SECRET
VISIT TO HONG KONG
Charles Goodhart (from the Bank of England) and I spent 4 and 5 October in Hong Kong. We went at the request of the Hong Kong Government to give technical advice on the proposal they have been developing to improve monetary control and stabilise the exchange rate for the Hong Kong dollar. Goodhart is writing up his detailed technical appreciation for the Hong Kong Government, and will bring a copy back to London on 7 October. This note describes the scheme, gives a summary assessment of it, how it might best be implemented, and how it compares with other possible options.
2. In the course of our visit we had discussions with those most concerned at a technical level in the Monetary Affairs Branch; with the Financial Secretary, the Chief Secretary and the Governor; with two leading bankers; and with outside economists, including Sir Alan Walters' contact Mr John Greenwood, who have been involved with developing the proposal.
Monetary Policy in Hong Kong
3. The striking feature of Hong Kong's monetary system is that the Colony has survived since 1974 with neither a fixed exchange rate nor any means of enforcing domestic monetary control. It is perhaps a comment on the underlying strength and adaptability of the economy that inflation has remained within bounds over the period. The points that John Greenwood made in this respect are obviously right. It is a message that visitors from the Bank of England have been conveying to the Hong Kong administration for many years. The schere now proposed would, if implemented, provide a mechanism of monetary control of a kind that has been missing
up to now.
The Scheme
4.
The proposal a has
been developed is basically what
is known as a "currency board" arrangement. It is also very similar
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