(17865) Dd.145178 400m 5/73 G.W.B.Ltd. Gp.863
NOTHING TO BE WRITTEN IN THIS MARGIN
ANNEX
CONFIDENTIAL
STERLING
1.
Many people in Hong Kong believe that the UK
seeks to control Hong Kong's reserves in order to
bolster sterling. This is of course untrue. Hong
Kong has been treated on a par with other sterling
holders such as Australia.
The floating of sterling
resulted in loss to the Hong Kong Government but this
was largely because they chose to guarantee their
banks' holdings of sterling in terms of Hong Kong
dollars, which rose, while our guarantee to Hong Kong
was expressed in US dollars, which fell. Taking into
account interest and guarantee payments, Hong Kong has
done better to be in sterling than if they had switched
to dollars in 1968. The Hong Kong Government and banks
together had some £800 million covered by our sterling
agreement which expired in September 1973. The banks
however diversified by forward sales before the expiry
of the Agreement and are not eligible for the current
guarantee. The Hong Kong Government have about
£350 million of sterling left of their own, and are
likely to accept the unilateral guarantee offered by
HMG for the period up to March 1974. Negotiations for
this have been required, because an adjustment of the
Minimum Sterling Proportion was needed to reflect the
non-inclusion of the banks' sterling.
2. The Hong Kong Government would like to be able to
stress the modifications made to suit Hong Kong's needs.
But the Treasury have to bear in mind the reactions of
other sterling holders. The line to take which we
believe will be agreed with the Hong Kong Government is
CONFIDENTIAL
/to stress