1
(You may be aware that such allegations were for a while reportedly being made by some PRC officials.) Happily, however, it transpires that the FRB Minneapolis Quarterly Review does not seem to have a wide enough, or credulous enough, readership for your theory to have, in the event,
• attracted any attention here.
It will come as no surprise to you if I say that I consider much of the speculation about political developments and government motives in your article to be in the realm of fantasy, but I shall confine my specific comments to major points relating to the technicalities of the Exchange Fund
pages 15 to 17.
The Exchange Fund does not embrace the Treasury or fiscal function. Thus, figure 1 is factually incorrect; debt certificates do not cancel out within the Fund's overall balance sheet: they are liabilities to the government's general rovenue and certain other minor accounts,
repr
nting the iscal
2.
During the Float period certificates of
indebtedness were exchanged against Hong Kong dollars only - not foreign currency; the Exchange Fund undertook foreign exchange transactions solely at its own discretion and was certainly not necessarily "willing to buy and sell
at market rates of exchange" 15, by this, you mean either that it would automatically provide foreign exchange at the prevailing rate 277 return for certificates of indebtedness, or that it was indifferent
between holding HK$ or foreign currencies.
as
It is, however, In the section, "An indeter inate exchange rate", that I think your most serious misconceptions about the pre-October 1983 arrangements lie. Quite frankly, I think the analysis is simply wrong, but difficult to pinpoint exactly where the crucial error lies, so let me approach it from a different angle. What is ultimately of importance is the exchange rate in the principal (wholesale, interbank call it what
you will) foreign exchange market. This would equate to the rate that the Exchange Fund might set for a limited range of transactions only if there was efficient arbitrage from one market to the other. If the Exchange Fund limited the supply of certificates of indebtedness (i.e. controlled the note issue), then such arbitrage would be frustrated, and, although the government might control the exchange rate in the very narrow market relating to the note issue, it would have no control over the principal market (so a two-tier system would emerge). If, on the other hand, free and full arbitrage was to be achieved, the Exchange Fund would have had (as in fact was and is the case) to allow the banks to expand or contract the note issue at will. This they did against corresponding credits or debits to the Exchange Fund's HK$ balances with the banks
/themselves.
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