TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 46

6. THE CURCUMSTANCES OF HONG KONG PRECLUDE EXCHANGE CONTROL. AFTE A THOROUGH EXAMINATION OF REALISTIC OPTIONS, WE HAVE NOW DECIDED TO ALTER THE FRAMEWORK WITHIN WHICH THE EXCHANGE RATE IS DETERMINED. WATH 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 NOTR SSUES, IN FOREIGN EXCHANGE AT A FIXED RATE OF HK DOLLARS *** EQUALS US DOLLARS 1. To

[ RATE TO

RE

ANNOUNCED

ON

15

OCTOBER.

DOLLARS

7. FROM THE SAME DATE, WHEN NOTES ARE WITHDRAWN FROM CIRCULATION AND THE NOTE-ISSUING BANKS SURRENDER CERTIFICATES OF INDEBTEDNESS THE EXCHANGE FUND WILL PAY THEM THE EQUIVALENT FOREIGN EXCHANGE AT THE SAME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 MATENTION TO HOLD HTHIS RATE UNCHANCED.

6. 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 HX DOLLARS X.XX EQUALS US DOLLARS 1. THIS WILL BE THE CASE BECAUSE FROM NEXT MONDAY MARKET FORCES WILL OPERATE AGAINST THE BACKGROUND OF THE F-LXED RATE FOR CERTIFICATES OF HANDEBTEDNESS. MUST EMPHASISE

*

THAT THESE NEW ARRNGEMENTS WILL MEAN BUSINESS AS USUAL BETWEEN BANKS AND THEIR CUSTOMERS AT STABILISED RATES.

9. YOU WILL ASK ABOUT THE IMPLICATHONS 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

H OUR ECONOMY'S ADJUSTMENT PROCESS. FACTORS SUCH AS INTEREST RATES AND MONEY SUPPLY WILL ADJUST TO BALANCE OF PAYMENTS PRESSURES AUTOMATICALLY WITHOUT GOVERNMENT INTERVENTION.

10. THE GOVERNMENT SELIEVES THAT THIS NEW ARRANGEMENT MUST NOW BE PREFERRED TO THE FREELY FLOATING EXCHANCE RATE SYSTEM. WE CANNOT RUN THE RISK OF FURTHER SPIRALLING DEPRECIATION, WITH THE RAMPANT INFLATION AND DISTRESS WHICH THAT WOULD BRING TO ALL OUR COMMUNITY. A RETURN OF CONFIDENCE IN OUR CURRENCY JU ESSENTIAL.