars which she has traditionally converted into
sterling: part of such sterling has been used direct to pay for
imports and part is thought to have been converted into other European
currencies mainly in Paris. China's concern looks hitherto to have