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THE CHOICE OF CURRENCY. I PRINCIPLE. THE SCHEME OUTLINED W
SECTION 1 COULD BE USED TO FIX TO ANY OTHER CURRENCY, SASKET OF CURRENCY, GOLD ETC. IN PRACTICE, THE CURRENCY IN WHICH MOST
OF HONG KONG'S TRADE, FINANCIAL, ENTREPOT AND TOURIST DEALINGS ARE NOW DEMONIMATED IS THE U.S. COLLAR, OF THOSE WE ASKED, ALMOST EVERYONE THOUGHT THAT ON ECONOMIC GROUNDS IT WOULD BE MOST SENSIBLE, SIMPLE AND STRAIGHTFORWARD TO PEG DIRECTLY ON THE U.S. DOLLAR. WE AGREE. THERE MAY, HOWEVER, BE OTHER WIDER, POLITICAL
CONSIDERATIONS THAT WE ARE NOT COMPETENT TO CONSIDER.
THE RATE TO ADOPT. ET IS POSSIBLE TO CARRY OUT CERTA IN
CALCULATIONS, ASSUMING THAT THE EXCHANGE RATE EARLIER IN 1982 WAS IN EQUILIBRIUM, TO ESTIMATE WHAT AN EQUILIBRIUM EXCHANGE RATE,
VIS A VIS THE U.S. DOLLAR MIGHT NOW BE, ON THE BASIS OF COMPARATIVE UNDER-LYING INFLATION IN THE USA AND HONG KONG, if
POLITICAL UNCERTAINTY HAD NOT INTERVENED. WE DID NOT TAKE THESE
EXERCISES (WHICH SEEMED TO GIVE ANSWERS OF AROUND HONG KONG
DOLLARS 7 (OR EVEN 6.50) TO U.S. DOLLARS 1) SERHOUSLY, SINCE WE CONS:DERED THAT WT WOULD BE ESSENT HAL, TO FOSTER CONFIDENCE, TO SET A DULY CAUTIOUS AND PLAINLY PLAUSIBLE CROSS RATE. ON THE
OTHER HAND, THERE IS SOME GENERAL AGREEMENT THAT THE EXCHANGE RATE HAS RECENTLY OVERSHOT, AND IT WOULD BE DESIRABLE TO IMPOSE SOME LOSS ON BEAR SPECULATORS. THE GENERAL CONSENSUS AMONG
THOSE WE ASKED AS OF 6 OCTOBER - WAS THAT HONG KONG DOLLARS 3
TO U.S. DOLLARS 1 WOULD BE ABOUT RIGHT. THIS SEEMS SENSIBLE TO
US, BUT IT WOULD NEED TO BE SUBJECT TO RECONSIDERATION IN
THE LIGHT OF SUBSEQUENT MARKET MOVES.
SECTION Wh C. THE REACTIONS OF THE BANKS.
(k) THE FOREIGN BANKS.
FACED WITH THE REACTIONS OF THE PUBLIC AS OUTLINED IN A ABOVE, THESE BANKS CAN CHOOSE WHETHER TO SWITCH IN FUNDS FROM ABROAD, OR CUT THE SIZE OF THEIR 300KS BY RAISING HONG KONG DOLLAR
INTEREST RATES. THAT IS THEIR COMMERCIAL CHOICE. SOME MAY
PLEAD THAT **PRUDENTIAL'' REQUIREMENTS PREVENT ANY FURTHER
SWITCH-LN. APART FROM A GENERAL SCEPTICISM, IT MAY BE REPLIED THAT THE FIXING OF THE HONG KONG DOLLAR SHOULD LESSEN THE
EXCHANGE AND PRUDENTIAL RISKS OF SWITCHING-EN. THEY SHOULD BE
ABLE TO COPE UNA:DED.
(bb) THE LOCAL BANKS.
THESE ARE, PERHAPS, PARTICULARLY VULNERABLE TO THE PUBLIC'S REACTIONS AND DO NOT HAVE THE ACCESS TO EXTRA RESOURCES AVAILABLE
TO THE FOREIGN BANKS. IT WOULD BE DESIRABLE TO HAVE A CONTINGENCY PLAN FOR SPECIAL ASSISTANCE TO THEM READY BEFORE THE
START OF SUCH A SCHEME. THIS COULD TAKE THE FORM OF THE EXCHANGE
FUND PLACING HONG KONG DOLLAR DEPOSITS WITH THEM (W.E. RECYCLING THEIR LOST DEPOSITS) ON TERMS THAT DO NOT REQUIRE 100 PERCENT OFFSETTING HOLDINGS OF LIQUID ASSETS.
(1) THE NOTE ISSUING BANKS.
AS FAR AS WE WERE ABLE TO TELL THE HKSBC S, FORTUNATELY, 4N A STRONG LIQUIDITY POSITION, WELL ABLE TO ABSORB THE MINTIAL
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