TNAG-1950-FCO40-2778-Hong-Kong-Exchange-Fund-1989 — Page 21

CONFIDENTIAL

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045122

MDLIAN 8890

CONFIDENTIAL

FM HONG KONG

TO PRIORITY FCO

TELNO 1453

OF 08090OZ MAY 89

914.

YOUR TELNTMZNOZOU' +

EXCHANGE FUND ORDINANCE

2.

(SUBJECT TO CORRECTION)

- Boε.

-Treasury

THANK YOU FOR THE ADVICE IN PARAGRAPHS 2 AND 3 OF TUR.

YOU SAID IN PARAGRAPH 4 OF TUR THAT SECTION 3(3) OF THE ORDINANCE MIGHT ALSO BE INTERPRETED AS MEANING THAT THE FINANCIAL SECRETARY IS NOT EMPOWERED AT ALL TO BORROW WITHOUT PROVIDING SECURITY. YOU ALSO ASKED FOR OUR COMMENTS. OUR VIEW IS THAT THE FINANCIAL SECRETARY CAN BORROW FOR THE ACCOUNT OF THE EXCHANGE FUND ON AN UNSECURED BASIS AND THAT SUCH BORROWING IS NOT AND SHOULD NOT BE SUBJECT TO ANY SPECIFIC LIMIT. IN PRACTICE, EACH LENDER DETERMINES HIS OWN LIMIT, HAVING REGARD TO HIS PERCEPTION OF THE CREDIT WORTHINESS OF THE EXCHANGE FUND. FOR YOUR INFORMATION, A COPY OF THE LEGAL ADVICE ON THIS MATTER WILL BE SENT TO YOU BY

CONFIDENTIAL FAX.

3.

ON YOUR SUGGESTION THAT IT WOULD NOW BE ADVISABLE TO ADJUST THE BORROWING LIMIT IN SECTION 3(3) DOWNWARDS TO A MORE REALISTIC LEVEL, OUR VIEW IS THAT THIS IS NOT NECESSARY. THE BORROWING LIMIT WAS FIXED AT HKD7 BILLION IN JUNE 1972. THIS REPRESENTED ABOUT 75 PER- CENT OF THE TOTAL ASSETS OF THE EXCHANGE FUND OR TWICE THE ANNUAL GENERAL REVENUE. AT HKD50 BILLION, THE BORROWING LIMIT NOW REPRESENTS UNDER HALF THE TOTAL ASSETS OF THE FUND OR 71 PER CENT

OF

ANNUAL GENERAL REVENUE. FROM THIS PERSPECTIVE, THE PRESENT LIMIT OF HKD50 BILLION DOES NOT SEEM EXCESSIVE. BUT THE ISSUE IS A SOMEWHAT ACADEMIC ONE. IT IS UNLIKELY THAT THE FINANCIAL SECRETARY WOULD NEED TO BORROW ON THE SERITY OF THE ASSETS OF THE FUND OR OF THE GENERAL REVENUE. WE FEEL THEREFORE THAT, RATHER THAN DRAWING - UNHELPFUL ATTENTION TO THIS BY DRAFTING AMENDING LEGISLATION, WE SHOULD LEAVE THE BORROWING LIMIT AS IT IS. IN ANY CASE, THE POWER OF THE FINANCIAL SECRETARY TO CHARGE GOVERNMENT RESERVES AND REVENUES IMPLICIT IN THAT LIMIT, BEING A FIXED NUMBER, WILL DIMINISH OVER TIME AS THESE RESERVES AND REVENUES GROW.

4.

ON THIS SUBJECT, THE ONLY LEGISLATIVE CHANGE THAT PERHAPS SHOULD BE MADE IS TO AMEND THE OFFENDING ''ON' IN SECTION 3(3) TO

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CONFIDENTIAL