XN000022-1986-04-09 — Page 2

WEDNESDAY, APRIL 9, 1986

EXCHANGE FUND USED RESPONSIBLY. DECISIVELY

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SIR JOHN

HONG KONG HAS COME THROUGH A ROUGH FOUR YEARS OF BANKING ROBLEMS WITH MINIMUM REAL TROUBLE BECAUSE THE GOVERNMENT HAS USED THE POWERS AVAILABLE TO IT, INCLUDING THE EXCHANGE FUND, RESPONSIBLY, PROMPTLY AND DECISIVELY.

THIS WAS STATED BY THE FINANCIAL SECRETARY, SIR JOHN BREKKlude, IN THE LEGISLATIVE COUNCIL TODAY (WEDNESDAY), IN RESPONSE TO RECENT REQUESTS FROM SOME MEMBERS FOR CLARIFICATION ABOUT THE USE OF THE EXCHANGE FUND TO SUPPORT TROUBLED LOCAL BANKS.

EXPLAINING THE LEGAL BACKGROUND TO THE RESPONSIBILITIES AND DUTIES OF THE FINANCIAL SECRETARY IN THIS FIELD, SIR JOHN SAID THE EXCHANGE FUND ORDINANCE PROVIDED FOR A SEPARATE LEGAL REGIME IN RESPECT OF THE CONTROL, MANAGEMENT AND AUDIT OF THE EXCHANGE FUND. THIS ORDINANCE PREDATED THE PUBLIC FINANCE ORDINANCE AND CONSTITUTED AN EXCEPTION TO THE GENERAL RULE THAT MONIES RECEIVED BY THE GOVERNMENT SHALL FORM PART OF THE GENERAL REVENUE.

SIR JOHN POINTED OUT THAT SECTION 3(1) OF THE EXCHANGE FUND ORDINANCE CLEARLY REQUIRES THE FINANCIAL SECRETARY TO CONSIDER MATTERS THAT MAY AFFECT, EITHER DIRECTLY OR INDIRECTLY, THE EXCHANGE VALUE OF THE HONG KONG CURRENCY.

+THE USE OF THE WORDS 'AFFECT' AND INDIRECTLY ENABLE DE TO CONSIDER NOT ONLY THE IMMEDIATE CONSEQUENCES OF THE USE, OR THE FAILURE TO USE, THE FUND, BUT ALSO SECOND-ORDER CONSEQUENCES, THE SO-CALLED 'KNOCK-ON EFFECT, HE SAID.

THUS, HE ADDED. IF I BELIEVE

+ IF I BELIEVE, HAVING CONSIDERED ALL RELEVANT FACTORS, THAT FAILURE TO USE THE EXCHANGE FUND TO SUPPORT A BANK MAY, WHETHER DIRECTLY OR INDIRECTLY, ADVERSELY AFFECT THE EXCHANGE VALUE OF THE HONG KONG DOLLAR, THEN I AM WITHIN MY POWERS TO ACT. INDEED I HAVE A DUTY TO DO SO.+

+

IN

SIR JOHN SAID THAT THE RESERVES OF THE EXCHANGE FUND, CONNECTION WITH THE POWERS AND DUTIES OF THE COMMISSIONER OF BANKING AND THE FINANCIAL SECRETARY WITH REGARD TO THE BANKING ORDINANCE AND THE EXCHANGE FUND RESPECTIVELY, FORMED A LENDER OF LAST RESORT -- A QUAS! CENTRAL BANK AS EXISTED IN MANY OTHER PLACES IN THE WORLD.

SUCH AN INSTITUTION +MUST BE READY WHEN ESSENTIAL TO CONSIDER SUPPORT FOR LOCAL BANKS IF AND WHEN THEY RUN INTO PROBLEMS+ SIR JOHN SAID, STRESSING THE GOVERNMENT'S COMMITMENT TO PRESERVING THE PROSPERITY AND STABILITY OF HONG KONG.

RECALLING THE EVENTS OF 1983, SIR JOHN SAID IT WAS HIS JUDGEMENT THAT, IF THE GOVERNMENT HAD NOT RESCUED HANG LUNG BANK AT THAT TIME, OTHER BANKS COULD HAVE COLLAPSED AND OTHER IMPORTANT SECTORS OF THE ECONOMY WOULD ALSO HAVE BEEN SET AT TOTAL RISK.

/+MOREOVER, SUCH