:
-
A.
Hong Kong.
ALL COMMUNICATIONS
TO BE ADDRESSED TO THE
CROWN AGENTS FOR THE COLONIES, THE ABOVE REFERENCE AND THE
DATE OF THIS LETTER BEING QUOTED.
TELECRANS, "OROWN, LONDON." TELEPHONE 7780 VICTORIA.
Sir,
53
4. MILLBANK,
RECS
C
7622
REC 5 H 9
WESTMINSTER,
LONDON, S.W.1.
4th February 1919.
I have the honour to acknowledge the receipt of your letter No.62451/1919 of the 13th January, regarding a suggestion which has been made in Hong Kong for the conversion of the present sterling loan into a silver loan.
2. Omitting at first from consideration any fluctuations in the sterling value of the Hong Kong dollar, that is, assuming that the value of the dollar remains constant throughout the next 24 years at its present level, it appears to us that the profitableness or otherwise of the proposed transaction can most simply be ascertained by a comparison of the yield allowing for redemption given by the existing stock on the one hand and by the proposed silver issue on the other.
3. The scheme has been worked out by the Colonial Government on the assumption that the market price of the existing sterling stock is 70. Now, on 3 per cent stock purchased at 70 and redeemable at par in 24 years' time, the yield allowing for redemption is given in investment tables as £5.19.2. per cent. The yield on 6 per cent dollar stock purchased at par and redeemable in 24 years at par is of course exactly 6 per cent.
Since the yield to the investor is the cost to the Government, the proposed conversion would (assuming a steady value for the dollar) involve a small loss to the Government represented by the difference of 10d. per cent in the yield added to the actual expenses of the conversion.
A.
The present market price of Hong Kong sterling stock is not, however, 70, but in the neighbourhood of 75, which is also about the price of other stocks of the same standing and redeemable on or about the same date. At the purchase price of 75 the yield on Hong Kong stock allowing for redemption is, according to the aame tables, only £5.8.11. per cent, or 118.1d. less than 6 per cent. At this price, therefore, the adoption of the scheme would, apart from any question of the fall of the dollar, involve a considerable loss in addition to the expenses of the conversion.
5. It is thus clear that the scheme amounts in effect to a apeculation on the probability that the exchange value of the dollar will fall well below its present level of about 3/-. Decreases in the value of the dollar will affect the comparison in the last paragraph because they will increase proportionately the number of dollars which the Colonial Goverment must remit to us from time to time to meet the interest and sinking fund charges on the existing loan. Suppose, for instance, that the dollar loan was issued, and the proceeds were remitted to us at 3/- and that the value of the dollar fell immediately afterwards in the ratio of 25.8.11. to £6, that is, to about 2/8, and remained constant thereafter at 2/8, the loss corresponding to the difference in yield would be made good. Allowing for the expenses of conversion
Under Secretary of State,
Colonial Office.
we
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