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100424
MDHIAN 2457
SECRET
FM HONG KONG
TO IMMEDIATE FCO
TELNO 372
OF 101125Z FEBRUARY 92
INFO IMMEDIATE PEKING, UKREP JLG HONG KONG
TOP COPY MQ DIST?
PERSONAL: FOR RICKETTS, HKD
PEKING:
PERSONAL FOR AMBASSADOR
UKREP JLG: PERSONAL FOR GALSWORTHY
300
OUR TELNO 358: CONFIDENTIAL FINANCIAL DIALOGUE: LIQUIDITY ADJUSTMENT FACILITY (LAF).
THE FOLLOWING IS THE TEXT OF A DRAFT PAPER ON LAF FOR HANDING OVER TO THE CHINESE:
QUOTE: HKG INTENDS TO CONSULT THE HONG KONG ASSOCIATION OF BANKS CHKAB) AND OTHER INTERESTED PARTIES ON A PROPOSAL TO INTRODUCE A LIQUIDITY ADJUSTMENT FACILITY (LAF) IN HONG KONG. THE PROPOSAL IS DESCRIBED IN THE ATTACHED PAPER TO BE USED FOR CONSULTATION. THE EXCHANGE FUND ADVISORY COMMITTEE HAS ALREADY BEEN CONSULTED ON A CONFIDENTIAL BASIS AND HAS GIVEN ITS SUPPORT. THE PROPOSAL HAS REGRETTABLY BEEN LEAKED TO THE PRESS. BUT PUBLIC RESPONSE, PARTICULARLY FROM THE FINANCIAL SECTOR, HAS FORTUNATELY BEEN OVERWHELMINGLY FAVOURABLE.
THE CHINESE SIDE IS INVITED TO NOTE THIS HKG INTENTION.
AFTER RECEIVING COMMENTS FROM INTERESTED PARTIES IN THE NEXT MONTH OR SO, HKG WOULD FINALISE THE PRACTICAL DETAILS OF THE PROPOSAL, INCLUDING THE NECESSARY DOCUMENTATION FOR TAKING SECURITY FROM BANKS WISHING TO BORROW UNDER LAF. THE PROPOSAL
WOULD THEN BE IMPLEMENTED.
THERE ARE TWO RELATED ASPECTS OF THE PROPOSAL WHICH, IN VIEW OF DOMESTIC SENSITIVITIES, WERE DELIBERATELY NOT GIVEN PROMINENCE IN THE PAPER. THESE ARE SUPPLEMENTED IN THIS NOTE FOR THE INFORMATION OF THE CHINESE SIDE.
FIRST, HKG FEELS THAT THE EFFECTIVENESS OF MONETARY OPERATIONS AIMED AT ENSURING EXCHANGE RATE STABILITY WOULD BE ENHANCED IF IT IS POSSIBLE TO HAVE A MORE DIRECT INFLUENCE ON INTERBANK INTEREST RATES. MONETARY OPERATIONS CURRENTLY INFLUENCE
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