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frombly send a histori 1. This minute is to record the outcome of a meeting yesterday between Mr Nott, Minister of State, Treasury, and officials on the one hand, and my Financial Secretary, Haddon-Cave, and myself on the other, about Hong Kong's sterling balances.
2.
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This followed on the exchange of telegrams which are attached.
The Ilam decision at that'
Time? If 3. Our object was to come to some understanding that would allow us to deal with Hong Kong's sterling balances in an orderly. way.
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Wie lea IGO it in situnible to indicati 4. The basic problem of the balances is that they are not only four very large (2661 m), but they represent nt of sterling to say Kap
90% Kong's
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Overseas reserves. It is no that commercially speaking this is an unjustifiably high proportion to hold, and so far as I know no other substantial holder accepts as much as even 50%. The high proportion was only justifiable in the past because of the existence of the Sterling Guarantee Agreements. Now that they are coming to an end, in default of firm information about some acceptable alternative, we must plan to diversify and do so in a way that will not disrupt the market.
5.
Unfortunately the Treasury were unable to tell us anything about their intentions. This was because no decision had yet been taken as to what arrangements, if any, HMG should offer to holders of sterling after the Guarantees expire on 24 September. These arrangements would be decided on and communicated to
sterling holders early in the second week of September in a message from the Chancellor. Meanwhile, Mr Nott and his officials said they looked to us to ensure that Hong Kong and the Hong Kong banks did not sell forward. We pointed out that while we fully appreciated the need to avoid damage to the market, it was asking a bit much of us to act, and to persuade others to act on the assumption that the eventual arrangements would be satisfactory while we had no inkling of what the eventual arrangements might be. But they refused to be drawn. So we have no knowledge of whether the arrangements they are working out will be acceptable to Hong Kong or not.
6. However, against the possibility of the Treasury being unable to make an offer that would justify retention of the present abnormally high proportion of Hong Kong's reserves in sterling,
SECRET
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