TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 171

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TELEGRAM NUMBER 1442 OF 29 SEPTEMBER

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THE FOLLOWING ARTICLE PRINTED TODAY IN THE FAR EASTERN ECONOMIC REVIEW IS FURTHER MATERIAL FOR YOU.

BEGINS.

See (26

HONG KONG: A WEEK OF DRAMA FOR THE HONG KONG DOLLAR MAY BE LEADING TO THE MOST FAR-REACHING CHANGES TO HONG KONG'S MONETARY SYSTEM SINCE THE CURRENCY WAS FLOATED IN 1974. AFTER FALLING STEADILY IN THE TWO PRECEDING WEEKS - BY 10 PERCENT AGAINST THE

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U.S. DOLLAR TO HK DOLLARS 8.35:U.S. DOLLARS 1 IT NOSED VED ANOTHER 45 HK CENTS TO SEPTEMBER 23 AND THE FOLLOWING MORNING A SATURDAY - SLUMPED TO 9.55. PANIC WAS IN THE AIR AND QUEUES FORMED TO BUY GREENBACKS.

THE GOVERNMENT, WHICH HITHERTO HAD TAKEN THE WEW THAT THE WEAK CURRENCY WAS A RESULT OF POLITICAL FACTORS WHICH IT COULD DO NOTHING TO ALTER, WAS AWOKEN. HONG KONG WAS WITNESSING NOT JUST A WEAKENING CURRENCY BUT A LOSS OF CONFIDENCE IN THE GOVERNMENT'S ABILITY TO MAINTAIN FINANCIAL STABILITY OR AN ORDERLY MARKET. IT WAS LONG PAST THE TIME WHEN PIOUS AFFIRMATIONS THAT THE CURRENCY WAS ALREADY UNDERVALUED COULD HAVE ANY IMPACT. THE BOTTOM LEVEL WAS ONLY MOMENTARY AND WAS MARKED BY THIN TRADING AND VERY WIDE SPREADS. SOME BANKS DECLINED TO DEAL AT ALL. BUT WITH THE CURRENCY HAVING LOST SO MUCH EN SO SHORT A TIME THERE WAS NO PREDICTING WHERE IT MIGHT STOP IF EXISTING MARKET FORCES WERE LEFT TO THEMSELVES.

SO, OVER THE WEEKEND, THE GOVERNMENT AND NOTE-ISSUING BANKS COBBLED TOGETHER THE OUTLINES OF A NEW SCHEME WHICH WOULD ATTEMPT TO INTRODUCE AN ELEMENT OF A FIXED RELATIONSHIP BETWEEN THE HONG KONG DOLLAR AND OTHER CURRENCHES. THE GOVERNMENT ALSO SAND THE EXCHANGE FUND WOULD PLAY A MORE ACTIVE ROLE IN THE FOREIGN EXCHANGE MARKET.

THE GOVERNMENT ALSO LEANDE ON THE HONG KONG ASSOC LAT::ON OF BANKS, THE INTEREST-RATE CARTEL, TO INCREASE DEPOSIT RATES ACROSS THE BOARD BY THREE PERCENTAGE POINTS. IN ITSELF, AN INTEREST-RATE RISE WOULD HAVE DONE LITTLE, BUT COMBINED WITH GOVERNMENT STATEMENTS, HT SENT SOME SHORTS SCURRYING FOR COVER, AND AT LONG LAST INTRODUCED AN INTEREST-RATE E

RATHER THAN U.S. CURRENCY.

NCENTIVE TO HOLDING HONG KONG DOLLARS

IN RESPONSE, THE LOCAL CURRENCY RECOVERED HT-HALLY TO AROUND 3.40/8.80, BUT THE NERVOUSNESS OF THE MARKET WAS INDICATED BY THE EXTRAORDINARILY WIDE SPREADS THAT CONTINUED TO BE QUOTED. GRADUALLY THEREAFTER THE MARKET SETTLE DOWN, SPREADS NARROWED AND HONG KONG CURRENCY CONTINUED TO IMPROVE BACK TO AROUND 8.10 ON SEPTEMBER 28, HEAVILY 300STED BY AN ACUTE SHORTAGE OF FUNDS IN THE INTER-BANK MARKET WHICH PUSHED RATES UP ABOVE 30 PERCENT. BUT IT REMAINED VOLATILE AND FORWARD RATES CONTINUED TO EXHIBMT VERY WIDE SPREADS.

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