RESTRICTED
+
6. THE BRITISH OFFICIALS EXPLAINED THE EVENTS LEADING UP TO AND THE PURPOSE OF THE FLOAT AND THE IMPLICATIONS FOR HONG KONG OF THE EXTENSION OF EXCHANGE CONTROL TO HONG KONG AND ALL OTHER OVERSEAS STERLING AREA COUNTRIES. WE FOR OUR PART EXPLAINED THE THINKING BEHIND OUR DECISION TO ESTABLISH TEMPORARILY A LINK WITH THE U.S. DOLLAR. WE STRESSED THAT, WHILE WE HAD EVERY INTENTION OF MANAGING THE RATE IN ACCORDANCE WITH THE RULES OF THE INTERNATIONAL MONETARY FUND, WE HOPED THE FLOATING OF STERLING WOULD NOT BE TOO PROLONGED FOR WE WISHED TO RE-FIX WITH STERLING AS SOON AS POSSIBLE. THE GREAT BULK OF OUR RESERVES ARE IN STERLING AND OUR MONETARY SYSTEM. HAS BEEN TRADITIONALLY LINKED TO STERLING. AT THE SAME TIME, WE WERE AT PAINS TO POINT OUT THAT, FOR THE REASONS I HAVE JUST EXPLAINED, AS STERLING FLOATED DOWN FROM U.S. DOLLARS 2.63 TO THE VALUE OF OUR EXTERNAL RESERVES (WHICH ARE LARGELY IN STERLING) HAD FALLEN IN RELATION TO WORLD CURRENCIES AND IN TERMS OF THE HONG KONG DOLLAR: AND WE EXPLAINED, IN THE FRANKEST POSSIBLE WAY, THE FISCAL IMPLICATIONS OF THE LOSSES INVOLVED IN THIS UNHAPPY
SEQUENCE OF EVENTS.
7. WE PUT TO THE BRITISH OFFICIALS CERTAIN IDEAS FOR PROTECTING OUR POSITION BOTH DURING THE REMAINING PERIOD OF THE FLOAT AND AFTER STERLING HAD RE-FIXED WITH THE U.S. DOLLAR, WHILST THEY PUT TO US CERTAIN IDEAS DEVELOPED IN LONDON FOR THE FUTURE OF THE STERLING BALANCES AND THE STERLING GUARANTEE AGREEMENTS. THESE EXCHANGES COULD NOT BE EXPECTED TO LEAD TO FIRM CONCULSIONS, FOR BOTH SIDES HAD TO LISTEN AND THEN REFLECT, BUT WE HAVE KEPT IN TOUCH WITH LONDON SINCE THE BRITISH OFFICIALS DEPARTED.
8. AS SIMILAR BILATERAL CONSULTATIONS HAVE HAD TO BE CONDUCTED WITH A NUMBER OF OTHER COUNTRIES WITH WHICH THE BRITISH GOVERNMENT SIGNED STERLING GUARANTEE AGREEMENTS IN 1968 WE COULD NOT EXPECT ARRANGEMENTS TO BE MADE FOR THE RESUMPTION OF TALKS WITH HONG KONG BEFORE THESE OTHER CONSULTATIONS HAD BEEN CONCLUDED. I UNDERSTAND THAT THE SIX TEAMS OF OFFICIALS CONDUCTING THESE CONSULTATIONS IN VARIOUS PARTS OF THE WORLD HAVE NOW ALL RETURNED TO LONDON AND THAT THE SITUATION IS BEING REVIEWED. IN OUR TELEGRAPHIC EXCHANGES WITH LONDON WE HAVE EMPHASISED MOST STRONGLY THAT HONG KONG'S POSITION AS A LARGE HOLDER OF STERLING BALANCES AS WELL AS OUR TRADITIONAL LINKS WITH STERLING DESERVE SPECIAL CONSIDERATION AND 1 HOPE THAT A FURTHER AND CONCLUSIVE ROUND OF TALKS WILL BE HELD VERY SOON NOW
EITHER HERE OR IN LONDON.
19.SIR,