SECRET
(iii) none of the measures discussed in this note can therefore by itself
be expected to restore the situation, although they may achieve some further
temporary confidence effect;
(iv) to the extent that HMG is involved (or seen to be involved) directly
in any of these measures it will be difficult to avoid being drawn into
assumption in some sense of responsibility for the management of the Hong
Kong economy and financial system. This would also represent a radical
change in the nature of the current political negotiations with China, which
the Chinese would be likely to seek to exploit;
(*)
in particular, any mechanism under-written by HMG for pegging the Hong
Kong to sterling could have serious consequences either for our own
reserves or for the value of sterling, or both;
(vi) since, however, we cannot carry this analysis much further without
direct consultation with the Hong Kong authorities themselves, if Ministers
wish to pursue the options further the next step would be to initiate such consultation (which the Governor has indicated he would welcome). This would
enable us to consider, for example, whether any further measures could be
taken to improve the control of the money supply. However, I strongly
recommend that such consultation should be on the basis that there are the
most serious objections to any mechanism designed to peg the Hong Kong $
to sterling. Moreover, consultation should be on the strictest possible
need to know basis in London. Knowledge that we were even considering
pegging to sterling as a theoretical option could itself have damaging
consequences both politically and in the markets. Subject to Ministers'
views, a suitable occasion for an initial discussion would be the visit that
I understand the Governor is due to make to London on 6 and 7 October.
PS Stop Press:
за
J B UNWIN
Mr Luce, currently on a visit to Hong Kong, is reported on the tapes
as saying at a press conference that:
"action to defend the value of the Hong Kong dollar is a matter for the Hong Kong Government"
This was in reply to a question on whether anything might be done by Britain to help the local currency should it be subject to further fluctuations.