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used since the beginning of September.
Where holders of HK$ have wished to off-load them, the HKG in attempting to slow the decline in the currency's value has sold (mainly) US$ reserves and bought HK$. This can, of course, only last as long as the foreign exchange reserves and is not an option other than in the short-term.
Para 7 (v): A reference to the increase in interest rates: The Hong Kong Association of Banks has, under pressure from the HKG, raised rates on HK$ deposits by 3 percentage points. (The best lending rate has consequently risen from 13% to 16%.) Under normal circumstances this would probably increase the demand for HK$ deposits. Where there are expectations of quite rapid falls in the US$ value of these deposits, then the risks of capital losses in foreign currency terms may offset the increased interest rate available.
The increase in interest rates will adversely affect hard-pressed borrowers, particularly those in the property sector and may dampen any recovery in the Hang Seng index.
Para 8: Other steps suggested are:
a) abolition of the interest tax on HK$ deposits, a step HKG has discussed publicly fairly frequently, though finding against it on the grounds of the revenue loss that would be involved;
b) an attempt to penalise the borrowing of HK$ (for speculative purposes) on the security of foreign currency deposits As is noted, this would be difficult to engineer, and probably counter-productive in terms of confidence.
4. HKG is clearly still studying its options and waiting to see what effect its recent actions and statements will have on the foreign exchange market.
29 September 1983
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Nick Hallett
N O Hallett ESID WH425B
233 5335