SECRET
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The attitude of the Governor
8.
The Governor judges that, in the absence of immediate proposals from HMG, which would form in his view a satisfactory guarantee of the value of the Government's sterling and a basis for a new Hong Kong dollar guarantee for the commercial banks, the Hong Kong Financial Secretary should:
at once begin to diversity the Government's sterling holdings, eventually to 50% Way £200 million);
advise the commercial bank to diversify (they would probably diversify rather less);
In a special arrangement feasible?
9. We have considered with the Bank of England whether we could
One devise a special immediate arrangement for Hong Kong. possibility would be simply to give a free guarantee at a current rate. Or the opportunity might be sought of using this opportunity to tie the arrangements to conditions that the Hong Kong Government would start establishing a more sensible domestic monetary regime. We could offer to guarantee the Hong Kong sterling at a current rate (probably nothing less would do the trick). We would make a charge for this guarantee which we
banks, would expect the Hong Kong Government to pass on to the in new arrangements with them: and we would seek to insist that the Hong Kong Government should undertake to begin issuing local paper or in the meantime to establish interest-bearing accounts for loans to the Government, and to become a lender
of last resort.
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Although the HK Government would probably welcome the offer of an exchange guarantee at a current rate, a package like this, would probably be unattractive. They are likely to regard the proposal to centralise the banks' foreign exchange in the Government's hands as a device by HMG to impose tighter control; and they regard the issue of local paper (wrongly in our view) as inflationary. The Government and the banks would dislike having to pay for the guarantee. We have arguments on these points and a satisfactory outcome might be negotiated, given
time.
The main point, for the present purpose, is that there
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