to the Banks.
5. The Exchange Fund has in effect been acting to some extent
like a Central Bank, ie. defending a rate of exchange, and has
felt obliged to compensate banks for the embarrassment this depar-
ture from the traditional system has inevitably caused. This in
turn has compromised the traditional basis on which the "automatic"
system works. A good banker would obviously be worried by the
fact that his assets do not meet his liabilities in the context of
one currency transferable into another at a fixed rate on demand.
I think the risk is probably exaggerated and that the Hongkong
Government would not experience difficulty in raising an external
loan to meet the deficit if need arose.
6.
However Hongkong probably cannot continue to "have it both
ways" on the currency front. Has not the time come to move to some sort of "Monetary Authority" (on Bahamas lines)? This could
mean, amongst other things, some economy in the holding of
external reserves. But perhaps the peculiar political circumstances
of Hongkong preclude such a development?
22 July 1974
M. Maccoll
(Mrs) M Maccoll
DTEU