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CONFIDENTIAL
arrangements completely excluded non-resident funds. We thought that our unwillingness to guarantee non-resident sterling had been made
clear at the time of the dollar-bond negotiations and that this same
policy was understood to underlie the sterling a greement.
2. Sir J. Cowperthwaite replied that at the time of the dollar-bond arrangements Hong Kong had been prepared to see a limit on the amount of sterling which the Exchange Fund might borrow from the commercial banks because this reflected the limited amount of the sterling which the
bond arrangements covered. Under the sterling guarantee arrangements, however, where almost 90 per cent of the Colony's sterling holdings were covered, without limit, Hong Kong saw little justification for a limit on the amount of sterling which the Exchange Fund might borrow,
so as in comparable circumstances elsewhere no limit was placed on the amount of sterling eligible for guarantee which a central bank might hold. During the sterling negotiations 1st July no mention had been made of any limit on the amount of sterling which would be eligible for guarantee. The high proportion of sterling which Hong Kong had to maintain under the sterling agreement made him reluctant to accept any arrangement which reduced the proportion of
sterling covered by the guarantee.
3. The existing limit of Hong Kong dollars 3,000m had proved insufficient because at the time when it was proposed it had been
The limit was proving too possible only to guess at what was needed. low partly because of accidental omissions from the earlier calculations but chiefly because of the steady rise in the sterling deposits of the Hong Kong banks which had taken place since the beginning of 1968. This rise was very largely due to the export-led boom which Hong Kong
was currently enjoying.
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CONFIDENTIAL