TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 11

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ARE DEPOSITED. THE HONG KONG BANKS WOULD CONTINUE TO REPORT OFFICIAL

STERLING DEPOSITED LOCALLY, BUT WOULD EXCLUDE THE DESIGNATED STERLING HELD IN LONDON. SIMILARLY, TO AVOID ANY DOUBLE-COUNTING, THE CROWN AGENTS WOULD HAVE TO BE ASKED TO EXCLUDE FROM THEIR

REPORTS STERLING BEING REPORTED BY LONDON BANKS.

5. THIRDLY, WHILE WE SHOULD VERY MUCH HAVE PREFERRED AN

ARRANGEMENT WHEREBY THE EXCHANGE FUND ACTUALLY ACQUIRED THE STERLING

SSETS, WE ARE PREPARED TO AGREE TO DESIGNATION PROVIDED THAT THE ARRANGEMENTS ARE FORMALLY SET OUT IN AN EXCHANGE OF LETTERS BETWEEN

THE HONG KONG GOVERNMENT AND THE BANKS CONCERNED. WE HOPE, THEREFORE, THAT YOU WILL AGREE THAT THE EXCHANGE OF LETTERS MUST

MAKE IT CLEAR THAT QUOTE FOR THE ACCOUNT OF THE EXCHANGE FUND

UNQUOTE MEANS THAT CHANGES IN' THE SIZE OR CONSTITUTION OF THE

DESIGNATED HOLDINGS WILL ONLY BE ABLE TO BE MADE WITH THE APPROVAL

OF THE EXCHANGE FUND, SO THAT, EVEN THOUGH, THAT APPROVAL WILL NORMALLY BE FORTHCOMING, THE FUND WILL BE SEEN TO BE THE PRINCIPAL

AND THE BANK THE AGENT IN THE MATTER.

6.

FOURTHLY, THERE IS THE QUESTION OF THE PROPORTION OF THE BANKS' STERLING ASSETS TO BE DESIGNATED. AS YOU KNOW, PART OF OUR CONCERN HAS BEEN TO ENSURE THAT, IN THE EVENT OF IMPLEMENTATION OF THE AGREEMENT, WE SHOULD BE ABLE TO DEMONSTRATE THAT PAYMENTS UNDER -- THE GUARANTEE WERE BEING MADE ONLY IN RESPECT OF STERLING WHICH CAN

PROPERLY BE REGARDED AS PART OF THE TERRITORY'S OFFICIAL RESERVES.

THE ABSENCE OF A CENTRAL BANK IN HONG KONG MAKES SPECIAL ARRANGEMENTS

NECESSARY, BUT PRESENTATIONALLY IT IS IMPORTANT THAT THE COMMERCIAL

BANKS BE LEFT WITH THE UNFETTERED USE OF NO MORE GUARANTEED STERLING

THAN THE SPECIAL CONDITIONS WARRANT. WE THEREFORE HOPE THAT YOU

WILL AGREE THAT, IN TERMS OF PARAGRAPH 6 OF COWPERTHWAITE'S LETTER, THE MINIMUM PROPORTION SHOULD BE PUT AT 70 PER CENT RATHER THAN 60 PER CENT. THIS WOULD MEAN DESIGNATING SOME 40 PER CENT

OF BANK STERLING RATHER THAN 30 PER CENT: BUT WE SHOULD PREFER

THE UNDERTAKING TO BE IN TERMS OF THE FORMER FORMULATION, 7. FINALLY, THERE IS THE QUESTION OF WHETHER IT IS SUFFICIENT TO CONFINE THE ARRANGEMENT TO THE THREE BANKS PROPOSED. OBVIOUSLY

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