G.F. 323
CONFIDENTIAL #
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Chapter 5
THE MONEY AND FOREIGN EXCHANGE MARKETS
15.
The money supply
32.
In Hong kong there are two main determinants of increases
in the stock of money held by the non bank private sector.
The first
is the acquisition of foreign assets by the banks or by the Government.
If the banks acquire foreign assets they create Hong Kong dollar deposits
in order to purchase these assets; if the Government purchases foreign
assets it is running down its holding of local currency and therefore
transferring ownership of these deposits from the Government to the
private sector. The second important determinant is domestic lending
by the banks. A final but very small influence is the financing of
the balance between the Government's revenues and expenditure. If it is
in surplus the effect is to withdraw money from the private sector
and transfer it to the Government. If there is a deficit which is met
by a reduction in the Governments Hong Kong dollar deposits then money
held by the private sector increases.
33.
The determinants of the money supply are the same regardless
of the exchange rate regime prevailing although the relative importance
<f domestic lending may be higher when the exchange rate is not fixed.
But the type of exchange rate regime does decide what determines the
acquisition of foreign ascets by the banks and by the Government.
Under a fixed regime these two sectors stand ready to accept, passively,
the net outcome of all overseas transactions; if Hong Kong earns more
foreign exchange than it uses then one or both sectors are obliged to
purchase the excess and in so doing increase the Hong Kong dollar
deposits held by the private sector. In these circumstances the only
domestic influence on the stock of money is the banks domestic lending
and to a very small extent the Governments financing of its fiscal
balance.
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