SECRET
1.
Hong Kongi
the Governor's letter of 18th December 1972 on the issue of Government paper to the banks
Suggestod lines of a memorandum to be enclosed with Sir Denis Groonhill's reply
The banks in Hong Kong are in a difficult position in that,
for historical reasons, whilst the bulk of their liabilities in
expressed in Hong Kong dollars a sizeablo part of their assets is held
in foreign exchange, predominantly in sterling, In normal
circumstances with such abnormally large holdings they would be
subject to an exchange risk in the event of a change of the
international value of sterling.
This exchange risk, however, 18
covered at present by the Hong Kong Government by the arrangements
entored into with the banks, The Hong Kong Government is able to
cover part of this exchange risk from external sources by reason of the
guarantee provided by the Sterling Agreement which covers the bulk of
officially held sterling.
2.
Г
At some stage the Hong Kong banks are likely to be faced with
the choice of having large uncovered foreign exchange positions, both
in sterling and in other currencies, or of reducing their foreign
exchange holdings to levels sufficient only for their normal
requirements and covering the exchange risk on such reduced holdingo
in the normal way, The only mothod of reducing their foreign
exchange holdings would be by selling the amounts in excess of their
amounts
day-to-day requirements for obligations expressed in local currency,
If this were to occur then the banks' Hong Kong dollar liabilitioa
would be matched by assets in the same currency and their foreign
exchange "books" would be similarly balanced. The banks would then
be in the same position as their counterparts in other sophisticated
economies and likewise the Government - as is the case in all advanced
countries would take into the Colony's official reserves the foreign