TNAG-1270-FCO40-1620-Financial-policy-in-Hong-Kong-1983 — Page 96

B

(M

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Mr Turnbull's letter of 7 October recorded that the Prime Minister hag noted that the Hong Kong Government wished to introduce the

scheme.

D

E

4. [Hong Kong telno 1501 contains the text of the memorandum describing the proposals to EXCO] In essence the scheme has three

components:

(i) a decision to issue and redeem against US dollars, at an exchange rate fixed by the authorities, the Certificates of Indebtedness issued by the Exchange Fund to banks issuing

Hong Kong dollar notes;

(ii) a simultaneous abolition of the withholding tax on

interest on Hong Kong dollar deposits;

(iii) a transfer of HK$250 million from the Exchange Fund to

General Revenue Account in order to make up for the resulting

loss of revenue. The Secretary of State's approval is required.[under Section 8 of the Exchange Fund Ordinance. The formal request from the Hong Kong authorities in this connection is contained in Hong Kong telno 1495]

5. The Governor told us last week that there was a chance that EXCO

would be opposed to his proposals. The scheme would place the banks in the front line. [They would be required to respond to the pressure of potential capital outflows either by providing foreign currency out of their own positions or by raising interest rates on Hong Kong dollar deposits. The burden of higher interest rates would fall on borrowers, notably home buyers and such highly-geared companies as those in the distressed property sector] In the Governor's view pressure on the banks and on interest rates would be preferable to pressure on the Exchange Fund and the exchange rate, [which would seriously hit the Hong Kong population through the inflationary effects of a currency depreciation] He would put this view strongly to EXCO, as well as the point that an arrangement(which stood a good chance of stabilising the Hong Kong dollar] would be very helpful to

HMG's stance in the negotiations. The Governor was not convinced, however, that EXCO [where banking and property interests were

strongly represented

Juch

would necessarily agree.

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16.