TOP SECRET
ANNEX III
ACTION TO BE TAKEN IN THE EVENT OF A FLIGHT OF CAPITAL
The war of nerves might lead to a flight of capital
from Hong Kong: in the first instance, this would probably
take the form of a move out of Hong Kong dollars into
sterling and other currencies, ccombined with an expansion
of the Hong Kong note issue, at the expense of bank
deposits in Hong Kong. There might also be a flight by
Hong Kong banks and traders out of sterling, with
Singapore probably the main destination. This need not
disturb the U.K. as long as Singapore continued to hold
their balances in sterling; but Singapore might be more
likely to diversify than Hong Kong is now. The banks,
who would come under severe liquidity pressure, could be
relied upon to bring this situation to the notice of the
authorities quite quickly.
2.
Initial action to prevent or contain a flight of
capital would have to be taken by the Hong Kong authorities,
who have powers under the Defence Financial Regulations to
impose controls. These powers, as at present applied, are
limited in scope, and are interpreted liberally. Their
scope could be widened, and their administration tightened.
The Regulations are renewable annually. It is important
that the Hong Kong authorities keep them in being(and/or
introduce permanent legislation as they have recently been
asked to do in any event in order to improve exchange control generally),
3. The main control would thus be in Hong Kong. In so
U.K. banks far as sterling balances were involved, thex Bank of England
would operate on the strength of local control approval. The United Kingom is, however, ultimately responsible for the administration in Hong Kong, and it might be necessary
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