XN000022-1979-02-28 — Page 27

*THAT IS TO SAY, MR. YET ANOTHER CONSEQUENCE

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HADDON-CAVE SAID, IT IS A CONSEQUENCE

OF OUR ECONOMY HAVING TO OPERATE UNDER A FLOATING AS OPPOSED TO A FIXED EXCHANGE RATE REGIME.+

THE PROPOSAL WOULD IN NO WAY BE AN ATTACK ON THE LENDING BEHAVIOUR, AS IT WERE, OF THE GOVERNMENT'S OWN BANKERS.

+RATHER, IT STEMS FROM A REALISATION THAT IT IS UNLIKELY THAT THE GOVERNMENT'S HONG KONG DOLLAR BALANCES CAN BE EASILY REMOVED FROM THE SYSTEM AND THAT, THEREFORE, THE GOVERNMENT HAS AN OBLIGATION TO LIMIT THE IR CONTRIBUTION TO THE GROWTH OF LOANS AND ADVANCES BY THE BANK ING SYSTEM AS A WHOLE.

+THE GOVERNMENT, HAVING PUT ITS OWN HOUSE IN ORDER, SO TO SPEAK, BY ASSUMING POWERS TO LIMIT THE SUPPLY OF CREDIT BASED ON

ITS OWN HONG KONG DOLLAR BALANCES, THE QUESTION NOW TO BE CONSIDERED IS THE CONTROL OF THE GROWTH RATE OF THE MONEY SUPPLY TO THE EXTENT THAT IT IS DETERMINED BY THE DEMAND FOR CREDIT WHICH, IN TURN, IS INFLUENCED BY THE RATES OF INTEREST AT WHICH LOANS AND ADVANCES ARE OFFERED BY THE BANKS, THE FINANCIAL SECRETARY SAID.

HE SAID HE HAD EXAMINED VARIOUS POSSIBLE METHODS OF RESTRAINT BEFORE CONCLUDING THAT THE ONLY REALLY SATISFACTORY AND PRACTICABLE METHOD OF EXERCISING CONTROL OVER THE GROWTH RATE OF THE MONEY SUPPLY WOULD BE THE USE OF INTEREST RATES,

THESE INCLUDED AN IMPOSITION OF CEILINGS ON LOANS AND ADVANCES FOR SPECIFIED PURPOSES AND A LIMITATION ON THE GROWTH OF BANK RESOURCES.

+ALL METHODS EXAMINED WERE EVALUATED IN TERMS OF WHETHER THE IR EFFECTS WOULD BE EQUITABLE AS BETWEEN TERMS OF WHETHER DIFFERENT CATEGORIES OF BANKS (AND DEPOSIT-TAKING COMPANIES), WHETHER THERE WOULD BE UNACCEPTABLE EFFECTS ON THE EXCHANGE RATE OR ON INTEREST RATES AND, OF COURSE, WHETHER THEY WOULD EFFECTIVELY ACHIEVE THE OBJECTIVE.

+MY CONCLUSION WAS THAT NONE OF THE METHODS DEVISED WOULD BE WHOLLY EFFECTIVE AND SOME OF THEM WOULD BE OBJECTIONABLE IN TERMS OF ONE OR MORE OF THESE CRITERIA. I WAS SEIZED OF A FURTHER CONSIDERATION NO MATTER HOW SKILFULLY THE CASE FOR THE

IMPOSITION OF A FORM OF DIRECT CONTROL MIGHT BE PRESENTED, IT WOULD BE INTERPRETED AS A RADICAL CHANGE OF POLICY BY THE HONG KONG GOVERNMENT AND ALL SORTS OF ERRONEOUS CONCLUSIONS DRAWN FROM THIS,+ MR. HADDON-CAVE EXPLAINED.

HE SAID HE WOULD PREFER NOT TO IMPOSE ANY FORM OF DIRECT CONTROL ON THE SUPPLY OF CREDIT IN HONG KONG AND PREFERRED TO LEAVE MATTERS TO THE BANKING SYSTEM ITSELF.

HE ALSO EMPHASISED THAT HE DID NOT AT PRESENT INTEND TO RAISE THE MINIMUM LIQUIDITY RATIO.

+NEVERTHELESS, I BELIEVE THAT AN INCREASE IN THIS RATIO MIGHT, IN CERTAIN CIRCUMSTANCES, BE APPROPRIATE FOR THE PURPOSES OF MONETARY POLICY. IT WOULD NOT BE PARTICULARLY EQUITABLE AS BETWEEN GROUPS OF BANKS, AND IT WOULD NOT BE TOTALLY EFFECTIVE IN ACHIEVING ITS OBJECTIVE, BUT IT IS A CONSTRAINT WHICH DOES LIE TO HAND. A SIMILAR CONSTRAINT COULD, IN DUE COURSE, BE APPLIED TO DEPOSIT-TAKING COMPANIES EVEN THOUGH WE HAVE NOT YET SET THE MINIMUM LIQUIDITY RATIO TO BE OBSERVED BY THEM.

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