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The theory
6.
The move represented a reversion to a fixed
exchange rate system similar to that which had prevailed
from 1935 to 1972. At the centre of the linked exchange
rate system is the fixed price against the US dollar
at 7.80 for the issue on redemption of currency notes.
7.
Currency notes are issued in Hong Kong by two
note-issuing banks, namely, the Hongkong and Shanghai
Banking Corporation and the Standard Chartered Bank.
Under arrangements instituted in 1935 the note-issuing
banks are required to hold non-interest bearing certificates
of indebtedness issued by the Exchange Fund against the
notes they issue. During the period 1935 to 1972, these
certificates were issued and redeemed against payment
in sterling at a rate related to the prevailing central
rate. From 1972 to 16 October 1983, payment was made
in Hong Kong dollars. The linked exchange rate system
requires that such payments be denominated in US dollars.
Thus the note-issuing banks now pay in US dollars, at
a fixed rate of HK$7.80 to one US dollar for additional
certificates of indebtedness and they receive US dollars
at this rate when certificates are redeemed.
In turn,
Hong Kong dollar bank notes are bought from or sold to
other banks in Hong Kong at this fixed rate by the note-
issuing banks.
/8.
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