TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 249

IN

FROM THE INTERBANK MONEY MARKET TO TIGHTEN IT AND DRIVE UP MONEY MARKET INTEREST RATES SO AS TO LEND SUPPORT TO THE EXCHANGE RATE. THE HONG KONG ASSOCIATION OF BANKS, WHICH SETS DEPOSIT INTEREST RATES IN HONG KONG, HAS BEEN ASKED TO RAISE DEPOSIT INTEREST RATES FOR THE SAME PURPOSE ON A NUMBER OF OCCASIONS.

THE BANKING COMMUNITY HAS BEEN ASKED TO COOPERATE AND ACT IN A

RESPONSIBLE MANNER BY REFRAINING FROM TAKING AN OPEN POSITION, EFFECT SPECULATING, AGAINST THE HONG KONG DOLLAR. THESE EFFORTS, HOWEVER, HAVE BEEN OVERWHELMED BY VERY STRONG DEMAND FOR FOREIGN CURRENCIES (MOSTLY US DOLLARS) FROM COMMERCIAL CONCERNS AND

PRIVATE INDIVIDUALS, STEMMING FROM AN UNWILLINGNESS TO BE LONG

IN HONG KONG DOLLARS. SENTIMENT IN THE MARKET IS AGAINST THE

DOMESTIC CURRENCY. IT IS AS SIMPLE AS THAT.

5. AGAINST THIS BACKGROUND, DIRECT INTERVENTION IN THE FOREIGN

EXCHANGE MARKET AND INCREASES IN INTEREST RATES CANNOT BE

EXPECTED TO STABILISE THE EXCHANGE RATE. MOREOVER, ANY SUBSTANTIAL

INCREASE IN INTEREST RATES WOULD BE DAMAGING TO THE PROPERTY

SECTOR AND COULD STRANGLE THE EXPORT-LED RECOVERY WHICH IS NOW

JUST GATHERING STRENGTH.

6. SOME COMMENTATORS, INCLUDING COMMUNIST NEWSPAPERS, HAVE ADVOCATED THE ABOLITION OF THE 10 PERCENT INTEREST TAX ON HONG

KONG DOLLAR DEPOSITS. IT IS CLAIMED THAT SINCE FOREIGN CURRENCY

DEPOSITS ARE NOT TAXED THIS WOULD LEND SUPPORT TO THE EXCHANGE

RATE. HOWEVER, THE DIRECT EFFECT OF ABOLISHING THE TAX WOULD

NOT BE VERY DIFFERENT FROM THAT OF INCREASING KATES BY ONE

PERCENTAGE POINT. FURTHER, THE REVENUE IMPLICATIONS OF THE

ABOLITION OF TAX WOULD BE UNACCEPTABLE IN VIEW OF THE CURRENT

BUDGETARY POSITION WHICH IS VERY TIGHT.

7. MUCH HAS BEEN MADE RECENTLY OF A CLAIM THAT THE BANK OF CHINA

IS SAID TO HAVE INTERVENED LAST WEEK IN THE FOREIGN EXCHANGE

MARKET TO SUPPORT THE HONG KONG DOLLAR. A FIGURE OF US DOLLARS

30 MILLION HAS SEEN MENTIONED, BUT THIS IS MINISCULE IN RELATION

TO THE SIZE OF THE FOREIGN EXCHANGE MARKET III HONG KONG: AND QUITS

INSIGNIFICANT IN RELATION TO THE EXCHANGE FUND'S EFFORTS

AND THE AMOUNT OF FOREIGN CURRENCIES THE BANK OF CHINA HABITUALLY

BUYS FROM THE MARKET.

HADDON-CAVE

LIMITED

HKD

FED

PS/ MR. LUCE MR. GIFFARD

CONFIDENTIAL