This flow of funds helped in the development of our industry and the growth of our stock exchanges, as well as assisting in bringing to the Colony British banks and other in- stitutions, whose expertise has helped in our development.
In view of the free money market here, Hong Kong's being part of the OSA was in a sense a paradox, and was permitted partly by UK Treasury officials turning a blind eye to the free money market, in spite of the fact that Hong Kong was part of what the Bank of England termed the 'Kuwait Gap'.
The 'Kuwait Gap' was a tolerated breach in the UK's foreign exchange controls. Although UK citizens were not permitted to transfer funds out- side the UK except with Bank of England permission, they could do so to countries in the OSA. One or two of these, such as Kuwait (hence the name 'Kuwait Gap') also per- mitted free money markets to operate. UK citizens could thus transfer funds. to a part of OSA in which a free market also operated, and then use this market to convert their sterling into other currencies.
Not official
It must be made clear that the HK Government did not condone the use of the Kuwait Gap, and hence the existence here until recently of Foreign Exchange Controls on sterling.
As in the case of the Basle agree- ment, it is hard to visualise Washing- ton tolerating a similar concession, had HK been part of an 'overseas
dollar area'. The significance of the 'Kuwait Gap' should not however be over-estimated since UK Treasury officials claimed that its contribution to leakage of sterling was minor. But it is, nonetheless, another instance of give and take in relations between HK and UK for the benefit of both sides.
On a more intangible level, the predominant style of banking in Hong Kong, despite the variety of foreign banks here, is based on British practice. And in the absence of a Central Bank, the HK Government has permitted the Hongkong and Shanghai Banking Corporation, the Chartered Bank and the Mercantile Bank to act as note-issuing banks. This reflects the faith of the HK Government in the stability and re- liability of these organisations, and this in turn is based on their links with London (which of course is again a reason why reserves, which underwrite HK's circulating currency, are in London). It is hard to imagine for instance First National City Bank or the Bank of America, excellent though these institutions may be, acting as note issuing banks, since they are 'foreign' banks and as such are less subject to local control.
The ties between HK and the UK are evident in insurance as well as banking practices. London is still probably the world's number one in- surance market, and although of course it is possible for an American, a Japanese or a Swiss to insure with, for instance, Lloyds, the close HK/ London link and the existence of
23