L.
Tel. No.:
Whitehall 1234
copies sent to Accts. & Mr.
Your Reference...
54126/4/47.
Treasury Reference „IF. 16/10/02.
Dear Mayle,
· Jordan (D)
TREASURY CHAMBERS,
LIVE,
30 SEP 1/4/
C. O. RUQY
GREAT GEORGE STREET,
LONDON, S.W,1.
2nd September, 1947.
63 66
(58).
We have now considered the draft telegram which you sent to us on 9th August regarding the proposed local loan in Hong Kong, with special reference to the investment in the loan of part of the Hong Kong Currency backing held in the Exchange Fund.
I must advise you that the Treasury can by no means agree to your proposal to permit the Hong Kong Government to borrow from the Exchange Fund. In the first place, although the currency backing which the Fund lend to the Government might be held to represent cover for Hong Kong notes held in South China, this currency requires backing as much as any other element of the note issue. Furthermore, insofar as a proportion of the Hong Kong notes in South China are held by the Chinese as a hedge against the inflation of their own currency, this money can reasonably be described as "hot". We must also point out that the form of borrowing which you appear to approve in principle would in fact be inflationary because the effect would be both to create a fiduciary issue and to release foreign exchange which would other- wise have had to be obtained from other sources.
However, the prime reason for opposing your proposal is that the reduction in currency cover in the Colonies is tied up with the question of Colonial sterling balances and, as you are no doubt aware, this question is now before the Ministers. proposals regarding Colonial currency cover should therefore have been put to us before a decision had been reached in this question.
No
In view of the fact that we can hold out no hope of resort to the Hong Kong currency cover, it seems necessary that you should clear up with Hong Kong the question of the amount for which the ordinance is to be promulgated. You must establish whether Hong Kong feels that she can proceed with an issue of the size of
N.L. Mayle, Esq.
Colonial Office,
/$150,000,000