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The government has been concerned by the falling exchange rate and has done everything in reason, within the established framework, to attempt to stabilise it. These efforts have achieved only limited success.
The circumstances of Hong Kong preclude exchange control. After a thorough examination of realistic options, we have now decided to alter the framework within which the exchange rate is determined. With effect from Monday, 17 October, the two note-issuing banks will pay the government's exchange fund for additional certificates of indebtedness, which they are required to hold as backing for any increase in their note issues, in foreign exchange at a fixed rate of HK$7.80 US$1.
From the same date, when notes are withdrawn from circulation and the note-issuing banks surrender certificates of indebtedness the exchange fund will pay them the equivalent foreign exchange at the same fixed rate. It is our intention to hold this rate unchanged.
The rates of exchange which a bank customer will obtain, whether exchanging bank notes or making any other foreign currency transactions, will continue to be determined by market forces, but will in practice be close to the fixed rate of HK$7.80 = US$1. This will be the case because next Monday market forces will operate against the background of the fixed rate for certificates of indebtedness. I must emphasize that these new arrangements will mean business as usual between banks and their customers at stabilised rates.
You will ask about the implications for the economy of stabilising the exchange rate in this way. In the short term there may be some upward pressures on Hong Kong dollar interest rates. Once the stability of the exchange rate becomes evident and accepted, interest rates should fall below present levels. Looking further ahead changes in the exchange rate will no longer be an element in our economy's adjustment process. Factors such as interest rates and money supply will adjust to balance of payments pressures automatically with government intervention.
The government believes that this new arrangement must now be preferred to the freely floating exchange rate system. We cannot run the risk of further sprialling depreciation, with the rampant inflation and distress which that would bring to all our community. currency is essential.
A return of confidence in our
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