SECRET
CHANCELLOR
THE EXCHEQUER
OF
tested at some stage over the year ahead; and indeed the present apparent stability might be largely because the Hong Kong markets were awating an expected announcement. It would of course be a considerable advantage to introduce the scheme at a time of relative stability: this would reduce the risk that interest rates would rise sharply. And stabilization would become more painful if postponed to a period of higher inflation.
4. Sir E Youde said that he expected to be asked what alternative measures he had considered, and some would have in mind pegging the Hong Kong $ to the £. The Chancellor pointed out that this too would provide no solution to the underlying problems; and might have additional disadvantages. There would be a problem of credibility; and, with so much of Hong Kong's trade being in US $, the dual currency system would undoubtedly remain, so that the shift away from the Hong Kong $ might actually be quicker. The US $ seemed the right currency to use in the scheme, given that most of Hong Kong's trade, financial, and entrepot dealings were only US $-denominated. Sir E Youde agreed that Hong Kong tended to think in US $. He also agreed that the further alternative of massive intervention to try to hold the exchange rate would not make sense.
5.
Sir E Youde said that his conclusion was that the Chancellor did not wish to dissuade him from going ahead with the scheme; and that if Hong Kong were to decide to do so, the Chancellor's view was that it might be best to do so as soon as possible. The_Chancellor agreed; and said that we would continue to watch developments with particularly close and sympathetic attention.
Distribution
Mr Turnbull: No.10
Mr Fall: FCO
Mr Bartlett: Bank of England
Economic Secretary
Mr Middleton
Sir T Burns
Mr Littler
Mr Peretz
Lore
JO KERR
10 October 1983