TNAG-1347-FCO40-1777-Financial-policy-in-Hong-Kong-1984 — Page 20

Mr Williams HKD

HONG KONG MONETARY ARRANGEMENTS

Reference...

屈肌

19%

23

alther

1. You sought comments on the article by Beers, Sargent and Wallace, 'Speculations about the speculation against the Hong Kong Dollar' which appeared in the Federal Reserve Bank of Minneapolis Quarterly. The editorial standards of this august journal seem to have been rather less than stringent in this case: the article exhibits a remarkable range of factual inaccuracy, specious argument and unjustified assertion.

2.

i)

ii)

3.

In brief, two claims are made:

-

the 'float' policy of 1974 October 1983 would have allowed a wide range of external values for the currency

... that would have cleared markets', and would not have exhibited the decline which occurred;

depreciation of the HK$ eased the problems of financial companies by reducing the foreign currency value of HK$ liabilities, so the 1983 deprecation 'would have been welcomed' by the authorities (the suggestion is they engineered it).

―

-

The first claim as Latter points out in his response is based on an inaccurate view of the way the Exchange Fund actually operated in this period. It rests also on a bizarre model of exchange rate determination which cannot be taken seriously.

—

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4. The second claim requires a very partial view of the effects of depreciation. In particular and making it hard to see why the authors advance their views one effect of slides in the Hong Kong dollar in increasingly nervous markets, both before and since the introduction of the link mechanism, has been the need for sharp increases in the general level of interest rates. (It remains to be seen how long the increased level of rates of last week will be maintained.) In these conditions it would be straightforward to produce a simple algebraic table, on the lines of figure 4 of the article, which would show the net income, rather than simply net asset, position of such firms - with debt servicing problems of borrowers outweighing any benefits of depreciation.

I would join with the others who have seen this article in hoping that nothing more will be heard of it!

5.

CODE 18-77

HP 4/83

THER

RECEIVED IN

0/ 25 JU! 1934

DESI TIMANTAS

18 July 1984

INGEX

TAY

. Taken

Nick Hallott

N O Hallett

Economic Advisers