XN000022-1972-12-13 — Page 35

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Wednesday, December 13, 1972

Floating of Sterling

Then came the sudden and unexpected decision of the British

Government on 23rd June to allow sterling to float for the time being.

While there had been some speculation that cost-push inflation, efforts

to expand the British economy and the impact of entry into the European

Economic Community would sooner or later require a downward revision

of the Smithsonian rate of US$2,6057, the reason for this decision was the

large movement of funds out of sterling during the previous few days which the British Government did not consider justified by the objective facts of the country's balance of payments position.

Dismantling of the Sterling Area

At the same time, the British Government announced the extension

of exchange control to Overseas Sterling Area countries to prevent

disruptive outflows of U.K. resident funds. Hong Kong became part of the

External Account Arca. In effect, the sterling area was dismantled

and the barrier around sterling withdrawn from the sterling area as a whole

to the British Isles.

The previous position was that sterling funds held by residents

of OSA countries could not be transferred into foreign currencies except for genuine trading purposes. Since 24th June residents of OSA countries have been free to transfer their sterling funds into any currency for any

purpose. Of course, in Hong Kong foreign currencies have always been

purchasable in the free market operated by the non-authorized banks,

/But