XN000022-1979-02-28 — Page 15

WEDNESDAY, FEBRUARY 28, 1979

13

MONETARY IMPLICATIONS OF GOVT'S BANK BALANCES

*****

ONE OF THE BUDGETARY POLICIES IS TO MANAGE PUBLIC FINANCES GENERALLY TO MINIMISE THE EXTENT TO WHICH THE MONETARY ENVIRONMENT IS DISTURBED, THE FINANCIAL SECRETARY THE HON. PHILIP HADDON-CAVE TOLD THE LEGISLATIVE COUNCIL TODAY (WEDNESDAY).

+

THE AIM, MR. HADDON-CAVE EXPLAINED, IS TO MINIMISE THE EXTENT TO WHICH THE GROWTH RATE OF MONEY SUPPLY IS ALTERED BY AN EXPANSION OR CONTRACTION OF CURRENCY IN CIRCULATION OR BY A BUDGET SURPLUS OR DEFICIT.+

SINCE THE MIDDLE OF 1972, HE SAID, WHEN THE HONG KONG DOLLAR CEASED TO BE TIED TO STERLING, WHENEVER THE NOTE ISSUE HAD BEEN EXPANDED, CERTIFICATES OF INDEBTEDNESS HAD BEEN ISSUED AGAINST THE CREATION OF HONG KONG DOLLAR DEPOSITS RATHER THAN AGAINST STERLING RECEIPTS.

+SIMILARLY, AN INCREASE IN COINS IN CIRCULATION IS NOW EFFECTED BY THE SALE OF COINS BY THE EXCHANGE FUND AGAINST THE CREATION OF HONG KONG DOLLAR DEPOSITS, THE FINANCIAL SECRETARY SAID.

IT HAS NOT ALWAYS BEEN POSSIBLE, HE SAID, PARTICULARLY SINCE THE FLOATING OF THE HONG KONG DOLLAR IN NOVEMBER 1974, TO USE THESE HONG KONG DOLLAR RECEIPTS TO ACQUIRE FOREIGN CURRENCY ASSETS BECAUSE THE EFFECT ON THE EXCHANGE VALUE OF THE HONG KONG DOLLAR WOULD HAVE BEEN UNACCEPTABLE.

+THUS THE MONETARY ENVIRONMENT HAS BEEN DISTURBED INASMUCH AS AN EXPANSION OF CURRENCY IN CIRCULATION HAS NOT BEEN MATCHED BY A REDUCTION IN BANK DEPOSITS IN HONG KONG AND HAS, THEREFORE, NOT BEEN NEUTRAL IN ITS EFFECT ON THE MONEY SUPPLY,+ MR. HADDON-CAVE SAID.

IN ORDER NOT TO DISTURB THE EXCHANGE VALUE OF THE HONG KONG DOLLAR, HE SAID WE HAD NOT DISPOSED OF ANYTHING LIKE THE SAME PROPORTION OF THE BUDGET SURPLUSES WE HAD BEEN GENERATING RECENTLY LARGELY INVOLUNTARILY, AS WE HAD DONE BEFORE 1972.

+SO THERE HAS BEEN NO CONSTRAINING EFFECT ON THE GROWTH RATE OF THE MONEY SUPPLY, HE SAID, ADDING #

+THIS IS BECAUSE A SURPLUS ON BUDGETARY ACCOUNT INVOLVES A TRANSFER OF DEPOSITS FROM THE NON-BANK PRIVATE SECTOR TO THE GOVERNMENT'S BANK ACCOUNTS. IF THIS SURPLUS IS RETAINED IN HONG KONG IN THE FORM OF HONG KONG DOLLAR DEPOSITS, THE EFFECT ON THE MONEY SUPPLY IS LARGELY NEUTRAL BECAUSE THE SURPLUS CAN BE RE-CIRCULATED TO THE NON-BANK PRIVATE SECTOR THROUGH THE CREATION OF BANK CREDIT.

+ONLY IF THERE IS A NEXT TRANSFER OF HONG KONG DOLLAR ASSETS INTO FOREIGN CURRENCY ASSETS HELD OVERSEAS (OR VICE VERSA) IS THE MONEY SUPPLY SIGNIFICANTLY AFFECTED.

/14