TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 122

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SECRET

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CHANCE

THE EXCHEQUER

43

Hal HMD

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INJEK

20 OCT 1933

Treasury Chambers, Parliament Street, SWIP 3AG

Andrew Turnbull Esq

10 Downing Street LONDON SW1

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01-233 3000

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PSIPUS

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6 October 1983

Sevet of State

in Evans

M Danald Ha(ERD

+7/10

HONG KONG

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As you will recall from my letter of 30 September, David Peretz from the Treasury and Charles Goodhart from the Bank of England have been in Hong Kong to look at the scheme the Hong Kong Government have devised for stabilising the Hong Kong dollar, and to give technical advice on its implementation.

The Chancellor thought the Prime Minister would like to see the attached summary report produced by David Peretz, who arrived back in London this morning. Charles Goodhart is staying in Hong Kong for a further 24 hours to write up a more detailed technical appreciation of the scheme at the request of the Hong Kong authorities.

The Chancellor thinks that Peretz and Goodhart have done a good job, and we know that the Hong Kong Government found their visit and advice most helpful.

In brief, the conclusions are:-

i. The present Hong Kong monetary system is unsatisfactory. Since 1974 there has been no effective form of monetary discipline either through control of the money supply or through the exchange rate.

ii. The scheme the Hong Kong Government have under consideration is technically feasible. It does not prevent further falls in asset values: no such scheme could, for the roots of the present problem of confidence are political not financial. And it entails risks, for it means taking the pressures, which could be in- tense, on interest rates. But these risks have to be weighed against those of a self-feeding collapse in the currency, if nothing is done.

SECRET