TNAG-0735-FCO40-939-Policy-objective-for-the-developing-of-Hong-Kong-in-the-1980-1978 — Page 82

23.

The Government can only directly influence the growth

of the money supply through its transactions in the foreign

exchange market: when, through the Exchange Fund, it converts

a Hong Kong dollar balance into a foreign currency balance held

overseas the money supply is reduced, compared with what it would have otherwise been, and vice versa. In the normal way, when there is a surplus on budgetary account, there is a transfer

of deposits from the non-bank private sector to the Government's bank accounts and, if this surplus is retained in Hong Kong in

the form of Hong Kong dollar deposits, the effect on the money supply is neutral. If there is a deficit on budgetary account,

there is a transfer of deposits from the Government's bank

accounts to the non-bank private sector and the effect on the money supply is again neutral. Only if there is a net transfer

of Hong Kong dollar assets into foreign currency assets held

overseas (or vice versa) is the money supply affected.

24.

Normally, also, an expansion or contraction of the

note issue is neutral in terms of the money supply: when the

Hong Kong dollar was tied to sterling, the note issuing banks

exchanged sterling assets against Certificates of Indebtedness

issued by the Exchange Fund and so, when the note issue expanded,

the banks' other liquid assets were reduced; and vice versa

when the note issue contracted. But, since the middle of 1972,

Certificates of Indebtedness have been issued against the creation of Hong Kong dollar deposits and, particularly since

the floating of the Hong Kong dollar in November 1974, it has

not always been possible to use these Hong Kong dollars to

acquire foreign currency assets because of the virtual certainty of the foreign exchange market being disturbed. But with the very ready co-operation of the note-issuing banks this problem

can be, and has been from time to time, overcome.

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