TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 73

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8. IF THE NEW ARRANGEMENT · ATTRACTS TOTAL CONFIDENCE AND

CREDIBILITY H.E. IN THE BELIEF THAT IT WILL ENDURE - THERE WILL NO LONGER BE ANY INCENTIVE FOR PEOPLE TO RUSH CUT OF HONG

KONG DOLLARS IN THE SHORT-TERM, EVEN THOUGH POLITICAL WORRIES

IF CONTINUED WOULD OCCASION A STEADY OUTFLOW OF CAPITAL OVER A

NUMBER OF YEARS. IN OTHER WORDS, CONFIDENCE IN THE CURRENCY, BUT NOT NECESSARILY IN THE FUTURE NOR HENCE IN HONG KONG ASSTES,

WOULD HAVE BEEN RESTORED, AND THE INTRODUCTION OF THE SCHEME

WOULD NOT IMPOSE ANY INTOLERABLE STRAINS.

9. IN PRACTICE, HOWEVER, THERE WILL PROBABLY BE SOME INITIAL

SCEPTICISM AND MISCOMPREHENSION, HOWEVER DEFTLY THE ALL-IMPORTANT

PRESENTATION IS HANDLED. TO THE EXTENT THAT PEOPLE PERCEIVE THE

ARRANGEMENT AS A CHANCE TO GET OUT OF HONG KONG DOLLARS QUICKLY

AT A RELATIVELY GENEROUS RATE, PRESSURES COULD DEVELOP.

10. ESSENT PALLY THE SCHEME TRANSFERS THE PRESSURE OF A RUN OUT

OF THE LOCAL CURRENCY AWAY FROM THE EXCHANGE RATE ONTO THE BANKING

SYSTEM AND THUS TO BORROWERS. THE LEVEL OF LOCAL CURRENCY INTEREST

RATES HAS TO RISE TO A POINT WHERE THE CONTINUING OUTFLOW INTO

FOREIGN CURRENCIES BY RESIDENTS IS MATCHED BY AN OFFSETTING

INFLOW BY BANKS AND OTHER SPECULATORS. IF THE BANKS WILL NOT

*NCREASE THEIR EXPOSURE IN HONG KONG, AND THE PUBLIC'S DESIRE

TO DIVERSIFY INTO FOREIGN CURRENCY ALS VERY STRONG, THEN #INTEREST RATES WOULD HAVE TO RISE SHARPLY. WITHOUT ANY SUCH SCHEME, HOWEVER, IN SUCH CIRCUMSTANCES THE EXCHANGE RATE WOULD BE FALLING SHARPLY,

AND THAT WOULD ALSO LEAD TO DOMESTIC INTEREST RATES RUS ANG

MARKEDLY, THOUGH PERHAPS NOT SO QUICKLY. IT IS ESSENTIAL TO REALISE THAT THE EXTENT TO WHICH DOMESTIC HONG KONG INTEREST

RATES MAY RUSE WILL DEPEND ON CONFIDENCE IN THE SCHEME HTSELF.

IF BANKERS, BUSINESSMEN, FOREIGNERS, ETC., WERE REALLY CONFIDENT

THAT A LINKED RATE AGAINST, SAY, THE DOLLAR WOULD BE MAINTAINED FOR, SAY, SHIX MONTHS, THEN THEY WOULD BRING IN EXTRA U.S.

DOLLAR FUNDS UNTIL THE HONG KONG DOLLAR SIX MONTH INTEREST RATE

WAS BROUGHT INTO LINE WITH THE U.S. DOLLAR SIX MONTHS RATE

RULING IN HONG KONG. CURRENTLY THE LOCAL HONG KONG DOLLAR

INTEREST RATES ARE ABOVE COMPARABLE U.S. DOLLAR RATES, SO THAT

WERE CONFIDENCE IN THE SUCCESS OF THE SCHEME TO BE INSTILLED

THEN HONG KONG DOLLAR RATES WOULD FALL, NOT RISE. SOME PROPONENTS

OF THE SCHEME BELIEVE THAT THIS IS WHAT WOULD HAPPEN.

11. PUBLIC REACTION MIGHT NOT, HOWEVER, BE LIMITED TO SWITCHING

DEPOSITS. THERE COULD CONCEIVABLY BE A SURGE IN DEMAND FOR ENTHER

HONG KONG DOLLARS OF U.S. DOLLAR BANKNOTES. STEPS WILL BE TAKEN

TO ENSURE SUPPLIES OF HONG KONG DOLLAR AND OF U.S. DOLLAR NOTES

IF THE SCHEME PROCEEDS, BUT SUCH A DEMAND COULD CONCEIVABLY LEAD

TO PRESSURE ON BANKS' LIQUIDITY IF IT WAS MORE THAN SHORTLI-VED.

MEANWHILE, IF THERE WAS ANY SORT OF RUSH TO THE BANKS, EITHER TO DRAW NOTES OR SWITCH DEPOSITS BETWEEN CURRENCIES, THERE MIGHT

BE ANOTHER BOUT OF RUMOUR AND PANIC DIRECTED AGAINST SOME LOCAL

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/ BANKS