TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 32

CYPHER/CAT A

CONFIDENTIAL

PRIORITY FOREIGN AND COMMONWEALTH OFFICE

TELEGRAM NUMBER 343

Slame tile

TO HONG KONG

22 MAY 1969

(FPAD)

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CONFIDENTIAL.

ADDRESSED TO HONG KONG TELEGRAM NUMBER 343 OF 22 MAY

REPEATED FOR INFORMATION KUALA LUMPUR (FOR FOGARTY).

(16)

YOUR TELEGRAMS 405 AND 406: STERLING GUARANTEES

1. WE ARE GRATEFUL FOR YOUR PROMPT AND FULL RESPONSE TO OUR TELEGRAMS 329 AND 339. THIS TELEGRAM DEALS WITH THE MAIN POLICY PROBLEM

RAISED BY YOUR REQUEST FOR A RISE IN THE EXCHANGE FUND'S BORROWING LIMIT. WE WILL DEAL SEPARATELY WITH PURELY OPERATIONAL MATTERS.

2. PARAS 1 AND 2 OF YOUR 406 BRINGS OUT THE CRUX OF THE PROBLEM. WE WOULD EMPHASISE THAT, WE DO NOT INTEND ANY DEPARTURE FROM OUR UNDERTAKING TO GUARANTEE HONG KONG'S OFFICIAL STERLING BALANCES, INCLUDING STERLING DEPOSITED, BY THE HONG KONG GOVERNMENT WITH LOCAL BANKS, BUT, AS BELL MADE PLAIN WHEN HE WAS IN HONG KONG (AND AS WAS ALSO BROUGHT OUT IN THE HONG KONG DOLLAR BOND NEGOTIATIONS), WE ARE NOT PREPARED TO SEE FUNDS OWNED BY NON- RESIDENTS OF HONG KONG BROUGHT WITHIN THE SCOPE OF THE U.K. GUARANTEE. IT WOULD BE INDEFENSIBLE BOTH HERE AND TO THE 0.S.A. FOR THE U.K. TO GUARANTEE MOVEMENTS OUT OF STERLING OR OTHER 0.S.A. CURRENCIES BY NON-HONG KONG STERLING AREA RESIDENTS (INCLUDING PERHAPS U.K. RESIDENTS), BY PROVIDING COVER THROUGH HONG KONG'S OFFICIAL RESERVES TO THE BANKS WHICH ACCEPT SUCH NON-RESIDENT BALANCES. ACCORDINGLY, WE WOULD WISH TO SEE ARRANGEMENTS WHICH FIRMLY LIMIT THE U.K'S GUARANTEE LIABILITY TO (A) THE STERLING ASSETS OF HONG KONG GOVERNMENT FUNDS HELD IN LONDON, AND (B) STERLING DEPOSITS OF THE HONG KONG GOVERNMENT WITH BANKS IN HONG KONG TO THE EXTENT THAT THESE REPRESENT HONG-KONG OWNED FUNDS.

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