TNAG-0379-FCO40-425-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 274

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seeks to achieve a budgetary lulance or surplus it is unnecessary for

it to issue paper to finance current expenditure. It appears, however,

that the Government may think that the issue of securities to the banks

against the payment of foreign exchange might be regarded as tantamount

to deficit financing and detract from Hong Kong's image of credit-

This would be a vorthiness flowing from sound financial management.

most unlikely outcome because the transfer of part of the bankca'

external reserves to the Government's own central reserves would have ·

no inflationary impact at all unless they were to be drawn on to finance

a rolatively high level of internal expenditure.

It is assumed that

this would not be the intention and the position could be made clear at

the time by an appropriate official announcement, It might also be

added that it is not unusual for governments to issue paper for

reasons unconnected with deficit finance, A number of countries,

including Japan and Germany, have recently, without need to borrow, put out short-term securities (sometimes through the Central Banks)

for monetary policy reasons, The object is to relieve the

commercial banking system of unwanted foreign exchange or of exoesalve

liquidity generated by foreign exchange inflows.

ό.

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As to the cost of servicing government paper, it will be

apparent that the foreign exchange acquired by the Government will be

employed in London, and later possibly in other centres, at rates of

interost which may be in excess of the rate payable on the Hong Kong

Government securities issuod locally, It is relevant to mention

that, for thủ roauons already outlined, it will be in the banks'

intorasts to take up such paper and this will be a consideration in

establishing the rate of interest to be paid on the Government

securities,