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examine this further it is necessary to look at the problem
separately in respect of the two groups of sterling concerned.
COMMERCIAL BANKS' STERLING
6. This is the core of the problem and does present a genuine
difficulty for Hong Kong. Because there are no local assets
available the banks have to hold substantial proportions of
their assets in foreign exchange principally sterling. They,
therefore, have HK dollar liabilities and sterling assets, and
unless they are protected in some way, face exchange risks not
normally taken by commercial banks.
7. In order to prevent the banks diversifying out of sterling
on the one hand and to protect the banks' sterling reserves on
the other, they were incorporated into official reserves under
the Sterling Agreement through the Hong Kong Government
signing a separate agreement with the banks the Exchange
Fund Guarantee Scheme.
only saw after signature), the Hong Kong Government guarantees
to the banks the HK dollar value of 100% of the sterling
covered (and a small charge is made), whereas the UK Government,
under the Sterling Agreement, guarantees to the Hong Kong
Government the US dollar value (at the 1968 rate) of 90% of the
sterling. The loss to the Hong Kong Government between 23 June
and 6 July 1972, when the Hong Kong Government linked the HK
dollar to the US dollar and suspended their Guarantee Scheme
has been substantial. (For detailed explanation of how this
loss came about, see paras 4-6 of Mr Franklin's minute of 20
February.) The Hong Kong Government announced that they would
calculate the payments due when sterling is re-fixed, but at
the time doubtless believed that this would be before the
Under this Scheme (whose terms HMG
expiry of the Agreements.
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