TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 224

GR 450

SECRET

SECRET

FF HONG KONG 271120Z SEP 83

TO FLASH UKMIS NEW YORK

TELEGRAM NUMBER 12 OF 27 SEPTEMBER

HKK

10.0/7

RECEIVED IN REGISTRY HO. 5)

2 0 OCT 1983

DESK OF

INDEX

BISTRY

PA

Action Taken

AND TO IMMEDIATE OTTAWA (FOR PS TO PM), FCU, PEKING

FOLLOWING FOR PRIVATE SECRETARY TO SECRETARY OF STATE.

(NIT)

UKNIS TELNO 5 TO HONG KONG: BILATERAL MEETHING WITH CHINESE

FOREIGN MINISTER.

1. WE HAVE REPEATEDLY EXPLAINED TO THE CHINESE IN THE TALKS

IN PEKING THAT THE FOREIGN EXCHANGE RESERVES ARE FULLY UNDER

THE CONTROL OF THE HONG KONG GOVERNMENT AND ARE USED SOLELY FOR

PUBLIC PURPOSES IN HONG KONG. IN FACT (THOUGH THIS SHOULD NOT

BE DISCLOSED TO THE CHINESE FOREIGN MINISTER) ONLY ABOUT 6

PERCENT OF THE RESERVES ARE HELD IN STERLING AND MARKET RATES

OF HITEREST ARE PAID ON THEM. OUR PUBLIC POSITION HAS THAT THE

STERLING ELEMENT OF THE RESERVES IS SIGNIFICANTLY LESS THAN 10

PERCENT.

2. THE TOTAL OF FOREIGN EXCHANGE RESERVES CURRENTLY STANDS -

AT ABOUT US DOLLARS 5.6 BILLION. THE EXCHANGE FUND HAS EXPENDED

SOME US DOLLARS 600 MILLION OVER THE PAST 12 MONTHS IN

INTERVENTION TO SMOOTH OUT EXCHANGE RATE FLUCTUATIONS. OVER

US DOLLARS 200 MILLION OF THIS HAS BEEN COMMITTED SINCE THE

BEGINNING OF SEPTEMBER, INCLUDING US DOLLARS 90 MILLION IN THE

PAST WEEK. THESE FIGURES SHOULD NOT BE USED PUBLICLY OR WITH

WU. BUT THE SECRETARY OF STATE MAY WISH TO SAY, IN RESPONSE TO

ANY CHARGE THAT WE HAVE BEEN NEGLECTING OUR RESPONSIBILITIES TO

FUPPORT THE HONG KONG DOLLAR, THAT WE HAVE IN FACT BEEN

INTERVENING ON THE MARKET. BUT INTERVENTION AND TECHNICAL

MEASURES WITHING THE FLOATING EXCHANGE RATE FRAMEWORK AS

OBSERVED IN HONG KONG AND WESTERN COUNTRIES CANNOT SUSTAIN

THE EXCHANGE VALUE OF A CURRENCY AT ANY PARTICULAR RATE IN THE

FACE OF MARKET SENTIMENT CAUSED BY ADVERSE POLITICAL FACTORS.

3. THE HONG KONG ASSOCIATION OF BANKS (HKAB) DEPOSIT INTEREST

RATES WERE RAISED TWICE DURING APRIL/MAY 1983 BY A TOTAL OF

3 PERCENT. MARKET FORCES LED TO REDUCTIONS DURING THE SUMMER.

AGAINST THE BACKGROUND OF THE RECENT DECLINE IN CONFIDENCE THERE

WAS A HKAB INCREASE OF ONE AND A HALF PERCENT ON 9 SEPTEMBER,

AND A FURTHER 3 PERCENT INCREASE EFFECTIVE TODAY, 27 SEPTEMBER.

AGAINST A BACKGROUND OF GENERALLY LOWER INTEREST RATES

INTERNATIONALLY, THE BEST LENDING RATE IN HONG KONG IS NOW

AT 16 PERCENT, 4 PERCENT HIGHER THAN A YEAR AGO.

SECRET

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