TNAG-2475-FCO40-3605-Hong-Kong-exchange-fund-report-and-accounts-for-1991-1992 — Page 99

CONFIDENTIAL

FM FCO

TO PRIORITY HONG KONG

TELNO 552

OF 24160OZ MARCH 92

CONFIDENTIAL

Mi's 102/5

TOP COPY Q DIST?

PERSONAL FOR GOVERNOR FROM RICKETTS, HKD

025503 MDLOAN 1259

Zd3

2613

YOUR TELNO 718: EXCHANGE FUND ORDINANCE: APPROVED INVESTMENTS

SUMMARY

1. NO DIFFICULTIES WITH THIS IN PRINCIPLE BUT WE HAVE SOME QUESTIONS ABOUT THE PROPOSED TIMING.

DETAIL

2. WE HAVE CONSULTED BOTH THE BANK OF ENGLAND AND THE TREASURY ON THE PROPOSALS ON TUR. NEITHER SEE ANY PROBLEM IN PRINCIPLE WITH THE IDEA THAT SOME PART OF THE EXCHANGE FUND'S ASSETS COULD BE INVESTED IN US EQUITIES WITH THE AIM OF INCREASING THE RETURN. THEY HAVE COMMENTED THAT, IN THE RUN UP TO 1997, THE FUND REALLY NEEDS TO BE REGARDED MORE AS A SOURCE OF LIQUIDITY FOR USE IN TIMES OF CRISIS THAN AS A LONG-TERM INVESTMENT. IF . YOU WERE TO GO DOWN THIS ROAD, WE ASSUME THAT YOU WOULD EDGE

INTO THE MARKET CAUTIOUSLY AND TAKE AS FULL ACCOUNT AS IS POSSIBLE OF THE RISKS OF ANY DOWN-TURN. SOME HERE CONSIDER THAT THE US MARKET MAY ALREADY HAVE FULLY DISCOUNTED BOTH THE EXPECTED ECONOMIC UP-TURN AND HIGHER CORPORATE PROFITS - BUT.

THIS IS CLEARLY A MATTER FOR YOU AND YOUR ADVISERS.

3. OUR CONCERN IS MORE OVER THE TIMING OF THIS MOVE. ONE ASPECT OF THE BANK OF ENGLAND'S REVIEW OF HONG KONG'S MONETARY ARRANGEMENTS, INCLUDING THE EXCHANGE FUND'S OPERATIONS (WHICH WE UNDERTAND HAS NOW BEEN SEEN BY THE FS), IS THE INVESTMENT OF THE EXCHANGE FUND'S FOREIGN CURRENCY ASSETS. THE BANK OF ENGLAND REPORT RAISES SOME QUESTIONS ABOUT WHETHER THE EXCHANGE FUND CURRENTLY HAVE THE STAFF OR SYTEMS THEY NEED FOR THIS TASK. THIS PROMPTS US TO WONDER WHETHER EXTENDING THE INVESTMENT AUTHORITY SHOULD TAKE PLACE NOW OR WHETHER IT SHOULD WAIT UNTIL THE RESOURCES AND ORGANSATION OF THE EXCHANGE FUND HAVE BEEN ADDRESSED BY THE FS IN THE LIGHT OF THIS REPORT.

4.

BEFORE TAKING THIS FURTHER HERE, WE SHOULD BE GRATEFUL FOR

1

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