FINANCIAL STRUCTURE
35
cent of official reserves, whichever was greater, up to an absolute maximum of £150 million. The arrangement, for which a charge was made, gave limited protection against loss from a further revaluation of the Hong Kong dollar in terms of sterling, but was soon superseded by a wider arrangement.
Under the new deal, which was made possible by the backing of the so-called Basle arrangement, Britain offered all members of the sterling area, including Hong Kong, a free guarantee in terms of US dollar value of all officially held sterling in excess of 10 per cent of each country's total official external reserves. This was in return for their undertaking to maintain a minimum proportion of their reserves in sterling. The guarantee was for five years from September 25, 1968 and the rate guaranteed was US$2.40 to £1. Hong Kong accepted this new scheme, undertaking to maintain in her reserves a minimum sterling proportion of 99 per cent. This proportion was reduced to 89.1 per cent (or by 10 per cent) in September 1971, when the British Government agreed to a general reduction of the minimum sterling proportions which sterling-area countries had undertaken to maintain in their
reserves.
Because there is no central bank, a substantial part of Hong Kong's exchange reserves are held by commercial banks. While the sterling assets held by these banks were not in themselves covered by the British guarantee, the UK-HK guarantee arrangement had a unique feature, carried on from the earlier Hong Kong Dollar Bond Scheme. This was a provision whereby official sterling deposits with com- mercial banks in Hong Kong ranked as official reserves for the purposes of the guarantee. This enabled arrangements to be made in February 1969, through the mechanism of the Exchange Fund, to bring a substantial part of commercial banks' sterling within the scope of the guarantee.
Following the meeting of the Group of Ten in Washington towards the end of December 1971, it was announced that the US dollar would be devalued by 7.89 per cent. This was accompanied by a series of adjustments of other major world cur- rencies. However, both sterling and the Hong Kong dollar maintained their gold parity. In effect, this meant that the rate of exchange between the HK dollar and sterling remained unchanged at $14.55 to £1, while the HK dollar was revalued against the US dollar by 8.57 per cent. The official rate became HK$5.58 to US$1 whereas the previous rate had been HK$6.06 to US$1.
When the United Kingdom announced on June 23, 1972 that sterling was to be allowed to float, the Hong Kong Government decided to retain the rate of HK$14.55 to £1 until it became clear how the situation would develop. This meant that as sterling declined in value in international markets, so did the Hong Kong dollar and on July 6, 1972, the Hong Kong Government decided to restore the Hong Kong dollar almost to its previous exchange value by fixing a new rate of HK$5.65 to US$1, a devaluation of only 14 per cent from the previous US dollar rate of HK$5.58 to US$1. By quoting the rate in terms of US dollars rather than sterling, during the period while sterling is floating, Hong Kong avoids movements in the value of