XN000022-1972-12-13 — Page 45

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Wednesday, December 13, 1972

securities.

Hong Kong's external reserves are still largely held in sterling

But as a result of the recent agreement the historical and technical factors which have led the banks to continue to increase their

sterling assets have been in part reversed. It is, of course, possible to select a currency that seems more likely to appreciate rather than depreciate, in the short term. One difficulty here is that we tend to invest in the

medium and long end of the market in order to maximise earnings and what

may appear correct in the short term may well prove very wrong in the longer

term, In the uncertain foreign exchange markets of recent years it has just

not been possible to move substantial sums from one currency to another

quickly without unacceptable loss, so that decisions have to be taken with

the longer term in mind. A further difficulty in the way of a rapid diversi- fication policy is that those currencies thought by the market in general to

be under rather than over valued are naturally in short term demand. The

result is that interest rates are extremely low or even negative and the

Governments concerned impose restrictions to deter overseas investment in their currencies. Thus the attractions of switching out of sterling on a

major scale, at least until September 1973 when the present Agreement expires,

are in fact small.

Nevertheless as suitable opportunities occur we are and have been

reducing the propertien of our reserves held in sterling to take advantage of

our 10% diversification facility. This has necessarily been a slow process

because nothing would have been gained by switching out of sterling into

/other