SECRET
exchange holdings and later accruals surplus to the banks' legitimate
requirements, This, in outline, is the essence of the case for the
issue of Government paper to the banks in exchange for sterling, and
in view of the way in which the situation is likely to develop it
would be wise if the process were to be initiated without too much
delay in order that there may be an orderly and gradual transition
to what would be a more normal and rational arrangement which would ·
bo both in the interests of the banks and of the Government, The
lattor would then find itself in a more satisfactory position vis-à-vis
the private sector, having resolved what is fundamentally an
institutional (difficulty which would (otherwise) bo bound to arise)
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whenever a change in currency relationships occurred,
3.
give nie to diffim
As regards paragraph 5 of the Governor's letter, it follows
from what is said above that the object of issuing Government paper
would be to give the banks an opportunity to dispose of their excess
uxternal assets if they wanted to, and in the probable future set of
oircumstances outlined it is likely that' any prudent banker would take
weed advantage of the facility. There would be no question of compulsion,
As to the other point mentioned in paragraph 5, whether the Hong Kong
Government holds the bulk of the Colony's reserves or part of them
continues to be held by the banks, it is the Government which assumes
the exchange risk either wholly directly or partly indirectly if it
chooses to guarantee the banks' holdings, It is, however, normal
for the bulk of a country's reserves to be held by the Government,
The following observations deal with other specific pointe
raised in the Governor's letter..
5.
It is, of course, true that governments usually issue short
and longer-term paper to cover deficits in the current or capital budget
or both. It is equally true that since the Government of Hong Kong