CONFIDENTIAL
2
6.
Para. 7.2.3 - The statement that "banks in Hong Kong with retail deposit bases enjoy a margin over cost of funds which is unusually high by world standards" is not an accurate description of the current situation.
The gap between НКАВ rates and the interbank interest rates has narrowed substantially over the past six months.
7.
-
Para. 7.3.1 We are not sure if zero-coupon bonds would find popularity here in Hong Kong. If interest- bearing bonds were to be issued, they would compete with Government Bonds and other issues made by the private The raising of HK$ 10 billion within a year would no doubt lead to higher borrowing costs for all parties.
sector.
8.
Second para.
7.3.1, as there are two identically numbered para. 7.3.1 - The proposal for Government to give an interest rate guarantee is not supported as it amounts to a subsidy from Government to the scheme. More importantly, the scheme could work against Hong Kong's exchange rate system. During a period when there is speculation on devaluation of HK$, it is conceivable that civil servants might rush to join the scheme to convert their HK$ entitlements to foreign currency assets, thus adding pressure on the HK$ exchange rate. In such circumstances, local interest rates would usually be driven up and the speculators would have to bear high interst cost for their taking a speculative short position in HK$. However a Government guarantee to civil servants on the interst rate differential would reduce the opportunity cost to civil servants who, wittingly or not, join the ranks of the speculators.
9.
Para.
8.1.2
-
We have doubt on the author's negative answer to the first question at para. 8.1(a). We believe that switching out of HK$ for an amount like HK$ 20 billion over 4 to 6 weeks will certainly have an appreciable effect on the exchange rate, even with the Exchange Fund operating to smooth out the effects, as suggested by the author.
The effect will be particularly problematic at a time when HK$ is on the weaker side of the link, and the switch would put pressure on the link, pushing HK$ exchange rate further from the link. The author cannot merely assume away the problem by placing the burden of exchange rate adjustment on the Exchange Fund.
10.
cost
of
Para. 8.1.4(b)
interest
The author's assessment that the rate guarantees can be offset by adjustments in the level of the Balance in the Clearing Account reflects a gross misunderstanding of the operation of the Accounting Arrangements and our monetary system.
CONFIDENTIAL
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