CONFIDENTIAL
NOTE FOR MR. MORETON
Sterling and the Sterling Agreement
At times of currency uncertainties the position of the pound is always liable to be raised by the Hong Kong authorities. There is still a residue of ill-feeling as a result of devaluation, while it is also felt that the Colony was hard done by in the negotiations leading to last summer's sterling agreement.
Sterling Agreement
2.
By an exchange of letters signed on 20 September, 1968, HMG undertook for five years (but with a review at the end of three years) to maintain the sterling value in terms of the US dollar of about 90% of Hong Kong official sterling reserves provided Hong Kong maintained at all times during the agreement a minimum of 9% of her total official reserves in sterling. This agreement is in almost identical terms to the other agreements concluded with virtually all 0.S.A. countries (although most other countries' agreements last only for three years in the first instance).
3.
The Hong Kong authorities consider that their minimum sterling proportion (m.s.p.), at 99%, is too high. This was based on the level of sterling held at end-June 1968; our aim in negotiating with all 0.S.A. countries was to agree m.s.p.s. on this basis and we broadly succeeded (although in some cases concessions had to be made because of the special circumstances of certain countries).
We do not accept Hong Kong's case for a lower m.s.p., which has
not been pressed since last September.
4. There is one, important respect in which the sterling agreement with Hong Kong differs from the generality: Hong Kong has no central
bank. The Colonial Government therefore relies on the three main
commercial banks to issue bank notes and to buy and sell sterling on request at official rates. Exchange control also obliges these note-issuing and the other authorised banks to hold most of their
reserves in sterling. In these circumstances, a good part of the commercial banks' balances represent what would elsewhere be
regarded as official reserves. For this reason we agreed to a
CONFIDENTIAL
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