TNAG-2466-FCO40-3590-Economic-situation-in-Hong-Kong-1992 — Page 39

G.F. 316

SECRET 高度機密

5

8.

However, the exchange rate for the Hong Kong

dollar in the foreign exchange market continues to be

determined by market forces, but since these operate

against the background of the fixed rate of HK$7.80=US$1

for certificates of indebtedness, arbitrage would effectively

stabilise the market rate around the fixed level. Thus

if the market price for US dollars were say, 7.85, anybody

holding, say, 1 million US dollars could obtain a Hong

Kong dollar balance of 7.85 million. That person could

then convert the balance into Hong Kong dollar notes

and through a bank buy back US dollars at a rate close

to 7.80, because the bank can make a profit at any price

above 7.80 by selling these notes back to the Exchange

Fund through the note-issuing banks at that rate. Alter-

natively, if the market price of US dollars were, say,

7.75, anybody could buy US$1 million from the market

with a Hong Kong dollar balance of 7.75 million. The

1 million US dollars so acquired could then be used through

"

a bank to purchase bank notes with a face value of HK$7.80

million. He could then redeposit the bank notes with

a bank, replenish his Hong Kong dollar balance and realise

a profit of HK$50,000.

9.

With the exchange rate effectively prevented

by arbitrage to move away significantly from the fixed

level, any pressure generated by a shift out of or into

the Hong Kong dollar is transferred away from the exchange

/rate

SECRET 高度機密