SECRET
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Hong Kong agreed not to seek unilateral appreciation of the Hong Kong
dollar although H.M.G. undertook not to oppose the introduction of a
new parity which was in the Colony's best interests should there have
been a general realignment of currencies. At the time, of course,
fixed, not floating, rates prevailed.
Following the entry into force of the Sterling Agreement in
September 1968 the Hong Kong Government offered a guarantee to all the
banks expressed in Hong Kong dollars based on the then H.K.$/£ parity
of H.K.$14.5455-£1. Under this arrangement the banks, in exchange
for certificates of indebtedness, sold at least 85% of their sterling
assets to the Exchange Fund which subsequently re-deposited the
sterling with the banks thus enabling them to continue to enjoy the
interest at the cost of only a small charge in Hong Kong dollars.
Under an arrangement in August 1972 the local guarantee was extended
to cover sterling withdrawn by the Hongshai from the Exchange Fund
for market intervention and compensation became payable shortly after
such withdrawals, In November 1972 this scheme was subsumed in the
£100 mn. diversification facility which was extended only to the
Hongshai, who in the event used only £18 mn. for direct diversification
and sold the balance of £82 mn. to the Bank of China to finance part of
Hong Kong's external deficit.
At the time of the Smithsonian Agreement the Hong Kong dollar
kept in step with sterling (£=U.S.$2.60) but following the sterling
float it was pegged on the U.S. dollar in July 1972 on the basis of a
small depreciation of about 1.2%. As a result of the subsequent fall
and the in the sterling/U.S.dollar rate, the Hong Kong dollar/sterling
Feb 73
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quotation has recently been fluctuating around H.K.$12.45-12.70=£1
compared with the rate of H.K.$14.5455 at which the Hong Kong Government
guarantees the banks'
This difference would involve payment
sterling.