TNAG-0067-FCO40-103-Governors--reports-1968 — Page 29

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with the peak of $450 million at the end of July. By the end of November the position had further improved: a net amount of $140 million had been transferred in.

29. Generally, then, our economic and financial situation had begun to take a more favourable turn and it was highly unfortunate that a further severe shock had to be absorbed as a result of the devaluation of the pound sterling by 14.3 per cent. The Colony's official reserves and those of the banking system are at present, largely as a consequence of our colonial status, maintained wholly in sterling. Indeed, Hong Kong is one of the world's largest holders of sterling, with between £350 million and £400 million held in that currency. Moreover, the greater part of the trading and financial relationships of both the business world and the private citizen are based on sterling and were, until now, predicated on the assumption of a constant rate of exchange between sterling and the Hong Kong dollar.

30. The devaluation of sterling imposed an immediate and unavoidable loss on the Colony which may be estimated at £60 million. The Hong Kong dollar was itself in no way under-valued in terms of international exchanges and, as we rely almost wholly on imported supplies, internal prices are peculiarly susceptible to changes in exchange rates. We were faced, therefore, with the dilemma of either, on the one hand, following sterling down, thereby imposing an immediate increase in costs (almost to the full extent of devaluation) and a consequential reduction in our hardly won standard of living; as well as, in the field of commerce, an immediate, fairly severe and totally unnecessary worsening of the terms of trade; or, on the other hand, maintaining our existing parity in terms of gold and thereby imposing a substantial immediate loss on the official reserves, on the banks, and to all others with sterling assets and existing or future Hong Kong dollar liabilities.

31. Our final solution was to devalue to the extent of 5.7 per cent only, thus revaluing against sterling by 10 per cent. It was hoped that the effects on costs and on terms of trade of devaluation of this magnitude would not be too severe. But it was also necessary, both because of the non-availability in the sterling area system of any cover against sterling risks and in order to prevent any loss of confidence in the banking system, to provide banks with a substantial degree of compensation from official funds for their consequential losses. The total cost to official reserves, both directly and indirectly by reason of this compensation, is estimated at £30 million. These reserves now lost had been earmarked to help to meet the cost of the substantial programmes of social (and, to a lesser extent, economic) development which are in train; and their loss is likely to result in some curtailment, or at least substantial postponement, of some of these plans. Our partial devaluation, will, therefore, also affect the living standards of the people; although not so directly or immediately as would have a full devaluation. Quite apart from the actual effects, sterling devaluation has put a most powerful political propaganda weapon in the hands of the Communists and the only undeniably true political propaganda weapon they have. It is one they are still brandishing vigorously months after the event.

Conclusion

32. On the home front it appears that, while the Communist effort is far from over and it is certain that their aim remains to reduce the Hong Kong Government to a satisfactory degree of subservience, nevertheless the assault on us has probably moved to a non-violent phase, with the Communists concentrating their efforts on increasing their local support by trying to find popular grievances to exploit. Obviously this new tactic could be very dangerous but the Communists have lost much ground and it will take them time to regain even the degree of public support they had before May last year.

33. Hong Kong has weathered the test of this summer's events mainly because the public as a whole, from highest to lowest, openly declared by word and deed that the Hong Kong Government had its overwhelming confidence and support in preference to the Communist minority who sought to force us to kowtow. These feelings were in turn reflected throughout the Public Service, whose members responded with outstanding loyalty and efficiency to the calls made upon them. Nowhere was this more apparent than in the response of the police force, who performed their duties with the highest efficiency and firmness coupled with admirable restraint. They became public heroes, and were in turn sustained by public confidence in them.

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