XN000022-1979-02-28 — Page 26

WEDNESDAY, FEBRUARY 28, 1979

24

ANY STIFFENING OF THIS REQUIREMENT BY SHORTENING THE MATURITY PATTERN OF THE EXCHANGE FUND'S DEPOSITS WILL ENTAIL SOME LOSS OF REVENUE TO THE FUND BECAUSE, MR. HADDON-CAVE EXPLAINED, WE CAN NORMALLY EXPECT TO EARN A LOWER RATE OF INTEREST ON THE FUND'S SHORT TERM DEPOSITS THAN WE CAN ON ITS LONG TERM DEPOSITS.

+ BUT THIS IS A COMPLETELY LEGITIMATE OUTCOME, HE ADDED. +THE FUND WAS SET UP IN 1935 WITH THE STATED PURPOSE OF

THAT REGULATING THE EXCHANGE VALUE OF THE HONG KONG DOLLAR – REMAINS ITS PRIME FUNCTION. THEN, THREE YEARS AGO, WE TRANSFERRED TO THE EXCHANGE FUND THE FOREIGN CURRENCY ASSETS OF THE GENERAL REVENUE ACCOUNT TO CENTRAL ISE THE MANAGEMENT OF THE GOVERNMENT'S FORE IGN CURRENCY ASSETS, AND TO RELIEVE GENERAL REVENUE OF THE COST OF POSITIONAL EXCHANGE LOSSES AND BOOK LOSSES ON FIXED INTEREST INVESTMENTS, MR. HADDON-CAVE SAID.

+AND WE ARE NOW IN THE PROCESS OF PROGRESSIVELY TRANSFERRING TO THE EXCHANGE FUND ALL THE HONG KONG DOLLAR BALANCES OF THE GENERAL REVENUE ACCOUNT (EXCEPT FOR WORK ING BALANCES WITH THE TREASURY).

+SO THE EXCHANGE FUND HAS BECOME, EFFECTIVELY, BANKER TO THE GOVERNMENT.

HE SAID IT WAS QUITE IN ORDER FOR THE FUND TO FOREGO SOME REVENUE ON ITS HONG KONG DOLLAR BALANCES IF THE INCREASE IN THOSE BALANCES WAS CAUSED BY OUR DESIRE NOT TO DISTURB THE EXCHANGE VALUE OF THE HONG KONG DOLLAR.

THE IMPLEMENTATION OF THE PROPOSED REQUIREMENT, HE SAID, WOULD NOT LIKELY TO LEAD TO AN EXACTLY PROPORTIONATE REDUCTION IN THE AMOUNT OF LOANS AND ADVANCES BY THE BANKS HOLDING THE GOVERNMENT'S DEPOSITS BECAUSE THEY WILL PROBABLY ADJUST THE IR CONVENTIONAL LIQUIDITY RATIO DOWNWARDS.

+BUT THERE IS A LIMIT TO THE EXTENT TO WHICH THEY WILL BE WILLING, AND ABLE, TO DO THIS SINCE BANKS HABITUALLY CHOOSE TO HOLD A CUSHION OF LIQUID ASSETS IN EXCESS OF THE STATUTORY MINIMUM.

+THE SIZE OF THIS CUSHION REPRESENTS A TARGET (OR RATHER A RANGE) SELECTED BY EACH BANK IN THE LIGHT OF ITS OWN CRITERIA AND ITS OWN PARTICULAR SITUATION AN INITIAL REDUCTION IN THE SIZE OF THE CUSHION BROUGHT ABOUT, EFFECTIVELY, BY A GOVERNMENT DECISION WILL LEAD TO EACH BANK CONCERNED TAKING STEPS TO RESTORE ITS CUSHION, AT LEAST PARTIALLY, THE FINANCIAL SECRETARY SAID.

BUT, HE SAID, DESPITE THE FACT THAT THE BANKS CONCERNED WILL BE ABLE TO AVOID THE FULL IMPACT OF THE PROPOSAL, THE ABILITY OF THE BANKING SYSTEM AS A WHOLE TO EXPAND ITS LOANS AND ADVANCES ON THE BASIS OF GOVERNMENT DEPOSITS WILL BE REDUCED.

+THE CREDIT CREATION POTENTIAL OF THE BANK ING SYSTEM HAS BEEN, AS I SAID BEFORE, INVOLUNTARILY INCREASED BY THE ACCUMULATION OF THE GOVERNMENT'S HONG KONG DOLLAR BALANCES IN A SITUATION IN WHICH THE HONG KONG DOLLAR IS FREELY FLOATING AND, FOR THE TIME BE ING, UNDER SOME PRESSURE IN THE MARKET, HE SAID.

/+THAT IS