Annex 2
Pegging the rate for the HK Z
This would involve an undertaking by the Hong Kong authorities, possibly with explicit or implicit backing from HMG, to fix the exchange rate at some particular level against the dollar or against sterling, or against a basket of currencies.
2. To meet such an undertaking the Hong Kong authorities would have to be prepared in principle to engage in unlimited intervention in support of their currency. All the experience of such intervention in sophisticated financial markets like Hong Kong's is that very large sums indeed have to be spent if the speculative pressures are strong; and that heavy intervention can itself increase those pressures if speculators believe the authorities will eventually give way.
A month's leading and lagging on trade payments alone could cost the HK authorities $2 billion. If all or nearly all holders of reasonably liquid HK s sought to convert them into other currencies an extreme but not inconceivable case there would be an outflow of $20 billion or so to meet.
3.
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Intervention would presumably, in the first case at least, be in US dollars, the currency that most sellers of HK Ss wish to hold. Hong Kong's own foreign currency reserves stood at around $6 billion at the end of June and are probably still at a similar level. These might serve to hold the line for a while, but as they were depleted the Hong Kong authorities would have to consider the next step. some circumstances they might be able to borrow in dollars on their own account, through in general one would expect it to be difficult to do so on any substantial scale, given the political uncertainties, without a HMG guarantee.
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4. Beyond that, the only option would be, in effect, to begin to draw on the UK's reserves. Our own dollar reserves which currently stand at around $4 billion would not last for long in the face of severe pressure, either. We would then have to consider some combination of sales of other currencies from our reserves and/or gold; or we could seek to borrow dollars on Hong Kong's behalf.
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