XN000022-1972-12-13 — Page 32

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Wednesday, December 13, 1972

unlike the Sterling Guarantee Agreement which provides for continuous

settlements, payments under the Exchange Fund Guarantee Scheme will be made

in one amount when sterling ceases to float.

Growth of Sterling Balances

So, following the negotiation of the Sterling Guarantee Agreement,

we remained locked into sterling. But, unlike the 32-year period from 1935 to

1967, an exchange risk was now explicitly recognized and covered. As it

happens, the conclusion of this Sterling Guarantee Agreement coincided with

the beginnings of a period of rapid and sustained growth of our economy. As

a result the sterling assets of the banking system increased from about

2200 m. at the end of March 1969 to about £360 mm. by the end of March 1972.

At the same time substantial budgetary surpluses amounting in all to HK$1,915 mm.

in the four years 1968-69 to 1971-72 were realised and this money was largely

invested in sterling securities the rest being deposited locally with our

bankers. As a result of this and other factors the Government's own sterling

assets increased from £190 mm. at the end of March 1969 to £408 mm. at the

end of March 1972.

Extension of Sterling Guarantee Agreements

Meanwhile, in the late summer and autumn of 1971 the U.S. dollar

cane under pressure in the world's foreign exchange markets. It was for this

reason that we did not immediately take advantage of the lowering of the

minimum proportion of our total official external reserves which we undertook

to keep in sterling under the Sterling Guarantee Agreement. A general lowering

of the M.S.Ps. by 10% (meaning in our case from 99% to 89%) was offered by the

/British