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nevertheless, the United Kingdom found great difficulty in a situation where circumstances including the special features of the sterling
agreement with Hong Kong appeared to make Hong Kong an attractive place
or non-resident funds, especially when the counterpart of these funds attracted the United Kingdom's guarantee. In particular, the
arrangements in Hong Kong appeared to give the commercial banks more
freedom than that enjoyed by banks in any other Sterling Area country.
2. In reply, Sir J. Cowperthwaite said that it was other factors than
the guarantee arrangements which made the Hong Kong dollar an attractive
currency to hold. The arrangements might make the banks more willing to
hold sterling, but did not in themselves induce an inflow. Indeed, the
banks were maintaining unduly low deposit rates in order to avoid
attracting an inflow of short-term capital. The principal aim of
interest rate policy was to retain resident funda in Hong Kong.
3. The United Kingdom side said that we were prepared to accept that
much of the increases in commercial bank deposits had been generated by
Hong Kong's economic boom and that there were special features in
Hong Kong which made it appropriate for some of the commercial bank
balances to be held by the banks but nevertheless to be guaranteed.
Under the present arrangements, however, the commercial banks enjoyed
a significant interest rate advantage since, in contrast to banks
elsewhere in the Sterling Area, they had free use of guaranteed sterling.
4. 8ir J. Cowperthwaite agreed that their arrangements gave the
commercial banks an opportunity profitably to encourage any flow of
non-resident funds, but did not agree that it was not possible to
discount completely the evidence of a recent inflow of "hot money".
Sterling deposits had risen gently in line with the economic boom, und
no great change had occurred in recent months. In any case, Hong Kong
was in a unique position in the 0.3.A. since she was running a
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