CONFIDENTIAL
5.
The United Kingdom side said that while we were ready to accept
from the evidence quoted by Sir J. Cowperthwaite that the export-led
boom had been a major cause of the increase in bank deposits in
Hong Kong, and also noted the explanation of underestimation only
recently discovered as the reason why the limit already agreed had
been so quickly exhausted, we did not consider that the evidence of
a hot money inflow could be completely discounted: the last annual
report of the Chartered Bank had regarded this as a significant factor
in causing the increase in bank deposits. Nor did we agree that a 'low
of funds to Hong Kong would cause no increase in the United Kingdom's
guarantee liability, because even if United Kingdom residents' funds
were ignored there were footloose sterling in the 08A which could be
attracted to Hong Kong (and brought within the United Kingdom's
guarantee liability) which could not have been sold to the holders'
on central banks. Nor was our concern to increase the sterling
balances indiscriminately by means of a guarantee. The arrangements
we did not
worked out last summer were to stabilise official balances;
want to guarantee private balances even if by doing so a reduction
could in some cases be avoided. We therefore did not wish to
compromise our general position by unnecessarily loose arrangements
to meet the special features of Hong Kong situation. The central
problem seemed to be that the banks in Hong Kong were holding
guaranteed sterling assets which they could use freely to earn the high
interest rates prevailing in London. In other countries, there were no
provisions for the re-deposit with commercial banks of sterling assets
sold to the central monetary authority, so that commercial banks could
earn only local interest rates almost invariably lower – on the se
deposits. And in the few cases where commercial bank balances were lovered on he guaranteed, as in Australia and New Zealand, the amounts of sterling
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CONFIDENTIAL