XN000022-1972-12-13 — Page 41

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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

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