TNAG-0126-FCO40-162-Sterling-balances-1970 — Page 34

A

CONFIDENTIAL

FCO TELNO. 343 TO HONG KONG

-3-

THE GUARANTEE. IN THESE CIRCUMSTANCES, HAVING AGREED THE EXTENT

OF THE U.K'S GUARANTEE LIABILITY AS DEFINED IN PARAGRAPH 2 ABOVE, WE WOULD CONTINUE OUR GUARANTEE ON THIS PART OF THE FUNDS HELD IN

THE EXCHANGE FUND.

7. IF IT IS NOT POSSIBLE TO IDENTIFY THE AMOUNT OF NON-RESIDENT

DEPOSITS TO PERMIT THIS SORT OF CALCULATION, WE CONSIDER THAT FOR

THE TIME BEING WE WILL HAVE TO MAINTAIN THE LIMIT OF H.K DOLLARS

3,000 MILLION. OUR REASON FOR THIS VIEW IS THAT THERE IS EVIDENCE OF

A FLOW OF ''HOT MONEY'' INTO HONG KONG FROM NEIGHBOURING COUNTRIES,

WHICH IS EXACTLY THE TYPE OF MONEY WHICH WE DO NOT WISH TO GUARANTEE

BUT WHICH WOULD HELP TO EXPLAIN WHY THE PRESENT LIMIT HAS, AGAINST FORECAST, NOT PROVED ADEQUATE FOR LONG.

8. WE REMAIN UNCONVINCED OF THE MERIT OF INCLUDING WITHIN THE

SCHEME THE NON-AUTHORISED BANKS. THESE BANKS, AS O'BRIEN SAID,

ARE NOT OBLIGED TO HOLD THEIR FUNDS IN STERLING. IF IT IS

NECESSARY TO CONTINUE TO THE PRESENT LIMIT THEIR EXCLUSION MIGHT

GIVE YOU MORE ROOM FOR MANOEUVRE.

9. WE HAVE NOTED IN OUR CONSIDERATION YOUR COMMENT IN YOUR TELEGRAM

495 ABOUT THE EFFECT ON CONFIDENCE IN STERLING OF AN INABILITY BY THE HONG KONG GOVERNMENT TO CONTINUE TO TAKE IN FUNDS, AND IN THIS CONNECTION HAVE ALSO NOTED YOUR TELEGRAM 409, AND THE REPORTED

STATEMENT BY THE EXCHANGE BANKS' ASSOCIATION THAT IT HAD NOT SO FAR

BEEN POSSIBLE TO BRING FORWARD POSITIONS WITHIN THE GUARANTEE

ARRANGEMENTS. FORWARD POSITIONS ARE OF COURSE EXLUDED FROM ALL

THE STERLING AGREEMENTS. THE EFFECT ON CONFIDENCE IN STERLING OF

A LIMITATION ON THE PRESENT GUARANTEE OFFERED TO THE COMMERCIAL

BANKS ON THEIR SPOT HOLDINGS WOULD BE MINIMISED PROVIDED THE

REASON FOR THE LIMIT WAS EXPLAINED AS IN PARA. 2 ABOVE.

10. WE SHOULD BE GRATEFUL FOR YOUR COMMENTS UNLESS YOU SHOULD PREFER

FIRST TO DISCUSS THE MATTER WITH FOGARTY.

STEWART

FILE S F.P.A.D.

H.K.D.

CONFIDENTIAL