TNAG-0210-FCO40-246-Briefs-and-background-notes-for-visit-of-Deputy-Under-Secret-1969 — Page 85

CONFIDENTIAL

VISIT OF DEPUTY UNDER-SECRETARY OF STATE

(SIR LESLIE MONSON)

TO HONG KONG, OCTOBER, 1969

CURRENCY QUESTIONS

Note No. 15

Hong Kong has no Central Bank. The three main Commercial Banks carry out such functions as the issue of bank notes and the buying and selling of sterling at official rates. The exchange value of the currency is regulated by an Ordinance providing for the management of an Exchange Fund, for the account of which the Financial Secretary, who controls it, may

borrow within limits laid down in the Ordinance.

2.

When Her Majesty's Government entered into the 1968 sterling agreement with Hong Kong, undertaking to maintain the dollar value of a proportion of the Colony's sterling reserves, the special role of the Commercial Banks' balances was recognised

and an arrangement made by which the Hong Kong Government brought

into official reserves and thus within the scope of the

J

guarantee a major part of the Commercial Banks' sterling balances. The instrument used for this purpose is the Exchange

Fund. The Fund borrows sterling from the Commercial Banks and

redeposits it with the Banks in its own name.

3.

In late 1968 the Hong Kong Government asked that the

statutory borrowing limits of the Exchange Fund should be increased to allow more of the Commercial Banks' sterling balances to come under guarantee. One increase was approved

and soon thereafter another. However, in buoyant economic

conditions of the Colony the Government wished to be able to

make quicker response to requests from the Commercial Banks

that they should take more sterling into the reserves than was

possible when each individual increase in the borrowing powers

of the Fund had first to be negotiated with ourselves and thereafter authorised by an amending Bill. The Governor

therefore asked that such amendments should in future be

allowed by Legislative Council resolution.

14.

CONFIDENTIAL