XN000022-1972-12-13 — Page 44

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Wednesday, December 13, 1972

in the Exchang Fund (i.e. the amount required to maintain the assets of the

fund at 105% of the note issue) will be largely used up in adjustment

payments to the banks (but let me hasten to add that the purpose of the

Exchange Fund is to regulate the exchange value of our currency); and

secondly the Hong Kong dollar value of the sterling assets held on account

of the General Account has been reduced. I estimate that the Colony's fiscal

surplus is at this time about $3,000 m. compared with $3,900 mm. at 31st

March. I am ignoring for the purposes of this calculation any fall in the

market value of our securities, on the one hand, and the surplus accumulated

so far in this year's accounts.

But these losses must be viewed against the advantages we have

received from having invested in sterling. Interest rates in London have in

general been higher than elsewhere. If one were to take those rates as 1%

p.a. higher and I would have thought that the differences may have been greater

than this over the five year period since the last sterling devaluation the

extra interest would amount to around £30 million.

This goes some way towards

It is a fact that all

offsetting the capital loss we have now suffered.

countries with overseas reserves to invest find the choice of ourrency a

difficult one. Those who chose the US$, for example, suffered a loss of

8.57% in December 1971 and such holders have no guarantee against further

loss. Our Sterling Guarantee Agreement and its extension to the banks through

the Exchange Fund Guarantee Scheme has, in the event, afforded us inadequate

protection, but it has proved better than no protection at all,

Hong Kong's

M