from the banks to the Government.
But if the banks are unwilling
It is,
to carry such risks, and have to be covered by some form of Hong Kong Government guarantee, then in effect it is the Hong Kong Government which assumes the exchange risk on foreign exchange holdings. however, normal practice for Governments to hold directly the bulk of a country's reserves.
5. It is true that Governments usually issue short and longer term paper to cover deficits in the current or capital budget or both. It is equally true that since the Government of Hong Kong seeks to achieve a budgetary balance or surplus it is unnecessary for it to issue paper to finance current expenditure. The Hong Kong Government
may think that the issue of securities to the banks against the
payment of foreign exchange might be regarded as tantamount to deficit financing and detract from Hong Kong's image of credit worthiness
flowing from sound financial management. This. is unlikely because the transfer of part of the banks' external reserves to the Government's own central reserves would have no inflationary impact unless they were to be drawn on to finance a relatively high level of internal expenditure. Since this would not be the intention the position
could be made clear at the time by official announcement. It is not unusual for Governments to issue paper for reasons unconnected with deficit finance. A number of countries, including Japan and Germany, have recently, without need to borrow, put out short term securities (sometimes through the Central Banks) for reasons associated with
monetary policy. The object is to relieve the commercial banking system of unwanted foreign exchange or of excessive liquidity generated by foreign exchange inflows.
6.
As to the cost of servicing Government paper, the foreign exchange acquired by the Government will be employed in London, and later possibly in other centres, at rates of interest which may be in excess
of the rate payable on the Hong Kong Government securities issued
locally. For the reasons already outlined, it would be in the banks'
interests to take up such paper and this will be a consideration in
establishing the rate of interest to be paid on the Government
securities.
3