TNAG-1347-FCO40-1777-Financial-policy-in-Hong-Kong-1984 — Page 39

AND

4. IN THE LIGHT OF RELATIVELY HIGH INTERBANK INTEREST RATES AND

RECOGNIZING THAT THE CORRECTIVE MECHANISM UNDER THE LINKED EXCHANGE

RATE SYSTEM REQUIRES, INTER ALIA, APPROPRIATE ADJUSTMENTS IN INTEREST RATES, THE HONG KONG ASSOCIATION OF BANKS (HKAB) CALLED A MEETING AT 5 P.M. ON FRIDAY AFTERNOON. IT WAS THEN DECIDED THAT DEPOSIT INTER-

EST RATES SHOULD BE INCREASED BY 3 PER CENT ACROSS THE BOARD. AT THE SAME TIME THE TWO NOTE-ISSUE BANKS INCREASED THEIR BEST LENDING RATE

BY 3 AND A QUARTER PER CENT TO 17 PER CENT. THE GOVERNMENT ISSUED

A PRESS STATEMENT IN SUPPORT OF THE INCREASE IN INTEREST RATES,

EMPHASISING AT THE SAME TIME THAT THE LINKED RATE OF 7.80 WILL NOT BE

ALTERED. THESE NEW HKAB RATES WAS ANNOUNCED ON FRIDAY EVENING AND

CAME INTO EFFECT ON SATURDAY MORNING, BY WHICH TIME THE EXCHANGE RATE

HAD RETURNED TO ABOUT 7.86.

5. ON MOMDAY, AS EXPECTED, INTEREST RATES ON THE INTERBANK MONEY

MARKET INCREASED SHARPLY. THOSE WHO HAD SOLD AND WERE SHORT OF HONG

KONG DOLLARS FOUND THEMSELVES HAVING TO BORROW AT VERY HIGH INTER-

BANK INTEREST RATES TO SETTLE TRANSACTIONS CARRIED OUT ON FRIDAY AND

SATURDAY. OVERNIGHT INTEREST RATES FOR THE HONG KONG DOLLAR WENT UP

TO ABOUT 40 PERCENT. THESE HIGH RATES SOON ATTRACTED MONEY BACK INTO

HONG KONG DOLLARS AND SO THE EXCHANGE RATE IMPROVED FURTHER TO

CLOSE ON MODAY AT AROUND 7.85. HIGH INTEREST RATES ON THE MONEY

MARKET CONTINUED TODAY (10 JULY). BY NOON, THE EXCHANGE RATE HAD RETURNED TO ABOUT 7.8350.

6. AFFECTED BY HIGHER INTEREST RATES AND THE VARIOUS RUMOURS, STOCK

PRICES FELL SHARPLY. THE HANG SENG INDEX DROPPED BY 49.26 POINTS ON

MONDAY TO CLOSE AT 773.60. AS THE EXCHANGE RATE SHOWED CLEAR SIGNS

OF RETURNING TO A LEVEL NEARER TO 7.80, THE STOCK MARKET ON TUESDAY RECOVERED SOME OF ITS LOSSES ON THE PREVIOUS DAY. BY NOON TIME, THE HANG SENG INDEX WAS 797.77, UP BY 24.17 POINTS.

LINE TO TAKE

7. THE NEW EXCHANGE RATE SYSTEM HAS BEEN EFFECTIVE IN RESTRAINING

THE DOWNWARD PRESSURE ON THE EXCHANGE RATE OVER THE WEEKEND AND

SHOULD PROVE TO BE EFFECTIVE IN RESTORING THE RATE BACK TO AROUND THE 7.80 LEVEL. ALTHOUGH THE PROCESS INVOLVED A HIKE IN INTEREST RATES, HOPEFULLY THE INCREASE WILL BE SHORTLIVED AND SO SHOULD HAVE LITTLE

ADVERSE EFFECT ON ECONOMIC ACTIVITY. AS THE RUMOURS SUBSIDE AND AS THE EXCHANGE RATE STABILIZES AT AROUND 7.80, INTEREST RATES SHOULD COME DOWN AGAIN. MEANWHILE, ALONG WITH THE STRENGTHENING US DOLLAR, THE HONG KONG DOLLAR CONTINUED TO BE STRONG ON THE WHOLE, AS INDICATED BY MOVEMENTS IN THE TRADE-WEIGHTED EXCHANGE RATE INDEX.

SHOULD YOU BE ASKED YOU SHOULD SAY THAT THE LINKED RATE OF HK 7.80

TO US DOLLAR WILL BE MAINTAINED BUT THAT FROM TIME TO TIME THE MARKET

RATES WILL MOVE EITHER SIDE OF THIS CONTROL POINT.

BRAY

LIMITED

HKD

FED

ECONOMIC ADVISERS

SIR W HARDING

CONFIDENTIAL

COPIES TO SIR & CRADOCK (2)

HKGO, LONDON.