TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 82

Mr Hum HKD

WH 306

Cr

SECRET

HICK

Reference

10017

20 CCT 1983

60

/fixed

HONG KONG:

EXCHANGE FUND

1. You may like to have a note on the problem we discussed last night and again this morning. It arises out of the proposals which are summarised in Kerr's letter to Turnbull of 6 October and its enclosure.

2.

A political difficulty is that EXCO may disagree with the proposals, and the Governor and the Financial Secretary may have to act contrary to their wishes, and possibly within the next few days. The Governor will then be obliged by Article XII of the Royal Instructions to report to the Secretary of State, stating the grounds and reasons of his action.

The

3. There is also one potential legal difficulty. Section 4(1) of the Exchange Fund Ordinance requires banks to pay to the fund the "face value" of certificates of indebtedness. By virtue of the terms of the schedule to the ordinance these must be expressed in dollars, ie Hong Kong dollars. proposal however is that banks should in future be required to pay in foreign currency, ie US dollars, and at a rate of exchange / by the Hong Kong Government. It is not easy to reconcile this

with the ordinance.

4.

However the Hong Kong Government and its legal advisers do not see any immediate need for amending legislation, because the note-issuing banks have agreed to cooperate in this way. There seems therefore little risk of the procedure being challenged in the courts. There is also said to be an earlier precedent, when from 1935-1972 banks were required to pay in sterling rather than Hong Kong dollars.

5.

As Hong Kong rightly say, they are taking a "legal short- cut".

However in the rather unlikely event of a legal challenge being mounted the matter could be regularised by legislative amendment, which could if necessary be retrospective (although as a general rule this an undesirable practice).

6. If the proposed procedure is put into operation without first amending the ordinance Hong Kong might nevertheless be invited to consider whether to regularise the position by subsequent legislative amendment, without waiting for the procedure to be challenged. It would of course be for Hong Kong's legal

/draftsmen

CODE 18-77

SECRET