CONFIUENITAL
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B. Money Market Operations
8.
The Exchange interbank liquidity and interest rates so as το
exchange achieved
Hongkong
Fund can influence the level of So the level of interbank assist in the maintenance of at around 7.80. This is increasing the balance in maintained with the Exchange
rate stability by reducing Bank's account
Fund under the Accounting Arrangements.
9.
interbank
The level of interbank liquidity has been kept for some time at HK$ 480 million. A reduction of this level by, say, HK$ 100 million to HK$380 million will result in
interest rates firming up substantially.
This will have the effect of strengthening the exchange rate or preventing it from weakening. · A greater reduction will mean even higher Hong Kong dollar interest rates.
10.
In
TO achieve such a reduction, the Exchange Fund has a number of choices. First is to withdraw the amount, say, HK$100 million from the Exchange Fund's Hong Kong dollar deposits placed with banks. settlement Of this, the Exchange Fund will arrange for the clearing accounts of the banks concerned to be debited the amount. The effect on the balance sheet of the Exchange Fund is that both the Hong Kong dollar assets (deposits with banks) and liabilities (HSBC's balance with the Exchange Fund under the Accounting Arrangements) will fall by HK$100 million. The size of the Exchange Fund, therefore, falls by HK$100 million which is a very
small amount. It should be noted in this connection that the net asset value of the Exchange Fund remains unchanged. Further, when it is no longer necessary to maintain high interbank interest rates, the original position can be restored by re-creating the HK$100 million deposit that had earlier been in effect cancelled.
11.
Secondly, the Exchange Fund can sell or issue an additional HK$100 million worth of Exchange Fund Bills (or indeed any other assets, including US dollars which will have the additional effect, as described earlier, Of direct support to the exchange rate) and in settlement of the transaction, arrange for the clearing account of the purchaser bank to be debited the amount. The effect of this transaction on the balance sheet of the Exchange Fund is that there has been a switch in the Fund's liabilities. While the balance in HSBC's account with the Exchange Fund decreased by HK$100 million, amount of Exchange Fund Bills outstanding increased also by HK$100 million.
The size of the Exchange Fund remains unchanged.
CONFIDENTIAL
PIO