7. To summarise, the banks continue in Hong Kong a practice long out moded elsewhere largely because there are no suitable local currency assets for them to hold as cover for their Hong Kong dollar Ideposits. For this purpose they require short-term interest earning
paper which is marketable in case of need and can be rediscounted with a Central Authority. The organisation of an after market and rediscount facilities are matters which can be worked out between
the Government and the banks. As regards the technical assistance referred to Mr Bell's letter to Mr Haddon-Cave of 1 December 1972, arrangements have already been agreed with the Hong Kong Government for a member of the Bank of England's staff to be seconded to Hong Kong to assist in the administration of monetary matters.
8. It is recognised that there are technical problems yet to be examined. Moreover, it seems right that issues of local paper should be on a modest scale to begin with, so that the adjustment from long established practices can be a gradual one. But it seems in the interests both of the banks and of the Hong Kong Government that steps should be taken in Hong Kong to evolve the banking system away from dependence on guarantee arrangements; and the sooner this process. is initiated, the smoother the transition can be.
F.C.O. February 1972.
STCRET