SECRET
HONG KONG GOVERNMENT STERLING
11.
Freedom of diversification would give Hong Kong even greater
autonomy than she at present enjoys. To this extent the move
might be welcome. It will however place greater responsibility
on the Financial Secretary and may well be unpalatable to him.
He will no longer be able to blame HMG for an adverse effect on
the value of Hong Kong's reserves whether they remain in
sterling or not. Hong Kong has traditionally wanted both to
have its cake and eat it so that we are likely to face continuing
opposition in this quarter. As the message from the Chancellor
to the Sterling Agreement Signatories will issue in July, this
may create problems in respect of the award of the Mass Rapid
Transit System contract which should be decided about the same
time.
SUMMARY
12. Whilst the Hong Kong Government can be expected to react
adversely to the news at first, there are grounds for supposing
that it will not be altogether unwelcome. It will add to her
financial independence and international stature and could
enable her to bring to an end her guarantee scheme with the
banks which has become a heavy liability.
We should be very
willing to advise over the setting up of a local money market
to absorb the commercial banks' sterling. In return HMG might
be asked to agree to some form of interim bilateral arrangement
for a limited period pending the establishment of such a market.
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SECRET