TNAG-2752-FCO40-3967-Organisation-for-Economic-Co-operation-and-Development-(OECD-1994 — Page 264

RESTRICTED

FM HONG KONG

TO DESKBY 260900Z FCO

TELNO 477

OF 251044Z MARCH 93

AND TO IMMEDIATE PEKING

INFO IMMEDIATE UKDEL OECD

RESTRICTED

111730 MDHIAN 4817

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YRTELNO 284: OECD: PROPOSED STUDY ON THE HONG KONG DOLLAR

CHINA'S FUTURE OUTLOOK AND

1. WE HAVE SERIOUS CONCERN ON THE POSSIBLE IMPACT OF SUCH A STUDY ON MONETARY STABILITY IN HONG KONG.

2. AS DESCRIBED IN THE OECD PAPER, THE STUDY WILL FOCUS ON, AMONGST OTHER THINGS: 'POSSIBLE ALTERNATIVES FOR THE CURRENT PEGGING (SIC) OF THE HONG KONG DOLLAR TO THE US DOLLAR'. THE MERE FACT THAT AN ORGANISATION LIKE THE OECD IS CONDUCTING A STUDY FOCUSING ON THE HONG KONG DOLLAR WOULD IN OUR OPINION BE VERY DAMAGING TO HONG KONG IN THE SENSE THAT IT WOULD UNDERMINE THE CREDIBILITY OF OUR LINKED EXCHANGE RATE POLICY.

3. IN THIS VERY IMPORTANT AND DELICATE TRANSITIONAL PERIOD, MONETARY STABILITY IS CRUCIAL TO HONG KONG. THIS IS SOMETHING THAT, REGRETTABLY, PEOPLE OUTSIDE HONG KONG DO NOT FULLY APPRECIATE. WITH NO EXCHANGE CONTROL, AND FREE FLOW OF CAPITAL, AS SPECIFIED ALSO IN THE JOINT DECLARATION, THE PROPOSED STUDY BY THE OECD IS PRECISELY SOMETHING THAT MIGHT SPARK OFF CURRENCY SPECULATION WELL BEFORE ANY CONCLUSIONS ARE DRAWN, WHATEVER THOSE CONCLUSIONS MIGHT BE. WE THEREFORE FEEL THAT YOU SHOULD OBJECT TO THIS STUDY. IT IS UNLIKELY THAT THE STUDY WILL BE KEPT CONFIDENTIAL. WE CAN SEE SUBSTANTIAL DOWNSIDE RISKS TO HONG KONG.

4. IF OECD IS INTERESTED IN STUDYING CHINA'S ECONOMIC DEVELOPMENT, OR EVEN MONETARY DEVELOPMENT, AND HONG KONG'S ROLE IN THIS PROCESS, WE WOULD HAVE LESS CONCERN. BUT TO PUT THE HONG KONG DOLLAR UP FRONT WOULD RISK SENDING WRONG SIGNALS AND

INVITING DESTABILISING MARKET REACTION.

PATTEN

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