SECRET
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of compensation to the banks
to the banks on their guaranteed sterling (£304 mn. at
end-May) of about £45-£50 mm. after the expiry of the local guarantee
agreement on 24th September in addition to approximately £15 mn.
already paid to the Hongshai. in respect of the amounts withdrawn
earlier. (If the sterling rate were to fall to U.S.$2.3506 a further
compensation payment to the banks of roughly £20 mn. would be necessary.
As against the Exchange Fund's total liability to date of about £60
H.M.G. have paid compensation to Hong Kong of £15 min. under the Sterling
Agreement.
The Current Situation
mn
•
The
At end-May Hong Kong's official sterling reserves stood at
£658 mn. of which Government held £354 mn. and banks £304 min. The
Chancellor's message gives no firm indication of H.M.G.'s future
intentions and the proposed unilateral declaration to continue the
guarantee at $2.3506 subject to the maintenance of MSP is likely to
issue only 3-4 weeks before the expiry both of the Sterling Agreement
and of the local Exchange Fund guarantee. As to the unilateral
declaration sterling would have to fall to U.S.$2.3271 i.e. 1% below
U.S.$2.3506, before any further settlement became due from H.M.G.
Hong Kong Government might conclude that it would be wise to settle
with the banks at around the rate ruling on 24th September involving
compensation of £45-£50 mn. (i.e. provided the H.K.$/£ rate weakens no
further) rather than renew their guarantee to the banks which would
cost an additional £20 mn. if the sterling rate fell to U.S.$2.3506
and further deplete Government reserves. In the meantime we are aware
that, in view of the uncertainty, the Hong Kong banks have been selling
sterling forward for value post-24th September and that, in the absence
of satisfactory new arrangements with H.M.G., the Hong Kong Government
themselves would wish eventually to diversify at least 50% of their
reserves out of sterling.