TNAG-2475-FCO40-3605-Hong-Kong-exchange-fund-report-and-accounts-for-1991-1992 — Page 103

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CONFIDENTIAL

OLIVER PAGE

Head of International Division (Developing World)

071-601 4174

thats looks

BANK OF ENGLAND LONDON EC2R 8AH

11 March 1992

PF Ricketts Esq

Hong Kong Department FCO

Whitehall

London

SW1

Pa

A

Mr Stora

We're still awaiting

Letter from MMT.

a/lette

(New file:

"

Exchange Fund Investments & Assets,"

Dear Peter

HONG KONG:

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2573

Tel sent

¥207

EXCHANGE FUND INVESTMENT IN EQUITIES

At lunch today, we said we would provide you with our thoughts on the telegram of 9 March from the Hong Kong authorities which seeks approval for the investment of up to 10% of the foreign currency assets of the Exchange Fund in the US equity market.

I should start by saying that we have no fundamental objection to the idea that some part of the EF's assets could be invested in US equities with the aim of increasing the return. Even so, in the run-up to 1997, the EF in our view really needs to be regarded more as a part of liquidity for use in times of crisis, than as a long- term investment fund.

As

However, our main question concerns the timing of this move. part of the review of the Hong Kong monetary arrangements which we have been asked to do by the Hong Kong Financial Secretary, Hamish Macleod, we have been looking at the Exchange Fund's operations. One aspect is the investment of the Exchange Fund's foreign currency assets. On this, one of the people from our own Reserves Management operation went out to Hong Kong and his report will form part of the overall report that we produce. It seems likely that our report, which should be finalised in the next week or two, will raise some concerns about whether the EF currently have the staff or systems they need for the task. So while we are not opposed to the principle of extending the investment authority to include equities, the question is whether now is the time to take this decision, or whether it should be postponed until the more fundamental issues - of the resources and organisation of the EF have been addressed by the Financial Secretary.