TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 158

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DESKEY 2908COZ

FM HONG KONG 290515Z SEP 83

TO IMMEDIATE FCO

TELEGRAM NUMBER 1435 OF 29 SEPTEMBER

STRICTLY PERSONAL FOR CLIFT (HONG KONG DEPARTMENT) FROM BREMRIDGE,

THE THE TWO PAPERS FROM MONETARY AFFAIRS BRANCH ARE AS FOLLOWS:

THE EXCHANGE RATE.

1. FARST N DO NOT BELIEVE THAT THERE CAN BE ANY REAL DOUBT AS TO THE VALMIDITY OF THE SCHEME (NEXT TWO WORDS UNDERLINED) IN PRINCIPLE. ALAN MCLEAN AND + HAVE INDEPENDENTLY SPENT A LOT OF TUME THINKING IT THROUGH, AND NOW STEPHEN CHEUNG APPEARS TO HAVE ACKNOWLEDGED THE THEORY, UN OTHER WORDS, THE SCHEME CAN WORK''. 1: UNDERSTOOD YOU TO SAY THAT PETER HAMMOND HAS SAND THAT HT WOULD NOT WORK, BUT OF HIS WIEW JS BASED ON ANYTHING LIKE THE SAME RATHER CONFUSED PERCEPTION WHICH APPEARED AN A LETTER FROM PETER WRANGHAM TO SMA YESTERDAY (WHICH SAW ONLY VERY BRIEFLY), THEN HIS OBJECTION DOES NOT STAND UP. OF COURSE, THE CRUCIAL QUESTION CONCERNS THE (NEXT WORD UNDERLINED PRACTICAL MANIFESTATION : OF THE SCHEME HY TERMS OF MONETARY AND REAL ECONOMY CONSEQUENCES.

AN THIS RESPECT CHEUNG'S WARNING COMES AS NO SURPRISE. THE POSSABILITY OF A SEVERE CONSEQUENCES IS ADMITTED IN PARAGRAPH 14 OF MY PAPER, AND SAND WHEN W SAW YOU YESTERDAY THAT THIS ASPECT REQUIRED STILL GREATER EMPHASIS. MCLEAN IS OF THE SAME OPINION.

THE POINT MS THAT THE CONSEQUENCES COULD BE EXTREMELY SEVERE F THE PUBLIC AND THE MARKETS DO NOT BELIEVE THAT THE RATE WOULD HOLD. IT IS PROBABLE, HOWEVER, THAT AFTER AN ITAL SPELL OF UNCERTAINTY THE SQUEEZE WOULD QUITE SOON EASE, PROVIDED THAT WE HELD THE LUAE. MONEY MIGHT REMAIN TIGHTER AND INTEREST RATES HIGHER (COMPARED WITH THE. SHTUATION WITHOUT THIS SCHEME), BUT NOT NECESSARILY TO AN ATOLERABLE DEGREE (ON THIS PON GREENWOOD IS CONSIDERABLY LESS WORRIED THAN EITHER MCLEAN OR MYSELF).

2. AS SEE IT, WE HAVE A STRAIGHT CHOICE BETWEEN ALLOWING THE EXCHANGE RATE TO SPIRAL DOWNWARDS INDEFINITELY, WITH REPEATS OF THE PANIC SEEN AT THE END OF LAST WEEK, OR INTRODUCING THIS SCHEME AND PUDING OUT THE MONETARY CONSEQUENCES. THESE CONSEQUENCES ARE LIKELY TO RE LESS SEVERE, THE LESS ANBITIOUS THE RATE WHICH IS SET. MAN OTHER WORDS, HE WE ARE PARTICULARLY NERVOUS, WE MIGHT CHOOSE 6.00. EVEN THIS WOULD FULF OUR ANNOUNCED HOPE OF RESTORING STABHUNTY AT A RATE CLOSER TO THAT JUSTIFIED BY FUNDAMENTALS THAN WHEN THE STATEMENT WAS MADE ON SUNDAY.

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