SECRET
3
best suit Hong Kong's conditions?
The Renminbi would not be
appropriate, for the Renminbi is not a true intemational currency but
itself adjusts to changes in other currencies. Givon the importance
attached by the Hong Kong Government to the cost of imports from China
in relation to the cost of living, an appropriate yardstick might be
the average rate of certain European currencies which would tend to
produce a reasonably stable relationship between the Renminbi and the
Hong Kong dollar provided that China does not change the basis on
which she quotes the Yuan. However, if it became known that a step
change system was being operated, either because of an official
announcement or by deduction after the first of such changes, then
speculative movements of funds both by local people and foreigners could ensue (although, of course, the smaller the step changes the less likely would be the risk of hot money flows).
3. Daily Rates
:
This
This would involve the quotation of new fixed rates daily
based perhaps again, say, on a mixed bag of European currencies.
use of this system, however, tends to be used mainly in centres without well functioning exchange markets where the Monetary Authorities in effect provide and receive the bulk of the foreign exchang. It could be used in Hong Kong but it would involve frequent interference by the Govornment in the free functioning of a relatively sophisticated foreign exchange market. It would, however, greatly
reduce the scope for speculative movements.
4. Floating
Floating should automatically result in a revaluation of the Hong Kong dollar which in present circumstances appears to be the necessary first step under any system. In principle it should require little intervention other than smoothing operations unless speculative