Hong Kong: Sterling Guarantee
Following the removal of the banks' sterling balances from
Government holdings, Hong Kong's external reserves can fluctuate as a
result of im
(a) intervention in the foreign exchange market;
4
(b)
budget surpluses or deficits;
(c)
(a)
Exchange Fund transactions with the note issuing banks;
Government foreign currency income and expenditure;
in addition to changes in the value of investments.
C
During the period covered by the Unilateral Declaration external reserves should rise slightly as (a) Government revenue will exceed expenditure and part of this may be switched into foreign currency, (b) the note issue and therefore Exchange Fund holdings shoul increase through inflation etc. and (c) income will be received on investments. Intervention in the foreign exchange market and further changes in the value of existing holdings cannot, of course, be
predicted.
The
Of the above only interest and dividends on sterling
securities of, say, £11 mn. will definitely accrue in sterling. banks have disposed of most of their sterling and indeed may now have to buy in sterling to meet China's needs of about £50 mn. per month. They may, therefore, now be expected to transfer to the Exchange Fund as backing for increases in the note issue either US dollars or, more likely, HK dollars (as happened between July 1972 and January 1973) since their currency balances may come under pressure as a result of
Budget surpluse increased import costs arising from the oil situation.
arise in local currency, but may be invested in foreign securities. As the Hong Kong Government does not wish to purchase further sterling, the larger part of increases in the Government's reserves during the period will probably accrue in HK dollars or US dollars, more likely
the former