XN000022-1982-02-24 — Page 4

WEDNESDAY, FEBRUARY 24, 1982

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MR BREMRIDGE SAID HE DECIDED AGAINST IMPOSING A MINIMUM LEVEL ON FOREIGN CURRENCY DEPOSITS AS ANY SUCH LIMITATION WOULD NECESSARILY HAVE HAD TO BE ARBITRARY. IF SET TOO HIGH IT WOULD HAVE VITIATED THE OBJECTIVES OF THE EXEMPTION AND IF SET TOO LOW IT COULD HAVE BEEN READILY CIRCUMVENTED, FOR INSTANCE BY GROUPS OF DEPOSITORS JOINING TOGETHER TO MEET THE STIPULATED MINIMUM.

+FURTHERMORE A MINIMUM LEVEL OF DEPOSITS WHICH WAS PITCHED HIGH WOULD BE OPEN TO CRITICISM ON GROUNDS OF EQUITY - HELPING ONLY THE RICH INVESTORS AT THE EXPENSE OF THE MAN IN THE STREET.+

MR BREMRIDGE SAID ACCORDING TO A REPORT PREPARED BY THE HONG KONG ASSOCIATION OF BANKS, THE GENERAL CONSENSUS OF ITS MEMBERS WAS IN FAVOUR OF A TAX EXEMPTION FOR FOREIGN CURRENCY DEPOSITS. THESE SUBMISSIONS ACKNOWLEDGED THE PROBABLE FISCAL CONSEQUENCES OF REPEAL, BUT TOOK THE VIEW THAT IN THE CONTEXT OF OUR BUDGETARY SITUATION, WE COULD AFFORD THE LOSS IN YIELDS FROM INTEREST TAX. THEY ALSO ARGUED THAT THE MONETARY AND ECONOMIC ADVANTAGES, IN PARTICULAR THE ENHANCEMENT OF HONG KONG'S POSITION AS AN INTERNATIONAL FINANCIAL CENTRE, COULD WELL OUTWEIGH THE FISCAL LOSSES AND THAT SUCH LOSSES WOULD IN PART AT LEAST BE OFFSET BY INCREASED PROFITS TAX YIELDS FROM FINANCIAL INSTITUTIONS.

+AFTER LONG INTERNAL DEBATE AND MUCH HEARTSEARCHING WE HAVE COME TO THE CONCLUSION THAT THE ARGUMENTS FOR A PARTIAL REPEAL OF THE INTEREST TAX ON PRAGMATIC AND ECONOMIC GROUNDS OUTWEIGH THE FISCAL ARGUMENTS FOR ITS RETENTION. THE GOVERNMENT CONSIDERS THAT THE CONTINUING GROWTH OF HONG KONG AS AN INTERNATIONAL FINANCIAL CENTRE IS WORTHY OF ENCOURAGEMENT, HE SAID.

HAVING DECIDED TO EXEMPT SUCH INTEREST TAX, MR BREMRIDGE SAID, THERE REMAINED THE PROBLEM THAT THE HONG KONG DOLLAR WOULD BE IN DANGER IF DEPOSITORS BEGAN SIGNIFICANTLY TO MOVE ACROSS THE EXCHANGES OUT OF LOCAL DOLLAR DEPOSITS INTO FOREIGN CURRENCY DEPOSITS.

HE SAID IT WAS NOW A RELATIVELY SIMPLE MATTER FOR AN INVESTOR TO MINIMISE HIS EXCHANGE RISKS AT SMALL COST BY ENTERING INTO WHAT WAS KNOWN IN THE TRADE AS A +SWAP+ TRANSACTION - THAT WAS THE COINCIDENTAL PURCHASE AND RESALE OF THE FOREIGN CURRENCY DEPOSIT. THIS PRACTICE WAS CLEARLY MUSHROOMING.

MR BREMRIDGE SAID BY REDUCING THE INTEREST TAX ON HONG KONG DOLLAR DEPOSITS TO 10 PER CENT. THE TAX ADVANTAGES OF MOVING INTO FOREIGN CURRENCY DEPOSITS WOULD USUALLY BE SMALL AND A SWITCH COULD WELL BE DISADVANTAGEOUS WHEN MEASURED AGAINST THE COSTS OF COVERING EXCHANGE RISKS.

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