TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 19

CONFIDENTIAL

substantial balance of payments surplus but was obliged to keep

99 per cent of her reserves in sterling. The obligation on the

ote-issuing banks to accept sterling would appear unjustifiable if the

absence of a guarantee left them at risk, If the United Kingdom was

unwilling to allow the Hong Kong Government to take in the totality

of commercial bank sterling, she should allow the commercial banks

in Hong Kong to hold other foreign currencies.

5. The United Kingdom side explained their concern lest sterling

should be attracted to Hong Kong which would not otherwise have come

within the guarantee because it was held either by United Kingdom

residents or by 0.8.A. residents who did not wish to surrender it to

their local central bank because of local exc: ange control. If it

became apparent that Hong Kong was receiving an inflow of funds the

United Kingdom was likely to be pressed by other 0.8.A. countries to

agree to similar arrangements with them as applied to Hong Kong, the

effect of which would be to extend the United Kingdom's guarantee

liability to include a substantial part of private 0.3.A. balances.

In view of the difficulty of trying to distinguish the amount of

sterling deposits which originated from non-resident sources and the

strength of the argument that Hong Kong should not be treated less

favourably than any other 0.S.A. country, the guarantee arrangements

in Hong Kong should be revised so as to approximate to those applying

in Australia.

6. In handing to the Hong Kong representatives an outline of the

proposed arrangements as suggested at the previous day's meeting

(copy attached to Mr. Hay's minute of 30th May) Mr. Bell explained

that the attractions of such an arrangement to the United Kingdom

were not only presentational, but also offered a possibility of

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CONFIDENTIAL