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8. IF THE NEW ARRANGEMENT · ATTRACTS TOTAL CONFIDENCE AND
CREDIBILITY H.E. IN THE BELIEF THAT IT WILL ENDURE - THERE WILL NO LONGER BE ANY INCENTIVE FOR PEOPLE TO RUSH CUT OF HONG
KONG DOLLARS IN THE SHORT-TERM, EVEN THOUGH POLITICAL WORRIES
IF CONTINUED WOULD OCCASION A STEADY OUTFLOW OF CAPITAL OVER A
NUMBER OF YEARS. IN OTHER WORDS, CONFIDENCE IN THE CURRENCY, BUT NOT NECESSARILY IN THE FUTURE NOR HENCE IN HONG KONG ASSTES,
WOULD HAVE BEEN RESTORED, AND THE INTRODUCTION OF THE SCHEME
WOULD NOT IMPOSE ANY INTOLERABLE STRAINS.
9. IN PRACTICE, HOWEVER, THERE WILL PROBABLY BE SOME INITIAL
SCEPTICISM AND MISCOMPREHENSION, HOWEVER DEFTLY THE ALL-IMPORTANT
PRESENTATION IS HANDLED. TO THE EXTENT THAT PEOPLE PERCEIVE THE
ARRANGEMENT AS A CHANCE TO GET OUT OF HONG KONG DOLLARS QUICKLY
AT A RELATIVELY GENEROUS RATE, PRESSURES COULD DEVELOP.
10. ESSENT PALLY THE SCHEME TRANSFERS THE PRESSURE OF A RUN OUT
OF THE LOCAL CURRENCY AWAY FROM THE EXCHANGE RATE ONTO THE BANKING
SYSTEM AND THUS TO BORROWERS. THE LEVEL OF LOCAL CURRENCY INTEREST
RATES HAS TO RISE TO A POINT WHERE THE CONTINUING OUTFLOW INTO
FOREIGN CURRENCIES BY RESIDENTS IS MATCHED BY AN OFFSETTING
INFLOW BY BANKS AND OTHER SPECULATORS. IF THE BANKS WILL NOT
*NCREASE THEIR EXPOSURE IN HONG KONG, AND THE PUBLIC'S DESIRE
TO DIVERSIFY INTO FOREIGN CURRENCY ALS VERY STRONG, THEN #INTEREST RATES WOULD HAVE TO RISE SHARPLY. WITHOUT ANY SUCH SCHEME, HOWEVER, IN SUCH CIRCUMSTANCES THE EXCHANGE RATE WOULD BE FALLING SHARPLY,
AND THAT WOULD ALSO LEAD TO DOMESTIC INTEREST RATES RUS ANG
MARKEDLY, THOUGH PERHAPS NOT SO QUICKLY. IT IS ESSENTIAL TO REALISE THAT THE EXTENT TO WHICH DOMESTIC HONG KONG INTEREST
RATES MAY RUSE WILL DEPEND ON CONFIDENCE IN THE SCHEME HTSELF.
IF BANKERS, BUSINESSMEN, FOREIGNERS, ETC., WERE REALLY CONFIDENT
THAT A LINKED RATE AGAINST, SAY, THE DOLLAR WOULD BE MAINTAINED FOR, SAY, SHIX MONTHS, THEN THEY WOULD BRING IN EXTRA U.S.
DOLLAR FUNDS UNTIL THE HONG KONG DOLLAR SIX MONTH INTEREST RATE
WAS BROUGHT INTO LINE WITH THE U.S. DOLLAR SIX MONTHS RATE
RULING IN HONG KONG. CURRENTLY THE LOCAL HONG KONG DOLLAR
INTEREST RATES ARE ABOVE COMPARABLE U.S. DOLLAR RATES, SO THAT
WERE CONFIDENCE IN THE SUCCESS OF THE SCHEME TO BE INSTILLED
THEN HONG KONG DOLLAR RATES WOULD FALL, NOT RISE. SOME PROPONENTS
OF THE SCHEME BELIEVE THAT THIS IS WHAT WOULD HAPPEN.
11. PUBLIC REACTION MIGHT NOT, HOWEVER, BE LIMITED TO SWITCHING
DEPOSITS. THERE COULD CONCEIVABLY BE A SURGE IN DEMAND FOR ENTHER
HONG KONG DOLLARS OF U.S. DOLLAR BANKNOTES. STEPS WILL BE TAKEN
TO ENSURE SUPPLIES OF HONG KONG DOLLAR AND OF U.S. DOLLAR NOTES
IF THE SCHEME PROCEEDS, BUT SUCH A DEMAND COULD CONCEIVABLY LEAD
TO PRESSURE ON BANKS' LIQUIDITY IF IT WAS MORE THAN SHORTLI-VED.
MEANWHILE, IF THERE WAS ANY SORT OF RUSH TO THE BANKS, EITHER TO DRAW NOTES OR SWITCH DEPOSITS BETWEEN CURRENCIES, THERE MIGHT
BE ANOTHER BOUT OF RUMOUR AND PANIC DIRECTED AGAINST SOME LOCAL
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/ BANKS