HERE'S HOW THE OLD SYSTEM WORKED:
CONFIDENTIAL
THE CURRENCY WAS BACKED BY U.S.-DOLLAR ASSETS. HONG KONG AND SHANGHAM,
BANKING CORP AND CHARTERED BANK, WHICH PRINT THE COLONY'S CURRENCY,
WERE REQUIRED TO SURRENDER A CERTAIN AMOUNT OF U.S. DOLLARS TO THE
GOVERNMENT'S EXCHANGE FUND. THE GOVERNMENT DECIDED HOW MANY LOCAL
DOLLARS COULD BE ISSUED AGAINS ONE U.S. UNUT. THE EXCHANGE FUND
THEN INVESTED THE MONEY IN BANK DEPOSITS, BONDS OR OTHER SECURITIES
TO EARN INTEREST.
THE HONG KONG DOLLAR WAS PEGGED FIRST TO THE PRICE OF SILVER AND
THEN TO THE BRITISH POUND: LATER T WAS FIXED AGAINST THE U.S.
DOLLAR. WHEN THE U.S. LET ITS CURRENCY FLOAT IN 1974, THE HONG KONG
GOVERNMENT ABANDONED WTS POLICY OF BACKING NOTES WITH U.S. DOLLARS.
SINCE THEN, NEWLY ISSUED HONG KONG DOLLARS HAVE BEEN BACKED ONLY
BY OTHER HONG KONG DOLLARS DEPOSITED WITH THE EXCHANGE FUND.
BASKET OF CURRENCIES
TODAY, HONG KONG NOTES COULD BE BACKED EITHER BY U.S. DOLLARS OR
A BASKET OF FOREIGN CURRENCHES. BY ALLOWING THE GOVERNMENT TO CONTROL
THE MONEY SUPPLY, THE CHANGE WOULD AFFECT INDIRECTLY THE VALUE
OF THE HONG KONG DOLLAR ON FOREIGN-EXCHANGE MARKETS.
BY SETTING THE NUMBER OF U.S. DOLLARS OR OTHER FOREIGN CURRENCY BEHIND EACH NEW HONG KONG DOLLAR, THE GOVERNMENT COULD
LIMIT THE PRINTING OF MONEY HERE. A SLOW-DOWN IN MONEY-SUPPLY
GROWTH WOULD RESTRICT CREDIT AND DRIVE UP INTEREST RATES. (THE
MONEY SUPPLY HAS GROWN 40 PER CENT ANNUALLY IN RECENT YEARS).
HIGHER RATES ON HONG KONG-DOLLAR DEPOSITS WOULD ENCOURAGE INVESTORS
TO HOLD LOCAL DOLLARS INSTEAD OF FOREIGN CURRENCIES.
HIGHER INTEREST RATES WOULD BOLSTER THE HONG KONG DOLLAR IN ANOTHER WAY, TOO. THEY WOULD DETER FOREIGN-EXCHANGE SPECULATORS, WHO WOULD HAVE TO PAY MORE TO BORROW THE HONG KONG DOLLARS THEY NOW
CASH IN FOR FOREIGN CURRENCY.
SOUND AS IT WAS, THE OLD SYSTEM DIDN'T ALLOW HONG KONG MUCH
FLEXWBMLTY IN ECONOMIC MANAGEMENT. THE RATE OF GROWTH OF THE
MONEY SUPPLY WAS SET BY THE INFLOW AND OUTFLOW OF FOREIGN EXCHANGE.
TO MAINTAIN THE GOVERNMENT'S EXCHANGE RATE, HONG KONG HAD TO FOLLOW THE UPS AND DOWNS OF WTS MAJOR EXPORT MARKET, THE U.S.
WHEN THE U.S. ECONOMY SLUMPED, HONG KONG EXPORTS FELL. THIS DEPLETED
THE NOTE ISSUANG BANKS' FOREIGN-CURRENCY RESERVES, FORCING THEM TO #SSUE FEWER HONG KONG DOLLARS. AS A RESULT, CREDIT DRIED UP AND THE ECONOMY SLOWED DOWN, EVEN THOUGH THE HONG KONG DOLLAR REMAINED STABLE.
THIS COULD HAPPEN AGAN. IT COULD MEAN A SHORTAGE OF CREDIT AT
A SAD TIME FOR BUSINESSES AND CONSUMERS AND DEAL YET ANOTHER BLOW
TO THE COLONY'S STRUGGLING PROPERTY SECTOR.
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