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trying to isolate a sum of that magnitude. The Hong Kong dollar bond
provides a precedent for giving exceptional treatment to Hong Kong
albeit covering a sum limited to 50% of Government reserves.
Any
new special arrangement could be justified, if necessary, to the rest
of the Agreement countries as being a subvention to a Colony, which,
because of its unique circumstances, has exceptionally high sterling
reserves.
Possible Forms of Guarantee
i
If it is thought that some form of special guarantee should
be offered, it would be as well to try to link it with the issue by the
Hong Kong Government of local paper in exchange for the banks' excess
holdings of foreign exchange, predominantly in sterling. Hong Kong
have opposed this suggestion in the past partly because they feared
wrongly that it would be inflationary but mainly because they thought .,
that with the bulk of the Colony's reserves centralised in Government
hands H.M.G. would be in a stronger position to impose their wishes.
Centralisation of reserves does not diminish the exchange risk and in
view of their dislike of the issue of local paper it seems that the
Hong Kong Government will need to be offered some incentive to undertake
it.
In other words, a special guarantee should be offered ideally
only on the condition that the Hong Kong Government would start to
centralise reserves.
First, however, it is necessary to examine the
possible forms of a guarantee before considering such a link.
The guarantee itself could be in the form of a bond or a
straight guarantee of balances. The 1968 Hong Kong dollar Bond need
not be taken as a precedent. In 1968 sterling was on a fixed parity,
the Hong Kong dollar was tied to sterling and the arrangement preceded
the Sterling Agreement which eschewed local currency as the numeraire
(although one of the conditions of the issue of the Bond was that a
unilateral appreciation of the Hong Kong dollar would not be undertaken).