TNAG-1950-FCO40-2778-Hong-Kong-Exchange-Fund-1989 — Page 98

CONFIDENTIAL

FM HONG KONG

TO PRIORITY FCO

TELNO 804

OF 080345Z MARCH 89

CONFIDENTIAL

016673

MDLIAN 3622

HKCIOS

TOP

FOR THE ATTENTION OF PAUL, HKD

EXCHANGE FUND ORDINANCE

SUMMARY

1. AFTER CONSIDERABLE RESEARCH, WE HAVE COME TO THE CONCLUSION THAT THE LIMIT SPECIFIED UNDER SECTION 3(4) OF THE EXCHANGE FUND ORDINANCE (EFO) IN RESPECT OF BORROWINGS UNDER SECTION 3(3) OF THAT ORDINANCE REFERS ONLY TO SECURED BORROWINGS BY THE EXCHANGE FUND. IT DOES NOT COVER, FOR EXAMPLE, TRANSFERS FROM THE GENERAL REVENUE TO THE EXCHANGE FUND OR UNSECURED MONEY MARKET BORROWINGS TO THE

ACCOUNT OF THE EXCHANGE FUND ARISING FROM MONETARY POLICY

OPERATIONS.

BACKGROUND

2. SECTION 3(3) OF THE EFO CONFERS A POWER ON THE FINANCIAL SECRETARY TO BORROW FOR THE ACCOUNT OF THE EXCHANGE FUND. IT STATES THAT ''SUBJECT TO SUBSECTION (4), THE FINANCIAL SECRETARY MAY BORROW FOR THE ACCOUNT OF THE FUND EITHER IN HONG KONG OR ELSEWHERE ON THE SECURITY OF ANY ASSET HELD BY THE FUND OR ON THE GENERAL REVENUE''.

3. SECTION 3(4) OF THE EFO SETS A LIMIT ON BORROWING UNDER SECTION 3(3) WHILE SECTION 3(5) EMPOWERS THE LEGISLATIVE COUNCIL TO

CHANGE THE BORROWING LIMIT BY RESOLUTION PROPOSED WITH THE APPROVAL

OF THE SECRETARY OF STATE.

4. WE HAVE IN THE PAST TAKEN THE VIEW THAT SECTION 3(4) OF THE EFO LIMITS THE AMOUNT THE FUND MAY BORROW FROM ANY SOURCE, WHETHER SECURED OR NOT. IN PARTICULAR, WE HAVE TREATED THE TRANSFER OF MONEY FROM THE GENERAL REVENUE TO THE EXCHANGE FUND AS A BORROWING BY THE EXCHANGE FUND FROM THE GENERAL REVENUE SUBJECT TO THAT BORROWING LIMIT.

5. THE LIMIT THUS HAD TO BE RAISED SUCCESSIVELY, WITH THE APPROVAL OF THE SECRETARY OF STATE, IN THE EARLY 1980S FROM HKD 7 BILLION TO HKD 30 BILLION TO ACCOMMODATE THE BUILD UP OF FISCAL RESERVES

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CONFIDENTIAL