NOTHING TO BE Written IN THIS MARGIN
W(B)L 51-7406
CONFIDENTIAL
which the sterling agreement with Hong kong
differs from the gerrerality.
5. We have now become aware of a danger which
was not sufficiently appreciated at the time of
the sterling negotiations. This is that the
sterling holdings of the commercial bars might
be swollen by deposits made freely with them
by residents of other OSA countries including
the UK. The Hong Kong Government might then
take in the se increased deposits under the
cover of the guarantee thus protecting private
non-Hong Kong residents against a further
sterling devaluation. Capital can be freely
transferred within the sterling area anyway;
but if the commercial banks did not enjoy the
guarantee they would not want to accept non-
resident deposits which gave them an unreserved
sterling position. There is some evidence of
flow
a fear of "hot money" to Hong Kong.
6.
exclude
Ideally, Exchange Controls could be used
either to axélänge altogether non-Hong Kong
residents' deposits, or to separate these so
that they could be kept apart from the funds
attracting the UK guarantee. However, the
safeguards used by apresent by the Hong Kong
Government to prevent the intake of sterling
into the reserves which originates outside Hong
Kong are not satisfactory. One difficulty
arises from the fact that the Hong Kong Governme
ment has offered the protection of the
guarantee not only to the three note-issuing
banks but to others including the Communist
banks (although the present indications are that
the latter will not take the offer up, being
/suspicious