CODE 18-77
Mr Lane
Economic Advisers
RESTRICTED
Reference
453/1
File
HKB 402/5
:
FOREIGN CURRENCY RESERVES, AND RESERVES
1. I should be grateful for your advice on the difference between Hong Kong's reserves, Hong Kong's surplus in the Exchange Fund And HMG's foreign currency reserves.
.
The Chinese, and indeed parts of HMG, have expressed concern about Hong Kong running down their general reserves in order to pay for the new airport projects. I have often wondered how Hong Kong's reserves can be compared and contrasted with HMG's foreign currency reserves. I have also wondered whether it is fair to view the run-down of Hong Kong's reserves as something worrying.
3. As I understand it, HMG's foreign currency reserves may be thought of as roughly equivalent to the surplus in the Exchange Fund in Hong Kong. As I further understand it, HMG has no general reserves, and in fact has a substantial national debt. Hong Kong on the other hand has a substantial general surplus.
4. I wonder whether you can also tell me what uses our foreign currency reserves may be put to. Are they very much the same as the Exchange Fund - ie solely to support the currency? Could HMG utilise these reserves to buy back Gilts? Could HMG transfer some to the general account to reduce the need for borrowing?
5. I have noticed that press reports tend to draw together a countries foreign currency reserves with the number of months of imports those reserves can finance. Why: there seems to be no connection?
6. Finally, I would be interested to know whether HMG's reserves are capable of being added to. Where did these reserves come from? With Hong Kong, since the Hong Kong Government does not pay interest on the US dollars deposited with it by banks to cover their note issue, they have a ready source of additional finance for the Exchange Fund. Apart from interest on its current balance, does the UK have any way of adding to its foreign reserves?
Milel u stare
M V Stone
Hong Kong Department
WH 304
270 2651
24 February 1992
ALKACL
RESTRICTED: