CYPHER/CAT A
CONFIDENTIAL
PRIORITY FOREIGN AND COMMONWALTH OFFICE
TELEGRAM NUMBER 371
Sterling Zila
Малий
TO HONG KONG
2 JUNE 1969
(MF)
مي
CONFIDENTIAL
PLEASE PASS FOLLOWING TO FOGARTY: HONG KONG STERLING DISCUSSIONS. COWPERTHWAITE AND PATERSON WILL HAVE TOLD YOU OF THEIR DISCUSSIONS IN LONDON. IT MAY HOWEVER BE USEFUL TO HAVE A SUMMARY OF OUR VIEWS. 2. OUR CONCERN IS THAT THE CIRCUMSTANCES IN HONG KONG, WHICH INCLUDE THE SPECIAL FEATURE OF OUR STERLING AGREEMENT THAT OFFICIAL STERLING CAN BE HELD WITH BANKS IN HONG KONG AS WELL AS IN LONDON, APPEAR TO MAKE HONG KONG AN ATTRACTIVE PLACE FOR NON-RESIDENT FUNDS
FOOTLOUSE PRIVATE OS A AND UK FUNDS. NOT ONLY COULD THIS ADD TO OUR GUARANTEE LIABILITY: IT COULD ALSO GIVE RISE TO PRESSURE FROM OTHER O S A COUNTRIES FOR A COMPARABLE CONCESSION. WE COULD NOT DEFEND TO PARLIAMENT THE INCLUSION OF UNLIMITED COMMERCIAL BANK STERLING WITHIN THE GUARANTEE OSTENSIBLY OF OFFICIAL BALANCES. 3 IN DISCUSSION, WE ACCEPTED THAT THE RAPID RISE IN COMMERCIAL BANKS' STERLING COULD IN LARGE PART BE ATTRIBUTED TO HONG KONG'S EXPORT LED BOOM, AND THAT THE ATTRACTION FOR ANY NON-RESIDENTS WHO MIGHT PUT THIER FUNDS INTO HONG KONG DOLLAR DEPOSITS WAS NOT THE GJARANTEE BUT THE RELATIVE STRENGTH OF THE HONG KONG DOLLAR. WE ALSO AGREED ON THE DESTRABILITY OF FINDING A SOLUTION WHICH WOULD AVOID THE NEED TO MAINTAIN IN HONG KONG A LIMIT TO THE AMOUNT OF STERLING WHICH COULD BE TAKEN IN, WHICH WAS NOT MATCHED BY SIMILAR RESTRICTIONS ON OTHER OS A COUNTRIES.
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4. HOWEVER, WE STILL CONSIDER AFTER THE DISCUSSION THAT THERE IS AN EVIDENT INTEREST RATE ADVANTAGE TO THE COMMERCIAL BANKS IN HONG KONG BECAUSE UNLIKE BANKS ELSEWHERE IN THE O SA THEY HAVE FREE USE OF OF THE GUARANTEED STERLING ( EVEN IF AT THE MOMENT THE BANKS DO NOT NEED TO EXPLOIT THIS ADVANTAGE BECAUSE ADEQUATE FUNDS ARE FLOWING IN OWING TO THE HONG KONG EXPORT BOOM AND THE STRENGTH OF THE HONG KONG DOLLAR), AND THAT THE EVIDENCE OF A QUOTE HOT MONEY UNQUOTE INFLOW CANNOT BE COMPLETELY DISCOUNTED.
5. IN SO FAR AS OUR CONCERN RELATES TO CAPITAL FLOWS FROM UK RESIDENTS TO HONG KONG, WE COULD NOT IN THE PRESENT CONTEXT
CONSIDER METHODS OF DIRECTLY IMPEDING SUCH FLOWS, ACCORDINGLY OUR CONCERN MUST BE TO SEE THAT THE ADVANTAGE WHICH HONG KONG GETS FROM
CONFIDENTIAL
/THE SPECIAL
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