SECRET
060412
MDHOAN 113
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WE THEREFORE ALSO AGREE THAT YOU SHOULD CONSULT THE CHINESE
ON THIS PROPOSAL AT THE NEXT MEETING IN THE CONFIDENTIAL
FINANCIAL DIALOGUE. WE HOPE THAT THEY WILL RESPOND SWIFTLY AND POSITIVELY. DESPITE LU PING'S ENCOURAGING REMARKS TO THE FINANCIAL SECRETARY, WE AGREE WITH PEKING TELNO 71 THAT IT WILL BE IMPORTANT TO EXPLAIN PERSUASIVELY TO THEM THE REASONS FOR MAKING THE CHANGE. WE THINK THAT YOU SHOULD PUT THE EMPHASIS ON THE FINANCIAL AND MONETARY ARGUMENTS, BACKED UP BY THE IMF, AND NOT LABOUR THE ARGUMENTS ABOUT PUBLIC ACCOUNTABILITY WHICH
FIGURE IN THE MEMORANDUM FOR THE EXCHANGE FUND ADVISORY COMMITTEE. THE CHINESE COULD BE EXPECTED TO REACT SHARPLY TO A PROPOSAL WHICH SEEMED TO BE AIMED AT REDUCING THE POWERS OF THE EXECUTIVE IN FAVOUR OF EG LEGCO, AND TO WONDER WHETHER OUR MAIN CONSIDERATION WAS LACK OF TRUST THAT THE SARG'S FINANCIAL SECRETARY WOULD ACT WITH THE SAME PROBITY AS SUCCESSIVE FINANCIAL SECRETARIES HAVE DONE SINCE 1945.
5.
IF THE CHINESE OFFER IMMEDIATE SUPPORT FOR PUBLICATION, WE WOULD BE HAPPY FOR YOU TO THEN SAY THAT THE FINANCIAL SECRETARY MIGHT LIKE TO MAKE AN ANNOUNCEMENT IN HIS BUDGET SPEECH IN MARCH. WE SUGGEST THAT IT IS BETTER NOT TO MENTION THIS TIMING AT THE OUTSET TO AVOID SEEMING TO ''BOUNCE'' THEM, WHICH MIGHT AROUSE SUSPICIONS.
6"
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IF THE CHINESE REACTION IS NEGATIVE WE SHALL NEED TO
CONSIDER AGAIN WHETHER IT IS RIGHT NONETHELESS TO MAKE THE ANNOUNCEMENT.
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WE ALSO WONDER WHETHER DISCUSSION OF THIS EXCHANGE FUND PROPOSAL WOULD OPEN THE WAY FOR A NON-POLEMICAL DIALOGUE ABOUT LAND FUND INVESTMENTS AND THEIR MONETARY AND FISCAL EFFECTS. EXCHANGE FUND FLUCTUATIONS WOULD CAUSE LESS CONCERN IF THERE WAS CONFIDENCE THAT THE LAND FUND WAS BEING MANAGED PRUDENTLY.
TWO DETAILED POINTS. FIRST WE ARE NOT ENTIRELY CLEAR FROM THE PROPOSALS WHETHER YOU WOULD BE ABLE TO USE YOUR FORWARD BOOK TO ADJUST THE END OF YEAR BALANCE SHEET FIGURES IF YOU THOUGH THAT DESIRABLE. OR WOULD THE PUBLISHED FIGURES INCLUDE BOTH SPOT RESERVES AND THE VALUE OF FORWARD CONTRACTS? SECOND WE ARE NOT SURE THAT THE Q AND A MATERIAL PROVIDES A VERY CONVINCING REASON FOR NON-PUBLICATION OF FIGURES BEFORE 1986. IS THERE A
GOOD PRACTICAL REASON?
ISSUE OF BANK NOTES BY BANK OF CHINA