CONFIDENTIAL
Hong Kong call into question the desirability of our continuing
to bend over backwards on her behalf, since she only bites the
hand that feeds her! The political case is therefore ambivolent
but its existence should not be forgotten.
If we do not offer a special arrangement, and there are
no Agreements of any sort, we risk the Hong Kong authorities
and the banks selling (if they have not started to already)
their not insubstantial holdings of sterling (approximately
£750 million in January) which could drive down the rate and
accentuate the problem already being experienced of high import
prices undermining the UK Government's prices and incomes policy.
This would make the negotiations for Stage Three that much more
There would also be a risk of political ructions
difficult.
with Hong Kong, which HKIOD would no doubt be in a better
position to assess.