CODE 18 - 77
CONFIDENTAL
Muniuko to du. Hand
Mr Milton (Hong Kong Dept
Miton
K 247)
HONG KONG GOVERNMENT INVESTMENTS
Dim
Reference.
R
13
*
20 APK 1917
16/3 4KK 102/1
assets
1. The attached tables show the distribution of the overseas/of the Hong Kong Government both by country and by currency at the begin- ning of 1976. The difference between the two analyses reflects invest- ments in the Euromoney market where bonds are issued in currencies different from that of the borrowing country. Sterling still repre- sents the largest currency held by the Hong Kong Government (37%) while the US dollar accounts for 34%. The remainder is held in a spread of the stronger European currencies (Deutchemarks, Swiss Francs, Dutch florins, Belgian Francs). Japanese and Canadian currency accounts for a further 6%.
2. The spread of countries in which the Government has invested is considerably wider, but most of the countries account for a small part of the investment. South African investments account for less than 1% of total overseas investments. This is considerably less than is invested in World Bank bonds or UK nationalized industry Eurobonds, for instance.
3. The Government of Hong Kong began its policy of diversification in 1972, before which nearly all its assets were held in Sterling. (Although the assets were held in sterling they were, from 1968 onwards, in effect dollar securities because the UK government guaranteed the dollar exchange rate under the Basle agreement). The current policy of the Hong Kong Government is to hold 30% of its assets in sterling, 40% in dollars and the remaining 30% in the strong European currencies, yen and Canadian dollars. This policy has never been made public but is to be found in the report of the Exchange Fund Committee. The dis- position of their assets does not yet conform to the desired distribu- tion and so a further rundown in the proportion of its assets held in sterling seems likely - most of this will have been achieved during 1976 without any selling of sterling, as sterling has depreciated by about 20% relative to Hong Kong dollar over the last year. This alone would reduce the proportion of sterling held to just above 30%, but a further slight rundown may have occurred in the last year.
4. The overseas assets of the Hong Kong Government are held in two
The first of Funds, the Revenue Surplus Fund and the Exchange Fund. these is the accumulated surplus of the Hong Kong Government which is the result of government revenue persistently exceeding expenditure. The second represents the backing of the currency notes issued by Hongkong Banks. The assets of that fund and its investment policy are not disclosed by the Government, as a secondary function of the fund is to intervene on the Hong Kong foreign exchange market to sta- bilize the value of the Hong Kong dollar.
RW
R Herd
Economists Dept (G 71B/G)
14 March 1977
LAFT
(19)
CONFIDENTIAL