G.F. 323
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16.
34.
When the exchange rate is not fixed the acquisition of foreign
assets by the banks and the public sector are determined as a matter
of choice by these two sectors. The demand for and supply of foreign
exchange is not equated by the banks or the Government meeting the
excess or deficit. The difference after each has adjusted its own
holdings of foreign assets is met by an adjustment in the price of
the Hong kong dollar. As the acquisition of foreign assets is deter-
mined by the Hong Kong Government and the Hong Kong banking sector
there is a sense therefore in which the stock of money in Hong Kong
is the outcome of purely domestic influences when the exchange rate
is allowed to float.
35.
During the early part of 1975 the banks and the Government
were acting to prevent an appreciation of the Hong Kong dollar; their
combined efforts together with the strong demand for Hong Kong dollars
prevented an appreciation but, of course, increased the Hong Kong dollar
deposits held by the private sector. Although there was an element of
smoothing, with later intervention to buy Hong Kong dollars, the net
effect was to hold the exchange rate lower than it vuld otherwise have
been and to increase the stock of money in the private sector. In
addition the modest increase in bank lending would also have increased
the stock of money in 1975. The public sectors' overall surplus in the
calendar year of 1975 has had a small expansionary effect on the stock
of money held by the private sector.
36.
There was not the same intervention in 1976 and the situation
approximated to a regime where the exchange rate equated the capital
and current accounts of the balance of payments. The money supply was
therefore determined by domestic bank lending and any foreign assets the
banks and the Government chose to purchase. As a consequence the
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