XN000022-1974-11-13 — Page 31

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WEDNESDAY, NOVEMBER 13, 1974.

THE GUARANTEE CURRENTLY IN OPERATION WAS AGAIN OFFERED UNILATERALLY BY THE BRITISH GOVERNMENT TO COVER THE PERIOD FROM 1ST APRIL TO 31ST DECEMBER THIS YEAR. THIS TIME HONG KONG'S MINIMUM STERLING PROPORTION IS, 70% OF TOTAL OFFICIAL EXTERNAL- RESERVES AS AT 31ST MARCH 1974. THE GUARANTEE IS NO LONGER IN TERMS OF US DOLLAR VALUE, BUT INSTEAD IS IN TERMS OF STERLING'S EFFECTIVE DEPRECIATION AGAINST TEN OTHER MAJOR CURRENCIES AS CALCULATED IN A TRADE-WEIGHTED INDEX. IT COMES INTO EFFECT IF THE POUND'S AVERAGE DEPRECIATION FROM +SMITHSONIAN+ PARITIES (1.E. SINCE 19TH DECEMBER 1971) IS GREATER ON AVERAGE DURING THE NINE-MONTH PERIOD OF THE GUARANTEE THAN 18.35% (THE AVERAGE DEPRECIATION DURING THE SIX- MONTH PERIOD OF THE PREVIOUS GUARANTEE).

A FEATURE OF THE GUARANTEES OFFERED UNILATERALLY SINCE SEPTEMBER 1973 HAS BEEN THAT HONG KONG HAS NOT HAD TO UNDERTAKE FROM THE START TO MAINTAIN THE REQUIRED STERLING HOLDING THROUGHOUT THE PERIOD. IT HAS ALWAYS BEEN POSSIBLE TO SPEND STERLING HELD IN THE RESERVES, PROVIDED THAT OTHER CURRENCIES WERE SPENT ALSO SO THAT THE SPECIFIED PROPORTIONS WERE MAINTAINED BUT UNDER THE UNILATERAL OFFERS HONG KONG COULD ALSO HAVE DECIDED AT ANY TIME THAT THE GUARANTEE NO LONGER OFFERED SUFFICIENT INDUCEMENT TO MAINTAIN THE SPECIFIED STERLING HOLDING. IN PRACTICE, BECAUSE A LARGE PART OF HONG KONG'S OFFICIAL STERLING HOLDINGS WERE INVESTED IN GILT-EDGED SECURITIES, AND THE MARKET PRICES OF THESE HAVE TENDED TO BE WEAK IN A PERIOD OF HIGH INTEREST RATES (ALTHOUGH THEY WILL EVENTUALLY BE REDEEMED AT THEIR FULL NOMINAL VALUES), HONG KONG COULD HAVE SWITCHED OUT OF STERLING AND INTO OTHER CURRENCIES ONLY AT A SUBSTANTIAL LOSS. SO THE GUARANTEES HAVE IN EFFECT PROVIDED A USEFUL BONUS.

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