SECRET
Agreements are ample testimory to this.
3. It was also agreed that in the context of a reformed international monetary system it would be important to have Hong Kong's reserves in the hands of the Jovernment if there was to be any possibility of consolidating them into 3DR. It was felt that the uncertainties surrounding Hong Kong's position in a reformed system might provide a good debating tactic with the Hong Kong Government.
4. The issuance of Hong Kong Government paper was also seen as a stage in the coming of age of Hong Kong and of the relations between the government and the private sector. The Hong Kong government would be glad to be rid of the embarrassment of making payments to the banks, as is required under the existing arrangements: the issuance of Hong Tong paper would remove the case for the Hong Kong government providing the banks with an exchange guarantee. Moreover, the issuance of paper for clearly non-inflationary purpose of taking charge of the colony's foreign exchange reserves would pave the way for later government issues which are likely to be necessary to finance public expenditure pro-rammes such as the Mass Transit scheme. The banks are at present in the unnecessarily comfortable position of being able to earn 9 per cent on their assets and at the same time enjoy a Hong Kong dollar guarantee.
5. It was
recognised that if problems such as speculation in favour of the Yen were to be resolved there would ultimately need to be sone exchange control restriction, in particular on the banks' net foreign asset positions. No feasible guarantee arrangement could achieve this. But, at this time, the provision of a facility whereby the banks could cover their Hong Kong dollar liabilities was of paramount importance. This would lessen the need for exchange omtrol and, at the same time, make it easier to get exchange control legislation through.
TACTICS
6. It was agreed that the first hurdle was to pursuade the Hong Kong Government of the desirability of issuing Hong Kong paper to the banks. The government would need to be assured on a number of points. Such issues would not require a Government deficit and it
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