Addinance
人
CODE 18.77
SECRET
Reference.......
A W25)
Mrs Priest (HKD, WH305)
HONG KONG: ECONOMY AND RECENT HKG POLICY
1.
You asked for a brief description of the steps taken by HKG over the last few days (set out in the Governor's telno 11 of 26 September).
2.
The fundamental problem is the disturbance in the market for HK$, where attempts to sell have been unmatched by demands to buy the currency at existing exchange rates, resulting in rapid declines in the currency's value. An indication of the uncertainty in the market as the HK$ slumped to its lowest point on Saturday 24 September has been the widening spread between buy and sell rates offered by dealers attempting to offset possible losses through very rapid changes in the value of HK$ they may have to hold in the absence of buyers.
3. The following briefly describes the steps taken, and contemplated by the HKG. Paragraph references are to telno 11:
Para 7 (i): HKG issued a statement expressing the Governor's concern about the 'unreasonable rates' being quoted for the HK$, stating that the rates did not reflect the basically healthy state of the economy and particularly the prospects for exports. It urged people to ignore 'alarmist chatter'.
Para 7 (ii): A statement issued subsequently by the Acting Financial Secretary referred to discussions with note-issuing banks, in particular to a possible change in the arrangements for issuing and redeeming Certificates of Indebtedness (CI). This change which was not described in any detail is said to
mean the assumption by the Exchange Fund of a more significant role in the exchange rate determination mechanism.'
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At present a note-issuing bank wanting to issue, say, HK$ 1 million in new notes purchases a CI of this value from the Exchange Fund by making a credit of HK$ 1 million to an Exchange Fund account in its books. (The total Hong Kong money stock is primarily composed of DTC and bank deposits notes and coins represent only about 5% of the widest definition of the money supply.) It is hard to see what the HKG has in mind. Before 1972 in the period when the HK$ was tied at a fixed rate to the £ notes were issued after CI had been purchased with sterling at the prevailing exchange rate. A reversion to this type of arrangement (with notes issued against foreign currency) might be part of an attempt to administer the exchange rate at a given level, or within limits. This is no more than a guess; we will have to wait and see what changes are intended.
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Para 7 (iii): HKG here reveal a step which they may take. This is to draw attention to the law prohibiting the use of foreign currency in domestic transactions (if traders refuse to accept HK$).
Enforcing the relevant/would presumably be rather difficult.
1
Para 7 (iv): This describes the intervention ('........ on a substantial scale') which has been undertaken by the Exchange Fund. About 14% of the total exchange reserves of US$ 5.6 billion have been used to purchase HK$ over the last year, with US$ 200 million
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