international markets. The dollar, furthermore, normally offers less attractive interest rates than sterling invested in London. Other curren- cies now standing strong on world exchanges, such as the West German mark and the Swiss franc, offer little or no yield and the governments con- cerned are reluctant to see their currencies used as reserve currencies, pointing to the UK as an example of the problems associated with assum- ing this role.
It is worth stressing one or two of the positive points that emerge. The rates of interest earned by HK's re- serves have been high, almost cer- tainly higher than would have been the case with any alternative form of investment. The Financial Secretary said at the time of the last budget that extra interest earned since 1967 from holding sterling, as opposed to other assets, had more than offset half the loss resulting from the fluctuations in the value of sterling. Although this may be a 'cold comfort' approach, interest earned on, say, US dollars would very possibly not have saved the overall value to an equivalent extent.
Which gives rise to the other ob- vious point what alternatives in today's conditions will give a better guarantee of security? The question
is
not capable of an immediate answer, and is one that must have given Mr. Haddon-Cave many anxious moments of thought.
And despite all the irritation at Britain's brinkmanship on the ques- tion of the renewal of the Basle
guarantee, it is worth stressing that no other nation certainly not the USA would have given us a guarantee in the first place. It is of course annoying to see the value of one's money decreasing and Hong Kong is right to fight for the best deal it can get, but it is hard to imagine Mr. Nixon, Mr. Tanaka or Herr Brandt taking very seriously the idea of a guarantee on the value of Hong Kong's reserves!
At the 11th hour
Any policy of diversification would to some extent therefore put the HK Government into the role of exchange dealers playing the market. What- ever its rewards, such a role is not also without risk. Since Hong Kong revised its traditional definition of the par value of the HK dollar in terms of sterling and went onto a US dollar standard, it has been neces- sary for Government to buy dollars on the free market in order to uphold the value of the HK dollar. For- tunately, these excursions into the market do not appear to have put a serious strain on Government. If however, Hong Kong prefers to 'go it alone', as opposed to the more stable, if at times inconvenient life under the Basle agreement, then the need to take an active role in the mar- ket would be emphasised. To put the point somewhat crudely the fact is that Hong Kong pressed right up to the 11th hour for an extension to the Basle Agreement before its expiration last September. If the alternative policy of diversification were so ob- viously attractive, it is unlikely that
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