SECRET
XCS(74)1
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As before, financial considerations are not the only ones. There is also the political problem that may arise from apparent compliance with requirements imposed seemingly for the benefit of the UK economy. However, the new guarantee, being in some respects more advantageous to Hong Kong than the previous one, and allowing as much diversification as we will probably wish to carry out, a sympathetic reception should follow a carefully worded press release which included a reference to the compensation received under the Declaration which expired on 31st March 1974.
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If it is decided that Hong Kong should abide, by the conditions of the offer, at least for some part of the period,' on the lines of paragraph 12 above, it is suggested that publicity should be in a low key on the following lines:
(a)
(b)
(c)
(d)
the sterling guarantee which applied from 25th September last to 31st March is being implemented, because sterling's average exchange rate against the US dollar during the period, at $2.3335, was below the guarantee rate of $2,4213, Hong Kong will be receiving substantial compensation once the necessary formalities have been completed;
the British Government have offered to continue providing a form of guarantee of the exchange value of Hong Kong's official sterling holdings up to the end of the year;
the new guarantee is in broadly the same terms as the previous one, but:
(i)
(ii)
the amount of sterling which Hong Kong would be required to keep in its external reserves would be 10% lower than before, which gives Hong Kong an appreciably greater degree of freedom, and the guarantee this time is to be calculated by reference to a weighted average rate for ten other major currencies, rather than the US dollar rate only. (The technical details have been well aired in the press already, but Editors could be provided with the note at Annex B);
the offer is a unilateral one and does not require acceptance by Hong Kong. The guarantee remains available, up to the end of the year, for as long as Hong Kong maintains the specified sterling holding within total external reserves and complies with reporting procedures.
Iress (c
Envelo
.AJE