we put to the Treasury proposals of our own for a carefully phased reduction of the sterling proportion of Hong Kong's reserves to a more normal level. These proposals envisage that as sales would be spread over a considerable period and would not have normal regard for purely commercial considerations, adjustment payments would be paid to us by the Treasury should phasing result in losses. The Treasury listened with interest, but without comment.
7. The Treasury's inability to give us any information on which to base a rational argument for not taking the prudent commercial course which would be to diversify to a level Similar to that of other major holders of sterling places an appallingly heavy responsibility upon the Financial Secretary and myself. But our feeling is that provided the foreign exchange market holds we should try to hold the situation in Hong Kong as the Treasury has asked, in spite of our inability to produce any rational commercial reason for doing so, and I might add in spite of a growing restlessness in business and Unofficial circles in Hong Kong about our continuing inability to reassure them about the future security and management of
our reserves.
8.
However, this means that when the Chancellor eventually communicates his new proposals in his message early in the second week of September, there will only be two weeks at the most between their receipt and the expiry of the Agréements-- Of those two weeks most of the time in any case will be taken up by the Commonwealth Finance Ministers fleeting at Nar-es-Salaam and the In Meeting at Nairobi. It will therefore be very difficult to find time or officials or Ministers to negotiate. Frovided the offer is completely satisfactory this will not matter, But if it is not, our willingness to go along with the Treasury's plea to sit tight for a further period, even at this late hour have left us totally exposed financially and politically unless HMG are then prepared to give immediate and special consideration to any representations we have to make, and would be prepared to deal with them immediately, and in spite of the commitments to the Commonwealth Finance Ministers and the IMF.
9.
The effect of the Treasury's refusal to take us into their confidence has therefore been greatly to aggravate the situation that will arise in 4 weeks time if the offer then made is not satisfactory. I feel I should put this on record.
10. I she
explain that the Hong Kong Government's position in all this is extremely delicate. In the first place we are, in effect, trustees for this money and must act prudently for Hong Kong as well as loyally to HMG. In the second place the
GECRET
/succesive
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