TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 179

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FM HONG KONG 29055OZ SEP 83

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TO IMMEDIATE FOO

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TELEGRAM NUMBER 1436 OF 29 SEPTEMBER

2 0 OCT 1983

FRY

*ion Taker.

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20

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

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IN THE LIGHT OF THE EXCHANGE RATE PROBLEMS EXPERIENCED AT THE END OF LAST WEEK, WE HAVE BEEN CONSIDERING A PROPOSAL FOR A SUBSTANTIAL REVISION OF THE MECHANICS FOR ISSUING AND REDEEMING CERTIFICATES OF INDEBTEDNESS TO THE NOTE-ISSUING BANKS IN SUCH A WAY AS TO PRODUCE AN EXCHANGE RATE WHICH WOULD MORE ACCURATELY REFLECT THE FUNDAMENTAL STRENGTH OF THE ECONOMY. A CHANGE OF THIS NATURE WOULD MEAN THE ASSUMPTION BY THE EXCHANGE FUND OF A MORE SIGNIFICANT ROLE IN THE EXCHANGE RATE DETERMINLAT÷LON MECHANISM.

2. THE IMPLICATIONS OF SUCH A MAJOR CHANGE IN EXISTING PRACTICE NEED THE MOST CAREFUL EXAMINATION. THE DOWN SIDE RISKS MUST BE EVALUATED AND WE ARE PARTICULARLY CONCERNED THAT WE MAY TRANSMUTE A POTENT HAL RUNAWAY EXCHANGE RATE INTO A LEVEL OF INTEREST RATES WHICH WILL HAVE EQUALLY DAMAGING EFFECTS ON THE ECONOMY. POSSIBLE EFFECTS ON THE EXCHANGE FUND MUST ALSO BE EVALUATED AGAINST A BACKGROUND OF LOSS OF CONFIDENCE.

3. AFTER CONSULTATION, ADVICE IN HONG KONG IS CONFLICTING. THE HONG KONG BANK ARE NOT ENTHUS PASTIC, THOUGH THEY ACCEPT THAT IF THE EXCHANGE RATE AGAIN RUNS AWAY THE COURSE PROPOSED MAY CONCENWABLY BE THE LESSER OF EVILS. MUCH WOULD DEPEND UPON THE CROSS-RATE TO THE U.S. DOLLAR INTITALLY SET.

4. REPEAT HOWEVER THAT WE CANNOT RISK A LEAP IN THE DARK. NOR MS THERE A NEED FOR PRECIPITOUS ACTION AT THIS JUNCTURE, THOUGH CLEARLY THE SITUATION COULD CHANGE QUICKLY.

5. *AM CONSEQUENTLY SENDING YOU TWO PAPERS PRODUCED IN MONETARY AFFARS BRANCH WHICH EXPLAIN THEIR GENERAL THINKING.

6. WOULD YOU PLEASE IN THE PRESUMED ABSENCE OF THE GOVERNOR OF THE BANK OF ENGLAND IN WASHINGTON DISCUSS THIS TELEGRAM WAITH KIT MCMAHON OR EQUIVALENT AND REQUEST THAT WITH THE MAXIMUM ACCEPTABLE DESPATCH CHARLES GOODHART OR A MAN OF EQUIVALENT STATURE SHOULD FLY TO HONG KONG TO ADVISE US ON THE SITUATION AS IT NOW PRESENTS TSELF. THE PURPOSE OF TELEGRAMMING THE FULL TWO PAPERS *S. ENTER AL HA SO THAT THE BANK OF ENGLAND AND THE MAN WHO IS COMING OUT HAVE TIME TO REFLECT ON THE SSUES EN ROUTE.

YOUDE

LIMITED HD/HRD MR GIFFARD

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