G.F. 316
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- 7
the linked rate.
The market rate temporarily touched
a low of 7.72 on 18 July 1985 and a high of 7.90 on
12 July 1984.
(Although in percentage terms this is
a fairly narrow range of fluctuation, particularly against
the background of a very volatile US dollar, perception
of the general public and market participants in particular
was that this had been very substantial.)
12.
This stability does not, however, mean that
the linked exchange system has been working properly.
13.
Arbitrage between the fixed rate Hong Kong
dollar notes market and the foreign exchange market,
or the threat of arbitrage, has not been an effective
means of preventing the exchange rate from moving away
from the linked rate of 7.80. There are a number of
reasons why this is so. First, the process of arbitrage
involves the conversion of Hong Kong dollar balances
into Hong Kong dollar notes or vice versa. The arrangement
between the note-issuing banks and other banks is such
that convertibility is open only to non-bank customers.
Banks cannot make use of this convertibility.
Notes
can only be traded amongst banks for US dollars. To
convert its clearing balance into notes,
bank would
need a third party who is a customer of a bank, more
conveniently of a note-issuing bank.
/14.
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