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Lord Shepherd Sir M. James Mr. Holland Mr. Christofas
15
Secretary of State
Hong Kong: Financial Questions
When the Governor of Hong Kong calls on you this afternoon he wants to talk to you, among other topics, about the financial discussions we have been having with him and his Financial Secretary in the last two days.
Hong Kong suffered losses of about £50 m. when we devalued. Pressure of public opinion in Hong Kong has impelled the Governor to make proposals to us designed to prevent or reduce such losses if ever there were a further devaluation of sterling. The nature of the actual proposals put forward by the Financial Secretary of Hong Kong were that over the course of the next few years half Hong Kong's total reserves (which by then will have reached £400 m.) should be "diversified" i.e. be held in U.S. dollars. Until this level of diversification were reached Hong Kong asked us to give her a gold guarantee for the undiversified proportion of her reserves.
It is quite impossible for us to agree to this. Other holders of sterling balances (totalling in all over £2,000 m.) would have asked for the same and it would have been a tremendous bear factor for sterling.
But we all recognise the force of Hong Kong's demand that merely because she is still a Colony she should not therefore be for ever a 100 per cent "conscript into sterling". Therefore we have devised an alternative and entirely novel scheme to meet Hong Kong's problem. This is that we should agree to part of Hong Kong's reserves being put into a special bond denominated in Hong Kong dollars. This means that to this extent Hong Kong would have a guarantee that in the event of a further
This sterling devaluation she would not suffer losses. proposal was approved as a basis for discussion with Hong Kong by the Chancellor and Lord Shepherd at the weekend. We were not therefore able to give Hong Kong a
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