FROM THE INTERBANK MONEY MARKET TO TIGHTEN IT AND DRIVE UP
MONEY MARKET INTEREST RATES SO AS TO LEND SUPPORT TO THE EXCHANGE
RATE. THE HONG KONG ASSOCIATION OF BANKS, WHICH SETS DEPOSIT
INTEREST RATES IN HONG KONG, HAS BEEN ASKED TO RAISE DEPOSIT
INTEREST RATES FOR THE SAME PURPOSE ON A NUMBER OF OCCASIONS.
THE BANKING COMMUNITY HAS BEEN ASKED TO COOPERATE AND ACT IN A
RESPONSIBLE MANNER BY REFRAINING FROM TAKING AN OPEN POSITION, EFFECT SPECULATING, AGAINST THE HONG KONG DOLLAR. THESE EFFORTS, HOWEVER, HAVE BEEN OVERWHELMED BY VERY STRONG DEMAND FOR FOREIGN
CURRENCIES (MOSTLY US DOLLARS) FROM COMMERCIAL CONCERNS AND
PRIVATE AND EVIDUALS, STEMMING FROM AN UNWILLINGNESS TO BE LONG
IN HONG KONG DOLLARS. SENTIMENT IN THE MARKET IS AGAINST THE
DOMESTIC CURRENCY. IT IS AS SIMPLE AS THAT.
IN
5. AGAINST THIS BACKGROUND, DIRECT INTERVENTION IN THE FOREIGN
EXCHANGE MARKET AND INCREASES IN INTEREST RATES CANNOT BE
EXPECTED TO STABILISE THE EXCHANGE RATE. MOREOVER, ANY SUBSTANTIAL
INCREASE IN INTEREST RATES WOULD BE DAMAGING TO THE PROPERTY
SECTOR AND COULD STRANGLE THE EXPORT-LED RECOVERY WHICH IS NOW
JUST GATHERING STRENGTH.
6. SOME COMMENTATORS, INCLUDING COMMUNIST NEWSPAPERS, HAVE
ADVOCATED THE ABOLITION OF THE 10 PERCENT INTEREST TAX ON HONG
KONG DOLLAR DEPOSITS. ITS CLAIMED THAT SINCE FOREIGN CURRENCY
DEPOSITS ARE NOT TAXED THIS WOULD LEND SUPPORT TO THE EXCHANGE
RATE. HOWEVER, THE DIRECT EFFECT OF ABOLISHING THE TAX WOULD
NOT BE VERY DIFFERENT FROM THAT OF INCREASHING RATES BY ONE
PERCENTAGE POINT. FURTHER, THE REVENUE #MPLICATIONS OF THE
ABOLITION OF TAX WOULD BE UNACCEPTABLE IN WIEW OF THE CURRENT
BUDGETARY POSITION WHICH IS VERY TIGHT.
7. MUCH HAS BEEN MADE RECENTLY OF A CLAIM THAT THE BANK OF CHINA
IS SAID TO HAVE INTERVENED LAST WEEK IN THE FOREIGN EXCHANGE
MARKET TO SUPPORT THE HONG KONG DOLLAR. A FIGURE OF US DOLLARS
30 MILLION HAS BEEN MENTIONED, BUT THIS IS MINISCULE IN RELATION
TO THE SIZE OF THE FOREIGN EXCHANGE MARKET IN HONG KONG: AND QUITE
INSIGNIFICANT IN RELATION TO THE EXCHANGE FUND'S EFFORTS
AND THE AMOUNT OF FOREIGN CURRENCIES THE BANK OF CHINA HABITUALLY
BUYS FROM THE MARKET.
HADDON-CAVE
LIMITED
HKD
FED
PS/ MR. LUCE MR. GIFFARD
CONFIDENTIAL