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TELNO 204-
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INFO DESKBY 14003OZ PEKING, UKREP JLG HONG KONG
HONG KONG PERSONAL FOR GOVERNOR FROM RICKETTS, HKD PEKING: PERSONAL FOR AMBASSADOR
UKREP JLG: PERSONAL FOR GALSWORTHY
43
YOUR TELNOS 372 AND 415: CONFIDENTIAL FINANCIAL DIALOGUE: LIQUIDITY ADJUSTMENT FACILITY (LAF)
1. THE TREASURY CONTINUE TO FEEL - OUR TELNO 149 THAT IT WOULD BE PREFERABLE TO AWAIT THE OUTCOME OF THE PRESENT REVIEW OF MONETARY ARRANGEMENTS WHICH THE BANK OF ENGLAND OFFICIALS ARE ASSESSING. NEITHER WE NOR THE TREASURY/BANK HAVE ANY FUNDAMENTAL DIFFICULTIES WITH WHAT YOU ARE PROPOSING, BUT WE HAVE NOT HAD THE BENEFIT OF SEEING THE BANK'S REPORT. NOR DOES THERE SEEM TO BE ANY URGENT NEED TO BRIEF THE CHINESE ON THE LAF. IF, NEVERTHELESS, YOU STILL WISH TO PROCEED, WE OFFER THE FOLLOWING COMMENTS ON THE PAPER.
2. ON THE COVERING PAPER, WE HAVE NO PARTICULAR DIFFICULTY WITH PARAGRAPHS 3,4 AND 5. THEY COULD OF COURSE BE MISINTERPRETED BY THE CHINESE AND THE NEED FOR INTRODUCING THE FACILITY IS WELL EXPLAINED IN THE PAPER. WE LEAVE IT UP TO YOU TO DECIDE WHETHER TO INCLUDE OR DELETE THE THREE PARAGRAPHS.
3.
WE AGREE
A
PARAGRAPH 2 OF SECOND TUR THAT IT WOULD BE SENSIBLE NOT TO TIE YOURSELF DOWN ON THE SPREAD FOR BID AND OFFER RATES.
4.
WITH REGARD TO PARAGRAPHS 14 AND 15 OF THE PAPER, THE BANK OF ENGLAND SUGGEST ONE ADDITIONAL CONSIDERATION WHICH PAGE MAY NOT HAVE PASSED ON TO YAM. THERE MAY BE AN UNNECESSARY DEGREE OF RIGIDITY IN TYING THE LAF RATE TOO CLOSELY TO THE US DOLLAR SHORT TERM RATE. THE PRIMARY AIM OF THE EXCHANGE FUND SHOULD BE TO INFLUENCE HONG KONG INTEREST RATES TO A LEVEL APPROPRIATE FOR SUPPORTING THE 7.80 EXCHANGE FUND. AT TIMES WHEN CONFIDENCE IS WEAKENING COR FOR THAT MATTER STRENGTHENING) EXCESSIVELY, A CONSIDERABLE DIVERSION FROM US RATES MAY BE DESIRABLE. AND
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