quarter of the total sterling liabilities of the UK.
The floating of sterling protected UK's reserves, and there is now less pressure from the EEC, whose Sterling balances have now been guaranteed by UK since last autumn. Hong Kong cannot assume it will automatically be granted an extension of the Basle guarantee.
Embarrassed
The view sometimes put forward is that the accumulated sterling reserves of places like Hong Kong are not fulfilling a true reserve role for the Pound Sterling because the funds are now at the disposal and therefore could be withdrawn of independent countries which were hitherto Colonies or dependent territories. They are shown in the UK balance of payments as liabilities and London acts merely in a 'banking' role receiving sterling deposits and paying out interest. It has been suggested that UK is even 'embarrassed' by the presence of large sterling balances and is now trying to divest herself of them in order to minimise the role of sterling as a reserve currency.
On the other hand, the Hong Kong Government/Banks combined sterling assets have acted as a major buffer against short-term outflows of sterling. The stable element of Hong Kong's reserves assist the Bank of England in operations for UK's foreign exchange equalisation account. This was illus- trated most recently by the official purchases of US dollars in May this year in order to prevent sterling rising
too strongly and thus curbing UK export growth. It has also been suggested that while UK authorities might wish to see HK's sterling assets located elsewhere, bankers would not like to see a withdrawal of HK's reserves; the association with HK and the funds it commands is valued by bankers.
In any case, it is unlikely that the British Government would be in a position to permit the repatriation of sterling balances all at once should HK want to diversify beyond the 10 per cent which is permitted under the Balse arrangement. It is more likely to be a phased withdrawal and so it is possible that UK, to discourage any substantial withdrawal of funds, might be prepared to agree to extend the present guarantee arrangement for a further period, albeit in a reduced amount.
At present, the only feasible alter- native to sterling as a reserve currency is the US dollar, which for the immediate future at least is likely to remain under pressure in international markets. The dollar, furthermore, normally offers less attractive interest rates than sterling invested in London. Other currencies now standing strong on world exchanges, such as the West German mark and the Swiss franc, offer a very limited yield and the governments concerned are reluctant to see their currencies used as reserve currencies, pointing to the UK as an example of the problems associated with assuming this role.
UK may derive a unique value from Hong Kong by virtue of Hong Kong's
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