TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 153

SECRET

Annex 2

Exchange Controls

1. For a nation with as sophisticated a financial sector and as open a trading sector as Hong Kong's, exchange controls are unlikely to be effective and all too likely to be counter-productive.

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That is no doubt why the Hong Kong authorities have not themselves considered this option. Complete controls could not be erected. Partial controls could simply damage confidence and lead to accelerating outflows. There is evidence that much of the pressure is coming from currency movements by small investors and traders rather than the large institutions, who might be simpler to control.

2. To the extent that some pressures are, however, coming from speculative currency transactions by Hong Kong registered banks there is one relatively minor measure that might be worth considering. In many countries, including the UK, there are rules governing the

currency exposure of banks, for purposes of prudential supervision.

There are no such rules for Hong Kong banks at present. They are

able to take large open positions against the HK S.

る。

In the immediate circumstances, if a new rule were introduced to limit banks' exposed positions, or to prevent them changing, few would believe it was for prudential reasons. It would much more likely be seen as an exchange control measure and possibly the thin end of a wedge, encouraging preemptive sales of HK Ss by those not affected (ie all other than banks). But at some point in the future when markets had settled down it might be a possibility to consider and introduce as a prudential measure, to match similar restrictions on banks elsewhere in the world.