CONFIDENTIAL
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The alternative interpretation and which is the correct one is a question for the lawyers - is that if unsecured borrowing is not precluded, it would not be subject to any limit specified in Section 3(4). Again like Whomersley, I think we would have to regard this as undesirable, but it would be helpful to have Hong Kong's view on this.
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5 Where I would differ from Whomersley, however, is that I do not think that the new and presumably correct and intended wording of Section 3 (3) of the EFO precludes the Exchange Fund "borrowing" not so much from the general revenue but "borrowing" the accumulated general revenue surpluses. I use inverted commas because if I understand the position correctly the accumulated surpluses of the general revenue, which are currently increasing as a result of recent and prospective budget surpluses, are habitually placed with the Exchange Fund, against the issue to the Treasury of debt certificates (as opposed to certificates of indebtedness, covered by Section 4 of the EFO, issued to note-issuing banks as cover for the note issue), purely for the purpose of sensible and prudent investment, which for all practical purposes, means in external assets. They are not "borrowings" on the initiative of the Exchange Fund in order to meet a need of the Exchange Fund. In effect, therefore, informally if not formally, such "borrowings" by the Exchange Fund are secured against the assets of the Exchange Fund.
6 To get back to basics, it would seem necessary (a) to make the required one-word amendment to Section 3(3); (b) to decide whether investing revenue surpluses on behalf of the Treasury constitutes borrowing which should be subject to any limit specified in Section 3 (4) - I should incline, I think, to the Hong Kong interpretation set out in Hong Kong Telno 1000 and in paragraph 9 of Hong Kong Telno 804; (c) if this is the correct interpretation, to consider amending the borrowing limit downward accordingly to some sensible level; (d) but if the borrowing limit is taken to apply to transfers from the general revenue, specify that any limit applies to both secured and unsecured borrowing. It is helpful to remember, of course, that if borrowing is unsecured the risk is with the lender, not with the Exchange Fund, though as has been pointed out, in theory unsecured borrowing, other things being equal, should be more expensive
(though, in practice, given the purposes for which the Exchange Fund sees fit to borrow, ie to stabilise the exchange rate, I doubt that this is a practical consideration).
7 Finally there is the question of timing. This will depend on what amendments are considered necessary. The actual position is that the Hong Kong Government has good reason to want to transfer a sizeable further amount from the general revenue to the Exchange Fund which will as a result exceed its current borrowing limit (on the current definition) of HK$50 billion. The alternatives are therefore either (a) to accept the Hong Kong suggestion and go ahead and make the required transfer on the grounds that the specified limit does not after all apply to such transfers, and to make the minimal amendment to the EFO by stealth, as it were, afterwards; or (b) to require the full amendment to the EFO at the earliest possible opportunity so that ambiguity no longer exists.