XN000022-1983-11-17 — Page 5

THURSDAY, NOVEMBER 17, 1983 ·

HE FELT THAT THE ADVOCATES OF SO USING THE LIQUIDITY REQUIREMENT HAD BEEN SEDUCED BY WHAT MIGHT BROADLY BE DESCRIBED AS RESERVE RATIO CONTROLS OPERATED ELSEWHERE IN THE WORLD, BUT HAD FAILED TO APPRECIATE CERTAIN IMPORTANT FEATURES OF HONG KONG.

THESE FEATURES INCLUDE THE ABSENCE OF A CENTRAL BANK, THE ABSENCE OF EXCHANGE CONTROLS, THE ABSENCE OF MARKETABLE GOVERNMENT DEBT AND LARGELY ARISING FROM THESE, THE LACK OF ANY CAPABILITY FOR THE GOVERNMENT TO CONTROL THE AVAILABLE SUPPLY OF SPECIFIED LIQUID ASSETS.

+THESE FEATURES PROVIDE HONG KONG WITH A UNIQUE MONETARY ENVIRONMENT INTO WHICH OTHER SYSTEMS OF CONTROL CANNOT READILY BE TRANSPLANTED, HE SAID.

+1 AM PARTICULARLY SURPRISED THAT CALLS FOR CHANGES TO THE LIQUIDITY ARRANGEMENTS AS A MEANS OF MONETARY CONTROL, AND INDEED MORE GENERAL CALLS FOR CREDIT CONTROL MEASURES, DO NOT APPEAR NOW TO HAVE ABATED AT ALL.

+THEIR CONTINUANCE SEEMS, FROM A THEORETICAL STANDPOINT, TO BELIE A BASIC MISUNDERSTANDING OF THE NEW EXCHANGE RATE REGIME, MR LATTER ADDED.

UNDER THIS REGIME, THE MONEY STOCK WILL AUTOMATICALLY ADJUST TO A LEVEL THAT IS CONSISTENT WITH THE EXCHANGE RATE, HE SAID.

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+THEREFORE, IF THE NEW SCHEME IS WORKING IN PRACTICE AS THE THEORY SUGGESTS IT SHOULD AND SO FAR THIS SEEMS BROADLY TO HAVE BEEN THE CASE - THERE CAN BE NO PLACE FOR A SEPARATE POLICY DIRECTED AT CONTROLLING THE MONEY STOCK.

+ONLY IF THE SCHEME WERE NOT WORKING SO WELL MIGHT THERE BE SOME JUSTIFICATION FOR ADOPTING A LESS NON-INTERVENTIONIST STANCE,+ HE SAID.

MR LATTER ADDED THAT HE DID NOT, HOWEVER, WANT TO DISMISS THE LIQUIDITY DEBATE ENTIRELY.

+WHILE I HOPE I HAVE DEMONSTRATED WHY I AM PERSONALLY SCEPTICAL OF THE MACRO-ARGUMENTS FOR REVISED LIQUIDITY ARRANGEMENTS, THE MICRO ARGUMENTS ARE AS VALID - SOME MAY SAY INVALID

SOME MAY SAY INVALID AS THEY EVER WERE,+ HE SAID,

THESE CONCERN THE RELATIVE COSTS AS BETWEEN DIFFERENT TYPES OF BANK OF MEETING THE LIQUIDITY REQUIREMENT, AND HENCE THE RELATIVE EASE OF CREDIT CREATION, HE STATED.

+ DO NOT WISH TO VENTURE INTO THIS DEBATE IN PUBLIC AT THIS TIME, BUT I CAN SAY THAT THE GOVERNMENT HAS UNDERTAKEN TO REVIEW THE MATTER, HE ADDED.

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