TNAG-2270-FCO40-3269-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1991 — Page 69

CONFIC ITAL

? 8.

Monetary

8.1

There are two principal monetary issues:-

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(a) Would the movement of the sums involved in the scheme from Hong Kong dollars to other currencies have a material impact on exchange or interest rates?

(b) Would the sums raised bave a material impact on the money supply and inflation.

8.1.2 The answer to both questions appears to be "no". According to market participants, the two way trade in Hong Kong dollars on the foreign exchange markets averages about US$2 billion a day. It would be possible to move up to HK$20 billion out of Hong Kong dollars over a period 1 month to 6 weeks without any noticeable effect, particularly if the exchange Fund were operating to smooth out the effects.

8.1.3 [Material on impact on money supply and inflation to be supplied]

8.1.4 If any form of interest rate guarantee were to be contemplated, Monetary Affairs Barnch might consider that its freedom to bring about a rise in interest rates for monetary policy reasons might be curtailed by the knowledge that such a rise might impose a direct cost burden on the Government. However, the mechanisms by which the Hong Kong Government seeks to influence interest rates would help compensate for any losses. My reasoning is as follows:-

(a) The Hong Kong government does nor control interest rates. The principle means of influence is via the clearing account with the exhange Fund maintained by the Hongkong Bank in the latters role as the central player in the Hong Kong clearing system. The Exchange Fund can vary the size of the balance it requires the Hongkong Bank to maintain in the account, which carries no interest.

(b) If MAB wished to raise interest rates, it would increase the balance required to be kept in the account, thereby reducing the supply of funds to the interbank market and driving the cost of money up. The Exchange Fund pays no interest on the clearing account, and would be able to earn a return on the additional funds, which would help offset the cost of the interest rate guarantee.