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Mr Murray
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PS/Lord Goronwy-Roberts
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HONG KONG: INVESTMENT IN SOUTH AFRICAN STOCKS
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Lord Goronwy-Roberts agreed that the Governor of Hong Kong's attention should be drawn to his Government's holdings in South African stocks. Mr Murray wrote to the Governor accordingly on
22 February.
From
Flag & 2. The Governor replied on 15 March. that the Hong Kong Government
made one direct investment in South African stocks in 1973 and that the Crown Agents have purchased the remaining stocks. this year all overseas investments are to be concealed in the accounts of the Exchange Fund, which are not published, and the Governor thinks that, since the Hong Kong Government have not previously been criticized, it is unlikely that they will be in future. If the Hong Kong Government were to sell their South African stocks at once, they would make a loss on some items and break about even on others, an outcome which would attract unfavourable comment from the Director of Audit and the Exchange Fund Advisory Committee. The Hong Kong Government will not be expanding their portfolio of South African stocks since South Africa has been removed from the list of designated countries in which investments
are made.
3. The situation revealed by the Governor's letter is reasonably satisfactory. If the Hong Kong Government's investments in South African stocks were to come to public notice - and I am not quite as sanguine as the Governor that this could still not happen, we would be in a position to say that whatever has happened in the past, the Hong Kong Government have no intention of purchasing South African stocks in future. It should also be noted that the total value of South African stocks (about £2.8 million at March 1976) accounts for less than 1% of the Hong Kong Government's total overseas investments. Since the Governor has indicated that the Hong Kong Government would make a financial loss if they were to dispose of their South African investments I do not recommend that we should press him further.
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4.
In considering my submission, Lord Goronwy-Roberts asked fo an estimate of the total of Hong Kong's reserves, along with a general picture of their location as diversification from sterling has proceeded. I attach a table, prepared by the Economists Department, which gives an analysis of their overseas investments at the beginning of 1976 (no more recent figures are yet available). I should point out that investments in a particular country may not be in the currency of that country since Euro-market bonds are issued in mixed currencies. At the beginning of 1976 sterling still represented the largest currency held by the Hong Kong Government (37%). However, the Hong Kong Government's policy since August 1975 has been to reduce the sterling component of the Exchange Fund's assets to around 30% and further diversification will have taken place during last year. (40% of the assets are to be kept in US dollars and 30% in other denominated currencies.) The Treasury and the Bank of England are aware of the extent of the Hong Kong Government's investment in sterling and have raised no objections. It is HMG's current policy to run down sterling balances in an orderly manner and the Treasury have already made initial approaches to the Hong Kong Government, among others, to
this end.
5. I recommend that we should simply take note of the Hong Kong Government's investments in South African stocks and in sterling, but that the question of the Crown Agents' role with regard to the purchase of South African stocks should be further examined. FRD, the Economists Department and CSAD concur.
21 April 1977
f.O. B. Lent.
JA B Stewart
Hong Kong & General Dept
CC:
PS/Mr Rowlands Mr Cortazzi Mr Smith (SEA) Mr Maud (FRD) Mr Reid (CSAD)
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I certainly think the Crown Agents' role with regard to the purchase of South African stocks should be further examined. As regards the Hong Kong holdings, which I discussed briefly with the Governor while I was in Hong Kong, I think the latter deserves an understanding reply. If Lord Goronwy-Roberts agrees, I will round-off the correspondence in the terms of the attached draft.
22 April 1977
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DF Murray
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