CONFIDENTIAL
1
(a)
THE GOVERNOR OF HONG KONG'S VISIT: 7-10 DECEMBER 1976
Possible Establishment of a Central Monetary Institution (Defensive)
FLAG-A
BACKGROUND
1.
Officials had some discussion with the Governor during his last visit about the recommendation in the Planning Paper that there should be a further re-examination of the relationship
between the Hong Kong Government and the banks in Hong Kong.
The Governor argued that the arrangements whereby banking affairs
are concentrated in the Monetary Affairs Office and the Hong Kong and Shanghai Bank acts as the government's banker, while theoretically posing a conflict of interest, work perfectly well in practice. He saw no need to establish any new institution with functions similar to those of a central bank, an idea which
had been put forward by a Bank of England adviser in late 1974. The Governor, on his return to Hong Kong, confirmed this view in writing.
ARGUMENT
2.
Officials have not been convinced that the relationship between the Hong Kong Government and the banks is satisfactory and the
Governor has been so informed. More recently, Mr Adrian Smith, Senior Economic Adviser, has reported, following discussions in Hong Kong, that there are prima facie grounds for looking further at the problem of monetary institutions. The Hong Kong and Shanghai Bank itself now apparently sees disadvantages in the present arrangements, though the Hong Kong Commissioner of Banking
seems unaware of any possible deficiency. The case for the establishment of a Central Monetary Institution (CMI) would become more weighty if, in future, there were to be a requirement for
debt management. Mr Smith also discovered some concern as to how the Hong Kong Government could in future carry out its interest and exchange rate policies when the Hong Kong dollar is steadily, if not so far uncontrollably, appreciating in value. This problem
CONFIDENTIAL
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