17
Wednesday, December 13, 1972
on September 24, 1973, for it was impossible to forecast whether a new
agreement on acceptable terms could be negotiated; and if it could not,
there would be little time to re-deploy some of our locked in sterling
assets so as to spread our exchange risks. We regarded, and still regard,
a satisfactory new agreement as the best solution (even though it might
mean taking powers to control the banks foreign currency holdings) since
we could then continue to enjoy the advantages of investing in the London
gilt edged market without risk. In this situation it seemed wiser not to
wait for the re-negotiation but to make an alternative arrangement.
November Talks in London
Eventually, further talks were arranged in London last month and
the outcome was an arrangement whereby, just as we are now under no obligation
to take further accruals of bank funds into official hands and cover the
amounts concerned through the Exchange Fund Guarantee Scheme, which is
between the Hong Kong Government and the banks, so it was accepted that,
if they wished, the banks holding the largest amounts could start to take
some of their sterling assets out of the Scheme, subject to certain perfectly
reasonable safeguards. This arrangement means that the figures of both
total official external reserves and total sterling reserves used for the
purposes of the Sterling Guarantee Agreement will fall by equal amounts and does
not affect, in any way, the Hong Kong Government's obligation under the
Sterlins Guarantee Agreement to maintain the M.S.P. at 89%. But it does
mean that the automatic channelling of bank funds into sterling assets which
/the