CONFIDENTIAL
38B
Mr Wilford
HONG KONG:
BANKING REFORM
I attach a letter I have received from Stanley Payton, covering a paper on this subject.
As you
know, it is my opinion that the Bank of England is right to be very concerned about the monetary organisation in Hong Kong.
2. The description given in the paper of the role of the banking system in the recent stock exchange bubble is disturbing enough. Hong Kong, and at one remove we ourselves, were lucky to pass through that episode without greater difficulty. But to my mind it is those parts of the paper which touch upon the relationship between Government and the banks which are most profoundly disturbing. One illustration is to be found on page 5 of the paper. We find the Banking Commission urging action which is opposed by the Hongkong Bank; and the Financial Secretary supporting the latter. The Hongkong Bank had, of course, a direct financial interest in opposing action. The Financial Secretary will have been aware of this, and will certainly have discounted the Hongkong Bank lobbying accordingly. But it remains an awkward fact that this same Hongkong Bank, besides very properly pursuing its commercial objectives, is the pivot of the Hongkong financial structure; it is difficult and possibly dangerous for the Financial Secretary to find himself wholly at odds with the Hongkong Bank. The potential conflicts of interest are obvious; we dealt with these here in 1844, but they are still present in Hong Kong in 1973.
3. At least superficially, a similar fate has overtaken our repeated urgings that a start should be made with local currency issues. According to this paper, all banks approached informally were in favour of such issues, except the Hongkong Bank; and we know that the Financial Secretary is not in favour. Once again, the opposition of the Hongkong Bank is understandable enough: they like, and profit from, their special position in Hong Kong which local issues would begin to erode. In the Financial Secretary's case, I think the Bank of England may well be right in pointing to an additional factor. He cannot bring himself to believe that our advocacy of local issues is disinterested; we must have some ulterior motive, disadvantageous to Hong Kong.
CONFIDENTIAL
/4.