CONFIDENTIAL
Sir D. Watson has see
1/70
MONETARY PROBLEMS IN HONG KONG
I called on Mr. Peyton at the Bank of England yesterday. I explained that you had asked me for some further description of monetary problems in Hong Kong, as I saw them, by way of supplementing the paper I wrote last year on this subject. To this end, I had prepared a list of issues (copy attached) which had occurred to me: would the 3ank be prepared to help me to put some flesh on these bones? He seemed very willing to help; indeed he said (but gave no grounds for so saying) that he thought that it was about time that the Bank dusted off its own thinking in these matters. He would set his people to work, and would be in touch.
We went through my list briefly. He seemed to think that it covered the main issues: though he would want to reflect on whether financial relationship with China might not be worth picking out as a separate issue.
In the course of our conversation, it became clear that he is much exercised by the role of the Hong Kong Bank, and in particular by potential (and probably actual) conflicts between its "central banking" functions and its "commercial" objectives. He cited its behaviour in the abortive tunnel issue as bordering on the irresponsible; which I suppose must rank as the hardest phrase I have ever heard one banker use of another. As I imagine you must know, the Governor of the Bank of England had to have words with the Hong Kong Bank in London. But there is the familiar problem: the Hong Kong Bank dominates the financial scene in Hong Kong and wishes to maintain this position. It is therefore extremely resistance to any changes which would tend to erode that dominance: as almost any sensible change inevitably would.
CONFIDENTIAL
/Take