TNAG-1249-FCO40-1563-Press-reports-on-the-future-of-Hong-Kong-1983 — Page 128

*

FOREIGN-CURRENCY DEPOSITS AND FX A STABLE RATE AGAINST WHICH THE HONG KONG CURRENCY COULD BE #SSUED AGAINST THEM. MOST LIKELY THE SYSTEM WOULD INVOLVE PEDEMPTION OF EXISTING CERTIFICATES OF

INDEBTEDNESS AND THEIR REPLACEMENT WITH NEW ONES ISSUED AGAINST A BASKET OF CURRENCIES RATHER THAN JUST THE H.S. DOLLAK OR STERLING THOUGH SOME FAVOUR STERLING FOR FÜLITICAL REASONS.

THERE ARE MIXED VIEWS AS TO HOW SUCH A SYSTEM WOULD WORK IN THE LONGER TERM, GIVEN THAT CURRENCY 4 CIRCULATION IS ONLY SOME HK DOLLARS 14 BILLION, OR 10 PERCENT OF BROAD HONG KONG DOLLAR MONEY SUPPLY. ONE VIEW IS THAT HT COULD ONLY BE SUCCESSFUL # CONJUNCTION WITH A RESERVE DEPOSIT SYSTEM WHACH WOULD GIVE THE AUTHORITIES GREATER CONTROL OVER CREDIT CREATHON. HOWEVER, OTHERS SAY THERE +S A STABLE RELATIONSHIP BETWEEN THE CURRENCY CIRCULATION AND MONCY SUPPLY, SO THAT A PEGGING OF THE CURRENCY WOULD STABILUSE THE MONETARY BASE AND THUS THE EXCHANGE PATE. **AT THE VERY LEAST IT WOULD DO NO TECHNICAL HARM AND SOME PSYCHOLOGICAL GOOD**, *SUGGESTED ONE #NVOLVED OFFICIAL. BUT SUCH BENEFITS MAY BE INSUFFICIENT AT A TIME WHEN POLITICAL NERVOUSNESS

REMANS MIGH.

}

WHILE THIS SORT OF SYSTEM WOULD GIVE ENHANCED STABILITY DURING NORMAL THGES IT MIGHT NOT PROVIDE MUCH PROTECTION AGAINST SUSTAINED POLITICALLY INDUCED CAPITAL FLIGHT. HN WHICH CASE, TO STABULISE THE RATE THE AUTHORITIES WOULD HAVE TO FALL BACK EITHER ON EXTREMELY DRACONIAN MATEREST RATES, OR SEEK A PUBLIC

- OR BOTH TO UNDERWRHITE THE COMMITMENT BY BRITAIN OR CHINA

HONG KONG DOLLAR.

ENDS.

YOUDE

NNNN