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4. TO REVERT TO YOUR LETTER OF 29 JANUARY TO THE CHAIRMAN OF THE EXCHANGE BANKS' ASSOCIATION, WE ARE IN FULL AGREEMENT WITH THE UNDERLYING PRINCIPLE TO EXCLUDE FUNDS HELD BY HONG KONG BANKS WHICH DO NOT ARISE FROM LOCAL RESIDENTS. THIS LEAVES OF COURSE FOR YOUR EXCHANGE CONTROL PROBLEMS OF POLICING THE ARRANGEMENTS AS A WHOLE, THE DIFFICULTIES OF WHICH AS BELL SAID WE DO NOT UNDERESTIMATE. ON THE DETAILS OF THE ARRANGEMENTS IN YOUR LETTER OF 29 JANUARY I HAVE THE FOLLOWING COMMENTS.
5. WHILE OF COURSE THE VERY GENERAL DISCUSSION WHICH WE HAD ON THIS MATTER DURING THE STERLING NEGOTIATIONS DID NOT DISTINGUISH BETWEEN COMMERCIAL BANKS IN HONG KONG, WE NOTE THAT YOUR OFFER INCLUDES THE NON-AUTHORISED AS WELL AS THE AUTHORISED BANKS, ALTHOUGH THE NON-AUTHORISED BANKS HAVE NO OBLIGATION TO HOLD STERLING AND ARE ALREADY ABLE TO COVER THEIR FOREIGN EXCHANGE RISKS THROUGH THE FREE MARKET. IN THIS CONNEXION, YOU WILL PRESUMABLY NEED TO TAKE STEPS TO ENSURE THAT THESE BANKS COMPLY WITH THE
PROVISIONS OF PARAGRAPH 6 OF YOUR LETTER.
6. THE MAIN POINT I WOULD MAKE ON THE PRINCIPLES OF YOUR ARRANGEMENTS RELATES TO PARAGRAPH 4(6) OF YOUR LETTER. THIS EXCLUDES FROM THE SCOPE OF THE GUARANTEE THE STERLING COUNTERPART OF THE HONG KONG DOLLAR BALANCES OF THE BANKS' BRANCHES OR CORRESPONDENTS ABROAD QUOTE IN EXCESS OF THE AGREED LIMITS UNQUOTE. CERTAINLY WE APPROVE OF THE GENERAL EXCLUSION BUT, IF WE UNDERSTAND YOU ARIGHT, WE ARE NOT CLEAR WHY EVEN SMALL AMOUNTS OF SUCH BALANCES WHICH DO NOT ORIGINATE IN HONG KONG SHOULD BE BROUGHT INTO THE SCHEME, AND WE HOPE THAT IT WILL BE POSSIBLE TO EXCLUDE ANY SUCH BALANCES. THE CONSIDERATIONS WHICH APPLY TO THE BALANCES OF HONG KONG BANKS APPLY EQUALLY, OF COURSE,
· TO THE COUNTERPART OF PRIVATE NON-HONG
KONG RESIDENTS' BALANCES AND WE WOULD THEREFORE LIKE TO SEE STEPS TAKEN TO EXCLUDE THESE ALSO.
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