XN000022-1972-12-13 — Page 26

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Wednesday, December 13, 1972

had a variable exchange relationship with London because the sterling (or

gold) value of the Hong Kong dollar varied with the price of silver. But

this had the advantage of establishing a stable exchange relationship with

China whose currency was also based on a silver standard and thus of preserving

the stability of the entrepot trade on which Hong Kong's economy then largely

depended. When China abandoned the silver standard in 1935, Hong Kong followed.

The note issuing banks were obliged to surrender all silver previously held

by them against their note issues in exchange for certificates of indebtedness.

The silver surrendered by the banks was used to set up an Exchange Fund which,

from the outset, kept its assets in sterling, a not surprising move given the

range of banking and investment facilities available in London. The Fund buys and

sells sterling at fixed rates close to par - or did so until sterling floated -

and thereby regulated the exchange value of the Hong Kong dollar. The sterling

area as it is known to-day came into being in the early days of the last war

basically as an aid to assuring that the foreign earnings of the Commonwealth

were centralised for the common good. Hong Kong, then, became a member of

the sterling area which in effect meant that the Government's reserves and

the greater part of the reserves of the banking system had to be kept in London

in sterling assets.

In 1935 the exchange value of the Hong Kong dollar was fixed at

approximately 1/3d. or at a rate of HK$16 to the £ sterling; and, with the

setting up of the International Monetary Fund after the war, the Hong Kong

dollar was given a gold parity which reflected this rate. Together with

most other sterling area currencies - and indeed those of a large number of

other countries as well Hong Kong, followed britain when sterling was devalued

in terms of the U.S. dollar in 1949. This strengthened the view widely held in

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