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fficulty the impact of the 1967 disturbances and the devaluation
of the pound sterling.
When
8. The devaluation of sterling led to considerable losses on the
sterling balances of the Hong Kong Government and the banks.
devaluation occurred the Government at first maintained parity with
sterling and then very shortly afterwards revalued by 10%, the final
result being a devaluation in terms of the U.S. dollar of only 5.7%.
A devaluation by Hong Kong by the same margin as sterling would have
meant an almost equivalent rise in the cost of living because of the
Colony's heavy dependence on imports particularly of food. On the
other hand, since the banking and official reserves of Hong Kong are
held in sterling, a decision not to devalue at all would have meant
a reduction in value of these reserves in terms of local currency.
In the event it was finally decided that the Hong Kong dollar should
be devalued by a lesser amount than sterling.
9.
The devaluation of sterling is estimated to have reduced the
purchasing power of Hong Kong's external assets (official and
unofficial) by approximately £50m. (much of the loss being borne
by the Exchange Fund which had built up a healthy surplus), while
the events of November 1967 left a legacy of resentment towards the
U.K. in so far as Hong Kong had suffered as a result of internal
U.K. developments over which Hong Kong had no control.
10.
As a result of these events and doubts about the future of
sterling, Hong Kong approached HMG for some protection against
further losses to her reserves. At first a facility was estab-
lished for Hong Kong to purchase bonds to be nominated in Hong Kong
dollars and purchased by the Hong Kong Government with sterling up
to 50% of her official external assets, subject to a limit of £150m.
With the Basle facility, HMG was able to improve on these dollar
bond arrangements, and by an Exchange of Letters signed September/
11.
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