W(B)L 51-7406
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CONFIDENTIAL
HMG's liability under the sterling guarantees.
However, if absolutely watertight safeguards
can be devised between the Treasury and Hong
Kong to ensure that the sterling acquired from
the banks for Hong Kong Government reserves
comes properly within the scope of the
guarantee there would remain only the
constitutional problem and this might not be
insuperable.
9.
In the meantime the Hong Kong "overnment
has borrowed for the Exchange Fund
HK$2,992 million (as at 16 May) against the
statutory limit of HK$3,000 million. The
Hong Kong authorities argue that the continuing
buoyancy of the economy, rather than "hote
money" from non-residents, is producing a steaģ
increase in the exchange reserves of the
commercial banks. The Fund's borrowing limit
may thus soon be reached and Hong Kong has
asked urgently to amend the limit to HK$3,500
million at least or preferably to HK$4,000 m.
Because of the normal legislative process
Laid those be might take too long the Governor bug usked if
Propond to
bb may exceed the limit administratively.
November,
(Last the Hong Kong authorities did in
fact anticipate HMG's approval of the increase
in the borrowing limit to HK$3,000 million and
bought sterling from the commercial banks in
excess of what was then their legal
authority.) The Hong Kong authorities have
commented that an inability to take funds into
the exchange Fund would be damagin to
confidence in sterling, while if it became
/known