XN000022-1972-07-06 — Page 12

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Thursday, July 6, 1972

involving no break in the traditional ties with sterling in which the bulk of

our external reserves are held." "The fact that sterling will be floating in

relation to the Hong Kong dollar as well as other currencies," he said, "will

be less serious for Hong Kong than a continued floating of the Hong Kong dollar in relation to all currencies except sterling."

Mr. Haddon-Cave added that an inevitable consequence of a stable

exchange rate for the Hong Kong dollar, when combined with the downward float

of sterling, would be that all Hong Kong's assets held in the United Kingdom,

including those of the Government, would lose value in Hong Kong dollar terms.

Depending on the new parity established between the Hong Kong dollar and sterling

there will be such a loss and the banks will have to be compensated in accordance

with the Exchange Fund guarantee arrangement, but the amount of compensation cannot

be determined at this stage.

However, the British Government has agreed to very early consultations,

generally on the future security of Hong Kong's sterling reserves and particularly on the future of the Sterling Guarantee Agreements in the context of a floating eterling. The Agreements guarantee the value of official reserves of sterling area countries against a fall in the exchange rate of the pound sterling in

relation to the U.S. dollar below the pre-December 1971 parity of US$2,40. The

Financial Secretary will also be consulting with the Hong Kong banks on the implications of the decision just announced for the Exchange Fund guarantee arrangement covering the banks' sterling holdings.

The Financial Secretary concluded by emphasising that it was the

Government's intention to return to a fixed rate with sterling as soon as the

floating of the pound ended,

Release Time: 6.30 p.m.