TNAG-1950-FCO40-2778-Hong-Kong-Exchange-Fund-1989 — Page 86

CODE 18-77

Mr Morris HKD

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copy of begestation

the minuté sent to

Min Ò Move Treasury

Reference...

and Mur Drage, Bank of England 2013

EXCHANGE FUND ORDINANCE

1.

HKC105/1

Jenn

It seems to me that the proper interpretation of section 3 (3) of the Ordinance is a difficult question. Omitting the words which are not relevant the section reads as follows:- "the Financial Secretary (may borrow for the account of the Fund . . . on the general, revenue" ". Το me this does not make a great deal of sense. I suppose, however, that the interpretation given by Hong Kong in para 9 of Telno 804 is a reasonable one. On the other hand, it seems to me clearly unsatisfactory that, on such an important matter, with such large financial consequences, the legal position should be so uncertain.

2.

I would have thought that one further consequence of the interpretation given by Hong Kong to section 3(3) would be to cast doubt on the powers of the Financial Secretary to make unsecured borrowings, and to borrow from the general revenue. The reason is that section 3 (3) of the Ordinance seems on its face to set out exhaustively the circumstances in which the Financial Secretary may borrow on account of the Fund. If this is correct, and Hong Kong are right in the interpretation given in para 9 of Telno 804, then it would follow that the Financial Secretary cannot make unsecured borrowings or borrow from the general revenue.

3.

Hong Kong do not, however, draw this conclusion, which, I imagine, would be very unwelcome to them, and it may be that there is some other provision in Hong Kong law which is relevant. We need to ask them about this.

4

Hong Kong draw the conclusion from their interpretation of section 3 (3) of the Ordinance that the limit specified in section 3 (4) applies only to secured borrowings. have thought that this would be unsatisfactory from our point of view, as it allows Hong Kong a simple means of circumventing the limit in section 3 (4) of the Ordinance, because all they need to do is to make unsecured borrowings. Moreover, I assume that, where the borrowing takes place on the market, the interest rate on unsecured borrowings is likely to be rather higher than on secured borrowings.

5.

To my mind all of this points towards the need for an amendment to the Ordinance; although this may be embarrassing in the short term, I would have thought that the longer term consequences of Hong Kong being seen to manage its financial

a unsatisfactory legal basis would be rather worse.

10.

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