CONFIDENTIAL
3. The latest round in UK advocacy has been to seek to convince the Hong Kong Government of a case as seen from here, for the issue of local Government paper to mop up some of the foreign exchange assets of the Hong Kong banking system. This would not of itself require the creation of a monetary authority. But it would be one of the things which a monetary authority would do, and would be a long step in what we would see as the right direction. You will be aware of the exchanges on this, which thus far have been on entirely predictable lines.
4.
Recent events must, however, have caused a good deal of hard thinking in Hong Kong. The cosy world in which it was appropriate for Hong Kong to maintain a fixed link with sterling has long since gone; and the variant under which the UK picks up the tab for any fall in the sterling/US dollar rate has twice shown itself to be wanting as the basis on which the Hong Kong Government guarantee arrangement with the Hong Kong banks can be financed. It will I suspect become increasingly obvious that the highly peculiar role of commercial banks in the Hong Kong monetary system cannot survive for very long however ingenious the devices to preserve their position.
5. But the fact is that Hong Kong has not yet shown itself willing to jump the first hurdle on the way towards a monetary authority; and for reasons which, however they may be dressed up, are I am sure basically political. Just how much pressure the UK should apply is a matter of political judgement; if we wish to step up the pressure, there will be opportunities during the next six months.
12 March 1973
cc Mr Wilford
Mr Keeble'
Mr Stuart (HK&IOD)✓
CONFIDNETIAL
D G Holland
Page 240Page 241
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Holland
Mr Holland