TNAG-0381-FCO40-427-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 145

BAY

10

In

no central bank in Hong Kong; and currency notes which,

in Hong Kong, are circulated by the commercial banking

system, are required by legislation to be fully backed.

practice, they are fully-backed by sterling which has

been surrendered to an Exchange Fund by the banks against

the issue of their own currency notes and the Fund has

accumulated a substantial surplus from interest earnings

over the years. This sterling is derived in large measure

from Hong Kong's export earnings: as exports increase,

banks' foreign exchange assets will also tend to increase

and so will deposits with the banks and currency in

circulation. The converse applies equally. It follows

that, under these institutional arrangements, the money

supply (comprising both bank deposits and notes in

circulation) is largely determined by the balance of trade

(visibles and invisibles taken together) as influenced from

time to time by capital movements. Any increase in the

rate of growth of aggregate demand arising from an

increased rate of growth of exports will tend to be

accompanied by an increase in the rate of growth of the money

supply and bank credit which will facilitate an increased

rate of growth of imports and consumption and push up

the internal cost/price structure. But, as the rate

of growth of imports increases, the rate of growth of banks'

foreign exchange assets and, with it, the rate of growth

of bank deposits, currency in circulation and bank credit

will decline, and this helps ensure that the economy deflates

so as to eliminate any excess demand all the more

quickly.

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