TNAG-1950-FCO40-2778-Hong-Kong-Exchange-Fund-1989 — Page 25

108g/mg1.pa O'MARA (640) CONFIDENTIAL

HM Treasury

ET MON

DROIT

Rm 108 So fler

Parliament Street

London SW1P 3AG4699

Telephone 01 270

14

P J Morris Esq

Hong Kong Department

Foreign & Commonwealth Office

London

SW1A 2AH

AKCIONS/1

18 April 1989

Dear Rize

HONG KONG: EXCHANGE FUND ORDINANCE

I am writing to confirm our conversation this morning.

We are all agreed that the wording of Section 3(3) of the Exchange Fund Ordinance requires amendment at some stage. However, we also agreed that we needed first to establish with Hong Kong

Kong whether investing revenue surpluses on behalf of the Treasury constituted "borrowing" which would be subject to the limit specified in Section 3(4).

/

If we conclude it should not be regarded as "borrowing" we should not only want to resist any pressure to increase the limit when the Hong Kong Government next wants to transfer a substantial amount from the general revenue to the Exchange Fund but, as Chris Elston has pointed out, would actively want to consider amending the borrowing limit downwards. Since this could presumably attract some attention in its own right, it is probably the point at which we could amend Section 3(3) too. (I agree with the Bank that it does not seem very desirable for the Secretary of State to permit an increase in the borrowing limit, if

we have concluded that transfers from the general revenue should not score against it, even if this was seen as a purely temporary measure.) I am sure we should find it difficult to make room within our own programme to legislate for such a tiny change, albeit an important one, but the Hong Kong Government do not appear to have raised any objection on these grounds.

If, contrary to expectation, investing revenue surpluses is regarded as "borrowing", we agreed the Hong Kong Government could need to alter the Exchange Fund Ordinance both to amend "on" to "of" in Section 3(3) and to make it clear that the borrowing limit applied to both secured and unsecured borrowing. However, in this case,

doubt whether any early action is required and share the preference the Hong Kong Government and Bank for waiting until some other amendment to the Ordinance is required. Other things

CONFIDENTIAL

Switchboard 01 270 3000

Fax 01 270 5653

Telex 9413704