12
Wednesday, December.13, 1972
1
But the immediate question which arose, now that the banks previously authorized to deal in foreign currencies (the so called Authorised Banks)
did not have to hold their excess liquidity in sterling, was whether the
Exchange Fund should continue to offer cover for further accruals of excess
liquidity in sterling. The banks now had the choice, exchange control
having ended, of placing their excess liquidity in sterling or non-
sterling assets. Why therefore should the Exchange Fund offer cover,
at any rate during the period of the floating of sterling, thereby adding
to the risks assumed?
Hong Kong's Reaction to Float
But a more immediate question to be answered was which of three
options open to us should we follow during the floating of sterling, namely
to remain linked to sterling at the then present rate
(1)
(2)
of HK$ 14.54 or at some other rate of our choice and
thereby float with sterling;
to abandon the sterling link and replace it with a
direct link with the US dollar;
(3) temporarily to float the Hong Kong dollar independently
with a view to establishing the true market valuation
of the Hong Kong dollar in relation to other currencies.
As is now a matter of history we decided that the best course to
adopt in the long run would be the setting of a new fixed rate between sterling and the Hong Kong dollar, for the fact is that Hong Kong's monetary system
/is