SECRET
5. THROUGHOUT THE PAST YEAR THE GOVERNMENT, THROUGH THE EXCHANGE FUND, HAS SOUGHT TO SMOOTH ERRATIC AND WAYWARD SHIFTS IN THE EXCHANGE RATE. THERE HAS BEEN SUBSTANTIAL DIRECT INTERVENTION IN THE FOREIGN EXCHANGE MARKETS IN HONG KONG AND SOMETIMES IN LONDON AND NEW YORK. THE EXCHANGE FUND HAS ALSO BEEN ACTIVELY BORROWING IN THE INTERBANK MONEY MARKET IN ORDER TO DRIVE UP MONEY MARKET INTEREST RATES. DESPITE UNDESIRABLE SIDE EFFECTS (E.G. ON THE PROPERTY MARKET AND MANUFACTURING COSTS), THE HONG KONG ASSOCIATION
OF BANKS HAS RAISED DEPOSIT INTEREST RATES ON A NUMBER OF OCCASIONS
IN ORDER TO MAKE THE HOLDING OF HONG KONG DOLLARS MORE ATTRACTIVE AND TO PUSH UP LENDING RATES (MAKING IT MORE EXPENSIVE FOR EXPORTERS TO BORROW HONG KONG DOLLARS TO MEET THEIR LOCAL LIABILITIES
INSTEAD OF REPATRIATING THEIR FOREIGN CURRENCY EARNINGS). BUT THESE EFFORTS HAVE ONLY HAD A LIMITED EFFECT. AT BEST, THE RATE OF DEPRECIATION HAS BEEN SLOWED DOWN. THE DEMAND FOR FOREIGN CURRENCIES TO HOLD (MOSTLY U.S. DOLLARS) HAS REMAINED STRONG, AND THERE HAS BEEN AN ABSENCE OF TWO-WAY TRADING. IN OTHER WORDS, SENTIMENT IN THE MARKET HAS BEEN PERSISTENTLY AGAINST THE DOMESTIC CURRENCY: DRAMATICALLY SO OVER THE PAST WEEK.
6. IT COULD BE ARGUED THAT UP TO LAST WEEK WE HAD EXPERIENCED NOTHING WORSE THAN A SERIES OF SLIPS AND THE WIDE SPREADS QUOTED FROM TIME TO TIME HAVE BEEN INDICATIVE OF A VERY THIN, ARTIFICIAL MARKET. ALSO, ALTHOUGH WE HAVE BEEN PRESSURISED FROM TIME TO TIME TO ''ACT' TO SAVE THE DOLLAR AND PROTECT THE PEOPLE'S
LIVELIHOOD, ETC., THERE HAS BEEN A RELUCTANT PUBLIC ACCEPTANCE THAT MARKET FORCES ARE INEXORABLE. HOWEVER, THIS HAS BEEN COMBINED
WITH SOME BEWILDERMENT AND RESTLESSNESS ABOUT OUR PASSIVE PUBLIC
RELATIONS STANCE IN RELATION TO THE NEGOTIATIONS IN THE FACE
OF THE COMMUNIST CAMPAIGN, BUT WAS UNTIL LAST WEEK, CONTAINABLE.
7. BUT BY YESTERDAY (SUNDAY) WE HAD TO CONCLUDE THAT
THE PRESENT SITUATION WAS SO DIFFERENT IN DEGREE
AS TO BE DIFFERENT IN KIND TO THAT WHICH WE HAD
EXPERIENCED SO FAR. SO WE DECIDED ON THE FOLLOWING MOVES IN AN ATTEMPT TO STOP REAL PANIC SETTING IN
AT THE BEGINNING OF THIS WEEK:
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ISSUED A STATEMENT EXPRESSING GREAT CONCERN ABOUT THE
QUINTE UNREASONABLE RATES BEING QUOTED FOR THE HONG KONG
DOLLAR ARGUING THAT THEY WERE QUITE INCONSISTENT WITH
THE UNDERLYING ECONOMIC AND POLITICAL SITUATION AND
URGING PEOPLE TO IGNORE RUMOURS AND UNHELPFUL COMMENTARY
(AN OBLIQUE REFERENCE TO COMMUNIST PROPAGANDA).
(hk) THE ACTING FINANCIAL SECRETARY SUBSEQUENTLY ISSUED A
FURTHER STATEMENT HINTING AT A REVISION OF THE PRESENT
ARRANGEMENTS FOR ISSUING AND REDEEMING CERTIFICATES OF -
INDEBTEDNESS TO THE NOTE-ISSUING BANKS,
WHICH MIGHT HAVE A HELPFUL INFLUENCE ON THE EXCHANGE
RATE, AND HE STRESSED THAT THE EXCHANGE FUND WOULD
OPERATE IN THE FOREIGN EXCHANGE AND INTERBANK. MONEY
MARKETS AS AND WHEN APPROPRIATE. SECRET -2-
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