TNAG-1652-FCO40-2300-Hong-Kong-Exchange-Fund-Ordinance-1987 — Page 8

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FROM:

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DATE:

29 January 1987

CC:

Mr Broadbent,

HONG KONG: EXCHANGE FUND ORDINANCE

Economic Adviser

Mr Fifoot,

Legal Advisers

2

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RECEIVED IN NECIJAY

2 FEB 1987

DENC CABLUR DEX

Problem

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1.

The Hong Kong Government have sought the Secretary

B of State's approval, under Section 3 (5) of the Hong Kong

Exchange Fund Ordinance, to introduce into the Hong Kong

Legislative Council a resolution to raise the Fund's

borrowing limit (specified under Section 3(4)) from HK$ 30,000 million to HK$50,000 million Should we agree?

Recommendation

2.

I recommend that the Secretary of State approve

Hong Kong's proposal I submit a draft telegram. The

Bank of England and the Treasury, whom we have consulted,

see no objection: nor do Economic Advisers or Legal

Advisers.

A

Background and Argument

3.

summarised

The background to Hong Kong's present proposal is

in

their Hong Kong telno 312 Briefly, the

limit was last raised from HK$7,000 million to HK£30,000

between 1980 and 1981 to accommodate the build-up of HKG's

fiscal reserves, as the bulk of these are invested with

the Fund against the issue of interest-bearing debt

certificates. Fiscal deficits then depleted the reserves

somewhat during the years 1982-85.

Since 1985 the reserves have again been built up. They are likely to

SECRET

REGISTRY

Action Takun

SECRET

exceed HK$30,000 million by the end of the current

financial year and to continue to rise thereafter.

4

limit

It is

A further reason to raise the borrowing

arises from the need to maintain the exchange rate link

between the HK dollar and the US dollar

occasionally necessary for Hong Kong to use the Fund,

pursuant to Section 3(1) of the Ordinance, to intervene in

the exchange market to dampen speculative pressure on the Hong Kong dollar. The temporary borrowings necessitated by such intervention can be substantial.

5

Total fund borrowings now exceed HK$29,000 million.

The Hong Kong Financial Secretary therefore proposes under

Section 3(5) of the Ordinance to introduce a resolution in

LegCo on 25 February, as part of the annual Hong Kong

budget, to raise the limit to HK$50,000 million. Earlier

action could be needed.

6.

We have consulted the Treasury and the Bank of

England on what is proposed. They see no objection. The

Bank point out that the factors underlying the request for permission to raise the borrowing

raise the borrowing limit of the Exchange

Fund essentially reflect the present healthy state of the

Hong Kong economy The rapid build up of fiscal reserves is the result of brisk economic activity, the high level of government receipts and the need to accommodate the resulting budgetary surpluses. The intervention in the

foreign exchange and money markets which has been

conducted with Hong Kong dollars from the Exchange Fund

has been necessary to reduce upward pressure on the Hong Kong dollar against the US dollar. In these circumstances

the Bank of England consider that an increase in the

borrowing limit from HK$30,000M to HK$ 50,000M would be

justified. Economic Advisers concur.

no legal difficulty.

29 January 1987

Legal Advisers see

Colten

CO Hum

Hong Kong Department

SECRET

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