flows became excessive and/or the local dollar appreciated too much in relation to export prospects. There is no Exchange Control or any other control mechanism in Hong Kong to prevent speculative flows but they would seem less likely to occur under floating than with a new fixed parity or a step change system. The only large exchange movements in recent times were connected with Stock Exchange, not exchange rate, speculation. As to the technique of floating, the-
availability of competent foreign exchange dealers and brokers in Hong Kong should present no difficulties on that score. Floating implies very little change in official reserves and although these have fallen over the last year mainly due to the repatriation of funds which had come in earlier to take advantage of the rising equity market, the overall level of official reserves is still higher than at end-1971 and appears to be fully adequate.
Conclusion
Floating would thus appear to be the best solution, although any change involving a degree of revaluation against sterling would increase the cost of the Hong Kong Government's guarantee to the banks. The cost of implementing the guarantee based on the sterling/Hong Kong dollar rate of 9th July would be £42 millions a further 5% revaluation of the Hong Kong dollar against sterling would involve an additional £18 million. This only emphasises the need for the Hong Kong Government to put out local paper in exchange for the lanks' excess
A
foreign exchange holdings, for at present the Government are committed to pay compensation on funds most of which under the normal practice of centralising reserves would be theirs to start with.
13th July 1973
D.F.S.