TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 20

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limiting the very large amounts of sterling at the disposal of the

Hong Kong banks which came within the United Kingdom's ŋuarantee. This should remove the major anomaly in the present arrangements,

thereby enabling the United Kingdom more readily to meet demands for

extension from other 0.8.A. countries and reconcile their action

with the general purpose of the sterling agreements as put to

Parliament. 8ince it was an essential part of the proposals that the

United Kingdom should relax its control on the amount of sterling taken

in by the Exchange Fund, Hong Kong would then have the full freedom

enjoyed by other 0.5.A. countries.

7.

In reply, Sir J. Cowperthwaite said that he did not see that these

proposals would reduce the factors about which the United Kingdom had

first expressed concern. This ability to accept the proposals would

depend upon the co-operation of the three or four major banks in

Hong Kong with whom he would need to discuss the matter. The proposals

should be technically feasible as the Hong Kong authorities already had

the necessary powers to recall sterling redeposited with the commercial

banks on terms to be decided. They had the advantage of avoiding the

need for the Hong Kong authorities to explain publicly the difficulties

which had given rise to the present situation. In further discussion,

Sir J. Cowperthwaite made it plain that any limit agreed to would be

given effect by taking back funds only from the main commercial banks;

the arrangements as already worked out would continue to apply to the

smaller participating banks. He suggested that the funds taken in

might be managed on the instructions of the banks, and that budgetary

surpluses expressed in sterling could be excluded from the limit.

United Kingdom side agreed that the application of the agreed limit

would be a matter for the Hong Kong Government, but that as our

concern was in part presentational we would have to take account of

such matters. We would also need to discuss what proportion of the

funds guaranteed would be re-deposited with the commercial banks - a

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