TNAG-0458-FCO40-523-Future-of-financial-and-economic-policy-of-Hong-Kong-1975 — Page 12

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with a natural concern for the fortunes of the various companies (both financial and commercial) with which they are associated.

It may be argued that in some respects the argument in favour of a CMI is no more than tidy mindedness and that the present system, ungainly as it is, works well.

Recent and impending developments, however, point to the need for a more active management of Hong Kong's internal and external finances. First, the stock exchange "bubble" of 1972-73 requires no further underlining. Second, the fact that Hong Kong can be exposed to unwelcome as well as to beneficial capital inflows (and therefore outflows) has been graphically demonstrated by the recent necessity of allowing the Hong Kong dollar to float. Third, the Hong Kong Government is faced with an imminent need to borrow in order to maintain essential current and capital expenditure.

In

Whilst the powers of a CMI must not be exaggerated, something could have been done to mitigate or discourage both the earlier surge in share prices and the more recent capital inflows e.g. by increasing the banks' liquidity ratios or by calling for reserve deposits. Or again the CMI could itself have absorbed the inflow of foreign exchange. the field of deficit financing a neutral or disinterested judgment would be valuable on the extent to which it would be prudent for Government

to borrow, on the form which such borrowing should take, e.g. short, medium or long term, on the terms and timing of issues, and the right

mix between domestic and external loans. On all these questions a properly constituted and staffed CMI could both give the necessary advice, execute the necessary operations and generally manage

Government debt.

The statutes of a CMI for Hong Kong would need to be carefully designed to fit the local scene without generating unnecessary friction with vested interests the phasing of its introduction would also be important in this and it would need high calibre management.

powers would need to include:-

-currency issue (initially indirectly through

the right to issue certificates of indebtedness

as cover for the note issue, as the Exchange

Fund does at present, but eventually in its name)

- operating clearing accounts for the banks

Its

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