GRS 2963 SECRET
FM FCO 201731Z AUG 82
TO IMMEDIATE HONG KONG
SECRET
TELEGRAM NUMBER 646 OF 20 AUGUST
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PERSONAL FOR GOVERNOR FROM CLIFT.
HONG KONG STUDY.
1. MIPT: TEXT OF ANNEX F AS FOLLOWS:
A. PRESENT SITUATION
RELATIONSHIP WITH HMG IN CURRENCY AND BANKING
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1. THE LETTERS PATENT AND THE ROYAL INSTRUCTIONS, WHICH FORM THE CONSTITUTIONAL BASIS OF THE GOVERNMENT OF HONG KONG, RESERVE TO THE SECRETARY OF STATE FOR FOREIGN AND COMMONWEALTH AFFAIRS, ON BEHALF OF THE CROWN, CERTAIN POWERS RELATING INTER ALIA TO CURRENCY AND BANKING: THESE INCLUDE THE POWER OF DISALLOWANCE OF ALL LEGISATION AND OF REQUIRING PRIOR APPROVAL OF LEGISLATIVE CHANGES IN CERTAIN CASES. IN PRACTICE, THE HONG KONG GOVERNMENT RUNS ITS FINANCIAL AFFAIRS QUITE INDEPENDENTLY OF HMG. THE TREASURY HAS CERTAIN RESPONSIBILITIES UNDER THE HONG KONG (COINAGE) ORDER 1936 (AS AMENDED). WHEN A NEW COIN IS NEEDED, OR WHEN A COIN IS TO BE DEMONETISED, THE TREASURY'S FORMAL APPROVAL IS REQUIRED. ALSO, UNDER THE ORDER HONG KONG IS REQUIRED TO HAVE ITS COINAGE STRUCK BY THE ROYAL MINT. APART FROM THIS NEITHER THE TREASURY NOR THE BANK OF ENGLAND HAVE ANY LOCUS STANDI IN HONG KONG, NOR ANY FORMAL RELATIONSHIP WITH THE HONG KONG GOVERNMENT. NEVERTHELESS HMG WOULD IN THE LAST RESORT BE REGARDED AS RESPONSIBLE FOR HONG KONG. 2. HONG KONG HAS NO CENTRAL BANK, BUT CERTAIN CENTRAL BANKING FUNCTIONS ARE PROVIDED BY THE EXCHANGE FUND - A GOVERNMENT ACCOUNT MANAGED BY THE MONETARY AFFAIRS BRANCH OF THE GOVERNMENT SECRETARIAT AND OTHERS BY THE HONG KONG AND SHANGHAI BANKING CORPORATION (HSBC).
3. CURRENCY NOTES ARE ISSUED BY HSBC AND THE CHARTERED BANK UNDER SPECIFIC LOCAL ORDINANCES. APART FROM SMALL FIDUCIARY ISSUES (TOTALLING HK DOLLARS 95 MN) WHICH ARE BACKED BY SECURITIES ISSUED OR GUARANTEED BY THE UK OR HONG KONG GOVERNMENTS, ISSUES OF CURRENCY HAVE TO BE BACKED BY INTEREST-FREE CERTIFICATES OF INDEBTEDNESS PURCHASED FROM THE EXCHANGE FUND. THE FUND IN TURN INVESTS THE PROCEEDS EITHER IN FOREIGN CURRENCIES OR IN HK DOLLARS (AS DEPOSITS WITH THE BANKS). THE FUND IS REQUIRED TO MAINTAIN ASSETS EQUAL TO 105 PERCENT OF ITS LIABILITIES IN RESPECT OF CERTIFICATES OF INDEBTEDNESS, BUT THERE IS NO REQUIREMENT FOR A SPECIFIC PROPORTION TO BE COVERED BY FOREIGN ASSETS. THE PROFITS OF THE NOTE ISSUE ACCRUE TO THE FUND. COINS (AND 1 CENT NOTES) ARE ISSUED BY
THE GOVERNMENT AND ARE ALSO BACKED BY ASSETS HELD WITH THE EXCHANGE FUND. AS AT END-1981, TOTAL NOTES AND COIN IN CIRCULATION AMOUNTED TO HK DOLLARS 12.3 BN. THE QUEEN'S HEAD IS USED ON COINS AND THE COLONIAL ARMS ON NOTES.
4. THE EXCHANGE FUND IS RESPONSIBLE FOR REGULATING THE FOREIGN EXCHANGE VALUE OF THE HONG KONG DOLLAR ON BEHALF OF THE GOVERNMENT. IN ADDITION TO ASSETS HELD AS CURRENCY BACKING, IT HOLDS ALL OTHER
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