SECRET
Hong Kong: A Special Sterling Guarantee Arrangement
This note examines, irrespective of whether or not further
Sterling Agreements are negotiated with the C.S.A. in general,
considerations relating to the possibility of offering some special
form of guarantee to Hong Kong and the form that it might take.
Background
Hong Kong is in an exceptional position in that in the absence
of a sufficiency of local outlets for the deployment of the counterpart
of their Hong Kong dollar liabilities, the banks have traditionally
hold foreign exchange balances greatly in excess of normal requirements.
The bulk of the banks' holdings has been in sterling and so long as the
Hong Kong dollar retained a fixed relationship to sterling the banks'
large uncovered position in that currency presented no risk.
However,
the situation changed radically, starting with the sterling crises in
1966/67 when the then Financial Secretary felt obliged to guarantee in
Hong Kong dollar terms the sterling holdings of the authorised banks.
In November 1967 the Hong Kong dollar followed the pound down only
partially and was revalued by 5.7% against sterling. At that time
the Hong Kong Government, in honouring its guarantee and in making
ex gratia payments to non-authorised banks, paid out £10.6 mm. from the
Exchange Fund in compensation and in addition the Fund lost the
Hong Kong dollar equivalent of £13 min. on its own account.
Following these losses the Hong Kong Government pressed H.M.G.
This was given (details in
to provide protection for the future.
Appendix) essentially in the form of a swap arrangement up to a maximum
of £150 mm of the Government's reserves whereby H.M.G. undertook to
issue and redeem at the H.K.$/£ parity rate ruling at the appropriate
times 7-year Bonds denominated in Hong Kong dollars against payment
by Hong Kong in sterling. One aspect of this arrangement, which three
months later was overtaken by the Sterling Agreement, was that