CONFIDENTIAL
5
(d)
He
back his
US$100
million
and
gets makes a profit of HK$10 million.
involves
an
15.
It has been argued by some that this process of banknotes arbitrage would lead to a depletion of the Exchange Fund, specifically those assets backing the note issue. This argument is misconceived. The banknotes arbitrage process initially increase in the amount of banknotes in circulation that is later reversed. There is no net change in the amount of banknotes in circulation after the banknotes arbitrage process is completed. The amount of assets backing the note issue remains unchanged. size of the Exchange Fund is unaffected.
D. Conversion of Hong Kong dollar
16.
into US dollar at 7.80
The overall
It is possible that with the exchange rate significantly on the weaker side of 7.80, there would be incentive for the holders of banknotes in the economy
of transaction requirements
return
banks note-issuing US dollars Exchange
relative to
at
to
to the
the more
that in the
in excess them through the
Fund to obtain rate of 7.80 favourable
market. foreign exchange
But there are not many banknotes in circulation in the economy that is in excess of transaction requirements. The fact that the exchange rate is weaker than 7.80 does not obviate the need to hold banknotes for shopping, betting at the Since the establishment of the linked
in system
etc.
rate
no
races, exchange
1983, there has been noticeable contraction in the amount of banknotes in circulation attributable to a weak exchange rate. The overall size of the Exchange Fund has therefore not been affected.
•
17.
In this connection, often the (uninformed)
is asked on question
whether the Exchange Fund is adequate for supporting the exchange rate at 7.80 if all depositors take their Hong
Kong dollars to the Exchange Fund to change them into US dollars at the fixed rate of 7.80, recognizing that total Hong Kong dollar deposits in the banking system, at well over billion, must be larger than the Exchange Again, this reflects a lack of understanding on how the system works.
HK$500
Fund.
CONFIDENTIAL
PIZ