RESTRICTED
IN THE SLIGHTLY LONGER RUN, THE CURRENCY'S ABILITY TO STABILISE WILL DEPEND ON THE CREDIBILITY OF THE DETAILS OF THE NEW SYSTEM. IN OUTLINE, HIT WILL ATTEMPT TO ESTABLISH A FIXED RELATIONSHIP
BETWEEN THE NOTE ISSUE AND THE CURRENCY'S EXTERNAL VALUE. AT PRESENT, NOTE ISSUING BANKS DEPOSHT HONG KONG DOLLARS WITH THE EXCHANGE FUND WHEN THEY ISSUE NOTES. ALTHOUGHT THE CERTIFICATES OF INDEBTEDNESS WHICH THEY ARE 4SSUED IN RETURN ARE NOT INTEREST- BEARING, ENLARGEMENT OF THE CURRENCY IN CIRCULATION IS A PAUNLESS
PROCESS FOR THE BANKS WHICH MANUFACTURE CREDIT AND THEN SEE THE
EXCHANGE FUND'S HONG KONG DOLLARS RE-DEPOSHTED WITH THEM.
THE DEA NOW HS TO GO BACK TO A VERSION OF THE SYSTEM WHICH EXISTED UNTIL 1974, WHEN BANKS HAD TO DEPOSIT FOREIGN CURRENCY AT THE RATE AT WHICH THE HONG KONG DOLLAR WAS THEN PEGGED (FIRST TO STERLING, LATER TO THE U.S. DOLLAR), THE INTENTION IS TO REQUIRE FOREIGN-CURRENCY DEPOSITS AND FX A STABLE RATE AGAINST WHICH THE
HONG KONG CURRENCY COULD BE ISSUED AGAINST THEM. MOST LIKELY THE SYSTEM WOULD INVOLVE REDEMPTION OF EXISTING CERTIFICATES OF HINDEBTEDNESS AND THEIR REPLACEMENT WITH NEW ONES ISSUED AGAINST A BASKET OF CURRENCIES RATHER THAN JUST THE U.S. DOLLAR OR STERLING THOUGH SOME FAVOUR STERLING FOR POLITICAL REASONS.
THERE ARE MIXED VIEWS AS TO HOW SUCH A SYSTEM WOULD WORK N THE LONGER TERM, GIVEN THAT CURRENCY IN CIRCULATION IS ONLY SOME HK DOLLARS 14 BILLION, OR 10 PERCENT OF BROAD HONG KONG DOLLAR MONEY SUPPLY. ONE WHEW AS THAT 4T COULD ONLY BE SUCCESSFUL IN CONJUNCTION WITH A RESERVE DEPOSHT SYSTEM WHICH WOULD GAVE THE AUTHORITIES GREATER CONTROL OVER CREDIT CREATION. HOWEVER, OTHERS SAY THERE IS A STABLE RELATIONSHIP BETWEEN THE CURRENCY N CIRCULATION AND MONEY SUPPLY, SO THAT A PEGGING OF THE CURRENCY WOULD STABILISE THE MONETARY BASE AND THUS THE EXCHANGE RATE. ''AT THE VERY LEAST IT WOULD DO NO TECHNICAL HARM AND SOME PSYCHOLOGICAL GOOD, SUGGESTED ONE INVOLVED OFFICIAL. BUT SUCH BENEFITS MAY BE INSUFFICIENT AT A TIME WHEN POLITICAL NERVOUSNESS REMAINS HIGH.
WHILE THIS SORT OF SYSTEM WOULD GIVE ENHANCED STABILITY DURING NORMAL TIMES IT MIGHT NOT PROVIDE MUCH PROTECTION AGAINST SUSTAINED POLITICALLY INDUCED CAPITAL FLIGHT. IN WHICH CASE, TO STABILISE THE RATE THE AUTHORITIES WOULD HAVE TO FALL BACK EITHER ON EXTREMELY DRACON-KAN INTEREST RATES, OR SEEK A PUBLIC COMMITMENT BY BRITAIN OR CHINA · OR BOTH - TO UNDERWRITE THE HONG KONG DOLLAR.
ENDS.
-
YOUDE
LIMITED
HDD/HKD MR GIFFARD
-2-
RESTRICTED