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The Case for a Special Guarantee for Hong Kong
Hong Kong is a Crown Colony under the direct rule of H.M.G.
and, in theory, the Governor has only limited powers. In practice,
however, H.M.G. has seldom interfered in internal matters and the
Colony has, therefore, been accustomed to determining its own policies.
MSP at 89% is very high and although it would be constitutionally
possible for H.M.G. to decree that there should be no diversification
of the Government's own sterling reserves, this would amount to
forbidding the Colony to take steps to safeguard the value of its
assets which have been created Dasically by the enterprise of the local
inhabitants and should remain available, and protected so far as
possible, for the future benefit of the Colony as a whole.
therefore seems inconceivable, for that reason and local political
considerations, that H.M.G. would consider issuing such an edict.
However, the main difficulty with Hong Kong lies in the fact
that, in the absence of a Monetary Authority, a very substantial part
of the sterling holdings (45% £304 mm. at end-May) is in the hands
These holdings and there are no exchange control
of the banks.
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powers in Hong Kong are extremely volatile. It follows that to the
extent that the commercial banks will not have sold their balances
forward against other currencies for value post-24th September some
powerful incentive is needed to persuade them to remain in sterling
and, depending on the amounts involved, possibly to reverse part of
their forward transactions.
The fact that Hong Kong is a Colony would not necessarily in
itself justify giving Hong Kong special treatment. The main
consideration is that 50% or more of the substantial sterling reserves
of around £660 mn. could well be diversified. Given the pressures
sterling the question, therefore, is whether it would be worthwhile
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