TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 232

-OLAND LONDON E31 4771

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DRAFT (27. 9.83)

Annex 1.

THE CONTROL OF THE DOMESTIC MONEY SUPPLY

Take the "domestic money supply" to consist of HK$ notes and coin; balances held on the clearing accounts maintained by all licensed banks as part of the Bankers' Clearing House arrangements;

currency notes in circulation;

accounts outside Hong Kong.

foreign

and banks' foreign currency clearing

The purpose of this note is first to set out the background to each of these elements of the domestic money supply; and then to consider

how, and with what effect, their growth could be controlled.

i

The Different Elements

1

HK$ Notes

Notes are issued by the Hongkong and Shanghai Bank and the Chartered Bank. The "authorised issue" is limited by law to $95 million, and is backed by BGS. The balance of the issue is backed by Certificates of Indebtedness (CI) issued by the Hong Kong Government Exchange

Fund (EF).

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 £ 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 regime 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