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(1) IF RUMOURS THAT SOME TRADERS ARE REFUSING TO ACCEPT
HONG KONG DOLLARS FOR GOODS IN THE SHOPS PERSIST, ATTENTION WILL BE DRAWN TO THE FOREIGN NOTES (PROHIBITION OF CIRCULATION) ORDINANCE WHICH MAKES IT ILLEGAL TO ASK FOR; OR EVEN OFFER, FOREIGN NOTES FOR DOMESTIC TRANSACTIONS.
(IV)
(V)
IN AN ATTEMPT TO TURN THE MARKET ROUND AND GET TWO WAY TRADING ESTABLISHED, THE EXCHANGE FUND IS INTERVENING ON A SUBSTANTIAL SCALE AND, ALTHOUGH THE RATE AT MIDDAY HAD IMPROVED (HK DOLLAR 8.50 TO THE U.S. DOLLAR), VERY LARGE SPREADS WERE STILL BEING QUOTED, INDICATIVE OF AN ARTIFICIAL MARKET. THE SPREADS NARROWED SOMEWHAT AFTER THE LUNCH BREAK.
THE HONG KONG ASSOCIATION OF BANKS WAS PERSUADED TO RAISE DEPOSIT INTEREST RATES BY 3 PERCENTAGE POINTS AND LENDING RATES HAVE CONSEQUENTIALLY BEEN RAISED.
8. WE CANNOT, OF COURSE, GO ON COMMITTING LARGE TRANCHES OF U.S. DOLLARS TO THE MARKET INDEFINITELY.
THE ONLY OTHER MEASURES WE COULD DEPLOY WOULD BE TO ABOLISH INTEREST TAX ON HONG KONG DOLLAR DEPOSITS (BUT THIS WOULD HAVE THE MOST MARGINAL EFFECT AND BE EXPENSIVE OF REVENUE): AND WE COULD TRY SOMEHOW TO PENALISE THOSE CUSTOMERS BORROWING HONG KONG DOLLARS "AGAINST THE SECURITY OF FOREIGN CURRENCY ASSETS (BUT SUCH A DEVICE WOULD BE COMPLICATED TO POLICE AND COULD BE DAMAGING TO CONFIDENCE IN HONG KONG AS A FINANCIAL CENTRE).
9. IT REMAINS TO BE SEEN WHETHER WHAT WE HAVE DONE WILL HAVE ANY DURABLE EFFECT. BUT TO HAVE DONE NOTHING WOULD HAVE GRAVELY WEAKENED PUBLIC CONFIDENCE IN THE HONG KONG GOVERNMENT.
WILL REPORT FURTHER AS THE SITUATION DEVELOPS.
YOUDE
FUTURE OF HONG KONG
LIMITED
COPIES TO
SIR IAN SINCLAIR
MR BURROWS
HD/HKD
HD/FED
MR ROBERTS
HD/PLANNING STAFF
MR MARTIN
HD/FUSD
PS
PS/LADY YOUNG
MR FLOWER
PS/MR LUCE
PS/PUS
SIR J BULLARD
MR GIFFARD
MR DONALD MR WRIGHT
MR COLES
LEGAL ADVISER
LEGAL ADVISER
NEWS D
ASSESSMENTS STAFF
CABINET OFFICE
PUSD
NO 10 DOWNING STREET
SIR A PARSONS. NO 10 DOWNING STREET
MR WALKER
RESEARCH D OAB 2/82
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