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SECRET
the external value of the colony's reserves is not depreciated as a result of delay or imprudence.
According to the Governor's reports, the Hong Kong judgement of the most prudent course is to diversify about half the Government's sterling holdings into other currencies. The commercial banks want to diversify a smaller amount. The banks are thought to be already preparing to sell their sterling forward which they will be able to do from 26 August. The Hong Kong Government wants to do the same. The amount involved is said to be £200 million of Government sterling and "a smaller amount" by the banks. The threat is therefore that about £300 million to £350 million will leave sterling. An outflow of this size would of course have a depressing affect on the sterling rate and would have to be met mainly out of reserves.
The Governor says that to avert this it would be necessary to
xtend the sterling guarantee immediately "on realistic terms". Otherwise he asks to be given complete freedom within the next Cew weeks even before the existing agreement expires.
Our position
As the expiry date approaches, there is a risk that sterling holders will seek to diversify, and those who want to get out will try to get out fastest. This is a risk which applies to all holders and will persist even if the Chancellor makes a unilateral declaration on the lines likely to be recommended. To keep the holders in sterling, we will be relying on the facts that interest rates on sterling are very attractive and that there are difficulties in finding better alternative reserve assets.
C
There is no particular reason why we should make an exception for | Huệ Kong. We should probably justify exceptiomterms to ourselves
(on the grounds that it is a colony with particular difficulties with the banks), but the other holders would be bound to hear of this. If we offered Hong Kong better terms than the others, then they will all demand equal treatment. More important, if Hong Kong
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