TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 160

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ETWEEN

4. IT IS IMPORTANT TO DISTINGUISH BETWEEN LOSS OF CONFIDENCE 44 HONG KONG'S FUTURE ON THE ONE HAND, AND THE VALUE OF THE CURRENCY ON THE OTHER, THE FORMER DEPRESSES THE PERCEIVED LONG-RUN (NEXT WORD UNDERLINED) REAL RATE OF RETURN ON ASSETS IN HONG KONG, AND CANNOT BE ARRESTED BY MONETARY POLICY. MONETARY POLICY OUGHT, HOWEVER, TO BE CAPABLE OF INFLUENCING THE VALUE OF THE CURRENCY 1.E. THE PRICE OF REAL ASSETS AND OF FOREIGN EXCHANGE IN TERMS OF THE DOMESTIC CURRENCY INDEPENDENTLY OF THE CONFIDENCE FACTOR. THE QUEST FOR A MEANS TO STABILISE THE VALUE OF THE CURRENCY NEED

NOT THEREFORE BE ENTIRELY HOPELESS.

THE PLAN.

5. THE EXCHANGE FUND WOULD SET THE PRICE OF CERTIFICATES OF *INDEBTEDNESS MAN TERMS OF FOREIGN CURRENCY (SAY U.S. DOLLARS). THIS WOULD BE MATENDED AS A FIXED PEG, ALTHOUGH IT WOULD BE

UNDERSTOOD THAT THE PEG MIGHT BE ADJUSTED FROM TIME TO TIME IN

ORDER TO MAHINTAVON A STABLE TRADE-WEIGHTED INDEX. A SMALL SPREAD

MIGHT BE ESTABLISHED BETWEEN THE PREVAILING BUYING AND SELLING

RATES FOR CikS.

6. THE ABOVE WOULD BE THE SUBSTANCE OF THE SCHEME. NO OTHER EXPLICITY ACTION WOULD BE TAKEN BY THE GOVERNMENT. THE NOTE-ISSUING

BANKS WOULD UNDERTAKE TO CONTINUE TO TREAT OTHER BANKS FARLY IN RESPECT OF NOTE TRANSACTIONS, BUT WHETHER THIS HNVOLVED RETENTION

OF EXISTING PROCEDURES, OR EXCHANGING NOTES AGAINST FOREIGN

CURRENCY AT A RATE ALMOST EQUAL (ALLOWING FOR A SMALL SERVICE

CHARGE PERHAPS) TO THE CH RATE, WOULD BE FOR THE BANKS TO AGREE

AMONGST THEMSELVES.

7. THE POSSIBILITY OF THE EXCHANGE FUND GUARANTEE.ING THAT A CIR

ISSUED AT A PARTICULAR RATE WOULD BE REDEEMABLE AT THAT RATE

HAS BEEN RAISED. THIS DOES NOT SEEM RIGHT IN PRANCHPLE. IT IS

NOT USUAL FOR GOVERNMENT TO COMPENSATE FINANCIAL INSTITUT KONS

FOR THE CONSEQUENCES OF MONETARY POLICY ACTIONS. AT PRESENT THE

BANKS MAY SUFFER LOSSES WHEN, FOR MNSTANCE, INTEREST RATES ARE

ALTERED AT THE GOVERNMENT'S HINT-HATIVE, BUT THERE IS NO QUESTION

OF COMPENSATION. UNDER THE PROPOSED SCHEME THERE WOULD PROBABLY

BE FEWER OFFICHAL HURTINATHIYES ON INTEREST RATES, SO HT WOULD

NOT BE UNREASONABLE TO EXPECT THE NOTE-HSSUING BANKS TO ACCEPT

POSSIBLE RISKS ON CHS INSTEAD. ANYWAY, THE RISKS WOULD BE TWO-WAY.

MOREOVER, THE MAIN EXPOSURE OF THE BANKS WOULD BE THE EXISTING STOCK OF CHS, WHICH DO NOT CARRY AN ISSUE PRICE THAT COULD BE THE BASIS

FOR A GUARANTEE.

EFFECT ON THE EXCHANGE RATE.

2. MARKET FORCES WOULD, THROUGH ARENTPAGE, TEND TO BRING THE

EXCHANGE RATE IN THE OPEN MARKET UNTO LINE WITH THE OW RATE.

AN ILLUSTRATION OF THE CONVERGENCE PROCESS IS AS FOLLOWS.

C.

9. SUPPOSE THE MARKET RATE WAS DOLLARS 8, BUT THE GOVERNMENT NOW

ANNOUNCES A CH RATE OF DOLLARS 7. SUPPOSE A CUSTOMER WANTS TO BUY

USD. SUPPOSE HE IS STILL QUOTED A RATE OF DOLLARS S BY HIS BANK.

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