TNAG-1347-FCO40-1777-Financial-policy-in-Hong-Kong-1984 — Page 38

i

1

GRS 900

CONFIDENTIAL

CONFIDENTIAL

FM HONG KONG 11065OZ JUL 84

TO ROUTINE FCO

TELEGRAM NUMBER 1892 OF 11 JULY

HKR

-CE

10013 (9

GISTN-

TO 11 JUL 1984

vction

No

Air

AND TO HONG KONG GOVERNMENT OFFICE LONDON, GENEVA, BRUSSELS, NEW YORK, WASHINGTON.

FOR HONG KONG GOVERNMENT OVERSEAS REPRESENTATIVES

REF

HKG/GT/70

BACKGROUND

SUBJECT

HONG KONG DOLLAR

THE US DOLLAR HAS BEEN VERY STRONG IN FOREIGN EXCHANGE MARKETS AROUND THE WORLD IN THE PAST TWO MONTHS. THE HK DOLLAR, HOWEVER, HAS BEEN ABLE TO HOLD ITS GROUND AT AROUND THE 7.82 LEVEL, A LEVEL WHICH, RIGHTLY OR WRONGLY, HAD BEEN REGARDED AS A PSYCHOLOGICAL UPPER LIMIT FOR THE EXCHANGE RATE UNDER THE NEW EXCHANGE RATE SYSTEM.

THE HONG AS THE US DOLLAR STRENGTHENED AGAINST MAJOR CURRENCIES, KONG DOLLAR ALSO STRENGTHENED AGAINST THEM. THE TRADE-WEIGHTED EXCHANGE RATE INDEX AT THE CLOSE OF THE FOREIGN EXCHANGE MARKET IN HONG KONG ON FRIDAY 6 JULY WAS 71.3, THE HIGHEST LEVEL SINCE THE LINKING OF THE HONG KONG DOLLAR TO THE US DOLLAR ON 17 OCTOBER

1983.

2. ALMOST IMMEDIATELY AFTER THE FOREIGN EXCHANGE MARKET IN HONG KONG WAS CLOSED ON FRIDAY 6 JULY, THERE WAS SUDDEN, SHARP PRESSURE ON THE HONG KONG DOLLAR IN LONDON. IN A THIN, ONE WAY MARKET, THE EXCHANGE RATE QUICKLY BROKE THROUGH THE 7.82 PSYCHOLOGICAL LEVEL. WITHIN ABOUT HALF AN HOUR, RATES OF UP TO HK DOLLARS 9 TO 1 US DOLLARS WERE BEING QUOTED.

3. A NUMBER OF RUMOURS, BELIEVED TO HAVE BEEN RESPONSIBLE FOR GENERATING THE PRESSURE, WERE CIRCULATING ON FRIDAY THESE INCLUDED: (A) A PROPOSAL BY CHINA TO SET UP A SINO-BRITISH JOINT COMMISSION

IN HONG KONG. THE BRITISH GOVERNMENT WAS REPORTED TO HAVE STRONGLY REJECTED THE IDEA, WHICH MIGHT LEAD TO A BREAKDOWN OF THE TALKS.

(B) THE GOVERNOR OF HONG KONG WILL BE A CHINESE BY 1987.

(C) THE HONG KONG GOVERNMENT WILL BE ADJUSTING THE LINK OF THE

HK DOLLAR TO THE US DOLLAR FROM 7.80 OT ABOUT 7.90 OR 3.00

(D) THE HONG KONG BANK, WAS BUYING US DOLLARS IN GREAT AMOUNTS IN

LONDON AT PRICES SUBSTANTIALLY ABOVE THE LINKED RATE.

(E) THE HONG KONG BANK WILL SOON ANNOUNCE A REMOVAL OF ITS DOMICILE

TO BERMUDA.

CONFIDENTIAL