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To summarise, the fact that the banks continue in Hong Kong
a practice long outmoded elsewhere is largely because there are no
suitable local currency assets for them to hold as cover for their
Hong Kong dollar deposits. 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 guarantee agreement
between the Government and the banks is in effect a substitute for
proper local assets and a continuation of the arrangement - already
proved costly to Government - would be inconsistent with the changes
which are taking place in Hong Kong's money and banking system,
Neither can it be assumed that II.M.G.'s guarantee arrangements would
continuo indefinitely. We look foward to developments in the
International Monetary System which would subsume sterling's role as
a reserve currency. If, therefore, steps can be taken in Hong Kong
to avolve the banking system away from dependence on guarantee
arrangements, the sooner they begin the better. Pressure from the
banks for a renewal of their arrangement with Government after
September 1973 should be relieved if suitable local assets were made
available. The organisation of an aftermarket and rediscount.
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facilities are matters which can be worked out between the Government
and the banks, As regards the technical assistance referred to in Mr. Boll's letter to Mr. Haddon-Cave of 1st December 1972, arrangements have already been agroed 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.