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}
SECRET
POSSIBLE HONG KONG GOVERNMENT REACTION TO THE ENDING OF THE
STERLING AGREEMENTS
1.
In particular this means that
This paper presupposes that if the Sterling Agreements are
not renewed Hong Kong will be treated no less favourably than
other holders of sterling.
Hong Kong must not be discriminated against over the
diversification of her sterling balances. In signing a
Sterling Agreement with Hong Kong, HMG have put her on
the same level as the independent holders and it would be
politically very damaging were restrictions to be placed on
Hong Kong movements out of sterling when the Agreement ends
(unless some quid pro quo were negotiated). Were this to
happen, we could expect an extremely bitter reaction from
Hong Kong and our position would be very difficult to justify.
2. It seems much more likely, however, that the Treasury,
whilst not welcoming full diversification, would not prevent
it. Before the Sterling Agreements were signed,
Hong Kong, as one of the Scheduled Territories, was prevented
from removing her reserves except with UK Exchange Control
permission. The descheduling of the Overseas Sterling Area
(except the Republic of Ireland and, later, Gibraltar) in June
1972 has removed this control. In any case, a rapid run-down
of her sterling holdings would be against Hong Kong's own best
interests as the releasing of large quantities of sterling
would reduce their value. Furthermore, there is in practice
nowhere apart from the US dollar market where her large assets
Interest rates in London are appreciably higher than
can go.
SECRET
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