CONFIDENTIAL.
STERLING
1. The floating of sterling created special problems for Hong
Kong.
2.
Nearly all Hong Kong's external reserves are held in sterling, and their value in relation to other currencies has declined with the fall in sterling's value after the float (by 7 per cent or so on a total of over £800 million). Following the earlier loss in November 1967, when sterling was devalued by just over 14 per cent, Hong Kong has resented this most recent loss; although, in response to any such criticisms from Hong Kong, it might be pointed out that the present dollar value of sterling is no lower than it was in mid 1971 or indeed at the end of 1967.
3. Moreover because of Hong Kong's extreme dependence on external trade, and particularly as far as imports of commodities for local consumption are concerned on trade with China, Hong Kong felt it necessary · with UK concurrence to peg the Hong Kong dollar at least temporarily to the US dollar in July of this year, rather than continuing to float with sterling.
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4. The US dollar value of Hong Kong's official sterling reserves is guaranteed at a rate of $ US 2.40. There is however a further
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because
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complication in the case of Hong Kong which does not apply to
there is no Costal Book other Sterling Area countries that her Government guaranteed local banks in respect of the Hong Kong dollar value holdings they were required to keep in sterling; and this will involve the Hong Kong Government in substantial additional losses.
5.
Discussions were held in Hong Kong in July in the context of the general negotiations on the possibility of concluding a new sterling agreement to carry forward, in a slightly modified form, the present arrangements beyond the expiry date of September 1973; and in September in London, when it was made clear to the Hong Kong authorities that it was not possible for the UK Government to offer any special assistance to Hong Kong. At present the Hong Kong authorities are considering their position in relation to their most immediate problem, that of their relationship with the commercial banks. As all 0.S.A. countries will very shortly be
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