ANNEX
STERLING
1.
Many people in Hong Kong believe that the UK
manipulates Hong Kong's reserves to bolster sterling.
This is of course untrue. It is however true that the
floating of sterling resulted in loss to the Hong Kong
Government. This was largely because they chose to
guarantee their banks' holdings of sterling in terms
of Hong Kong dollars, while our guarantee to Hong Kong
was expressed in US dollars. The Hong Kong Government
and banks together had some £800 million protected by our sterling agreement which expired in September 1973.
The banks then withdrew. The Hong Kong Government
have about £300 million left of their own, and have
now accepted [are likely to accept the unilateral
guarantee offered by HMG for an interim period up to March 1974. Negotiations for this have been prolonged, because an adjustment of the Minimum Sterling
Proportion was needed to reflect the omission of the
banks' sterling. Many people in Hong Kong have
attributed this delay to further attempts to coerce
Hong Kong.
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 middle way
now agreed with the Hong Kong Government is to stress
that the new arrangement satisfies both sides within
the context of our unilateral offer. For the longer
term future after March 1974, we can say that disc
I