letter deals with these proposals in some detail, and I have the
following comments1 -
(a) The Governor is correct in saying that the usual reason for the
issue of government paper is to cover government debt; but it i
not the only reason, and a number of surplus countries,
including Japan and Germany, have recently issued paper (some-
times through the central banks) with the object of relieving the
commercial banking system of unwanted foreign exchange, or of
the liquility generated by foreign exchange inflows
However,
(b) It would certainly not be necessary as the Governor seems to
imply in paragraphs 2-4 - for the Hong Kong Government to
create a real debt situation in order to issue paper.
the Mass Transit Scheme seems ready-made for the purpose and
it would be interesting to know the reasoning behind the advice
given by the merchant bankers that a bond issue should be
avoided until a part of the railway is operative.
@
In paragraph 5 the Governor appears to have misunderstood our
proposals. The object of issuing government paper would be to
give the banks an opportunity to dispose of their foreign currency
assets if they wanted to; the question of compulsion would
therefore not arise. It is no doubt true that H.M.T. would like
to see a substantial part of the banks' existing sterling holdings
brought into Hong Kong's official reservés, so that too rapid a
run-down could be avoided; neverthless, I do not think that we
should accept the suggestion that we were motivated by selfish
considerations in putting forward our recommendations.
the
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Similarly, I doubt whether the F.C.0. dan be said to be unaware of
the issues involved in view of the volume of paper that has
been generated!