TNAG-0747-FCO40-951-Visits-of-Foreign-and-Commonwealth-officials-to-Hong-Kong-1978 — Page 63

CODE 18 - 77

Mr McLaren (HKGD)

Reference

CONFIDENTI AL

HKK cab/1

? JUN 1978

80.51

INDEX

PA

HONG KONG : CENTRAL MONETARY INSTITUTION COMI)

1.

3/ni

I have discussed with John Thompson the draft section on a CMI in the forthcoming submission for the Secretary of State and am content with it.

2.

The

However, you may wish to have the background at hand. Hong Kong and Shanghai Bank (HKSB) acts as note issuer (for 80% of the total issue), Government banker, lender of last resort and banker to the other commercial banks. It therefore carries out some, but not all, of the traditional functions of a CMI. Recently, the Monetary Affairs branch of the Financial Secretariat under Mr Blye has been expanded. It now manages the Exchange Fund and operates in the market to alleviate wide fluctuations in the Hong Kong $.

3. The then Chief Economic Adviser to FCO (Mr Holland) alerted us (and the Governor) to the possible deficiencies in the old arrangement following his visit in October 1973. Mr Holland pointed out that HKSB was in a monopoly position in an important sector of the economy and consequently possessed monopolistic powers which could be used to the detriment of other banks and the economy. There was some evidence that it prospers unduly in times of high interest rates and credit squeezes. Furthermore, there was a certain opaqueness in HKSB's role as Government banker in that when it operated on the foreign exchange market, one could never be sure whether it was operating on its own account or on Government instructions, and thus it was in a privileged position because it alone amongst banks had this knowledge. Mr Holland did provide the Governor with some personal notes on possible reform, as also did Mr Tompkins (then Far East adviser at the Bank of England, now Governor of Central Bank of Fiji). But to my knowledge, there was no response from the Governor. The World Bank Report 1977 also expressed concern at HKSB's position along analogous lines in calling for developments towards some form of CMI. Some progress

is undoubtedly being made (at our jogging) with the development of the Monetary Affairs branch, but our grounds for concern, are, in my view, still applicable. Mr Stewart, on his recent visit, did not see any case, though, for prompt action by us.

4.

In short, concern at the absence of a CMI and the position of HKSB has been expressed for some time now. But this is not to say we should recommend action, but rather to keep a watchful eye on it, and encourage moves towards a CMI.

20 June 1978

Arman ruiz

Adrian Smith

Senior Economic Adviser

CONFIDENTIAL