TNAG-1950-FCO40-2778-Hong-Kong-Exchange-Fund-1989 — Page 27

6623P

CONFIDENTIAL

lilno ber4444

BANK OF ENGLAND

Threadneedle Street

London

EC2R 8AH

X

3621

P J Morris Esa

Hong Kong Department

Foreign & Commonwealth Office

London

SW1A 2AH

40-3

Dear Moms,

HONG KONG: EXCHANGE FUND ORDINANCE

3 April 1989

HKCIOS/1

C82/8

1

Your letter of 30 March (PJMAMX) to John Drage has come to This does indeed seem to be a tricky problem and one with a number of facets.

me.

2 I start from the position that the current wording of Section 3 (3) of the Exchange Fund Ordinance (EFO) is mistaken and that the offending "on" should indeed be "of". I therefore agree with the commonsense Hong Kong interpretation of that Subsection, ie that the Financial Secretary may borrow for the account of the Exchange Fund up to the limit specified in Section 3(4) either against the security of the assets of the Fund or against the security of the general revenue.

3 One interpretation of this could be that the Financial Secretary is not empowered at all to borrow without providing security. This, as whomersley points out in his minute of 29 March, would be unwelcome to the Hong Kong Government since it would preclude them from making unsecured borrowings for monetary policy purposes, let alone from the general revenue surpluses of the Treasury. This gives rise to the question first whether one can borrow funds which are their own security; and secondly whether a transfer from the general revenue surplus to the Exchange Fund - out of one Government pocket into another constitutes borrowing for the purposes of the EFO. On this latter point the Hong Kong government clearly now assumes that it does not, though the fact that the Exchange Fund can use the resulting foreign exchange for intervention purposes might indicate otherwise.

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