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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, IT WILL ATTEMPT TO ESTABLISH A FIXED RELATIONSHIP BETWEEN THE NOTE ISSUE AND THE CURRENCY'S EXTERNAL VALUE. AT PRESENT, NOTE-ISSUING BANKS DEPOSIT HONG KONG DOLLARS WITH THE EXCHANGE FUND WHEN THEY ISSUE NOTES. ALTHOUGHT THE CERTIFICATES OF INDEBTEDNESS WHICH THEY ARE #SSUED IN RETURN ARE NOT INTEREST- BEARING, ENLARGEMENT OF THE CURRENCY IN CERCULATION 16 A PAINLESS PROCESS FOR THE BANKS WHHICH MANUFACTURE CREDIT AND THEN SEE THE EXCHANGE FUND'S HONG KONG DOLLARS RE-DEPOSM:TED WITH THEM.
THE MDEA NOW *S TO GO BACK TO A VERS/HON 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 EXHISTHING CERTIFICATES OF
INDEBTEDNESS AND THEIR REPLACEMENT WITH NEW ONES #SSUED 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 IN 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 VIEW AS THAT T COULD ONLY BE SUCCESSFUL IN CONJUNCTION WITH A RESERVE DEPOSIT SYSTEM WHICH WOULD GIVE THE AUTHORITIES GREATER CONTROL OVER CREDHT CREAT HON. HOWEVER, OTHERS SAY THERE IS A STABLE RELATIONSHIP BETWEEN THE CURRENCY IN 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 DUR ING 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-HAN INTEREST RATES, OR SEEK A PUBLIC COMMITMENT BY BRITAIN OR CHINA - OR BOTH TO UNDERWRITE THE HONG KONG DOLLAR.
ENDS.
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HID/HKD HR GIFFARD
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