CONFIDENTIAL
FM FCO
TO
IMMEDIATE HONG KONG
TELNO 914
OF 27170OZ APRIL 89
CONFIDENTIAL
HKCIOS / 1
TOP Q DIST
7
020033
MDHOAN 0055
OUR TELNO 856: EXCHANGE FUND ORDINANCE
1.
WE ARE SORRY THAT IT HAS TAKEN US SO LONG TO REACH A FINAL VIEW ON THIS MATTER AND APOLOGISE FOR ANY INCONVENIENCE CAUSED. 2. IT IS CLEAR FROM THE RESEARCH YOU HAVE CARRIED OUT THAT THERE IS AN ERROR IN THE WORDING OF SECTION 3(3) OF THE EXCHANGE FUND ORDINANCE AND THAT 'ON THE GENERAL REVENUE' SHOULD READ 'OF THE GENERAL REVENUE'. WE AGREE WITH YOUR INTERPRETATION OF SECTION 3(3), IE THAT THE FINANCIAL SECRETARY MAY BORROW FOR THE ACCOUNT OF THE EXCHANGE FUND UP TO THE LIMIT SPECIFIED IN SECTION 3(4) EITHER AGAINST THE SECURITY OF THE ASSETS OF THE FUND OR AGAINST THE SECURITY OF THE GENERAL REVENUE.
3 IT FOLLOWS FROM THIS INTERPRETATION THAT TRANSFERS FROM THE GENERAL REVENUE (EG FOR THE PURPOSES OF SENSIBLE AND PRUDENT INVESTMENT) DO NOT FALL WITHIN THE DEFINITION OF BORROWING UNDER SECTION 3(3) OF THE EXCHANGE FUND ORDINANCE AND THAT THE LIMIT SET ON SUCH BORROWING HAS PREVIOUSLY BEEN RAISED HIGHER THAN NECESSARY. IN THE LIGHT OF THIS, IT WOULD BE NEITHER NECESSARY NOR APPROPRIATE FOR YOU TO MAKE ANY FURTHER UPWARD ADJUSTMENT OF THE BORROWING LIMIT SPECIFIED UNDER SECTION 3(4) IN ORDER TO ACCOMMODATE THE HK DOLLARS 18.5 BILLION THAT YOU PROPOSE TO TRANSFER TO THE EXCHANGE FUND.
4.
IT HAS ALSO OCCURRED TO US THAT, UNLESS THERE IS SOME OTHER RELEVANT PROVISION IN HONG KONG LAW, SECTION 3(3) MIGHT ALSO BE INTERPRETED AS MEANING THAT THE FINANCIAL SECRETARY IS NOT EMPOWERED AT ALL TO BORROW WITHOUT PROVIDING SECURITY. THIS WOULD NO DOUBT BE UNWELCOME TO YOU AS IT WOULD PRECLUDE YOU FROM MAKING UNSECURED BORROWING, EG FOR MONETARY POLICY PURPOSES. WOULD YOU SEE THE NEED TO MAKE A SUITABLE LEGISLATION PROVISION FOR UNSECURED BORROWINGS? IN ANY CASE A VIEW WOULD NEED TO BE TAKEN ON WHETHER SUCH BORROWING WOULD BE SUBJECT TO ANY LIMIT
SPECIFIED IN SECTION 3(4). WE WOULD WELCOME YOUR COMMENTS ON
THIS.
5. IN ANY EVENT, WE BELIEVE THAT IT WOULD NOW BE ADVISABLE TO ADJUST THE BORROWING LIMIT IN SECTION 3(3) DOWNWARDS TO A REALISTIC LEVEL. WE SHOULD BE GRATEFUL FOR YOUR VIEWS.
6.
WE AGREE THAT THE WORDING OF SECTION 3(3) REQUIRES AMENDMENT
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CONFIDENTIAL
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