HONG KONG
The Governor's letter is concerned primarily with the problem
of Hong Kong's sterling balances, and tries to demonstrate that our
recommendations concerning the issue of government paper would not
solve the immediate problem. It is, perhaps, worth pointing out at
the start that although our recommendations were put forward in the
context of the sterling problem, they were primarily designed to
contribute to the solution of the underlying institutional difficultier
! in Hong Kong, which go beyond the immediate sterling problem.
So far as the sterling balances are concerned, the Governor has, of course, got a valid case in arguing (paragraphs 5(b) and 9) the it is unreasonable to expect the Hong Kong Government and/or the banks
to go on holding so much sterling without the prospect of a new
guarantee.
He concedes that the interim arrangements agreed with
1
Haddon-Cave last November will be helpful but Hong Kong will certainly
need more help before long.
:
Someone
In the longer term, Hong Kong's difficulties will concern
other currencies as well as sterling, particularly when the banks'
diversification programme gets under way. Hong Kong earns a
substantial foreign exchange surplus and in this respect is in
much the same position as other surplus-earning countries.
has to take the exchange risk. In most countries the banks are able cover, themselves through a central monetary institution, which in turn may operate for the government account, so that the ultimate risk is borne by the government. In Hong Kong, ad hoc arrangements had to be
made, in the form of the guarantee arrangements, which proved
unnecessarily expensive for the Hong Kong Government.
This was the background to our suggestion that the Hong Kong
Government should make available some alternative asset, denominated
in Hong Kong dollars, which the banks could hold. The Governor's
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