XN000022-1981-04-09 — Page 5

THURSDAY, APRIL 9, 1981

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→IN THOSE DAYS, THE GROWTH RATE OF THE MONEY SUPPLY WAS MAINLY DETERMINED BY SHIFTS IN THE NEW EXTERNAL BALANCE. PUT THE OTHER WAY ROUND, DEFICITS AND SURPLUSES IN THE BALANCE OF PAYMENTS WERE LARGELY ELIMINATED BY CHANGES IN THE MONEY SUPPLY, THAT IS TO SAY, THE ADJUSTMENT MECHANISM OPERATED THROUGH THE MONEY SUPPLY.

+UNDER A FLOATING EXCHANGE RATE REGIME, SUCH DEFICITS AND SURPLUSES ARE ELIMINATED, IN THEORY AT LEAST, BY CHANGES IN THE EXCHANGE RATE WITH LITTLE OR NO EFFECT ON THE MONEY SUPPLY.

+BUT IN AN OPEN ECONOMY LIKE OURS, WHERE THE VALUE OF OUR VISIBLE AND INVISIBLE TRADE IS 2.3 TIMES AS LARGE AS THE VALUE OF OUR GDP, AND GIVEN THE LOW PRICE ELASTICITY OF DEMAND FOR IMPORTS, THE EXCHANGE RATE CHANGES REQUIRED TO CORRECT LARGE DEFICITS OR SURPLUSES IN THE BALANCE OF PAYMENTS MAY BE TOO LARGE TO BE TOLERABLE.

+THUS, IT IS NECESSARY TO SUPPORT THE ROLE OF EXCHANGE RATE CHANGES IN THE ADJUSTMENT MECHANISM BY INFLUENCING THE GROWTH RATE OF THE MONEY SUPPLY, AS DETERMINED BY THE DEMAND FOR CREDIT AND NET FLOWS OF FUNDS ACROSS THE EXCHANGES, BY APPROPRIATE ADJUSTMENTS TO INTEREST RATES.+

SIR PHILIP SAID THE ORIGIN OF THE INTEREST RATE AGREEMENT LAY IN THE BANKING CRISIS OF THE EARLY 1960S BROUGHT ABOUT BY · CUT-THROAT COMPETITION FOR DEPOSITS AND LOANS BY THE BANKS,

+ITS PURPOSE NOW IS NOT SO MUCH TO PREVENT CUT-THROAT COMPETITION - AND THERE ARE MANY WAYS IN WHICH BANKS AND OTHER DEPOS IT-TAKING INSTITUTIONS CAN COMPETE FOR BUSINESS AMONGST THEMSELVES - AND TO PRESERVE TO THE BANKS A MONOPOLY OF SHORT TERM DEPOSITS AS AN END IN ITSELF.

+RATHER IT IS TO ENSURE THAT THE INTEREST RATE AGREEMENT OPERATES IN RESPECT OF A SUBSTANTIAL SHARE OF THE TOTAL HONG KONG DOLLAR DEPOSIT BASE SO THAT INTEREST RATE CHANGES ARE INFLUENTIAL.+

+THE INTEREST RATE WEAPON IS EFFECTIVELY OUR ONLY WEAPON OF MONETARY POLICY, THAT IS TO SAY, THE ONLY MEANS AT OUR DISPOSAL TO

INFLUENCE THE GROWTH RATE OF DOMESTIC LOANS AND ADVANCES AND SHIFTS IN THE NET ACQUISITION OF FOREIGN CURRENCY ASSETS, AND THEREFORE, OF THE MONEY SUPPLY.+

SIR PHILIP POINTED OUT THAT IF NON-BANK DEPOSIT-TAK ING INSTITUTIONS CAN OFFER MORE ATTRACTIVE RATES FOR SHORT TERM DEPOSITS, THEN SOME BANKS WOULD SEEK AGGRESSIVELY TO EXPAND THE IR DEPOS IT GARNERING ACTIVITIES BY SETTING UP WHOLLY OWNED DEPOSIT-TAK ING COMPANY SUBSIDIARIES, WHILST OTHERS WILL THEN BE FORCED TO PROTECT THE IR SHARE OF THE MARKET BY LIKEWISE SETTING UP SUBSIDIARIES,

HE SAID SINCE THE END OF 1978 THERE HAD BEEN A SUBSTANTIAL INCREASE IN THE NUMBER OF CREDIT-GRANTING INSTITUTIONS IN HONG KONG, WITH THE ADDITION OF 41 DEPOS IT-GARNER ING LICENSED BANKS AND 99 DEPOS IT-TAK ING COMPANIES.

+THIS HAS, TO SOME EXTENT, CREATED A BORROWERS' MARKET AND LED TO MANY EXPRESSIONS OF CONCERN ABOUT THE RATE OF EXPANSION OF THE MONETARY AGGREGATES, BUT IT CANNOT BE SAID TOO OFTEN THAT

INTERPRETATION OF PRESENTLY AVAILABLE STATISTICS IS DIFFICULT.

/+THE SHARE

+++