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4. AT IS IMPORTANT TO DISTINGUISH BETWEEN LOSS OF CONFIDENCE IN HONG KONG'S FUTURE ON THE ONE HAND, AND THE VALUE OF THE CURRENCY ON THE OTHER. THE FORMER DEPRESSES THE PERCEIVED LONG-RUN (NEXT WORD UNDERLINED) REAL RATE OF RETURN ON ASSETS IN HONG KONG, AND CANNOT BE ARRESTED BY MONETARY POLICY. MONETARY POLICY OUGHT, HOWEVER, TO BE CAPABLE OF INFLUENCING THE VALUE OF THE CURRENCY
.E. THE PRICE OF REAL ASSETS AND OF FOREIGN EXCHANGE IN TERMS OF THE DOMESTIC CURRENCY INDEPENDENTLY OF THE CONFIDENCE FACTOR. THE QUEST FOR A MEANS TO STABILISE THE VALUE OF THE CURRENCY NEED NOT THEREFORE BE ENTIRELY HOPELESS.
THE PLAN.
5. THE EXCHANGE FUND WOULD SET THE PRICE OF CERTIFICATES OF *INDEBTEDNESS IN TERMS OF FOREIGN CURRENCY (SAY U.S. DOLLARS). THIS WOULD BE INTENDED AS A FIXED PEG, ALTHOUGH IT WOULD BE UNDERSTOOD THAT THE PEG MIGHT BE ADJUSTED FROM TIME TO TIME IN ORDER TO MAINTAHN A STABLE TRADE-WEIGHTED INDEX. A SMALL SPREAD MIGHT BE ESTABLISHED BETWEEN THE PREVAILING BUYING AND SELLING RATES FOR CELS.
6. THE ABOVE WOULD BE THE SUBSTANCE OF THE SCHEME. NO OTHER EXPLICITY ACTION WOULD BE TAKEN BY THE GOVERNMENT. THE NOTE-ISSUING BANKS WOULD UNDERTAKE TO CONTINUE TO TREAT OTHER BANKS FAIRLY IN RESPECT OF NOTE TRANSACTIONS, BUT WHETHER THUS INVOLVED RETENTION OF EXISTING PROCEDURES, OR EXCHANGING NOTES AGAINST FOREIGN CURRENCY AT A RATE ALMOST EQUAL (ALLOWING FOR A SMALL SERVICE CHARGE PERHAPS) TO THE C RATE, WOULD BE FOR THE BANKS TO AGREE AMONGST THEMSELVES.
7. THE POSS BLUTY OF THE EXCHANGE FUND GUARANTEE.ING THAT A C#
SSUED AT A PARTICULAR RATE WOULD BE REDEEMABLE AT THAT RATE HAS BEEN RASED. THIS DOES NOT SEEM RIGHT IN PRINCIPLE. IT IS NOT USUAL FOR GOVERNMENT TO COMPENSATE FINANCIAL INSTITUTIONS FOR THE CONSEQUENCES OF MONETARY POLICY ACTIONS. AT PRESENT THE BANKS MAY SUFFER LOSSES WHEN, FOR INSTANCE, INTEREST RATES ARE ALTERED AT THE GOVERNMENT'S INIT HATIVE, BUT THERE IS NO QUESTION OF COMPENSATION. UNDER THE PROPOSED SCHEME THERE WOULD PROBABLY BE FEWER OFFICIAL INIHTINATIVES ON INTEREST RATES, SO IT WOULD NOT BE UNREASONABLE TO EXPECT THE NOTE-HSSUING BANKS TO ACCEPT POSSIBLE RISKS ON CS INSTEAD. ANYWAY, THE RISKS WOULD BE TWO-WAY. MOREOVER, THE MAIN EXPOSURE OF THE BANKS WOULD BE THE EXISTING STOCK OF CNS, WHICH DO NOT CARRY AN ISSUE PRICE THAT COULD BE THE BASIS FOR A GUARANTEE.
EFFECT ON THE EXCHANGE RATE.
8. MARKET FORCES WOULD, THROUGH ARBITRAGE, TEND TO BRING THE EXCHANGE RATE IN THE OPEN MARKET INTO LINE WITH THE CRATE. AN ILLUSTRATION OF THE CONVERGENCE PROCESS IS AS FOLLOWS.
9. SUPPOSE THE MARKET RATE WAS DOLLARS 8, BUT THE GOVERNMENT NOW ANNOUNCES A CH RATE OF DOLLARS 7. SUPPOSE A CUSTOMER WANTS TO BUY USD. SUPPOSE HE IS STILL QUOTED A RATE OF DOLLARS 8 BY HIS BANK.
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