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up, being suspicious of its purpose). But more important, the
Hong Kong authorities have only undertaken not to take into
official reserves non-resident deposits by banks outside Hong
Kong; deposits by private non-residents, it is said, cannot be identified, nor can their sterling counterparts. (There are
also problems arising from the effectiveness of the checks and controls which do exist.)
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7. In these circumstances the only control which we can exer-
cise over the Hong Kong Government is through the statutory
limit on their powers to borrow for the Exchange Fund. These
are fixed by the Hong Kong Exchange Fund Ordinance which under
Royal Instructions cannot be amended without HMG's approval.
8. After the conclusion of the sterling agreements Hong Kong asked for permission to increase the borrowing limits of the
Exchange Fund. This was agreed and after a further request the limit was again raised to its present ceiling of HK$3,000 million (about £200 million). Hong Kong also asked for permission to
make further amendments by resolution of Legislative Council to avoid the delays involved in the normal legislative procedures.
No decision has been reached on this request but it is unlikely
to be agreed for the two reasons that such a loss of control would
be constitutionally unacceptable and also because in the absence
of any other form of control the Treasury would be unable to limit the extent of HMG's liability under the sterling guarantees. However, if absolutely watertight safeguards can be devised between
the Treasury and Hong Kong to ensure that the sterling acquired from the banks for Hong Kong Government reserves comes properly within the scope of the guarantee there would remain only the constitutional problem and this might not be insuperable.
9. In the meantime the Hong Kong Government has borrowed for the Exchange Fund HK 2,992 million (as at 16 May) against the
statutory limit of HK$3,000 million. The Hong Kong authorities
argue that the continuing buoyancy of the economy, rather than "hot money" from non-residents, is producing a steady increase in
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