TNAG-2471-FCO40-3595-Confidential-talks-between-the-UK-and-China-regarding-financ-1992 — Page 147

CONFIDENTIAL

12.

Thirdly, the Exchange Fund can request the Treasury to withdraw HK$100 million from its deposits with banks and transfer the amount to the Exchange Fund and, in settlement, arrange for the clearing accounts of the banks concerned to be debited the amount.

The effect of this on the balance sheet of the Exchange Fund is that there has again been a switch in the Fund's liabilities. while the balance

an increase of issued to the

in HSBC'S account with the Exchange Fund decreased by HK$100 million, this is matched by HK$100 million in debt certificates Treasury evidencing the transfer Of an additional HK$100 million of fiscal reserves to the Exchange Fund The size of the Exchange

for management purposes. Fund remains unchanged.

13.

Fourthly, the Exchange Fund can borrow the HK$100 million directly from banks in the interbank market and, in settlement, arrange for the clearing

amount.

accounts of the banks concerned to be debited the The effect of this on the balance sheet of the Exchange Fund is that there has again been a switch in the Fund's liabilities. This time, the decrease in the balance in HSBC's account with the Exchange Fund is matched by an increase in liabilities to banks in the form of a loan from those banks. The size of the Exchange Fund remains unchanged.

C. Banknotes Arbitrage

14.

Banknotes arbitrage involves certain rather complicated transactions that theoretically can be carried out by anybody. It can best be illustrated by simplified example in which the exchange rate in the foreign exchange market is trading at the weak level of 7.90.

a

(a) An individual sells US$100 million for million in the foreign exchange (He now has HK$790 million in account instead of US$100

(b)

HK$ 790 market. his

bank

million.)

He withdraws HK$780 million of banknotes from his bank, leaving HK$10 million in his bank account.

(c)

He

returns

the HK$780 million of banknotes with the help of another bank, to the note-issuing banks (and through to the Exchange Fund) which have to give US$100 million in exchange.

them

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