XN000022-1972-12-13 — Page 36

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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