CONFIDENTIAL
• HONG KONG: MONETARY MANAGEMENT AND INSTITUTIONS
Whilst in Hong Kong recently, I took the opportunity to seek to inform myself on this range of subjects. My own expertise in the technicalities is limited; and it would in any case have been inappropriate for me to display a keener interest in this field than was compatible with a "familiarisation" visit. In particular, I did not have the opportunity to have any discussions with commercial banks or other financial institutions in the private sector.
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2. It is clear that the Hong Kong Government's approach to monetary management cannot be considered in isolation from the general philosophy underlying the approach to economic policy in Hong Kong. The main elements are conveniently set down in the Financial Secretary's speech (October 1973) to the Conference on Business Opportunities in the Pacific Basin. This I attach as required
reading for those who would seek to understand that philosophy. The arguments in that paper are deeply believed by the Financial Secretary, and they would I suspect command a fairly wide measure of support both within and outside Government in Hong Kong.
3. Under the heading "The Automatic Corrective Mechanism" he says:- "Not that there is any need for the Government to intervene to regulate the economy. Provided the rate of growth of public expenditure is kept more or less in line with the growth of overall demand, the economy will automatically adjust so as to maintain both internal and external equilibrium." In developing his argument he goes on to say "this process would be reinforced by an automatic monetary effect. Neither the Government (except to a very limited extent) nor the banks can influence the money supply
the money supply is largely determined by the balance of trade (visibles and invisibles taken together) as influenced from time to time by capital movements." 1 An improvement in the balance of trade, so the argument
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/runs,
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