t
+
1
Wednesday, December 13, 1972
followed sterling down. After these events Hong Kong's recorded sterling
assets amounted to £350 mm.
Thus internal
Both the Hong Kong Government and the authorized banks found themselves
in a difficult position: on the one hand, the sterling area exchange control
rules applied, thus effectively limiting our ability to diversify our external
assets; on the other hand, if there were to be a further devaluation of
sterling it seemed unlikely that Hong Kong would wish to follow suit, for
our rate of exchange must be determined solely by reference to Hong Kong's
own essential interests. In any case, even if we were ever to get into serious
balance of payments difficulties, an adjustment in the rate of exchange
would not, I am afraid, be a very appropriate way to deal with the situation
because of our extreme dependence on foreign trade, Hong Kong's importe
are equal to about 100% of the G.D.P. and exports to about 85%.
expenditure is reflected directly in expenditure of foreign exchange;
the best and indeed the automatic corrective to any disequilibrium (either
way) in our balance of payments is an automatic monetary deflation (or inflation) which adjusts the cost/price structure until equilibrium is restored at the
existing exchange rate. There is a continuous process of adjustment of this
nature. When the balance of payments is in deficit, the full deflationary
effect of this automatic mechanism is, in practice, softened by the availability
and, when of the Government and the banks of substantial external reserves;
the balance of payments is in surplus the inflationary effect of the automatic
mechanism is to some extent limited by the issue of Hong Kong dollar currency
only against the deposit of sterling and the requirement that the banks must
-
-
and
/maintain.