CONFIDENTIAL
although the Exchange Fund should be free to hold any sterling
deposited with the commercial banks; any excess over this amount
which the Hong Kong Government wanted to be eligible for guarantee
ould be held in London. Such an arrangement had important
presentational advantages for the United Kingdom in putting the
guarantee arrangements in Hong Kong on an equivalent basis to those
elsewhere, so that the United Kingdom should not appear to be
guaranteeing unlimited amounts of sterling in practice at the disposal
of the commercial banks when there was no adequate safeguard to
ensure that non-resident private sterling deposits were not included
within such funds. Because the commercial banks would hold
Hong Kong dollar assets in respect of sterling held by the Exchange
Fund direct in London, there might be some reduction in the interest
rate advantage which they would otherwise enjoy.
8. Bir J. Cowperthwaite said that there was no insuperable objection
to this suggestion. Indeed, before introducing their guarantee scheme
for the commercial banks, the Hong Kong authorities had considered, but
decided against, an arrangement whereby the Government would buy
sterling from the commercial banks and invest this on its own account
instead of re-depositing it with the commercial banks. But the Hong
Kong Government would be very reluctant to become responsible for
interest rates on these balances and would seek to find some way of
passing the available sterling interest rates in full on to the
commercial banks.
9. It was agreed to hold a further meeting on the subject the
following day.
CONFIDENTIAL