3
-
Wednesday, December 13, 1972
commercial and banking circles that the relationship between the Hong
Kong dollar and sterling was fixed. So much so that, for instance, it
was not the custom for importers or exporters with sterling contracts to
cover forward; and the authorized banks, required as they were by the
exchange control rules of the sterling area to hold their excess liquidity
in sterling, did not envisage an exchange risk.
So, although the relationship between the Hong Kong dollar and
sterling was at no time a statutory one, but one that was established
and maintained by the operations of the Exchange Fund, it came to be
regarded as immutable. The Hong Kong dollar, if you like, was looked
upon almost as an extension of sterling, despite the fact that the money
supply was based on Hong Kong's own net foreign exchange earnings
(largely in U.S. Dollars and an inflow of capital largely from South
East Asia.)
In November 1967 when sterling was devalued by 14. Hong Kong
was faced with the dilemma of either again following sterling down and
letting the internal cost/price structure adjust to the new rate through
inflation or of maintaining the cross rate with the U.S. dollar and taking
a loss on the Hong Kong dollar value of both the Government's and the
banking system's sterling reserves. In the event, a compromise solution.
was adopted: the Hong Kong dollar was devalued by 5.7% in terms of the U.S.
dollar, that is to say, the old rate of H.X, $16 to the £ sterling was
changed to HK $14.54. This compromise solution cost Hong Kong public funds
about H.K, $450 m., including ex gratia adjustment payments from the Exchange
Fund to the commercial banks to compensare them for their losses. But it did
allow us to limit the rise in our cost/price structure and it must be remembered
that; in 1967 in contrast to 1949, very few countries even in the sterling area
/followed