TNAG-1257-FCO40-1590-Third-countries-and-the-future-of-Hong-Kong-1983 — Page 176

CONFIDENTIAL

THE MONETARY SYSTEM OF HONG KONG

1. A number of factors have led to Hong Kong becoming one of the world's leading financial centres. These include the consistency of its policies, the integrity of the administration of justice and the stability of its government. These factors have provided inspiration for international investors and experienced professionals in general. A large number of banks, deposit-taking companies (DTCS), insurance companies, attracted by Hong Kong's economic, legal and social environment, have chosen to base

themselves there. However, the international and mobile nature of

the majority of these companies would mean that Hong Kong would cease to be a financial centre if, for some reason, the confidence

that they share in the territory were to fail. Absence of exchange controls and confidence that they would not be introduced have been

particularly important.

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2. International companies operate in or transact business through Hong Kong because they know that the government does not interfere in business, which operates free of external control and which have

a clearly defined British based legal framework. The Government makes no attempt to fix the Hong Kong dollar by reference to any other currency. The association with sterling ended in 1972. Since 1974 the Hong Kong dollar has been a fully independent floating

currency.

3. The Hong Kong Government Exchange Fund, established in 1935,

holds most of the Government's financial assets. The British

Government is not involved in the management of the Fund and does not receive any benefit from it. The Exchange Fund can intervene in

the foreign exchange markets to smooth movements in the exchange

rate, but it cannot fix the rate at any particular level.

4. There are four stock exchanges in Hong Kong which are to be amalgamated, as well as thriving commodities and gold markets.

CONFIDENTIAL