TNAG-1652-FCO40-2300-Hong-Kong-Exchange-Fund-Ordinance-1987 — Page 15

GRS 450

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FM HONG KONG

TO IMMEDIATE FCO

TELNO 312

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TOP COPY Q DIST ?

OF 261025Z JANUARY 87

15/1

HKK

105 RECEIVED ON S JISTRY

29 JAN 1987

JEKTRY

PERSONAL FOR HUM HKD, FROM FINANCIAL SECRETARY mion Texen

EXCHANGE FUND ORDINANCE

I SHOUD BE GRATEFUL FOR THE SECRETARY OF STATE'S APPROVAL, IN ACCORDANCE WITH SECTION 3(5) OF THE EXCHANGE FUND ORDINANCE, TO INTRODUCE INTO THE LEGISLATIVE COUNCIL A RESOLUTION TO RAISE THE BORROWING LIMIT OF THE EXCHANGE FUND SPECIFIED UNDER SECTION 3(4) OF THE SAME ORDINANCE FROM THE EXISTING DOLLARS 30,000 MILLION TO DOLLARS 50,000 MILLION.

2. THE FINANCIAL SECRETARY IS EMPOWERED TO BORROW FOR THE ACCOUNT OF THE EXCHANGE FUND UNDER SECTION 3(3) OF THE EXCHANGE FUND ORDINANCE BUT HE IS CONSTRAINED BY THE AGGREGATE BORROWING LIMIT UNDER SECTION 3(4). THE LIMIT WAS LAST SUCCESSIVELY RAISED FROM DOLLARS 7,000 MILLION TO DOLLARS 30,000 MILLION DURING 1980 AND 1981 TO ACCOMMODATE THE BUILD UP OF FISCAL RESERVES THEN, AS THE BULK OF THE GOVERNMENT'S ACCUMULATED FISCAL RESERVES IS INVESTED WITH THE EXCHANGE FUND AGAINST THE ISSUE BY THE FUND OF INTEREST BEARING DEBT CERTIFICATES.

3. FISCAL DEFICITS OVER THE THREE FINANCIAL YEARS 1982-83 TO 1984-85 NECESSITATED SOME DEPLETION OF FISCAL RESERVES DURING THE PERIOD. FROM. 1985-86, HOWEVER, FISCAL RESERVES HAVE AGAIN BEEN PRUDENTLY BUILT UP. AT THE END OF THE CURRENT FINANCIAL YEAR, TOTAL FISCAL RESERVES ARE LIKELY TO EXCEED DOLLARS 30,000 MILLION AND ARE EXPECTED TO CONTINUE TO RISE FAIRLY RAPIDLY. IF AS WE WOULD WISH FISCAL SURPLUSES CONTINUE TO BE TRANSFERRED TO THE . EXCHANGE FUND, THERE IS A NEED TO RAISE THE BORROWING LIMIT AGAIN.

4. ANOTHER REASON FOR RAISING THE LIMIT, NOT NECESSARILY ONE TO BE USED IN PUBLIC PRESENTATION, IS THAT THERE IS OFTEN A NEED, FOR MONETARY POLICY REASONS, FOR THE EXCHANGE FUND TEMPORARILY TO BORROW OTHER THAN FROM THE GENERAL REVENUE. ALTHOUGH THE LINKED EXCHANGE RATE SYSTEM HAS BEEN OPERATING SATISFACTORILY, OCCASIONALLY IT IS NECESSARY FOR THE FINANCIAL SECRETARY TO USE THE EXCHANGE FUND, PURSUANT TO SECTION 3(1) OF THE EXCHANGE FUND ORDINANCE, TO INTERVENE IN THE FOREIGN EXCHANGE AND MONEY MARKETS. SUCH INTER- VENTION IS AIMED AT DAMPENING AND SMOOTHING OUT WAYWARD MOVEMENTS OF THE EXCHANGE RATE AWAY FROM THE 7.80 LEVEL WHEN IT IS UNDER SHARP AND DESTABILISING SPECULATIVE PRESSURE. IT ALSO FACILITATES,

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