TNAG-0621-FCO40-769-Budget-of-Hong-Kong-1977 — Page 124

G.F. 323

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16.

34.

When the exchange rate is not fixed the acquisition of foreign

assets by the banks and the public sector are determined as a matter

of choice by these two sectors. The demand for and supply of foreign

exchange is not equated by the banks or the Government meeting the

excess or deficit. The difference after each has adjusted its own

holdings of foreign assets is met by an adjustment in the price of

the Hong kong dollar. As the acquisition of foreign assets is deter-

mined by the Hong Kong Government and the Hong Kong banking sector

there is a sense therefore in which the stock of money in Hong Kong

is the outcome of purely domestic influences when the exchange rate

is allowed to float.

35.

During the early part of 1975 the banks and the Government

were acting to prevent an appreciation of the Hong Kong dollar; their

combined efforts together with the strong demand for Hong Kong dollars

prevented an appreciation but, of course, increased the Hong Kong dollar

deposits held by the private sector. Although there was an element of

smoothing, with later intervention to buy Hong Kong dollars, the net

effect was to hold the exchange rate lower than it vuld otherwise have

been and to increase the stock of money in the private sector. In

addition the modest increase in bank lending would also have increased

the stock of money in 1975. The public sectors' overall surplus in the

calendar year of 1975 has had a small expansionary effect on the stock

of money held by the private sector.

36.

There was not the same intervention in 1976 and the situation

approximated to a regime where the exchange rate equated the capital

and current accounts of the balance of payments. The money supply was

therefore determined by domestic bank lending and any foreign assets the

banks and the Government chose to purchase. As a consequence the

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