TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 22

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Hong Kongi Advice on Exchange Rate Policy

First, facts so far as they are known.

The Hong Kong Exchange Fund, established in 1935, "shall be-

used for the purpose of regulating the exchange value of the currency

of Hong Kong" and "The Fund or any part of it may be held in Hong Kong

currency or in any other currency ... and the Financial Secretary may

for account of the Fund buy or sell such currency".

Ordinance 1935)

(Exchange Fund

Thus the Exchange Fund may hold and deal in any currency. Before 6th July 1972, when Hong Kong fixed on the U.S. dollar, the

note-issuing banks in practice operated on the sterling exchange

standard and paid over sterling to the Fund. Since that date, bu

subject to Hong Kong's MSP restraint, the banks would normally have issued local currency against the surrender of U.S.dollars to the Fund but until recently there was a scarcity of foreign exchange in the market and the banks were issuing notes against Hong Kong dollars (at par) which were then passed to the Exchange Fund in exchange for Certificates of Indebtedness.

There are no fixed rules as to who shall intervene in the

foreign exchange market. Sometimes it is done direct by the Exchange Fund and on other occasions by the Hong Kong Bank when agreement to that end is reached. For instance, after the fix on the U.S.dollar last July the Hong Kong Bank was apparently unwilling to intervene and Exchange Fund alone operated in the market. Later on agreement was reached that the Hong Kong Bank could draw on its guaranteed sterling for market intervention. In November 1972: when H.M.G. agreed that £100 mn. of the banks' sterling could be diversified over a five-month period the earlier agreement was subsumed in the