5
FRIDAY, JULY 15, 1988
(B)
((°)
HSBC BORROWS HONG KONG DOLLARS IN THE INTERBANK MARKET; OR
A CUSTOMER OF HSBC ACCEPTS HONG KONG DOLLARS FOR HIS ACCOUNT WITH, OR FOR REDUCING A CREDIT FACILITY MADE AVAILABLE BY, HSBC FROM ANOTHER PERSON BANKING WITH ANOTHER BANK.
5. THUS WHEN THE EXCHANGE FUND, AS A CUSTOMER OF HSBC, CARRIES OUT FOREIGN EXCHANGE AND MONEY MARKET OPERATIONS TO STABILIZE THE EXCHANGE RATE, THE EFFECTIVENESS OF SUCH ACTION CAN STAND TO BE
GRADUALLY ERODED.
6. TO ILLUSTRATE, CONSIDER THE CASE WHEN, FOR WHATEVER REASON, THE EXCHANGE RATE IS WEAKENING AWAY FROM 7.80. ARBITRAGE BETWEEN THE FIXED-RATE MARKET FOR HONG KONG DOLLAR BANK NOTES AND THE FOREIGN EXCHANGE MARKET, OR THE THREAT OF IT, WILL CONTRIBUTE TO CONTAINING THE DEVIATION FROM 7.80. AT THE SAME TIME AND WORKING IN THE SAME DIRECTION, THE CORRECT MONETARY POLICY RESPONSE MUST BE TO KEEP CONDITIONS IN THE INTERBANK MARKET TIGHT AND INTERBANK INTEREST RATES 111GH RELATIVE TO THOSE OF THE US DOLLAR. THIS CAN BE ACHIEVED BY THE EXCHANGE FUND SELLING US DOLLARS FOR HONG KONG DOLLARS OR BORROWING HONG KONG DOLLARS, BOTH THROUGH HSBC. IF, HOWEVER, OTHER CUSTOMERS OF HSBC ARE AT THE SAME TIME SWITCHING OUT OF HONG KONG DOLLARS INTO US DOLLARS AND TO THE EXTENT THAT HSBC COVERS THE SHORT US DOLLAR POSITION BY RECOUPING THE CORRESPONDING AMOUNT FROM THE FOREIGN EXCHANGE MARKET, THE TIGHTNESS IN THE INTERBANK MARKET WILL INADVERTENTLY BE RELIEVED. OTHER CUSTOMERS OF HSBC MAY ALSO BE TAKING ADVANTAGE OF THE HIGH HONG KONG DOLLAR INTERBANK INTEREST RATES AVAILABLE BY RUNNING DOWN HKAB-TYPE DEPOSITS WITH, OR DRAWING DOWN BEST LENDING RATE (BLR) FACILITIES MADE AVAILABLE BY, HSBC AND PLACING THOSE FUNDS WITH OTHER BANKS IN THE FORM OF DEPOSITS WHICH ATTRACT INTERBANK INTEREST RATES. THIS AGAIN WILL UNHELPFULLY RELIEVE TIGHTNESS IN THE INTERBANK MARKET.
NEW ACCOUNTING ARRANGEMENTS
7.
SUCH EROSION IN THE EFFECTIVENESS OF FOREIGN EXCHANGE AND MONEY MARKET OPERATIONS CARRIED OUT BY THE EXCHANGE FUND FOR THE PURPOSE OF MAINTAINING EXCHANGE RATE STABILITY IS CLEARLY UNDESIRABLE. THE GOVERNMENT AND HSBC HAVE BOTH RECOGNISED THIS FOR SOMETIME. NEW ACCOUNTING ARRANGEMENTS BETWEEN THE EXCHANGE FUND AND HSBC, WHICH EFFECTIVELY ELIMINATE THIS SHORTCOMING, HAVE THEREFORE BEEN DEVELOPED. THE DETAILS OF THE NEW ACCOUNTING ARRANGEMENTS ARE AS FOLLOWS:
/(A) HSBC
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