TNAG-1347-FCO40-1777-Financial-policy-in-Hong-Kong-1984 — Page 29

and by the government of China. Such drastic policies could to some extent be avoided by accepting deficits and devaluations.

Finally, one other recent event raises questions about the Hong Kong government's commitment and ability to adhere to its tradition of conservative fiscal policy. As mentioned earlier. there is no government-supplied de- posit insurance in Hong Kong. In the past. some banks have failed, but government intervention has been offi- cially limited to a policy of accepting or encouraging the takeover or merger of threatened banks by or with stronger ones. However, on September 28. 1983. the Hong Kong government departed from this long-standing policy and took over the Hang Lung Bank. The Financial Secretary, Sir John Bremridge, explained this action by saying that the Hang Lung Bank's failure and the resulting losses to depositors were unacceptable to the govern-

ment.

This departure from long-standing policy can be viewed as a threat to fiscal conservatism and a threat of further devaluations because it represents a major change in the categories of public and private liabilities that are potentially claims against the monetary and fiscal re- serves of the government. Under the long-standing policy. only Hong Kong currency was a claim against the government's monetary reserves, while bank deposits represented (risky) claims backed by the (risky loans and investments of the banks. If the government has instituted a new policy of protecting depositors against potential losses, the stream of implicit govemment obligations has increased substantially. Without tax increases. these extra obligations threaten to impair the funds available for backing the Hong Kong currency. While it might be desirable for other reasons, therefore, the takeover of the Hang Lung Bank is a signal that market participants could readily interpret as portending a weak Hong Kong dollar.

References

Hong Kong & financiarons: History, analysis, prescription. 1982 Asian Mone

Ian Mosure & November-December: 2-69

Karexen. John, and Wallace Nell 1981. On the indeterminancy of equilibnum

exchange rates Quartern Journal of Economie: 96 (May). 207-22 Keynes. J M 1924 Preface to the Frenon editor. În 4 tract on monctar, re-

form, Keprini 19′′; in vol. 4 of Thi collertes writings of John Maynard Kovnes. pp. XVI-XXI. London Macmillan, St Marun's Press. for the Royal Economic Society

Sargent. Thomas J. and Wallace Neil 1982 The rea-bills doctrine versus the quantity theor. A reconsideration. Journu of Political Econom: 90 (December: 1212 R