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6
rate onto the banking system. In the event of a shift
out of Hong Kong dollar into foreign currencies by bank
customers with Hong Kong dollar balances, there would
be a reduction in the net foreign currency position for
the banking system as a whole. If it is reluctant to
accept such a reduction then there would be pressure
for interest rates to rise to the point where the continuing
outflow into foreign currencies is matched by an offsetting
inflow attracted by an interest rate differential which
favoured the Hong Kong dollar.
10.
The rise in interest rates would at the same
time discourage Hong Kong dollar borrowing and lead to
a contraction in the Hong Kong dollar money supply.
This would in turn reduce domestic demand, restrain imports
The combined
and, through a downward adjustment in the cost/price
structure, enhance export competitiveness.
effects of these changes would contribute to restoring
external balance.
Practice
11.
Since the establishment of the link, the Hong
Kong dollar's exchange rate against the US dollar has
been remarkably stable, fluctuating for most of the time
within 4% on either side of 7.80. There has, however,
been spasmodic, substantial pressure on both sides of
/ the linked
G.F. 316
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