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of, say, six months. Under this idea the UK would, by unilateral declaration, guarantee the balances of those major sterling holders who chose to maintain their minimum sterling proportions (msp), but there would be no obligation on the sterling holders to do so. The exchange rate to which the guarantee would apply would have to be fixed nearer the time. It could be a market
OP rate of 2.40 or 2.3506 pounds to the dollar.
Special position of Hong Kong
The total
Hong Kong is one of the largest sterling holders. official reserves (May 1973) are £727 million of which £354 million is held by the Hong Kong Government and £304 million by the commercial banks. The msp is high at 89%.
The difficulty is that there is no equivalent in the colony of a central bank, and no local paper to provide backing for the lia- bilities of the commercial banks. The banks have therefore been uned to holding sterling securities as backing for their liabili- ties which are expressed in Hong Kong dollars. In order to bring the sterling holdings of the commercial banks into the sterling
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reemesti enztagonents along with the Government's own holdings, an arrange- ment was made whereby the banks sold their sterling to the Hong
The Kong Government in exchange for borrowed Hong Kong dollars. effect is that the sterling guarantee of HMG applies to all Hong Kong sterling, but the Hong Kong Government in its turn assumes an obligation to the Hong Kong banks. As a result of the currency upsets of recent years during which the Hong Kong dollar appreciated against sterling and the US dollar, the Hong Kong Government has a liability to make large payments to the Hong Kong banks who enjoy a very favourable position.
The immediate difficulty
Although Hong Kong is a colony, the Governor usually acts with the consent of the Legislative Council. He is concerned to be able to demonstrate that the public financiers of the colony are managed for the benefit of the people of Hong Kong, and in particular that
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