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personal basis. We do not know whether Mr Nott will agree to
the recommendations they contain. It would therefore be
inadvisable for Mr Royle to be drawn too deeply into
discussion as he will not know what line Mr Nott has actually
taken.
8. One important point Mr Royle will wish to note is that
whilst Treasury intend to discourage the Hong Kong
authorities from diversifying, there is no recommendation
that they should be forbidden to do so. (FCO officials have
stressed that any move to use HMG's reserve powers in this
respect would need to be approved by the Secretary of State
who would be unlikely to agree in view of the constitutional
crisis that would almost inevitably ensue from such
intervention).
COMMERCIAL BANKS' STERLING
9. Closely linked to the specific problem of the Hong Kong
Government's reserves is that of the sterling owned by the
commercial banks. Treasury and the Bank, with FCO support,
have long advocated some arrangement whereby the commercial
banks' sterling reserves could be exchanged for paper issued
by the Hong Kong Government. The Hong Kong Government have
not so far looked at this proposal with favour. The expiry
of the present Sterling Agreements makes this question more
urgent. In his personal telegram number 752 to the Governor
Mr Royle offered help. The Governor's thinking is conveyed
in his reply (Hong Kong telegram number 866) and is on
somewhat different lines. He favours the secondment for an
SECRET 3.
/extended