M
SC, OVER THE WEEKEND, THE GOVERNMENT AND NOTE-ISSUING RANKS
CEBLED TOGETHER THE OUTLINES OF A NEW SCHEME WHICH WOULD ATTEMPT
TO INTRODUCE AN ELEMENT OF A FIXED RELATIONSHIP BETWEEN THE HONG KONG DOLLAR AND OTHER CURRENCHES. THE GOVERNMENT ALSO SAID THE
EXCHANGE FUND WOULD FLAY A MORE ACTIVE ROLE IN THE FOREIGN-EXCHANCE
MARKET.
THE GOVERNMENT ALSO LEANDE ON THE HONG KONG ASSOCIATION OF BANKS, THE INTEREST-RATE CARTEL, TO INCREASE DEPOSIT RATES ACROSS THE
BOARD BY THREE PERCENTAGE POINTS. IN MATSELF, AN INTEREST-RATE RISE WOULD HAVE DONE LITTLE, BUT COMBINED WITH GOVERNMENT STATEMENTS,
IT SENT SOME SHORTS SCURRYING FOR COVER, AND AT LONG LAST
INTRODUCED AN INTEREST-RATE E
RATHER THAN U.S. CURRENCY.
NCENTIVE TO HOLDING HONG KONG DOLLARS
A
IN RESPONSE, THE LOCAL CURRENCY RECOVERED HET HALLY TO AROUND 8.40/8.80, BUT THE NERVOUSNESS OF THE MARKET WAS INDICATED BY THE EXTRAORDINARILY WIDE SPREADS THAT CONTINUED TO RE QUOTED. GRADUALLY THEREAFTER THE MARKET SETTLE DOWN, SPREADS NARROWED AND HONG KONG CURRENCY CONTINUED TO IMPROVE BACK TO AROUND 9.10 ON SEPTEMBER 28, HEAVILY BOOSTED BY AN ACUTE SHORTAGE OF FUNDS MN THE HINTER-BANK MARKET WHICH PUSHED RATES UP ABOVE 30
PERCENT. BUT AT REMAINED VOLATILE AND FORWARD RATES CONTINUED
TO EXH4BIT VERY WIDE SPREADS.
IN THE SLIGHTLY LONGER RUN, THE CURRENCY'S ABILITY TO STABILISE WILL DEPEND ON THE CREDIBILITY OF THE DETAILS OF THE NEW SYSTEM. MN OUTLINE, IT WILL ATTEMPT TO ESTABLISH A FOXED RELATHONSHIP BETWEEN THE NOTE ISSUE AND THE CURRENCY'S EXTERNAL VALUE. AT PRESENT, NOTE-ISSUING BANKS DEPOSIT HONG KONG DOLLARS WITH THE EXCHANGE FUND WHEN THEY HSSUE NOTES. ALTHOUGHT THE CERTIFICATES OF INDEBTEDNESS WHICH THEY ARE 4SSUED IN RETURN ARE NOT INTEREST- BEARING, ENLARGEMENT OF THE CURRENCY IN CIRCULATHON IS A PAINLESS PROCESS FOR THE SANKS WHICH MANUFACTURE CREDIT AND THEN SEE THE EXCHANGE FUND'S HONG KONG DOLLARS RE-DEPOSHTED WITH THEM.
THE DEA NOW HS TO GO BACK TO A VERSION OF THE SYSTEM WHICH EXISTED UNTIL 1974, WHEN BANKS HAD TO DEPOSIT FOREIGN CURRENCY AT THE RATE AT WHICH THE HONG KONG DOLLAR WAS THEN PEGGED (FIRST TO STERLING, LATER TO THE U.S. DOLLAR). THE INTENTION IS TO REQUIRE FOREIGN-CURRENCY DEPOSITS AND FHX A STABLE RATE AGAINST WHICH THE HONG KONG CURRENCY COULD BE ISSUED AGAINST THEM. MOST LIKELY THE SYSTEM WOULD ENVOLVE REDEMPTION OF EXISTING CERTIFICATES OF MINDEBTEDNESS AND THEIR REPLACEMENT WITH NEW ONES ISSUED AGAINST A BASKET OF CURRENCIES RATHER THAN JUST THE U.S. DOLLAR UR STERLING
OR
THOUGH SOME FAVOUR STERLING FOR POLITICAL REASONS.