TNAG-2421-FCO40-3523-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1992 — Page 21

CONFIDENTIAL# 3

ecretary for Monetary Affairs

G6/9/1C(90)

529 0021

Fro

(39)

Ref..

.in.

Tel. No.

Date.

7 January 1992

HKA 233/1

A=R 1992

MEMO

од

Secretary for the Civil Service (Attn: Miss Christina Tsang)

253

(109) AP 295/5-C(90) 11/27/4

MMócs Policy.

Your Ref.

In

dated

19 December 1991

пи

Rys willing

cc for

Pension Safeguards Hypothecated Pension Funds

E

2. The Scbone of

pas

1014

No Waters (CSB I gave me hese pp in HIC on 6 April. Some good pls, brushed ande unconincingly in a Margour's

report

A fuller reply to your

memorandum under reference will be on its way to you. But, having read the "preliminary report" by Mr Margolis, I feel I should also give you my general impression on the proposal.

2.

I feel very skeptical about the proposal. It gives me the feeling I usually get from many studies by merchant bankers touting for business. They would present proposals in very attractive terms

terms using all sorts of technical jargon. I am not saying that the proposal falls into this category. I just want you to be aware of this possibility. The business opportunities associated with arranging to raise HK$10 billion on the one hand, and managing a HK$10 billion investment portfolio on the other are enormous.

3.

If the portfolio is to be invested in fixed interest securities and cash deposits, my opinion is that it would be very difficult to achieve over the years an average rate of return, which is higher than the costs of borrowing long term money, unless the portfolio takes exchange rate and other risks. But by their nature,

nature, risks do not necessary bring a higher rate of return. Given that the Hong Kong dollar is firmly linked to the US dollar, one would have to bet on long term depreciation of the US dollar against other foreign currencies to achieve a higher rate of return than US fixed income securities. This is no more than a bet.

4.

on

The cost of borrowing money at this point in time for repaying after 1997 is likely to be very expensive, thus making it more unlikely that the return the portfolio would cover the borrowing cost. Furthermore, one would need

take account of the substantial expenses for arranging the borrowing on the one hand and the fund management fees on the other. Incidentally a 0.5% fee for a large fixed interest portfolio is very high.

to

M

9/10

G.F. 73C

CONFIDENTIAL #

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