TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 205

SECHET

Annex 6

The Control of the Hong Kong Domestic Money Supply

A narrow definition of the "domestic money supply" might consist of HK notes and coin; balances held on the clearing accounts maintained by all licensed banks as part of the Bankers' Clearing House arrange- ments; foreign currency notes in circulation; and banks' foreign currency clearing accounts outside Hong Kong. The first half of this Annex describes these various elements; the second half considers possible ways the HK authorities could seek to control their growth.

HK Notes

2.

Notes are issued by the Hongkong and Shanghai Bank and the Chartered Bank. The "authorised issue" is limited by law to 895 million, and is backed by British Government Securities.

The

balance of the issue is backed by Certificates of Indebtedness (CI)

issued by the Hong Kong Government Exchange Fund (EF).

る。

From 1935 to 1972 CIs, which are denominated in HK %, were issued or redeemed against the payment in London to/from the EF of the sterling equivalent of their face value, at the fixed exchange rate of the time. This system protected the value of the currency in a period of very limited flows of capital; the exchange control regi in force in Hong Kong until 1971 concentrated the territory's balance of payments earnings in the large banks, which then drew on those earnings to acquire local currency either as notes (from the note-issuing banks) or as deposits, in the foreign exchange market. The market value of the HK was effectively under-pinned by this mechanism.

4.

The system could not however protect the value of the currency in the face of heavy capital flows, particularly after the abolition of exchange control, when the share, of balance of payments earnings held by the large banks fell and the local foreign exchange market became much better developed and more able to absorb larger transac- tions. In June 1972, in a period of heavy capital inflows, the HK Ø

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